December 2014
Bank mandate fraud is increasing both in terms of frequency and sophistication.
Even the best run companies are not immune to the risk of this type of fraud, but being aware and cautious when changes are requested to payment details can provide important protection.
Bank mandate fraud most frequently occurs when the payee’s bank details are fraudulently amended and sent to the payer in order to divert payment.
HOW IT WORKS
The contract typically provides for payments to be made to the payee’s bank account, the details of which are specified in the con-tract. Shortly before a payment is due the payer receives a request for the payment to be made to a different account. The payment instructions appear genuine in that they are on the company letterhead of the payee and apparently authorised and signed. Often they are sent from what appears to be the payee’s e-mail address; although
close scrutiny may reveal that the address is not exactly the same. Similar requests can be made by way of letter or telephone.
Having updated the details of the payee’s bank account, the payment from the payer will be diverted to a fraudulent bank account rather than the payee’s genuine bank account. The fraudsters may need to rely upon the paying bank not checking that the name of the recipient on the payment instructions corresponds to the name of the beneficiary of the account to which the payment is made. However, this is a check which rarely is under-taken in practice and which, under English law, banks are not legally required to perform. The latter has recently been con-firmed in a judgment from the Court of Appeal.
PAYER’S RISK
Whilst some payees will contact the payer relatively quickly should an invoice be left unpaid there is no guarantee that this will be noticed immediately and several invoices may have been paid before such time a payee realises payment is over-due.
Once the payee becomes aware it has not been paid and chases for payment, the fraud is
discovered. At this point both parties will be out of pocket and whilst some payees may be willing to cover some parts of the loss, the fact is that the payee is entitled to be paid and the payer is at risk of having to pay the full amount again to the payee.
RECOVERING A LOSS
Should you fall victim of bank mandate fraud the prospects of recovering the amounts paid to the fraudulent bank account are very limited. The likelihood is that the fraudulent account will have been opened in a different country to the one where you are located and that it has been emptied or closed shortly after the fraud has been committed. Whilst attempts can be made to contact the bank where the fraudulent account has been opened, the bank is unlikely to be allowed to
provide any information relating to the account. Legal proceedings may be necessary in order to reveal the name of the person setting up the account and other account information, but this provides no guarantee you will establish the true identity of the fraudsters or trace the funds that have been diverted.
MINIMISING THE RISK
It is inevitable that payees may at some point during the life of a contract wish to amend payment details. When receiving such a request, particularly if made by a payee who is based in a different part of the world or to whom particularly large payments are to be made, checks should be made to ensure the validity of the request made. These checks should include contacting the payee by telephone and e-mail (via a telephone number or e-mail address with is known to belong to the payee) asking the payee to verify its payment details. Where the change in
the payment details also identifies a change in the beneficiary of the payment, then a separate confirmation should be obtained from the payee that payment to the new beneficiary will discharge the payer from its payment obligation.
Consideration should also be given to putting in place standard procedures setting out how
the accounts department should deal with requests of this nature. If in doubt, do not pay until proper checks have been made and you are certain that the payment is going to the right place. [1]