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UPDATED: Freight audit and pay firms defrauded Philips of millions

[ February 19, 2015   //   ]

Dutch Electronics giant Philips has been defrauded of an estimated €20 million by freight audit and pay companies, according to a report in the Het Financieele Dagblad (HD) newspaper on 19 February.

The fraud, which came to light during bankruptcy hearings, took place in Germany and US and were perpetrated by firms that were supposed to audit and control the payment of freight charges worth billions of euros. However, some of these subcontractors took advantage of the lack of control by Philips and created surpluses which they then diverted to private accounts over several years up to 2013.

According to the report, Bauknecht, L’Oreal and Husqvarna were victims of similar frauds.

Directors of the freight audit and pay companies funnelled Philips money into houses, sports cars and expensive club memberships.

One of the companies named in the report is Inspeg, a former Philips subsidiary in Germany and the other US-based Trendset. Neither company is now trading. Inspeg has been bought by a UK-based company, Trax Universal Group (no connection with Trax Technologies, Trax Holdings or Trax Tech Europe) in 2010 while Trendset was purchased by Shreveport, Louisiana-based freight audit firm AFS for only $1.1m in June 2013.

A spokesman for Philips confirmed that the company had been a victim of fraud by the two companies, but that the actual loss to the company was only €5m as it had taken out insurance against fraud. He said the company had since tightened up its procedures and now employed companies only to audit, but not pay, its freight charges.

The Dutch newspaper also reported that one of the companies now doing audit work for Philips, nVision, has since been the subject of an investigation. These related to the tendering procedure and allegations that foreign workers were being employed on tourist visas. Philips said that the complaint about working conditions was unfounded but that the investigation into the tender is still ongoing.

Freight audit and pay companies are used by a number of firms – especially in the US – to both verify bills from freight and transport service providers and, in some cases, pay freight bills on their behalf. There have been problems with unscrupulous or even insolvent companies accepting money but then failing to pay the freight operator, with freight audit firms operating what is effectively a ‘Ponzi’ scheme with money taken from one shipper used to pay the freight bills of another.

There have been cases of companies handing over millions of dollars, only for the money to ‘disappear’ into the FA&P company’s accounts.

Trendset had already come to the notice of the US authorities; in March 2013, it went into Chapter 11, owing millions of dollars to customers who had advanced it money to pay their freight bills with initial reported claims from five clients alone were over $25 million. The case was filed in the Bankruptcy Court for the District of South Carolina.

Trendset director of administration Julie Tucker had, together with her husband, James Tucker, embezzled funds between 1996 and July 2011 which they used to fund a “lavish lifestyle”. Julie Tucker was sentenced to 33 months in jail in April after pleading guilty to charges of embezzlement. James Tucker was sentenced to eight months’ house arrest.

This case was followed, in May 2013, by another in the US involving TransVantage Solutions of Branchburg, New Jersey – which also operated as Freight Traffic Services, FTS Industries and FTS – filed a voluntary petition for Chapter 11 bankruptcy in its local Bankruptcy Court. President, Shirley Sooy admitted to a multi-million dollar “hole” in TransVantage’s accounts.

It had been thought that problems of this kind were less likely in Europe with its more robust controls on freight audit and pay companies would prevent such problems. However, the Philips case suggests that the problem is not confined to the US.

The recent fraud cases have led to calls for more stringent controls on the freight audit and pay industry. Dominic McGough, managing partner at the UK arm of supply chain consulting and freight audit and pay specialist enVista said he believed that controls on the industry would and should be tightened up. He added that, in the case of his own company, he preferred to only audit freight bills for clients and not pay them on behalf of clients. In those cases where clients did ask for a payment service, full visibility was provided. “The technology to do that is there and needs to be embraced,” he said, adding: “Also, in this day and age, with interest rates so low, there is no need for a freight audit and pay company to hold on to its clients’ money.” If a company did so, it should trigger alarm bells, he said.

However, McGough said that he did not believe that the Philips case would harm the nascent freight audit and pay industry in Europe and that controls on this side of the Atlantic were, on the whole, much more effective than in the US. European firms were also less inclined to ask for third parties to pay freight bills on their behalf, partly because electronic banking is much less prevalent in the US than in Europe.

 

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