Fraud risk in receivables finance – The role of technology

Receivables finance (RF) has long been a cornerstone of corporate finance, enabling businesses to convert outstanding invoices into immediate liquidity. By selling their receivables to a funder, companies may access cost-effective funding and reduce risk, while investors may gain exposure to short-duration, diversified assets at a competitive return.

However, as recent events surrounding First Brands Group illustrate, this structure remains vulnerable to risks beyond credit, such as fraud. These vulnerabilities highlight the need for greater scrutiny and the adoption of new technologies.

How does fraud occur in RF transactions?

Fraud in RF transactions typically manifests through misrepresentation of receivables quality, double pledging of assets and fabrication of invoices. These risks arise because RF relies heavily on the integrity of the originator’s reporting and servicing processes. If invoices are falsified or pledged to multiple financiers, the asset base becomes compromised, exposing investors and lenders to significant losses.

The First Brands case underscores these vulnerabilities. The U.S. auto parts supplier, which filed for Chapter 11 reorganization in September 2025, allegedly engaged in widespread financial misconduct, including doctoring invoices and double-counting receivables to secure billions of dollars in financing.

What makes RF vulnerable to fraud?

Several market features of RF contribute to fraud risk:

1. Information asymmetry: Investors and lenders may rely on originator-provided data without analyzing historical data and internal credit and operational processes.
2. Servicer dependence: Given the usually heavy operational workload, originators may continue servicing receivables post-sale, creating opportunities for manipulation if internal controls are weak.
3. Origination through fintech platforms: Many funders want access to this space, interested in the return relative to the short-term nature of the asset. However, by delegating the responsibility of originating and structuring, they may not receive detailed transaction information – exposing them to risk, given that such platforms do not normally have skin in the game.

These factors can make RF particularly vulnerable when governance fails or liquidity pressures incentivize aggressive accounting.

How can technology help detect fraud in RF?

The First Brands saga has accelerated calls for digital transformation in RF oversight. Advanced technology and reporting platforms can reduce fraud risk through:

1. Real-time data integration and monitoring: Cloud-based platforms enable continuous monitoring of receivables performance across geographies. By aggregating item-level data from ERP systems and payment gateways, these solutions can provide a single source of truth, reducing reliance on manual reporting.
2. Elimination of manual processes: When files are provided manually, there is no barrier to manipulating the asset file while moving from ERP to funder. With an automated solution, a fraudulent actor would have to manipulate the ERP on a recurrent basis, as opposed to changing a simple spreadsheet.
3. Creation of a shadow ledger: An automated reporting tool can monitor each invoice in a relevant pool of assets. If properly implemented, a funder can track asset performance across the entire range of seller entities and ERPs. This helps to detect unusual performance patterns such as reappearing invoices, duplicates, or amount and due date changes.
4. Automated checks and anomaly detection: Certain advanced digital tools now enable continuous scrutiny of receivables portfolios, automatically flagging inconsistencies such as atypical aging profiles and deviations from established dilution trends. By utilizing such technology, funders and investors can be better equipped to identify and address potential risks before they escalate.
5. Transparent and detailed reporting frameworks: Industry initiatives promoting simple, transparent and standardized structures, coupled with automated waterfall calculations and trigger monitoring, may enhance investor confidence and regulatory compliance. This can be absent when investing through fintech platforms where information provided by the corporate is shared in an aggregated format with limited scrutiny.

What will shape the future of RF?

The collapse of First Brands is a cautionary tale for all stakeholders in the RF ecosystem. While RF remains a powerful liquidity tool, its resilience depends on effective governance and technological safeguards. Platforms that deliver real-time transparency, automated controls and immutable records are no longer optional: They are essential to maintaining trust and confidence in this asset.

As institutional investors continue to seek exposure to trade finance assets and corporates aim to unlock working capital, the combination of advanced technology and human expertise within complex RF structures will help to shape the market’s future.

While digitalization may stand as the frontline defense against fraud, it’s equally vital to maintain effective human oversight by having seasoned professionals conduct independent reviews and engage in regular dialog with originators and funders.

This interplay between technological innovation and expert judgment helps ensure that not only are anomalies flagged automatically, but also the nuances of complex transactions are properly understood and addressed. In essence, resilient frameworks are often built on digital efficiency and the irreplaceable insight of experienced practitioners.