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.

Scams & Swindles

The best way to learn from a mistake is to learn from others that have lived through it.  That has been an important life lesson I learned early on in my life.  Here are a few tips about scams so that you don’t have to learn the hard way:


So far, this is what may have happened:

You have received profits on time, perhaps more than once.

You have invited others to join the investment on the basis of your results. (You have now become a middleman to a fraud.)

The time comes for the 3rd or 4th disbursement of profits, but there are delays.

You are told the profits have been delayed, or you cannot get your money back, or the transfer of funds has been delayed because:

x of a bank error.  The (insert the title) will fix the mess and re-submit.

x the officer encrypted the wrong transfer code and the funds were returned by one of the correspondent banks.  The Trader will fix the mess and re-submit.

x the (insert the title) has pneumonia (the flu, broke his leg, had an accident, was mugged, whatever) and is in the hospital.  The funds will be disbursed as soon as he gets out.

x the (insert the title)’s mother (father, uncle, sister, wife …) is in the hospital (dead, heart-attack …).  The funds will be disbursed as soon as he gets back. 

x the bank is going through an annual audit and/or a bank merger, so all transfers are temporarily frozen.

x one of the investors/attorneys/whatever contacted the bank and asked a lot of questions.  The bank is angry and has frozen the money or the disbursements.

x the Trader has gone to an important banking conference and the funds will be disbursed when he returns.

x the SEC (FBI, Treasury Dept., Banking Commission, whatever) is performing an unwarranted investigation of the investment.  Funds will be transferred as soon as they are satisfied.

x the Trader is in Europe (Asia, Middle East, Moscow …) trying to settle a problem caused by (any number of things) and it may be a while before funds can be disbursed.

x there is no trading after about the middle of November until the middle of January because those are not international banking days for trading.

x the currency market is down, the shifting of the exchange rate, the fall in the Japanese stock market, the September 11th tragedy, the current recession, the imminent fall of the Tower of Pisa, etc. has made conditions unfavorable for profitable trading at the moment.  We will have to wait until international conditions are more favorable.

x Our personal favorite: The fund is now full and we are not accepting any more applications. 

x The fund is now in the process of developing profits and disbursements will begin soon.

 x and excuse #14: you have to send more money.