History repeats itself, yet we learn nothing?!?
“The man who is admired for the ingenuity of his larceny is almost always rediscovering some earlier form of fraud. The basic forms are all known, have all been practiced. The manners of capitalism improve. The morals may not.”
– John Kenneth Galbraith
Bernie Madoff stunned the world with an audacious $65 billion fraud. However, there is nothing new about Madoff’s method of fraud. In fact, the type of scheme that he operated – commonly known as a Ponzi scheme – dates back to the 1920s and an infamous fraudster named Charles Ponzi.
The numbers may be bigger and the public outrage much more vocal, but fraud has been part of society for as far back as there are records. How big a problem is fraud today? The Association of Certified Fraud Examiners, the preeminent authority on internal and external fraud reported in their 2010 “Report to the Nation” that organizations lose 5% of their gross revenue to fraud every year.
Internal fraud (fraud perpetrated by employees and members of management) routinely grabs the headlines. The damage that can be caused by internal fraudsters can range from a mere nuisance to a catastrophe that can literally destroy a company, wipe out shareholder value and leave thousands without jobs. Internal fraud schemes range in complexity from simple embezzlement schemes to highly orchestrated financial statement frauds that require tremendous time, effort and resources to perpetrate.
Typically, frauds perpetrated by members of management are far more damaging and costly than employee level fraud. The Madoff, WorldCom, Enron and Stanford cases all involved white males, over 50 years of age, all well educated. In addition, each man had a large team of helpers that knowingly, or unknowingly, helped perpetuate the alleged fraud schemes over multiple years.
Does this mean that all males over 50 with college degrees are fraudsters in the making? Certainly not, but it does give you an idea as to which individuals are more likely to involved.
So what? Fraud happens, and we move on with our lives. Well not exactly… In a recent article by Brian Payne, chair of the Department of Criminal Justice in the Andrew Young School of Policy Studies at Georgia State, he noted the following:
“…white-collar crime harms the community by reducing the faith that individuals have in public and private leaders. This consequence is particularly problematic given that most white-collar leaders are, in fact, honest professionals. Make no mistake about it — the vast majority of white-collar professionals never engage in wrongdoing. The few professionals who do commit crime dramatically lower the trust that individuals have in our political and economic institutions. The consequences of this broken trust are enormous.”
How much faith, or trust in the “system” has been lost as a result of headline grabbing frauds and the resulting collapse of the global economy? It is impossible to tell, but whether you agree with the tactics or not, “Occupy Wall Street” is just one example of frustration with the “system” and a desire to do “something”.
If we reduced the amount of fraud in the economy, would the level of trust in our institutions automatically increase? Probably not. Fraud is just one piece of a very large complex puzzle. However, when the people don’t trust the system, they push for change. Something eventually gives. Wouldn’t it be nice to see less fraud, and more trust? We can dream, right?
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
International fraud awareness week – shining a spotlight on an urgent problem
From November 6-12, the Association of Certified Fraud Examiners (ACFE) encourages companies of all sizes to participate in International Fraud Awareness Week. With an estimated five percent of revenue lost to fraud each year, the ACFE asks that organizations “proactively take steps to minimize the impact of fraud by promoting anti-fraud awareness and education.”
To help support the effort, the ACFE has provided a “starter” pack to help organizations think differently about fraud and the impact on their bottom line.
The starter pack includes a fraud prevention check-up to help companies test whether they have the appropriate internal controls in place to combat fraud, a profile of a fraudster and the red flags to look out for, and a paper that addresses the role of the board of directors in preventing fraud. The resources are free and can help set your organization on the path to combating both internal and external fraud.
Based on the information shared in the ACFE’s Report to the Nations, the profile of a fraudster is a follows:
More than half of all cases in the study were committed by individuals between the ages of 31 and 45
Fraud offenders were most likely to be found in one of six departments:
Accounting (22%)
Operations (18%)
Sales (13.5%)
Executive/upper management (13.5%)
Customer service (7.2%)
Purchasing (6.2%)
The median loss was $160,000
The frauds lasted a median of 18 months before being detected
The most common behavioral red flags displayed by perpetrators:
Living beyond one’s means (43 percent of cases)
Experiencing financial difficulties (36 percent of cases)
Frauds committed by owners/executives were more than three times as costly as frauds committed by managers, and more than nine times as costly as employee frauds. They also took much longer to detect.
By promoting fraud awareness and prevention and providing free resources, the ACFE is leading the charge in tackling a pervasive problem that is estimated to cost companies around the globe $2.9 trillion a year. Whether your company has a fully integrated fraud program in place, or it is just beginning the process, the ACFE is an invaluable resource in the fight against fraud.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Today’s high school cheats – tomorrow’s fraudsters?
The numbers are truly astounding. Several recent studies note that approximately 90 to 95% of high school students admit to having cheated in some shape or form. The type of cheating ranged from copying homework to cheating on final exams.
USA Today reported that an Ohio High School canceled graduation ceremonies for all 60 seniors.
An excerpt from the USA Today article:
“Superintendent Dorothy Holden said so many students are involved that it was impossible “to separate the wheat from the chaff” in terms of deciding who could graduate. Instead, all students will be mailed their diplomas.”
The statistics relating to cheating in college are equally shocking. Various studies report that approximately 85 to 95% of college students admit to cheating.
What does this alarming trend mean for companies? The connection between cheating in high school, college and fraud in the workplace is not fully understood. However, if children opt to cheat while “earning” an education, what type of behaviors will they pursue in the work place?
For employees that routinely received “A’s” in high school and college, a bad performance review may trigger feelings of resentment that could lead to fraudulent activity. Just as they felt justified in cheating while in school, they may rationalize that committing fraud to either improve their performance, or steal funds to “punish” their employer is justified. In fact, given their track record of academic fraud, reaching the decision to commit corporate fraud may be arrived at in very short order.
I do not mean to infer that all “20 something” employees entering the workforce are fraudsters in the making. However, you can’t help but ask if an employee that cheated in high school and/or college has the moral compass to guide them in today’s workplace?
Do you believe that academic fraud is an indicator of propensity to commit corporate fraud? If so, are you concerned that corporate fraud will increase as today’s college and high school seniors enter the workplace?
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
“Bloodless, white collar crime”
“The son of a Philadelphia mob boss infamous for his violent reign was indicted today for a bloodless, white collar crime: a scheme to defraud a Texas financial firm out of $12 million.”
– abc news, ‘Little Nicky’ Scarfo’s Son Busted in Jersey
Within hours of finishing my post on organized crime and the “Easy Button”, I stumbled across this article involving ‘Little Nicky’. Allegedly, Little Nicky and his friends had plans to take over FirstPlus Financial Group, a publicly traded company, by replacing the board with representatives under their control, and using the company to purchase reportedly worthless companies created for the purpose. Prosecutors allege that the scheme cost FirstPlus $12 million.
The scheme unraveled as a result of a three-year investigation by the FBI. That gives you an idea of how difficult organized crime is to combat. If it takes the FBI – with all of their powers – three years to investigate and trigger indictments, the mob had a solid plan in place. There is no indication of how the plan ultimately fell apart, but for at least a short period, it appeared to work. Dismiss members of organized crime as being “dumb”, or unable to commit white collar crime at your peril.
Preparing for this type of attack is way beyond the scope of this post, but, I wanted to provide a specific example of organized crime and white collar crime. It can, and does happen…
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Blog of the week – www.workplaceinvestigationsblog.com
Debra’s focus on public sector investigations really caught my attention but her blog tackles a number of topics including fraud, sexual discrimination, and FMLA that pertain to both the public and private sector. Many attorneys claim that they can conduct investigations dealing with a broad range of issues. Most of the time, they end up being specialists in a couple of areas, and generalists in all others. Debra’s blog provides the reader with considerable evidence that she is well equipped to tackle a plethora of issues. The posts are easy to read, light on legalese and heavy on clear and consistent guidance regarding best practices.
I encourage readers to check out the blog archive where there are blog posts dating back to July 2009. Navigating the blog is exceptionally simple with all of the links on the left hand side as opposed to the right side that most bloggers tend to use. Lastly, the site uses a very soothing blue color scheme that is much appreciated when you read as many blogs as I do!
Congratulations Debra! Keep up the great work.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Organized crime has an “Easy Button” – White Collar Crime
“The Federal Bureau of Investigation on Friday estimated there are some 1.4 million gang members in the United States and they are turning to white-collar crimes as more lucrative enterprises.”
msnbc.com, FBI: Gangs turning to white-collar crimes
Drug trafficking and prostitution certainly pay the bills, but gang members see the potential to make big money with white-collar crime so says the FBI in its 2011 National Gang Threat Assessment. I’ve written about organized crime before as it relates to the banking sector. In fact, very early on in my fraud career, I lead an investigation of identify theft involving an Asian gang based on the West Coast. To be honest, I was very impressed with the overall scheme. The gang routinely overcame the countermeasures that we deployed and over the course of 6 months, made many, many millions. As far as I know, they remain at large.
From my experience, the biggest threat posed by organized crime as it relates to white-collar crime is their efficiency. Either by threats of violence, a sense of loyalty, or sheer determination, organized crime is often far more efficient than the fraud departments they face. Unless the organized crime entity is targeted by law enforcement, fraud departments rarely see their “enemy”. In jungle warfare, fighting a faceless enemy that can strike with impunity exerts a tremendous psychological toll on soldiers. Clearly, we are not talking about life and death, but fraud investigators can become quite demoralized when tasked with defeating an attack by organized crime. In reality, you never really defeat organized crime, you temporarily slow down the frequency and severity of their attacks.
Whether you work for a company with less than 10 employees, or a multinational with 10,000 employees, there is much to learn from organized crime and their approach to fraud. Sure, the gangs have their fair share of politics and distractions in the form of law enforcement investigations, but when it comes to making money, organized crime makes every effort – violent or otherwise – to protect their cash flow.
Using violence to prevent fraud is not an option for businesses. However, can your company say that it has an organized response in place to prevent fraud? As we know, fraud has many forms. Your company doesn’t have to be fighting organized crime to apply lessons learned from their approach. Ask yourself if fraud prevention and investigation is a high priority in your organization? Does the company dedicate the resources needed to combat fraud – both employee and third-party? (Hint: what appears to be employee related fraud, may actually be a “plant” by organized crime). If the fraud department recommends a change in policy or procedure, or an investment in technology to combat fraud, who listens?
The fact that the FBI believes that organized crime is focusing their efforts on white-collar crime may actually be a blessing in disguise. In order to improve their performance, a sports team often has to play against a superior opponent. In case you hadn’t already guessed, organized crime is the superior opponent. Will your company learn from the experience, or be subject to an embarrassing defeat that serves no purpose… well, almost no purpose. The gang will enjoy spending your company’s cash. And, they’ll probably be back for more…
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Blog of the week for Oct 17 – mortgagefraudblog.com
“Mortgage Fraud Blog is the premier website for news and information on mortgage fraud and real estate fraud throughout the United States.”
I couldn’t agree more. The Mortgage Fraud Blog provides the reader with a comprehensive view of mortgage fraud. The site is well organized and very easy to navigate. I especially like the fraud glossary. Mortgage fraud, like many types of fraud, has its own language. Many blogs assume that the reader knows the jargon, so it’s nice to see a blogger who recognizes that not everyone is familiar with the terminology. Also check out the ticker that summarizes the results of 1,851 cases that the site tracks. Care to guess the average prison term for perpetrators of mortgage fraud? The number is probably lower than you think…
Finally, I really like the quick links dropdown box that can help the reader move quickly to topics of interest. If you have even a passing interest in mortgage fraud, this site provides more than enough information to keep you up to date on the latest developments. Keep up the good work!
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
And so it begins: Fraud Happens launches blog of the week!
I am very pleased to announce the blogs of the week for the week beginning October 10. Given the number of blogs that were submitted, I decided to showcase three blogs instead of just one.
I thoroughly enjoyed reading each of the blogs mentioned below. I found the posts to be engaging, very well researched, and sometimes even humorous! I strongly recommend that you take the time to visit each one! In no particular order, we have…
Ponzitracker offers a fresh take on an old problem. This blog is well written and informative, and it does something that is difficult to do – shed new light on an old and often ignored type of fraud.
Jordan Maglich is the blogger behind Ponzitracker. He does a great job summarizing why you should visit his blog:
“This blog is intended to provide a unique insight into this age-old practice, while at the same time assembling a mechanism to track their occurrence and gain an understanding of the true toll, both economic and societal.”
His recent post on a potential $1 billion dollar fraud in China is fascinating. Could this be the beginning of an increase in all types of fraud taking place in China? As more ponzi schemes are discovered in China, I am sure Jordan will discuss them on his blog.
Internal Investigations Blog covers a broad range of frauds in a level of detail that few blogs can provide. In addition to the clever titles that draw the reader in, James McGrath, managing partner of McGrath & Grace, provides a view of the inner workings of an investigation. Each post is very well researched and cited. I also like that James includes references to other bloggers.
As a former prosecutor, I can see James’ experience from both sides of the table infused in several posts. On that basis alone, it makes sense to read the blog. Certainly there are many former prosecutors in private practice today, but few that are able to articulate their thoughts with such clarity.
There is so much great content on this blog that it would be helpful to provide a list of posts by month or implement subject word hyperlinks. I would also consider adding an RSS feed and an email signup. Other than that, I will personally add this blog to my reading list. It is well worth the visit!
FCPA Compliance and Ethics Blog
The FCPA Compliance and Ethics Blog provides a very detailed discussion of FCPA compliance and risk. I like that Thomas Fox – the site’s owner – shares specific steps that companies may want to consider regarding FCPA compliance, etc. (Thomas’ disclaimer reminds readers to seek appropriate legal counsel before taking action).
Thomas regularly includes mention of other experts in FCPA compliance and provides guest post opportunities as well. That can only help strengthen his brand and validate the accuracy of the information that he provides readers. As a provider of professional services, I personally struggle with how much knowledge and expertise I should share. Thomas seems to have found the balance that works for him. Maybe his approach is something we can all learn from?
Thanks to everyone that took the time to share their blog. Please note that I received a number of blogs written in languages other than English. To be honest, I am not sure how best to review foreign language blogs. I may start a foreign language blog in the near future.
Bloggers – keep up the good work! If I didn’t mention your blog this time around, I reserve the right to visit your blog again in the future!
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
$2.7 million embezzled from Arizona National Guard
While members of the Arizona National Guard were in harm’s way, James Eugene Burnes, a retired Army colonel took care of business on the home front. Unfortunately, he put his personal business above the needs of the National Guard. Between May 2003 and August 2011, Burnes embezzled $2.7 million from the Arizona National Guard Family Emergency Fund and the Arizona National Guard Emergency Relief Fund.
Apparently, Burnes had fallen on hard times. Just three years after retiring from the Army on presumably a healthy pension, he began committing fraud in his new role as a resources manager for the Arizona Department of Emergency and Military Affairs. From all accounts, he had a gambling habit that needed to be fed. To cover his tracks – as so many perpetrators of fraud do – he created fake financial statements and audit statements.
Here is how he stole the money:
Withdrew $1.9 million in cash during 675 separate visits to the bank (He visited the bank as often as 20 times a month).
Wrote 169 checks totaling more than $400,000
Purchased 32 cashiers checks for more than $332,000
Authorized electronic transfers of $40,000
Management oversight was apparently lacking and numerous red flags were ignored. In fact, an employee within Burnes organization uncovered the fraud and shared the information with a supervisor. The fraud continued for another five months before the supervisor confronted Burnes and initiated a review of bank records which confirmed the fraud.
I am sure that the Arizona National Guard thought it was appropriate to trust “one of their own” – a retired Army Colonel. If only life were that simple… Burnes may have been an exemplary officer while on active duty, but as I have said before, even good people make mistakes. Burnes will found out soon how much he’ll have to pay for his mistake when he is sentenced later this year.
Trust too much, and employees may view it as a sign of weakness. Call me cynical, but if my experience has taught me anything, it is that organizations routinely place far too much trust in their employees. If you ever catch yourself saying that you trust your employees and they would never steal from you, it may already be too late. Trust me; I built my career as a fraud consultant based on employers trusting that their employees will never steal. Guess what? Fraud happens.
Learn more about the case here and here.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Have trade secrets, will travel…
We regularly hear from the U.S. government about the theft of intellectual property by Chinese companies and their government. This is just one of several examples that I have reviewed and analyzed in the past week. I am sure that there are many more attempts that go unreported.
In February 2012, Hanjuan Jin, a former software engineer for Motorola, Inc., was found guilty of stealing more than 1,000 electronic and paper documents from Motorola. Jin was caught by U.S. Customs while attempting to catch a one way flight to China. She had worked for Motorola since 1998. Why did she decide to steal Motorola’s trade secrets? Had she stolen intellectual property prior to 2007? We’ll probably never know…
The 2007 theft was not a “spur of the moment” decision. It had been in the planning phases for approximately a year.
In February 2006, Jin took a medical leave of absence. Between November 2006 and January 2007, Jin flew to China and worked for Sun Kaisens, a Chinese telecommunications company that developed products for the Chinese military. Jin had already spent June through November 2006, in China negotiating with Sun Kaisens. While working for Sun Kaisens, Jin was provided access to classified Chinese military documents.
In February 2007, the plan to steal trade secrets from Motorola kicked in to high gear:
February 15, Jin returned to the US from China.
February 22, she bought a one way ticket back to China.
February 23, she notified Motorola she wished to return to work.
She went back to work on February 26. Once back on the company’s premise, she accessed large volumes of proprietary documents during normal work hours as well as after hours. She was also observed leaving the building with various documents and possibly a laptop.
February 27, she volunteered for a layoff from Motorola.
February 28, Jin was caught trying to leave the country with over 1,000 electronic and paper documents belonging to Motorola. She also had a number of documents marked “secret” belonging to the Chinese military.
Interestingly, Jin was found her not guilty of three counts of economic espionage for the benefit of the People’s Republic of China and its military. She faces a maximum penalty of 10 years in prison on each count of stealing trade secrets.
Given Jin’s frequent trips to China, and the fact that the theft had been in the planning phases for 12 months, it is anyone’s guess regarding how much of Motorola’s intellectual property Sun Kaisens or the Chinese government were able to gain direct access to. Since Jin spent time in China prior to the theft attempting to convince Sun Kaisens to employ her, she likely shared information from memory. Also, since Jin had been employed with Motorola since 1998, it is possible that she had taken information over time in the event that a move to China was in her future.
This case underscores why it is important to protect your company’s trade secrets. Ask yourself the following questions:
Does your company have trade secrets? Can you list them?
How are they used within the business?
Where are they stored?
What has the company put in place to control and monitor access?
How would the company know that an employee is about to steal trade secrets?
There are a number of additional questions involving the alignment of people, processes and technology and the protection of trade secrets, but the questions above should generate sufficient food for thought.
Protecting trade secrets requires a multipronged approach. If there are any gaps in the approach, employees or third parties intent on stealing intellectual property will find them. Don’t believe me? Sanofi-Aventis also has experience dealing with Chinese foreign nationals and the theft of trade secrets. For more on that case, click here.
Arguably, the theft of intellectual property can do more damage to a company than the theft of cash. A company can earn more money to replace the money that was stolen, but once a trade secret is no longer “secret”, the damage is done. Many companies look to the legal system to punish the entity or individual that stole their trade secrets. Certainly, the courts can help. But if your organization cannot demonstrate that it took steps to appropriately protect its trade secrets, the courts may not look too kindly on your claim.
Be proactive! Invest the time and effort to protect your company’s intellectual property. Once your intellectual property is in stolen, you may be a company in name, but in reality, you are a shadow of your former self.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
The results are in… 2012 will be another difficult year
In December 2011, I created a poll on LinkedIn that asked the following question:
“What do you predict will happen to corporate fraud in 2012 versus 2011?”
Here are the final results:
Increase – 55 (70%)
Decrease – 9 (11%)
Stay the same – 11 (14%)
Not Sure – 4 (5%)
The poll generated 79 responses, and numerous insightful comments (see below).
Comments:
“Interesting question, Paul. And interesting current responses indicating expected uptick. My expectation is increased and even explosive EXPOSURE of fraud, including increased enforcement, willingness to come forward, and EXPOSURE also of enforcement failure points and beneficiary parties.”
-Dean Levinson
“It is interesting that the crash of 1907 was fueled by “bucket shops” or financial investment firms operating out of store fronts that sold derivatives. They also were famous for “pump and dump” schemes of giving advice to people on how to buy and sell, but really created false lows and false highs on a given investment. After the crash the bucket shops were outlawed in every state because of how terrible the financial fraud was. In the years prior to the 2008 crash, legislation was passed to allow the sale of derivatives and the federal legislation mandated that all existing laws on the state level outlawing bucket shops were voided….so much for greater state and local control as going hand in hand with deregulation. Well, now you can get an investment account on line….they give suggestions to investors in a manner very similar to the pump and dump schemes from the bucket shops, and they still trade derivatives. Even since the 2008 crash, the bad practices that were once outlawed due to the terrible effects they had are still practiced. 100 years ago, if fraud was discovered, it was outlawed. Today, if the govt. outlaws something, it is seen as too much regulation and prevents job creation, so fraud is legalized. If the govt. tries to regulate that, it is claimed as too intrusive, so the industry tries to make new guidelines for derivative trading and such. If fraud is discovered, it will be legalized. Once it becomes legal, it is not fraudulent. And once there is money to be made through legalized theft, it will fund lobbyist money to make sure the laws remain in tact to enforce the fraud rather than to remove it.”
– Paul Peck
“In the US exposure of corporate fraud will increase in 2012. The key words here are exposure of existing frauds. On the law enforcement side, the FBI is currently inundated with tens of thousands of fraud complaints (over 63,000 reported) and it will take years to catch up. The FBI reported that the sub prime mortgage frauds, misused bailout funds, green frauds, and others would make this true several years ago. On the political side we have groups such as Occupy and the Tea party demanding corrections to government policy that have created and nurtured a culture of corruption and fraud. A new justice department in 2013 will likely have a mandate to clean up some of the problems created during the last four years; this will place pressure on the current justice department to file cases and create the appearance of doing something about it during an election year. I agree will all the previous comments about financial pressures leading to increased corporate fraud; cooking the books is far less likely to occur when profits are growing through honest efforts.”
– John Evangelisti
“Sadly, Paul, I have voted increase. Scott has pretty much nailed it right on the head – as financial distress increases, the “need” increases, many times, to the point where otherwise honest people feel that they have no other option. In the upper echelons, the pressure to meet targets will be immense, and there will be many instances of overstating revenues and understating expenses by said echelons to meet they targets that they have put out in the public eye.That will be exacerbated by potential drops in overall remuneration packages due to lower or non-existent bonuses, again, heightening the perceived need.”
– Alan Hunter
“I believe that fraud will continue in the rise unless whistleblowers are more protected and/or compensated accordingly.”
– Edward Sotomayor
“While the poor economy will continue to trigger fraud, I’m thinking the number of major conspiracies exposed in the corporate world will likely decrease in 2012, given the awareness that has occurred over the past couple years.”
– Don Crocetti
“Thanks Paul for the poll. It would be all too easy to point out that historically in times of recession and economic downturn, corporate fraud increases. With predictions of very slow (if any) economic growth both in the US and UK and the Eurozone crisis, the global picture looks a little gloomy for the foreseeable future. With the aforementioned and the austerity measures across the public sector starting to bite early 2012, I believe the financial pressures on individuals will increase and therefore increase the likelihood of financial misconduct across both private and public sectors. Looks like I will be taking that easy option after all and voting for the increase based on my own experience and history!”
-Scott Grant
Thank you to everyone that took the time to vote or comment. Buckle your seats, it is going to be a bumpy ride in 2012!
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Who is to blame for $10.2 million embezzlement?
Just when you think you’ve heard it all…
This case involves the Pope, travel on corporate jets, the Superbowl, and a celebrity chef. In fact, it is so unusual that I had to include it in our proprietary global knowledge center (enter 8688JGT for 3 months free access). Since it is included in our database, we have already analyzed the case and provided a list of lessons learned. Before I share some of that information here, let’s learn about the fraud.
Patricia K. Smith, the former controller for Baierl Acura, pleaded guilty to taking $10.2 million from the dealership over a 7 year period. Smith moved money from the dealership’s business accounts to her personal account using over 800 Automated Clearing Housing (ACH) transfers. Smith then used the proceeds to fund the following expenses:
• $1.8 million billed to American Express for private jet charters; travel to seven countries in Europe and four islands in the Caribbean
• $44,500 for four club-level tickets along with full hospitality at Super Bowl XLV
• $32,500 for a luncheon for six people prepared by Food Network star Ina Garten at her barn in East Hampton, NY
• $5,000 for “The Vatican Package,” which included Mass in Papal Audience with VIP seating, air fare for four, VIP tour of the Vatican Museum with a private tour guide, and a private tour of the Sistine Chapel with family before it is open to the public
• $2,500 for a Phantom of the Opera experience, including costume fitting, wig fitting, an escort onstage during the Hannibal Opera sequence, and four seats for the performance.
She also purchased the following assets which will be subject to forfeiture:
• Four houses— three in Pennsylvania and one in Georgia
• 10 vehicles, including three Acuras, four Hondas, and a Mustang convertible (At least she remained loyal to Acura / Honda)
• Stocks, jewelry, cash, gold coins and personal property, including flat-screen televisions, a mink coat and a baby grand piano.
I have my own thoughts on who is to blame, but I would like to hear your perspective before I weigh in. Please register your vote in the poll at the top of the article. I’ll share my thoughts in a subsequent blog post.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Post-mortem of a fraud – what small and large companies do differently
I believe that each instance of fraud provides companies with an opportunity to reassess their entire fraud defense. Some would call this continuous improvement; others would view it as a best practice. Whatever you call it, fraud defenses must be reviewed, tested and re engineered on a regular basis. Waiting for fraud to happen then scrambling to implement controls after the fact makes very little sense. In the airline industry it is called “Tombstone legislation” – someone has to die for changes to be made – only in this case it is small companies that are “dying”. Large companies live to fight another day. At least most of the time – even when the losses are in the millions…
Things to do on first day with new employer:
Turn up on time – check
Find desk and log in to computer – check
Figure out way to embezzle $1 million…
If the reports are to be believed, when Brenda L. Jones started working with Sirius XM Radio she almost immediately embarked on a fraud scheme that resulted in a seven figure loss. A co-conspirator with the mysterious initials “VP” was not indicted (any guesses why they were not indicted?)
What makes this fraud particularly interesting is the size of the victim company. Sirius XM Radio is not a “Mom & Pop” company with limited resources to deploy in the fight against fraud. Yet, they suffered a huge loss. Had this fraud happened at a small company, it is highly likely that they would have been forced in to bankruptcy.
I am often asked to detail the size of company that I help fight fraud. My answer is small, medium and large – they all need help! Fraud happens at companies of all sizes and many of the best practices are applicable regardless of size.
Over the course of a year, fraud losses at a large company will typically exceed losses for a small company. But on a per incident basis, there is very little difference. To illustrate the point, take a look at the graph below from the Association of Certified Fraud Examiners 2010 Report to the Nations. There really isn’t that much of a difference between the median loss at a small company (less than 100 employees) and losses at companies with more than 100 employees. With that said, a $155,000 fraud at a small company can close the doors. A $164,000 fraud at a Fortune 500 company is a blip on the radar.
The biggest difference between how fraud is handled at small and large companies can be found in the post-mortem process:
Not surprisingly, the post-mortem at a large company is focused on preventing the fraud from happening again. Often, employees that failed to uncover the fraud are disciplined or terminated. If the company has an internal audit function, they are often asked to prepare a report that details the control failures and provide recommendations to avoid a similar fraud in the future. Management of the operation where the fraud took place is expected to implement, and subsequently own the changes to the internal control environment. Invariably, the fraud will receive a nickname and over time, the mere mention of the fraud will either silence a room or result in embarrassed chuckles. No one wants to see that fraud happen again.
The post-mortem at a small company is an entirely different matter. Instead of internal audit reviewing the situation and recommending improvements, the owner or senior executives normally dive in and do their best to understand what really happened. The entire company – not just the department where the fraud took place – is on tender hooks. They literally don’t know whether they will have a job next week. A law firm is normally involved in some shape or fashion and their mere presence sends concerned employees scurrying up and down the corridor looking for someone to tell them what is happening.
Quite simply, the stakes are not the same for large and small companies.
I believe that the post-mortem process at most companies is in need of an overhaul. Very rarely do small or large companies do anything more than deploy controls to stop exactly the same fraud that they just experienced from happening again. That’s understandable. “Scope creep”, “trying to boil the ocean’, “not trying to solve world hunger” are all euphemisms for don’t over engineer the solution.
I agree that it is important to solve the problem at hand. With that said, it is almost guaranteed that a company will experience more than one fraud in its lifetime. Subsequent frauds may duplicate a previous fraud, be a variation on a theme, or something entirely brand new. Will your company be ready?
As for Sirius XM Communications, I am sure the post-mortem process is over by now. I wonder what they did to stop a similar fraud from happening in the future? Anyone want to bet that they expanded the post-mortem process to include an assessment of fraud risk within the entire accounts payable department.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
The confession – the “how” and “why” of employee fraud
“It is not the criminal things that are hardest to confess, but the ridiculous and the shameful.”
– Jean Jacques Rousseau, (1712-1778) Swiss political philosopher
The employee sitting across the table from me (we’ll call him Bob) looked like he was going to throw up. I didn’t feel any better. I had played this scene over in mind for weeks and hardly slept the night before.
Welcome to my first interview involving a fraud suspect. You can conduct as many “mock” interviews as you like, but until you are sitting face to face with an employee accused of fraud, you really have no clue what it feels like.
Bob clasped his hands together – almost in prayer – and stared directly at me with eyes that appeared on the verge of unloading tears. Below the table, his legs were bouncing at an alarming rate, so much so that the binders in front of me were slowly shuffling towards the edge of the table. It was time to begin…
“Do you know why you’re here?” I asked
“Yes” said Bob. “I did it. I took the money. Can I go home? I need to tell my wife”
Now what am I supposed to do? The employee had confessed without seeing one document. This is easy! Will they all go this smoothly? I composed myself and asked Bob to tell me what he meant. What money? How did he take it? He again asked to go home, but I encouraged him so share his side of the story and review the documents I had compiled. I convinced him that he needed to know what he had just confessed to doing.
We spent the next hour reviewing the investigation binder in detail. During that time, Bob explained how he embezzled over $100,000 from the company. I also shared the mistake he made that resulted in his undoing. At the end of the hour, Bob had explained how he had committed the fraud, but he had not shared why he had done so.
Knowing how the fraud took place is certainly important as employee and third-party fraud tends to follow “tried and tested” modus operandi. There are certainly variations on themes where a fraud includes a “wrinkle” or unusual element that is unique. With nearly 17+ years experience in this arena, I am still learning new and unusual ways to commit fraud. But don’t neglect the “why”… If you really want to make a difference, ask about the how and the why.
Never make any promises to entice the employee to provide the “why” (That can really create much bigger problems down the road). There are a number of tactics to help employees through this phase of the interview. I personally like the “5 Whys” approach.
“Why did you take the money?”
“Lots of reasons. I don’t really want to tell you why.”
“It would really help if you did. I know this has been bothering you for a long time. Why take all that money? What made you take the first step?”
“I didn’t get promoted last year. I deserved it. I did all the work, and he (pointing to his supervisor seated in the far corner) took credit. For everything.”
“But why commit fraud, though? You might have been promoted this year”
Bob looked down and bit his bottom lip.
“I know other people took money and got away with it.”
“In this office?” I asked. “How do you know?”
“I know because I saw them. They gave me money to keep quiet. I shouldn’t have taken it. But then I wanted more.”
“Why take the money? Why not tell someone about what you saw?”
“My kids need clothes and we just don’t have it. My wife hasn’t been able to find a job and we don’t have anyone to look after the kids anyway. The others were fired so I couldn’t get any more money from them.”
It turns out that 2 employees were fired six months prior for absenteeism. Upon further investigation, both had been involved in stealing inventory and selling it on eBay. Bob stumbled across the fraud and agreed to accept kickbacks to keep quiet.
Sometimes the “5 Whys” works. Other times, no matter how you ask the questions, the employee declines to share anything of value. In fact, I had one employee tell me that they needed the money, and then run out of the room! Not much you can do in that type of situation.
Remember: how fraud is committed is always important, but so is the why. Don’t neglect one over the other as understanding both can help your company prevent fraud. Take the time to learn from each fraud. After all, you’ve paid the entrance price; why not watch the entire movie?
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
“She’s just a wolf in sheep’s clothing”
Looks like another bookkeeper may have forced their employer to declare bankruptcy. Karen Tripp allegedly embezzled $1.5 million from Seiler-Nabors Construction Company, based in Collierville, Tennessee. The indictment states that Tripp wrote checks to her personal bank account as well as the antiques store that she owned. She also allegedly used the money to buy her children cars, build a mansion and take exotic vacations.
Collierville’s population is just under 45,000. I am sure the Seiler-Nabors bankruptcy will create a sizable ripple effect across the community. The company has already fired 20 employees which will obviously have a direct impact on a number of families.
Christy Klink worked alongside Tripp. She shared her thoughts with Memphis reporters regarding the indictment.
“It’s not going to change anything that happened or change the financial problems it has caused us. It does give us some satisfaction to know she is going to spend a lot of time in jail.”
Klink may be in for a rude awakening if Tripp is found guilty or “cops” a plea. In reality “a lot of time in jail” may not amount to much. It is probably Tripp’s first offense, and I would guess that she’ll serve 2 to 4 years. She’ll probably be ordered to pay the money back and it sounds like there may be some assets that can be liquidated. But, when the IRS comes knocking for the taxes on the $1.5 million (I doubt that Karen declared all of her income), they’ll likely jump to the head of the line demanding payment.
This case is just another example of how fraud can destroy a business. Ultimately, there are very few “winners”. In addition to closing the business and putting 20 people out of work, trust was lost. Trust that their employee was honest. Trust that their mother’s gifts and new house were earned and not stolen, and trust that if you work hard and do the “right thing” for your employees and the community that you’ll be rewarded.
Christy Clink’s father is a part owner of Seiler-Nabors Construction. Clink told reporters that her father had hoped that the company would pay for his retirement.
“He lost my mom about three years ago. He’s not really gotten over that and this comes and destroys him. She’s taken everything. He’s going to lose it all.”
This story involves a small company, but the “lessons learned” can apply to companies of all sizes. If you learn only one thing from this post, please monitor employees that issue payments. This case involved checks, but fraud can just as easily happen with wires, debit cards, credit cards, ACHs and of course cash. When was the last time that you reviewed your bookkeeper’s work? Do you reconcile your company’s bank statements on a daily basis? Who has access to blank checks?
Remember: You can trust but always verify.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Grab your Magic 8 Ball
I’d love to hear your thoughts on fraud in 2012. Several industry associations are predicting that we will see a significant increase in corporate fraud. Others believe that we are over the worst and that fraud losses may actually decrease. Your turn… please take 2 seconds to submit your vote.
Also, if you would like to share your thought process in the comments section, please do so! You may be the “lone voice”, or in the majority. Either way, you’ll find out!
Thanks for taking the time to vote!
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Blog of the week – www.fbi.gov/news/news_blog
It is very easy to forget that many law enforcement agencies, including the Federal Bureau of Investigation have a blog. The FBI’s blog is easy to navigate, regularly updated and includes information on a vast range of fraud types that fall within the FBI’s area of operation. It is certainly not aesthetically pleasing, but the format is consistent with the FBI’s persona.
The “news by subject” section is particularly helpful as it provides hyperlinks to topics such as organized crime and white-collar crime. I found the post “Ten Years Later: The Enron Case” particularly intriguing. Many of the Enron trial exhibits and documents are available online. Personally, it looks fascinating, but I am little biased…
http://www.fbi.gov/news/news_blog
Do you want to learn more about what is happening in fraud today? Click here
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Dishonor among thieves
If you believe Diana L. Farmer-Forston, since her early childhood life has been a struggle. But in many respects, her struggles are just beginning. Diana was recently sentenced to two years in prison for embezzling $567,000 from her employer, Bennett and Zydron, a Virginia Beach law firm. In an interesting twist, Diana ended up being scammed out of $300,000 of the fraud proceeds when she agreed to lend a co-worker money to cover expenses associated with their cancer treatment. Allegedly, Diana made her coworker sign a promissory note with a monthly interest rate of 4.5%. Thankfully, the coworker is cancer free. In fact, they never had cancer in the first place.
Hired by the law firm in 2005, Diana didn’t launch her fraud career until 2007. What happened between 2005 and 2007? Did Diana’s struggles from her childhood come back to haunt her? We do know from court filings that her husband of 25 years announced in 1999 that he had decided to undergo a sex change operation. Their marriage ended shortly thereafter. That revelation surely had an impact on Diana, but did it force her to commit fraud seven years later?
Here’s a hint: In many cases, you’ll never figured our exactly what drove an employee to commit fraud.
In Diana’s case, it would likely require extensive therapy to truly undercover the root cause. Diana’s attorney claims that she has struggled with depression and other undisclosed mental health issues since her childhood. He also states that Diana was also around physical, sexual and emotional abuse while growing up. She has apparently had a very difficult journey to date, but her struggles started long before she joined the law firm.
As an employer, you have to focus on what you can control. Certainly, before hiring a new employee, perform background checks, conduct a rigorous interview process and call references. Whether the employee experienced abuse as Diana apparently did it is legally, ethically and morally out of scope during the interview process. Remember, you can’t control what has already happened…
You can control what happens once the employee sets foot in the office. Once they join the organization, make sure that you don’t send messages that help the new employee rationalize that committing fraud is “ok”. Fraud prevention essentially begins during the interview process and continues throughout the employee’s tenure. Assuming that you have not hired an employee that is already an accomplished fraudster, your company has ample opportunity to prevent from fraud happening. I’ll detail many of the tactics you can use to build a culture that prevents fraud in my next post. This post hopefully lays the groundwork.
Bottom line: You can prevent fraud if you focus on what you can directly control. The employee already has ‘baggage’ that they bring to the table. You can’t control how much, or what it contains. You can control how your organization is positioned to prevent and detect fraud. There are no “fool-proof” approaches, but you have far more power than you realize…
Learn more about Diana’s case here
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com
Impersonation Schemes: A Big Headache for Companies
This is “Fraud Happens” first guest post. ildar khakimov is a Montreal based internet enthusiast who co-founded several projects including callcenter.com
Companies suffer staggering losses when it comes to impersonation scams.
A good example can be seen in a documentary called “Yes, men fix the world”, in which two men setup fake press conferences on behalf of companies to spread false news.
It’s believed that Dow Chemicals suffered a 2 billion dollar loss as a result of the duo’s fake news announcement which alleged the company’s planned to pay out compensation for the Bhopal Disaster.
So what about the more common forms of impersonation, such as the use of fake caller IDs?
Caller ID spoofing can be even more dangerous because it’s not a single person hitting a single target, but rather a large telecom fraud machine that’s able to place thousands of calls or send millions of SMS messages pretending to be someone they’re not.
Most recent example is fake SMS giftcard scam. In 2012, many individuals started receiving messages that claim they won a free giftcard from Best Buy. The SMS was asking people to visit a specific web-site to claim a prize that didn’t exist.
People that got duped went straight to Best Buy and demanded their “winnings”. This forced Best Buy to spend company resources in order to explain consumers that they got scammed.
In addition, it’s hard to put a monetary value on Best Buy’s tarnished reputation. For example many consumers, who leave complaints on sites like callercenter.com, believe that Best Buy gave out their personal information to telemarketers and that perhaps their personal information was compromised due to company’s inefficient security measures. Even if such allegations are later proven false, the damage to the company’s image has already been done.
One such complaint goes: “[…]Walmart employees are in on it, or Walmart’s IT security is **** and they were hacked? I paid for my purchase with a credit card, so I certainly hope that wasn’t leaked along with my phone #. One thing’s for sure: I will never step foot in a Walmart again!”
Another popular fraud conducted via SMS while showing a fake caller ID is known as Smishing. It consists of a banking notification from crooks who pretend to be the victim’s bank. The SMS threatens the victim to shut down their account unless they login to a specific web-site.
Login information entered is stolen and then used by fraudsters to siphon funds to off shore accounts.
Banks often reimburse stolen funds and thus suffer financial losses from caller ID spoofing. These types of scams are on the rise. A survey of 95 financial institution by ABA show a 260% increase of such scams in 2011 compared to 2009.
In addition to that, banks have to spend millions on security to help fight smishing fraud, in an interview with USA Today, Carol Kaplan of American Bankers Association admitted: “[…]there continues to be huge gobs of investment into shoring up security.”
It’s hard to estimate how much money companies lose because of Caller ID spoofing, but it’s a very significant amount and the situation won’t change until this practice is more strongly regulated by the government.
Now the fraudsters have started spoofing caller IDs making it look like they’re calling from the U.S government to offer a free grant. Who knows, maybe now the government will take notice?
If you are interested in writing a guest post, please email me – pmccormack@connectics.biz. I look forward to hearing from you.
9 million reasons to fight internal fraud
UPDATE: Patricia K. Smith sentenced to six and a half years. Read more here.
Patricia Smith will be sentenced today, May 8 for embezzling $10.2 million from Baierl Acura. The US Attorney recommends that she serves five to six years. I wouldn’t be surprised if she receives less time than that.
“The $10 million stolen is not an insignificant amount to Baierl, as it might be for a Fortune 500 corporation,”
– U.S. Attorney Steve Kaufman
The majority of Fortune 500 corporations can absorb seven-figure losses and continue operations. Employees may be fired for failing to detect the fraud, processes may be revised and additional technology purchased to prevent a similar loss in the future, but for the most part, the company will shrug off the loss within weeks, sometimes just days.
Does that mean that small companies will automatically close their doors if they experience a $10 million loss? Not necessarily… As we’ll see below, it is actually a little more complicated than that.
Here is another quote from U.S. Attorney Steve Kaufman.
“The defendant’s pattern of theft negatively impacted the finances of Baierl Acura each and every year from 2005 through much of 2011. Fortunately, her activity did not affect Baierl’s timely payment of its payroll, tax and business obligation and liabilities.”
“No harm, no foul?” Patricia committed a crime, but the dealership didn’t suffer that much damage, right?
In my first blog post, I discussed the untold story of small business fraud. I noted that opportunities for the business to expand disappear while the fraudster lines their pockets with ill-gotten gains. In some respects, that is one of the saddest outcomes of fraud within a small business. It robs these businesses of their future.
As this case shows, some businesses can continue operations while a fraud scheme is running. However, the lack of cash puts the business on a different course – they just don’t know it…
With less cash in the bank, hiring decisions are delayed, bonuses canceled, and expansion plans shelved. What would Baierl Acura have done with the $10.2 “extra” dollars? We’ll never know. What we do know is that the business had earned that money. Here is a novel thought… the dealership could have kept the money in the bank and earned interest! They had the right to invest it as they saw fit. Patricia Smith did not have the right to use the money as she saw fit.
So what did Patricia do with the money?
We know that she bought real estate, cars and took luxury vacations, including a VIP trip to the Vatican. AUSA Kaufman can help answer the question.
“A large portion of the money also was wasted on gambling activity, both by herself and by at least one family member,”
Given that Smith had assets, how much of the $10.2 million does the government expect to recover?
$1 million… 10% of what she embezzled.
At the end of the day, the dealership waves bye-bye to $9 million ($9.2 to be exact) and well as the future that might have been. And we’re left with yet another sad ending involving internal fraud at a small business.
UPDATE: Patricia K. Smith sentenced to six and a half years. Read more here.
Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter or white paper you get an accomplished writer that is also an expert in fraud.
paul@mccormackwrites.com