Staffing Factoring Fraud: Using Tax Guard to Mitigate Risks Published November 5, 2012
It’s Halloween season and we’re hearing about a fresh scandal in the staffing industry that is all trick and no treat for factors. Start with the owners of a Rochester, NY staffing agency. Add a stack of invoices sold to commercial factors to the tune of $600,000. Now add the active ingredient: the fabricated timesheets and payroll records on which these invoices were based. Season with 12 indictments handed down by a federal grand jury last week and you have yourself a recipe for a Factor’s Worst Nightmare.
If you are a factor working with clients in the staffing industry, it’s worth asking, could this happen to you? Unfortunately, just as a solid staffing agency can be a great revenue stream for a factor, staffing is an industry that creates a specific set of worries for a factor.
Our experience at Tax Guard indicates that noncompliance with federal tax obligations is quite common among staffing agencies. Purchasing receivables from a staffing agency presents a risk that really flies in the face of other ordinary due diligence measures you factors may rely upon to fund a client. Relying upon the historical relationship with that client can lull a factor to sleep. A staffing agency that has already established this credibility is in a position to sell a factor a phony invoice, especially when the business is growing and the amounts invoiced increase.
In one example, Tax Guard’s reporting helped a factor determine that a staffing client’s receivables were bogus. Tax Guard’s report indicated the business was steadily making federal tax deposits of approximately $10,000 per quarter. However, the receivables were increasing on a monthly basis and the most recent figures were several thousand dollars per month.
The main expense for a staffing company, by far, is payroll. As the receivables were increasing, the federal tax deposits should have been increasing as well – but they weren’t. After reviewing some potential explanations with Tax Guard (for example, the factor could have been leasing its employees or using a PEO), the factor followed up with the client. It soon became apparent that there was no explanation for the discrepancy and the invoices were indeed fraudulent.
Tax Guard’s real-time access to tax deposit records enables tax risk management on an invoice-by-invoice basis, activating a line of secondary questioning in such high-risk situations. This is another unique Tax Guard advantage helping factors ensure that the nightmare of funding on fraudulent invoices is one in which they never find themselves.