The need to be aware of fraudulent activity is increasing among automotive retailers, as was clear during an Auto Dealer Innovation Series session offered on November 16 thanks to the Trillium Automobile Dealers Association (TADA).
The session included several speakers from TD Auto Finance who offered a glimpse into fraudulent situations, the actual cost to dealerships when these situations occur, the most common types of fraud, and how dealers can better protect themselves.
Kirsten Burbidge, Group Manager of Fraud Ops at TD Auto Finance, launched the session with a few facts: if a dealership experiences an average loss of $24,000 per fraud occurrence, it will need to sell 10 vehicles to make up for one instance of fraud.
Also worth noting is that car loan fraud is estimated to be between 700 million and one billion in Canada every year, and as many as 20 per cent of car loan applications include some type of material misrepresentation or fraud element. Furthermore, up to 70 per cent of early payment defaults have fraudulent misinformation in the original application.
In the last two years, 55 per cent of Canadian businesses said they were a victim of fraud. ID theft, Synthetic ID, Customer Misrepresentation, and Credit Bust Out are common types of fraud.
Synthetic ID is a combination of stolen and fake information; Customer Misrepresentation includes straw buyers, the misrepresentation of true customer information, altered documents, and fake residential or employee information; and Credit Bust Out is when a client obtains numerous credit products in a short period of time but has not intention of paying.
Other types of fraud include Crime Ring Activity, which is often a combination of previously mentioned fraud types, but with a distinct trend between applications—including terrorist financing and laundered money. And Vehicle Fraud is when aspects of the vehicle are not accurate (think power booking, VIN upping, cash back, salvage, rebranded, and multiple vehicles).
Burbidge advises checking that there are no mileage discrepancies, checking the VIN number in multiple places, “and of course, make sure that you’re disclosing everything that’s necessary to the customer, as well as to the lender, so that everyone can make appropriate decisions,” she said.
She adds that dealers should “make sure you’re doing your diligence when you’re taking a vehicle into inventory and ensuring that everything is as accurate as possible so that you’re not taken advantage of either.”
Know your process
Sandra Barnes, Manager for Cash Management at TD Auto Finance, works with controllers and dealer principals to review electronic banking solutions and internal controls. In discussing the top three fraud events, she said dealers need to be aware of their processes when it comes to things like drafts or certified cheques.
“That is really key when you’re talking with your sales managers or your business managers and your controllers and your bank partners. That’s really how awareness and prevention occurs,” said Barnes.
She said one of the biggest things that they have observed increasing over the last couple of years during the pandemic is the acceptance of drafts or certified checks for vehicle purchases. And while that used to mean guaranteed funds and vehicles were released, this is not the case with check fraud, certification fraud, and draft fraud, which Barnes said are all easily done by fraudsters.
She recommends caution when accepting these as payment, and ensuring dealers do their due diligence on the purchaser as well. Barnes also notes that there is a “real value” in working with your relationship team at your bank to verify the bank drafts prior to releasing the vehicles, and in making sure that it is in fact a legitimate transaction.
“You may want to also consider implementing an internal deposit hold policy to ensure that those funds are cleared and that the instrument isn’t returned to your account as a fraudulent item, because you will be on the hook for that fraudulent item,” said Barnes.
She said they have seen many cases around these types of scenarios, and cautions that there have been occurrences where funds are deposited at a different location or a different branch and the vehicle is released, only to have the draft returned a couple of days later as fraudulent.
“We just want you to make sure that the purchases are cleared and you’re not left with a vehicle gone and no credit for that,” said Barnes.
Knowing your customer & dealer agreement
Jennifer Talluri, Senior Dealer Relationship Manager at TD Auto Finance, explored the importance of knowing your customer, especially where destination and remote sales are concerned.
She said an expired ID, not meeting the client, and not going through the “know your customer steps” can lead to things like identity theft—something that played out perhaps more than usual during the COVID-19 lockdown. This was, and still is, a period when customers can pretend to arrive from out of town.
Talluri noted an example of such a situation in which someone appeared to arrive from out of town to purchase a vehicle. The vehicle was shipped away, leaving the bank and the dealership at a loss. She said it goes back to “the importance of meeting your customer, especially as we see that evolution of destination sales and remote sales, and having to meet our customers in different ways.”
Laurence Paquin, Senior Dealer Relationship Manager for TD Auto Finance, discussed the importance of knowing your dealer agreement. He said when you have a personal client(s) coming into the dealership and looking to register a vehicle, it would typically be registered into a personal name.
“We’ve seen situations where fraudsters, and in some cases a genuine client, might ask for that vehicle to be registered with the ministry into a business name. And in a lot of cases that might be legitimate, and just a legitimate client requests,” said Paquin, “but it has been a tactic of the fraudsters to request a vehicle to be registered into primarily an incorporated entity.”
In those instances, he said it is a breach of their dealer agreement and a breach of the approval conditions that are indicated. Unless it is a commercial or a small business vehicle loan, that registration must go into the personal names of the people on the deal.
It’s all about awareness
There are a number of things dealers can do to better protect themselves against fraud, including verifying and certifying funds prior to delivery, doing a pre-delivery check of the file and deal, creating processes for remote deliveries and for accepting large sums of cash, and understanding fraud insurance coverage for your dealership. ID verification checks and reviewing signatures on IDs and documents is also important.
Overall, the team at TD Auto Finance recommends ongoing fraud awareness, the implementation of security features for online services, authenticating outgoing payments, and creating and reviewing the company’s internal controls and best practices for account reconciliation.
