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What dealerships need to know about synthetic fraud

 

What dealerships need to know about synthetic fraud

Jul 17, 2019

Did you know that nearly 50% of all fraud in 2018 was caused by internal control weaknesses? This short article will discuss synthetic fraud schemes within dealerships, plus tools and steps to help mitigate and possibly prevent those frauds. 

Why does it matter if it hasn’t happened here?

You may not be overly concerned with synthetic fraud because you have good people and have never had a problem in the past. But, as you know, it is not only your employees that you need to be aware of.  As technology has changed over the years, you now have a multitude of risks to address, from fraudulent applications to crypto ransomware.

In the second quarter of 2018, over $620 million in auto loans had a high likelihood of synthetic fraud. However, that was only 0.05% of the $1.2 trillion in auto loan balances at that time.

So, is synthetic fraud similar to synthetic oil? Not quite. Synthetic fraud is created by fraudsters using a combination of fictious information along with real data. For example, a fraudster may create a fake name but then use a real social security number from a minor. 

This is a not a quick process for the fraudster, as it requires them to create legitimate accounts to build a favorable credit score or to piggyback off other individuals as authorized users (either through devious schemes or through credit-boosting companies).

But when they have developed this persona, they are setup for a “bust-out.” They often apply for additional credit limits and other credit, such as auto loans, at the same time and then max out all available credit, pay nothing and disregard that identity. 

Without the right controls in place, you can be caught off-guard by these thieves. Most lenders will hold dealerships responsible for the misrepresentations on the loan applications. If a loan is defaulted soon after origination, lenders will often have an investigator review the application to verify the stated information, looking for misrepresentations. If any are found, those loans could be subject to dealer buyback and cost your dealership significantly — especially if you were targeted by a fraudster or even a group of fraudsters.

Additionally, the dealership may be responsible for recovering the car, which will incur costs with no guarantees. Where the fraudsters can really maximize their activities is to sell the BMWs, Range Rovers and other preferred models in foreign countries for a premium three times the U.S. market rate. 

Alright, I hear you. What should I do?

There are a lot of short phrases in the fraud world, such as: 1) it is not a matter of if, but when, 2) trust but verify, 3) the perfect crime, and 4) trust is not a control.

These phrases are like quick fixes — they are a great antidote, but there isn’t much substance behind them. Quick fixes may not be the solution when internal controls are key. 

In addition to checking identity, other fraud-checking steps such as employment and income verification can mitigate your risk. Have the information double checked by two different employees. Tie out that information to social security cards, driver licenses and other utilized documents. Do you utilize a UV flashlight to check the hologram within the IDs? Do you have an ID-checking guide to find fake IDs in all 50 states? Do you have documented internal controls?

Being aware of the current fraud trends is important. You cannot mitigate the risk if you don’t know the risk. If fraud has occurred, make it a teachable moment. Document it, hold trainings (with current employees and every new employee) and remind employees at least annually of their responsibilities in looking for and catching fraud.

Your employees should also trust their instincts. If a buyer seems fishy, perform more thorough fraud-checking steps and don’t be afraid to involve the accounting department or walk away from the deal. Collaboration with your lenders or accounting firm is another great way to fight fraud. 

As more dealerships address the risk of synthetic fraud, criminals and fraudsters will be looking for other avenues, putting you at risk if you’re not taking preventive measures. Also, if you have children born after 2011, you should research how you can protect them from identity theft, as they are at a higher risk due to the change to randomized numbers. 

Protect your dealership with Wipfli

With deep dealership industry experience, our internal control specialists and fraud examiners work together to help you deter synthetic fraud along with other risks. Contact us to learn more about how your dealership can prevent fraud.

Author(s)

Troxell_Anthony
Anthony D. Troxell, CPA, CFE
Senior Manager
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