Bank Fraud · Evidence

How Are Borrowing Base Certificates Investigated?

How loan agreements, receivable records and draw approvals help distinguish inaccurate collateral reports from deliberate misrepresentations.

By Heath Hyde · East Texas and statewide

Mr. Heath Enix ‘Heath’ Hyde
Eligible to Practice in Texas
Attorney at Law
Bar Card Number: 00796807
TX License Date: 11/01/1996

Primary Practice Location: Sulphur Springs, TX and Dallas, TX
214 Connally St Ste A
Sulphur Spgs, TX 75482-2612

The number on a borrowing-base certificate comes from the borrower’s receivables or inventory. It is supposed to reflect collateral that qualifies under the loan agreement. If investigators challenge that number, the agreement and the records behind the certificate matter more than the total alone. Counsel needs to work out which entries were wrong, who submitted them and whether that person knew they were false when seeking credit.

Rebuild the certificate for each draw

Start with the draw date. Pull the agreement then in effect, including amendments, and match it to that day’s certificate. The supporting file should include receivable-aging reports, credits issued to customers, inventory locations, field-examination reports, audit exceptions and approval of the draw. A newer version of a report may give a different answer.

An investigator may describe the result as “inflated collateral.” Ask what makes up that amount. An invoice entered twice is not the same problem as an invoice for a sale that never happened. Other entries may involve an old debt, returned goods, a customer dispute, a related company or a classification mistake. Separate those categories and rebuild the schedule as of its cutoff date. Include any documented exception the bank approved.

Trace each disputed invoice

An invoice number is a useful starting point for comparing the two sides’ calculations. Beside it, counsel can enter the contract amount, shipping record, customer’s acceptance and money collected. Which entry does the prosecution dispute? Why would it be ineligible? The same line can identify the employee responsible and any message telling the bank about the problem.

Payment after the draw belongs in a separate column. It may reduce the loss being alleged, but a later collection cannot tell us whether the person submitting the certificate knew it was false at the time.

Check exceptions and data changes

A field examiner’s open question can be mistaken for an exception. It may mean only that the borrower has time to provide an answer. Before treating the receivable as approved collateral, locate the approval itself. Also check what the credit committee had been told before the draw.

Check the audit’s definition of eligible collateral against the dated agreement. The audit may be using a rule adopted after the draw.

A change of accounting software can also explain a duplicate. If the business moved to a new enterprise resource planning (ERP) system, keep the migration logs and support tickets from the vendor. Then find the original invoices. “The migration did it” is an explanation to test, not a conclusion: there may be a real invoice imported twice, or no original invoice at all. The records for each transaction help counsel tell the difference.