Fictitious invoices and the debtor who doesn't exist

A fictitious invoice is one for goods or services that were never supplied. It is the oldest fraud in invoice finance and still one of the most damaging, because the financier advances money against a debt that will never be paid. Nobody is going to settle an invoice for something they didn’t receive.

There are two versions. In the first, the debtor is real but the invoice isn’t: a genuine customer, a made-up sale. In the second, the debtor itself doesn’t exist, or exists only on paper. Both can be found, but they are found in different ways.

A real debtor, a false invoice

This version is the more common, because it borrows credibility. The debtor’s name is already on the ledger, it pays well, and nobody looks twice at one more invoice from it.

The signs are in the pattern rather than the document:

• Invoices out of character. A customer that usually buys £8,000 a month suddenly has £30,000 of invoices dated in the last week of the month.
• Round numbers and no detail. Real trade produces odd amounts and specific line items. A false invoice is often a round sum for a vague service such as “consultancy” or “project work, phase 2”.
• Payments that don’t match. The debtor keeps paying its usual invoices and leaves the new ones untouched. A remittance that lists every invoice except the large recent ones is worth a question.
• Disputes when you call. A verification call that gets “we’ve never ordered that” is the clearest answer you will get.

The client often pays these invoices off itself, from its own funds or from the next round of prepayments, to stop them ageing into the warning bands. That is why money arriving from the client rather than the debtor deserves attention.

The debtor who doesn’t exist

A fictitious debtor takes more effort to set up, and is harder to see from the ledger alone. The client invents a customer, or uses a company it controls, and invoices it. Sometimes the “debtor” even pays a few small invoices early on, using the client’s own money, to build a track record before the large ones arrive.

When a new debtor appears on a ledger, a few basic checks go a long way:

1. Does it exist? Look it up at Companies House. Check the registered office, the date of incorporation and the filing history. A company formed six weeks ago with no accounts filed is not necessarily fraudulent, but it is not a debtor you would fund on trust.
2. Who runs it? Compare its directors and registered address with your client’s. A shared director, a shared address or a shared accountant points to a connected party, which most facility agreements treat very differently.
3. Can you reach it independently? Find the debtor’s phone number yourself, from its website or a directory, rather than using the number on the invoice. A verification call to a number the client supplied may simply reach the client.
4. Does the trade make sense? A packaging firm selling to a supermarket chain is plausible. A packaging firm suddenly selling £60,000 of goods to a newly formed “logistics consultancy” is not.

The paperwork around the invoice

A real sale leaves a trail: an order, a delivery note signed by someone at the debtor, a proof of delivery from a haulier, sometimes a timesheet approved by the customer. A fictitious one usually has only the invoice, or paperwork produced by the client after the event.

When you ask for supporting documents, look at more than whether they exist:

• Are delivery notes signed, and by whom? A signature that looks the same on every note, whichever debtor received the goods, is a concern.
• Do the dates make sense? Goods delivered on a Sunday to a site that’s closed on Sundays tell their own story.
• Do the quantities and descriptions on the order, the delivery note and the invoice agree?

Why credit controllers find it first

Fictitious invoices are often found by the person chasing them. They are the ones who call the debtor, hear the hesitation and notice the payments that never come. That only works if they know what they are listening for, and know that “we’ve never heard of that invoice” is something to escalate the same day, not note on the account and chase again next week.

A good credit controller treats an unusual answer as information. The best teams make it easy to raise: a quick note to the client manager, a second call from someone senior, a check on the debtor’s other recent invoices.

What to do when you suspect it

Don’t confront the client before you have the facts. Verify a sample of the debtor’s other invoices directly. Check the bank statements for payments from the client that cleared the debtor’s older items. Stop further prepayments against the debtor while you look. Then involve your risk team, and let them decide how to approach the client.

The cost of a fictitious invoice rises every day it stays funded. The earlier someone asks the right question, the smaller the hole.