Fictitious invoices and the customer who doesn't exist

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

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

A real customer, a false invoice

This version is the more common, because it borrows credibility. The customer’s name is already on the A/R aging, 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 $10,000 a month suddenly has $40,000 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 “consulting” or “project work, phase 2”.
• Payments that don’t match. The customer keeps paying its usual invoices and skips the new ones. A remittance that lists every invoice except the large recent ones is worth a question.
• Disputes when you call. A verification that gets “we 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 advance, to stop them aging past the eligibility cut-off. That is why money arriving from the client rather than the customer deserves attention.

The customer who doesn’t exist

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

When a new customer appears on the receivables, a few basic checks go a long way:

1. Does it exist? Look it up in the Secretary of State business search for its state. Check its status, when it was formed and who the registered agent is. A company formed six weeks ago is not necessarily fraudulent, but it is not a customer you would fund on trust.
2. Who runs it? Compare its officers and addresses with your client’s. A shared owner, a shared address or a shared bookkeeper points to an affiliate, which most factoring agreements treat as ineligible.
3. Can you reach it independently? Find the customer’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 company selling to a grocery chain is plausible. A packaging company suddenly selling $75,000 of goods to a newly formed “logistics consulting” firm is not.

The paperwork around the invoice

A real sale leaves a trail: a purchase order, a signed delivery receipt, a bill of lading from the carrier, sometimes a timesheet approved by the customer. A fictitious one usually has only the invoice, or paperwork produced by the client after the fact.

When you ask for proof of delivery, look at more than whether it exists:

• Are delivery receipts signed, and by whom? A signature that looks the same on every receipt, whichever customer received the goods, is a concern.
• Do the dates make sense? A delivery on a Sunday to a site that’s closed on Sundays tells its own story.
• Do the quantities and descriptions on the purchase order, the bill of lading and the invoice agree?

Why collectors find it first

Fictitious invoices are often found by the person collecting them. Collectors are the ones who call the customer, 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 have no record of that invoice” is something to escalate the same day, not note on the account and follow up next week.

A good collector treats an unusual answer as information. The best teams make it easy to raise: a quick note to the account executive, a second call from someone senior, a check on the customer’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 customer’s other invoices directly. Check the bank statements for payments from the client that cleared the customer’s older items. Hold further advances against the customer 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 financed. The earlier someone asks the right question, the smaller the hole.