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Preventing fraud: What are your responsibilities? – 19 Apr 2007

Agents keen to avoid falling victim to fraudsters should heed the advice of a leading industry lawyer: “People will only rob a jeweller if it is easy to get into.”


The basic rules boil down to good management and tight financial control. But that does not prevent four to five major frauds a year, according to ABTA – accounting for up to one in five of all business failures in the trade.


These are the frauds referred to as bust-outs, when large numbers of air tickets are sold by an agency and either not booked or the money not paid to suppliers.


ABTA has a problem in spotting these frauds developing because of the normal time lapse between a customer booking a holiday and receiving the tickets.


“There is a window of opportunity of several months,” said ABTA head of financial services Mike Monk. “I have to wait until someone rings to say something is wrong.”


This is less of a problem in cases involving agents who issue air tickets, rather than just sell them – owing in part to sharp regulation by the International Air Transport Association.


The IATA billing and settlement plan handles the proceeds of a majority of flight sales, with about £400 million a month going through its BSP in the UK – well in excess of £100,000 per IATA agency outlet.


There are about 1,500 IATA agents in the UK, with perhaps 3,000 outlets. They pay the airlines on a single date each month, many using overdraft facilities to ensure they make the payment on time.


Trevor Sears, senior partner at law firm Davenport Lyons, acts as legal counsel to IATA and sees about two defaults a month. “A lot of travel agency failures may involve fraud,” he says. “But there are usually no more than one or two bust-outs a year.”


He added: “The system has been tightened considerably. There were probably 12 failures per month 15 to 20 years ago.”


Despite the number of defaults declining, the amounts involved can be substantial. In one recent case, £2 million worth of tickets were issued in 48 hours.


Agents who wish to avoid potential fraud and liability for the losses have two clear legal responsibilities:to notify the authorities of any change of ownership, and not leave doing so until too late and to look after money that does not belong to them or their company and not use it for another purpose.


Sears says: “You have an obligation to inform IATA or ABTA of any change of ownership and it is best to do so before it happens.


“If you are planning to get out of a business, notify the authorities. Often people don’t do so until after the event and that may be too late.


“Typically, a fraudster [buying into a business] will say, ‘Don’t bother saying anything until we make the final payment’.”


ABTA requires members to inform it of a change of ownership within seven days of the transaction. But Monk agreed it is wise to give advance notice as this allows checks on whether the person has been involved in a previous failure.


Monk says: “The people buying may be known to us. But some owners sell their business without even involving a solicitor.


“It’s foolish because if the transaction is not concluded properly, papers are not properly signed or filed, the original owner will be liable if the business runs up debt.”


Failure to hand over money from sales can land an agency in hot water, even without any criminalinvolvement.


Missing a monthly payment not only involves default on a debt but breach of a trust agreement with IATA. So the issue is not just about recovering the unpaid money. “You are looking at a breach of trust as opposed to straight-forward debt collection,” said Sears.


He defines fraud as “when someone fails to pay money that does not belong to them”.


For example, the owner or directors of a failing business often pay themselves a lump sum just before the company ceases trading. “They may feel they are owed the money, but you can’t do that,” said Sears.


“We take a dim view as to why money has been used for a purpose other than paying the airlines. There are questions to be answered if an IATA agent fails to make a payment.


“It is not the agent’s money they are dealing with. They are not buying a ticket from an airline and selling it on. They act as an agent and have sold something that is not theirs, so they need to have the money.”


Trevor Sears acts as legal counsel to IATA. However, his views are not necessarily those of IATA.


 


Tough rules to keep fraud in check


IATA acts immediately if an agent defaults on a monthly payment. The agent’s bank account is usually frozen while IATA looks at who, or what, is responsible.


The bust-outs perpetrated by criminal gangs grab the headlines but are not the norm for IATA. More frequent are cases in which an agency defaults after failing to collect cash from customers or using income from sales to clear a debt or overdraft.


Trevor Sears, who acts as legal counsel to IATA, says: “If an agent fails to pay £100,000, either they must have £100,000 in their account – which is unlikely because the payment would have been made – or they must demonstrate bad debts equal to that amount.”


The agent may not have set out to commit fraud, but the result is the same in the eyes of the airlines.


“We take a very tough line,” says Sears. “By and large, the airlines get what is theirs. They won’t lose out.”


 


Who is liable?



  • In a typical bust-out, the original owners will not know what is going on but risks liability if they have failed to give notice of a change of ownership.
  • Director may be liable for a breach of trust – a case in 1989, which ended in the Privy Council in London – involved the director of a Hong Kong agency who was found liable after BSP cash was used to pay off a company overdraft.
  • An owner and/or directors risk liability for any losses due to fraud by an employee.
  • An employee only risks liability if caught up in a fraud – perhaps collecting money from a bank when they know there is something wrong. Employees are unlikely to be culpable for doing their normal job. 
  • Failure to comply with IATA regulations may also bring liability – when thieves broke into an agency and stole tickets and ticket-issuing plates from a safe, the agent was deemed liable because they had failed to comply with rules that tickets and plates be kept separately.

 


What is a bust-out?


A bust-out involves fraudsters moving into an agency in a deal with an owner who is in financial difficulty or wishes to retire.


They might offer cash ahead of completing the deal and the owner does not notify the authorities. Then tickets are issued in a sudden frenzy.


Payments are generally in cash or cheques, as a bank would spot the surge in card use.


Such frauds typically involve long-haul tickets in business or first class. The tickets are genuine, as they have been issued by an IATA agent. But they may not be valid if the holder has not paid an ‘applicable fare’.


Airlines will react by black-listing the tickets. They are not obliged to carry passengers who have not paid an appropriate fare and may stop people at check-in to ask how much they paid.


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