Construction CreditorWatch
5 mins read

Combating fraud and phoenixing in the construction industry

Employing around 1.16 million people in 2021, the construction industry is significant to Australia’s economy. The industry’s value sat at $202 billion in 2021 with $81.84 billion of that coming from the private sector.

The Association of Certified Fraud Examiners (ACFE), the world’s largest anti-fraud organisation, found that over US$3.6 billion was lost due to fraud globally, across 133 countries, in 2022. Fraud has a significant impact on many industries and is particularly rife in construction. A typical fraud case causes a loss of US$8,300 per month and lasts around 12 months before detection. In 2022, the global median loss for construction sits at US$203,000.

Contributing to around nine per cent of Australia’s GDP, it’s no wonder that fraud is prevalent in such a large industry. Fraud in construction can be common due to the long lifecycle of the industry, sitting at roughly four times higher than any other industry, globally. The types of fraud are endless in construction and these can include multiple types of occupational fraud, such as corruption, asset misappropriation, phoenix activity and financial statement fraud.

Corruption can include invoice kickbacks or fraudulent or inflated invoices. According to ACFE, 56 per cent of cases in construction were corruption. Asset misappropriation includes ghost employees, theft of money or products, shell companies, fake expenses, fake shipping or sales and fake wages or expenses. Financial statement fraud includes false net worths or net incomes (including overstatements or understatements) and concealed liabilities and expenses.

What is illegal phoenixing?

Phoenixing occurs when a company is liquidated or abandoned – its directors may declare bankruptcy or insolvency – and a new company is set up to continue doing the same business. The assets are transferred to the new company and the debt remains with the old company. Such activity is illegal when it is done for the purpose of escaping debts and liabilities.

An example of this would be a construction company who is noticing their clients diminish slowly while struggling with outstanding debts from unfinished projects, unpaid wages and unpaid suppliers. This company then declares bankruptcy to avoid their obligations. This gives them an unfair and illegal advantage over other businesses as they continue trading with their current assets without any of their debt. 

Costing the Australian economy around $3.2 billion each year, the construction industry is prone to illegal phoenixing due to the amount of variables this industry causing companies to become bankrupt and insolvent very quickly.

Illegal phoenixing not only harms the economy, it’s detrimental to employees, subcontractors, creditors and the overall construction industry. The billions of dollars this costs the economy includes $655 million in unpaid wages and entitlements to workers, the loss of $1.93 billion in debts owed by wound-up companies to creditors and $610 million in missing government revenue.

For construction companies, big and small, it’s important to stay on top of the credit those you are extending credit to. Through a construction company credit check, ASIC company search and credit monitoring, any business can be controlled and protected to prevent fraud and financial risks.

Ramping up due diligence to combat fraud and phoenixing

Conducting due diligence with a company search is the ideal way to protect your business. Find out exactly who you’re working with before you sign papers or conduct business by uncovering all the information associated with a company’s directors through an ASIC company search.

Allowing you to search for an ASIC registered director or individual, this tool will extract personal details, and current and/or historical relationships with any Australian company such as directors and shareholders. This extraction will also include addresses, involvement in other companies that are currently or previously trading, ABN/ACN, birth details, date of appointment to, and cessation from, a company and also any indication of banned futures of securities representatives or disqualified directors.

This valuable information provides an overall view of an individual or director and their risk as a new partner, supplier or customer.

Know Your Customer and Ultimate Beneficial Owner reports

Another way to perform due diligence is through CreditorWatch’s Know Your Customer (KYC) procedures. This includes our anti-money laundering (AML) reports which provide adverse media checks, politically exposed person (PEP) and sanction checks to identify involvement in bribery and corruption, ultimate beneficial owner (UBO) reports to show who actually owns a business, verification of identity (VOI) checks to avoid identify fraud, document verification services (DVS) and individual and entity verification. You can also use Director IDs to see what other companies a director is associated with. 

By knowing exactly who your customer is and their criminal risk, KYC ensures you are complying with AUSTRAC’s AML/CTF legislation, protecting you against fraud such as corruption, tax evasion, theft and other crimes.

With CreditorWatch’s UBO reports, you can quickly and easily identify non-individual customers and understand risks associated with your customers’ UBO. Our sophisticated software scans ASIC reports and calculates ownership percentages to generate an easy-to-read PDF report.

Credit checks

Running a company credit report gives you an overview of those companies and their credit risk to you. Our business credit check provides essential information such as a default risk rated from A1 to F, credit enquiries, defaults registered against the company, ATO tax defaults, court actions, cross directorship information and ASIC notices published against the business. This comprehensive information allows you to make better financial decisions.

As part of your credit check, CreditorWatch’s RiskScore assesses the risk level of a business through tradeline behavioural data, business demographic risk data and traditional credit risk drivers. It also predicts which of your customers are most likely to default in the next 12 months. Conduct checks on public companies, trusts, sole traders or any other type of commercial entities, and view their RickScore which determines their creditworthiness, to lower your exposure to fraud.

Meanwhile, CreditorWatch’s Financial Risk Assessments help you make high-value financial decisions. Ready in two days, this in-depth analysis contains graphs, trends and explanations on key financial performance indicators. An experienced analyst reviews an entity’s cash flow, income statements and balance sheets, over a two-to-three-year period, to offer a tailored analysis and forecast of their financial performance. You will also receive recommendations on how you can protect your business.

Circumstances can change in an instant, especially in the construction industry. Staying on top of your suppliers, subcontractors and debtors is important to avoid any financial mishaps. Our credit monitoring service provides you with 24/7 credit monitoring to constantly watch over your customers. Credit monitoring notifies you through email when important information changes including court actions against your debtors, non-payments to other suppliers or voluntary administrations. This empowers you to act quickly to mitigate potential risks.

Contact CreditorWatch

Having the right tools can make all the difference for construction businesses. Protect your business against fraud with CreditorWatch’s valuable insights and solutions. Contact us for a free demo now.

Senior Consultant
Annie joined CreditorWatch in July 2019. She has more than 7 years’ experience in procurement, credit management, and empowering businesses to make smart decisions through unique, data driven, insights.. She is passionate about assisting businesses mitigate debtor and supplier financial related risks through CreditorWatch’s reporting and monitoring capabilities. With a client base across all industries, she specialises in Construction, Manufacturing, and Real Estate industries.
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