Watch out as the month closes, dealers. The dealership fraud rate is 56 percent higher in the last week of the month than in the first week, according to Frank McKenna, chief fraud strategist at PointPredictive, a San Diego company specializing in fraud detection.
Some fraud comes from outside the dealership, but internal fraud is also an issue, a potential downside to stair-step programs and other end-of-month incentives from automakers.
"We don't know the exact [cause], we just know that the end of the month seems to drive the fraud rate up," McKenna said.
PointPredictive estimates that fraud risk in 2017 will land between $4 billion and $6 billion. Fraud could come from players outside the store, or it could be happening at the hands of a dealership staff member.
The fraud rate typically trends with sales volume, McKenna said. As sales volume increases, the fraud rate does, too. "Fraudsters like to hide their activities when there's more," he said.
Fraud rings typically target dealerships with a lenient F&I manager. They often go to the dealership every night to get as many cars as they can until the dealership or lender catches on, McKenna said. "It could be fraud rings that understand this dynamic and choose the end of the month because they know that dealers are more highly incented to get the cars out the door," he said.
It's somewhat expected that dealerships will have to combat some sort of external fraud, but it's the internal fraud that's sometimes left in the shadows. It could be a lone actor, such as "a finance manager who just wants to make their quota, so they start to fudge numbers because they're going to get a big bonus at the end of the month," McKenna said.
Or, with hundreds or thousands of dollars on the line at the end of each month, the internal misbehavior could be broader, with multiple sales and F&I employees tempted to misrepresent some of the numbers.
Dealerships should take measures against all types of fraud, but especially as the month closes. Fraud, whether external or internal, not only hurts the store's profits and reputation, it also gives the industry false encouragement to increase targets even further.