Embezzlement in The Security Suite

You might think I’m writing about the investigation function of the security department. No, this time I’m referring to fraud perpetrated by the watchdog. What happens when the person responsible for guarding company assets goes rogue? It is indeed a rare occurrence. In my 10-year career I’m only aware of two such cases. In one case the Asian security division of a major financial concern colluded with its contracted security guard firm to bilk millions of dollars in the form of kick-backs over several years. Another case concerned a senior security executive who embezzled money from the firm through a cunningly constructed fraudulent disbursement scheme; creating false vendor accounts (International consultants) and submitting false invoices payable to a fictitious third-party.

The article below highlights the dangers of asset misappropriation committed by apparent trusted internal senior executives:

Read More: CIO Gets Six Years for Embezzlement Scheme IDG News Service (12/14/10) McMillan, Robert

Fraud Prevention, Awareness and Investigation as the Corner Stone of a Revenue Protection Practice

The real and effectual discipline which is exercised over a workman is that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligence — Adam Smith

Security and loss prevention as a corporate function has historically competed for resources and recognition. Our contributions, like that of many service organizations, is often peg with the prevailing swing of the economic pendulum, despite the level of real of perceived value added to the business.  In that sense our organizations have evolved; like a peacock in the animal world our feathers have morphed to be more visible and colorful. Through trial and error we’ve shaken off the image of the corporate cop or rent-a-cop, getting in the way of business and a burden on profitability, to one of a trusted business partner driving the security and loss prevention function.  One area of our practice that has increasingly proven our value within many organizations in these economic recessionary times is that of fraud prevention, awareness and investigations.

Today’s fraud practice is the culmination of twenty years of research and real world practice into the root causes of fraud. That means that if you structure your team to get the right training through organizations like the ACFE, chances are great your security suite would be well positioned to become a strategic partner within any given organization by among many other contributions, setting up programs that prevent, identify and eradicate fraud. As many Chief Security Officers hear from their board of directors fraud has become a structural deficiency around the world costing hundreds of billions of dollars each year. If the organization couldn’t properly defend itself against internal and external fraud, it couldn’t be expected to remain competitive and comply with its fiduciary duties to investors.

More than anytime before organizations are increasingly expecting their largest share of revenue to come from emerging market countries. Many of these countries however have been plagued by deeply rooted and widespread corrupt practices which can catch the unaware organization conducting business therein by surprise. Losses sustained due to fraud and corruption could undermine an organization’s revenue prospects, but more importantly it could threaten its strategic market presence. That is were a fraud prevention practice could add the most significant contribution to the bottom line. Implemented successfully the fraud program could not only prevent losses, but presented correctly with the right metrics, it could be demonstrated to assure revenue, which under these circumstances could be as important as generating it.

By ensuring that revenue is not lost to fraud waste and abuse security units with capable fraud practitioners amidst their ranks have won the heart and minds of stalwarts within the organizations who previously derided it as dead weight. It is a reputation won through trial by fire.

Most Common International Fraud Schemes

  • Bribes and Kickbacks
  • Front Companies
  • Bid Rigging
  • Information Brokers
  • Fraud by contractors

The Fraud Triangle:

  • Opportunity
  • Rationalizations
  • Pressure

Prevention Strategy:

  • Opportunity is addressed by the organization’s internal control environment. Organizations with a strong system of internal controls and built-in checks and balances present their employees with less opportunity for fraud. For a given asset, a strong system of internal controls should include separating the functions of the asset’s physical custody, recording the asset’s activity and authorizing the asset’s use.
  • Rationalization often is addressed through corporate culture. Consider the message a management team’s actions send to employees, contractors and clients. If owners and managers tend to play fast and loose with the rules, stakeholders could have similar thoughts about corporate assets.
  • Pressure is primarily internal to the person, and most often manifests itself as perceived personal financial pressure. It is often the most difficult to control through policy. Due diligence could help identify potential red flags before they result in fraud.

Common Skills and Tools Needed:

  • Unconventional interviewing skills to be able to elicit asymmetric information in the absence of documentary evidence.
  • Reliable boots on the ground presence that’s familiar with local customs, language and traditional information sources
  • Assemble a multidisciplinary team (including fraud examiners, forensic accountants, and adept investigators) all familiar with the specific environment
  • Be familiar with trends in the commodity markets, as many frauds are perpetrated due to price volatility
  • Be thoroughly familiar with the inner workings of your global supply chain especially as it pertains to trade documents (bill of ladings, letters of credit, commercial invoice, etc.) as they can be forged easily
  • Be familiar with wired transfer (EFT) red flags for fraud. Plenty of large commercial transactions with emerging markets require it.

Five-fingered discounts? Not in the US

Two divergent trends came under scope recently. Apparently and contrary to popular belief retail theft has decreased by approximately 6.8 percent in the US compared to 2009. The downward trend is credited to an increased spending to reduce the amount and scope of shrinkage.  This is of extreme importance to all shoppers since retails pass losses sustained do to retail theft onto their legitimate shoppers, adding an average of $186 to every family’s shopping bill. That is a huge dent for most during these tough economic times.

Elsewhere around the developed world however, trend held steady the opposite way. Countries like India, Brazil, South Africa and France Britain and Germany shoplifting has continued to grow albeit at a lower pace. Despite these developments, The US apparently leads the way in terms of magnitude of loss standing at approximately $39 billion dollars in losses, followed by Britain with losses standing at a far removed $6.6 billion.

As some wise guy once said “the truth is in the pudding”

Read More: http://bit.ly/cQ7z75 and http://bit.ly/96FI9y

Entrepreneurs Beware of Internal Fraud Schemes

Just when many small business balance sheets are reeling due to the struggling economy, a hidden threat to profits could be lurking in the back office.  Internal fraud has been on the upswing since the recession began.  According the Association of Certified Fraud Examiners (ACFE) misappropriations and other forms of fraud have hit small businesses at a disproportional higher rate than larger concerns.  If we consider that often time entrepreneurs lack the know-how (or the sufficient bandwidth for that matter) to put in place appropriate financial controls to prevent or detect fraud, you understand why they’re being taken to the cleaners more frequently. As you might imagine the theory of cause and effect is at play here, since mounting job losses and eroding safety net act as motivation for dishonest and trust unworthy employees to wreak havoc on your hard-earned profits.

The following article from the WSJ describes the plight of two small business owners and the fraudster (You guessed it, trusted insiders) that almost cause their businesses to cave in. Learn how they felled prey to these fraud flunkies and the price they had to pay.  There are important lessons on two key prevention strategies: vigilance and separation of duties.

Read more at:  When You’re Most Vulnerable to Fraud – http://bit.ly/cZwJDS

Fraud Prevention Tips:

  • If you’re delegating responsibility for accounts receivable and the company’s disbursements, don’t put the same person in charge of both, even if it means you have to hire an additional employee.
  • Bring in an outside accountant at least once a year to review your business financial records. Typical fees are $100 to $150 an hour, depending on how organized your records are. Consider retaining different outside accountants occasionally to have a fresh eye involved in the review.
  • Be aware of employees who are involved with your company’s finances and never take time off. Embezzlers rarely take vacations for fear their theft will be discovered by someone filling in.
  • Embezzlers usually spend the money they steal very quickly. Tip-offs include changes in lifestyle such as spending on expensive cars and vacations.
  • One common internal fraud is kickbacks involving vendors, so stay alert to unusually close relationships between employees responsible for finances and suppliers and customers.
  • Be the first person to open your monthly business bank statements. Even if you don’t have time to examine them closely, your attention sends a message to any potential fraudster.
  • When perusing your bank statements, don’t just look at the numbers; examine the actual images of canceled checks. Otherwise you can’t confirm where the money really went.
  • Remember that some internal theft doesn’t leave an audit trail.
  • For example, skimming involves stealing a company’s cash before the receipts are entered into the accounting ledger. In a sales skim, the fraudster collects a customer’s payment at the point of sale and simply pockets the money without recording it. The loss may come to light only via clues such as inventory shortages or lower-than-expected cash flow.
  • Look at receipts for deposits of both federal and state taxes.
  • Remember that liabilities can double the amount of taxes due, including penalties and interest, within a year, so don’t take more than a few months between your informal audits.
  • Maintain an open-door policy that encourages employees who have suspicions about misappropriations or questionable spending to tell you in confidence.

Fraud & Corruption Around the World

A selection of fraud and corruption news article from around the world. I do suspect that fraud reports are more prevalent from countries where there is greater scrutiny of white collar crimes, of course there are exceptions.  For instance I have spent time in the Dominican Republic, where fraud and corruption are endemic at all levels in this small island country in Latin America (Caribbean) yet you rarely see any reports of such public and private corruption anywhere except the Transparency International or the Economist Intelligence Unit reports.  Impunity leads to censorship and you know how the rest of the story goes. Despite how many people perceive fraud and corruption (White Collar Crimes), it is not a victimless crime.  For proof just look at the strips of poverty that skirt the otherwise ever growing patches of opulence around the city of Santo Domingo. Not very different from any other LatAm city.  The root causes are there in plain site, but life in these impunity laden cities goes on as normal.   

New Zealand‘s ‘Madoff’ jailed after stealing millions to spend on prostitutes http://bit.ly/dgwDhb  

First major banking arrest under fraud Act  http://bit.ly/aB7FMu

Bad debts and fraud drive Bradford & Bingley’s £196m loss  http://bit.ly/duWPIh

British directors arrested in bribery inquiry http://bit.ly/9JfImq  

UPDATE 2-Innospec to pay $40.2 mln to end bribery probes http://bit.ly/9o4ltI

CFO Sink’s Staged Accident Sweep Results in 19 Arrests Statewide http://bit.ly/b7OwSS  

Verdict on China Rio trial on Monday, Australia says http://bit.ly/dxmEqo

Russian bribes nearly tripled despite economic crisis – official report http://bit.ly/alFQPC

Russian officials involved in multimillion-dollar bribery scandal with Daimler http://bit.ly/9Muer2

Ex-IKEA Boss Bares Russia’s ‘Chaotic Reality’ http://bit.ly/aiDZRT

Pfizer Told to Pay $142.1 Million for Neurontin Marketing Fraud http://bit.ly/9606Sa

New Fraud Cases Point to Lapses in Iraq Projects http://nyti.ms/9zY93w

Food Fraud Busters – Getting Rid of Dangerous Fake Edibles

Few crimes are as abominable as food fraud, which according to this Newsweek article endangered thousands of lives.  Imagine going to your local grocery store for UHT packaged milk only to find out it’s fake after you’ve been hospitalized with food poisoning.  Many of us would never see it coming; the tell signs would not always be obvious and even the store owners can be deceived or worse, they could be in collusion, sourcing cheaper products to increase their profit margins.

The Fake-Food Detectives

Food fraud has been around almost as long as food itself. Finally, some experts are starting to get tough.

Read More: http://bit.ly/9IiZBE

Product Diversion + Job Scam = Clever Fraud

Dina Wein Reis was the mastermind behind a clever fraud that combined the obscure trade of product diversion and the increasing job scams.  In this case the targets were top executives at consumer product giants.  Word of advice for all job seekers: Beware and do your due diligence.

The alleged grifter who duped corporate giants

Some executives thought it was their lucky day when Dina Wein Reis called with a lucrative proposition. It wasn’t.

By James Bandler with Doris Burke