Employee fraud – the problem may be bigger than you think…

Before you can tackle employee fraud within your organization, you need to know how big a problem you have. An article that I wrote for Memento – a leader in enterprise fraud management – discusses a common mistake that banks make when tackling employee fraud. The principles that I share in the post are applicable to more than just banks.

Click here to read the post.

Please feel free to leave comments here, or on Memento’s blog letting me know what you think.

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

Bookkeeper plays “hide and seek” with company’s bank records

Source: Hyku

Bonnie Denning didn’t want the owners of Easy Picker Golf Products to see the company’s bank records, and now we know why! Over the course of less than 12 months, Denning alledegly embezzled $818,339.37 from the Lehigh Acres company using wire transfers, a debit card linked to the company’s accounts, and one check (I suspect that there will be more fraudulent checks uncovered in due time).

Here is a break down of the loss:

  • 60 Debit card transactions – $411,387.00 

Alledegly used to used to buy clothes, gas, electronic goods and home furniture.

  • 54 wire transactions – $358,885.50

Alledegly included $4,799.58 to purchase granite for Denning’s home and $29,160.00 associated with a drug rehabilitation program for a relative

  • 1 check – $5,295.76 for shutters for Denning’s home

Total loss – an eye popping $818,339!

Here are some lessons learned:

  1. Denning refused to turnover the company’s bank records to the owners. In fact, the owners had to request the statements directly from the bank! That is a GINORMOUS red flag. Never, I repeat never give your bookkeeper sole custody of your company’s bank records.
  2. The bank issued a debit card to Denning apparently without the knowledge of the owners. I’ll leave it up to the owners and the bank to decide who is at fault here; however, as I have said before, relying exclusively on your bank to prevent embezzlement is a losing proposition.
  3. Engaging a bookkeeper should never result in the the owners abandoning oversight of the financials. To the contrary, owners must stay engaged and ensure that the bookkeeper compiles the results in an accurate and efficient manner. Put simply, not paying attention can cost you dearly.

I sincerely hope that the Easy Picker Golf Product Company can survive this catastrophic loss. I can only imagine how the owners must feel.

As this case develops, I’ll keep you posted.

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

Don’t forget about fraud perpetrated by customers…

Source: Brittany G

Many fraud blogs – including this one – tend to focus almost exclusively on employee fraud. However, fraud perpetrated by customers can be just as damaging.

Not surprisingly, many companies are loathed to think that customer fraud happens. Senior executives in marketing, sales and operations often appear determined to explain why customer fraud is not a big issue. To underscore their flawed logic, and in defiance of their fiduciary duties to the company, the executives continue to dream up new products and services that are riddled with holes that allow, and sometimes encourage customer fraud to take place.

Inevitably, when the fraud losses start to mount, rarely will the department that created the product/service acknowledge that it was flawed. Instead, they ask why the fraud department seemed unable to stop the fraud from taking place. The company’s CFO or COO normally gets dragged in to the discussion and so begins the “Mexican Standoff”.

Before anyone becomes overly agitated that I believe executives sometimes violate their duties of loyalty and/or care, think about the bigger picture. Typically, fraud losses are not recorded in the same profit and loss statement (P&L) where the revenue is booked. Most executives that are in charge of a product or service receive bonuses based on the revenue generated instead of net profit earned. Surely, that creates the potential to drive up revenue at the expense of sound fraud risk management practices that minimize costs?

Some enlightened organizations allocate fraud losses back to the individual product or services’ P&L. Doing so allows the company to judge the sales and marketing executive’s performance based on revenue growth and the “bottom line” which reflects revenue less associated costs, including fraud.

This approach to fraud loss accounting is not “fool-proof” and requires time and effort to ensure that both the fraud department, and the department receiving the fraud loss allocation support the process. However, it is well worth the effort as the moral hazard associated with marketing and sales “owning” the revenue and not the fraud loss should give organizations – both large and small – cause for concern.

Does your organization allocate fraud losses to product P&Ls? If so, has it helped minimize losses?

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

Punishing the white collar criminal

“The judge opened his file and retrieved the case’s sentencing memos, plea agreement and lengthy pre-sentence report, which he had read over the past few days and which spelled out the case’s particulars: Borgono had pleaded guilty to conspiring to defraud the federal government by falsifying records that allowed her boss, the president of a Miami-based export company, to steal more than $10 million from the Export-Import Bank of the United States”

–  Judge who had ‘no passion for punishment’ retires after 31 years, The Washington Post, June 1, 2012

The Washington Post Article referenced above provides a ‘behind the scenes’ look at the challenges facing the judiciary when sentencing white collar criminals. Should society punish white collar criminals to the maximum extent allowable under the law, or does it make more sense to show compassion? Does tough sentencing for white collar criminals discourage “would be” fraudsters? How important is it to rehabilitate the offender?

Consider the vast difference between the punishment that the federal prosecutors argued for and the request made by Borgano’s defense attorney:

“Because so much money had been stolen, federal prosecutors argued in court papers that Urbina should sentence the former office manager to 18 months in federal prison. Her attorney countered that Borgono deserved just a year of home detention and two years of probation because the Peruvian immigrant, who became a U.S. citizen in 2007, had not reaped a dime in the scheme’s proceeds beyond her $500 weekly salary. She had cooperated extensively with authorities and had helped them build their case against her boss, a man sentenced by Urbina to nearly four years in prison. She also had the support of her community, the attorney said. The judge’s folder was filled with heartfelt letters from relatives, friends and even her priest.”

More on who won that fight in a minute…

In addition to the investigations that I personally conduct, each week I review over fifty cases involving fraud and intellectual property theft to determine which examples to include in our Global Knowledge Center. The differences in the sentences handed out to white collar criminals are truly startlingly, and in some cases alarming. Even within the same jurisdiction, the sentences handed down vary significantly. And let’s not forget that the Internal Revenue Service may also take an interest in the case. Or not… I have yet to understand the criteria that the IRS applies when determining which cases involving fraud and unreported income are worthwhile pursuing. That’s a discussion for another day…

I understand better than most that each case is unique and numerous factors must be taken in to account before a sentence can be handed down. But let’s consider the variation in sentencing from the “would be” fraudsters perspective. Does the threat of prison time factor in to their decision making process? Should it? What are the odds that they will be caught in the first place? Why consider the worst case scenario when committing fraud is so incredibly easy to do?

The case highlighted in the Washington Post article is somewhat different as Norma Borgano did not personally benefit from the fraud – her boss Guillermo O. Mondino did and he received 46 months in prison for his troubles.

So let’s compare Mondino’s sentence to the 66 months that Patricia K. Smith,the perpetrator of a $10.2 million dollar fraud received. That’s a difference of 20 months, or nearly two years. I fully understand that each case is different, but is Smith’s crime anymore heinous than Mondino’s? In fact, Mondino’s fraud involved a far higher potential loss of $24 million. Did Mondino’s attorneys do a better job defending their client? Who knows, but the difference is significant – especially if you are the unlucky individual serving the “extra” 20 months!

As for Norma’s fate, she received a year of home detention, four years of probation and $5,000 in restitution payments. Is that an appropriate sentence? Let’s be honest, who are we to judge?

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

A billion dollar industry and it ain’t legal (Hint: it used to be a secret)

All is not right with economies in the Western world. The US remains in a malaise while several European economies teeter on the brink of the abyss. The UK just entered a “double dip” recession and as a major trading partner for the US, we’ll surely feel the impact here in the coming months. There are many reasons for the current economic crisis. Without doubt, risk taking on Wall Street and the reckless spending that it helped fuel and support is largely to blame for where we find ourselves today. That’s history. Done. We can’t change it, we can only learn from it.

I am far more concerned with how we move forward. How does the US economy dust itself off and lead the world to better times? If there was a “magic bullet” we would have used it by now. I guess time will tell whether the decisions being made today in both the public and private sector will hurt or help.

One thing I can tell you is that US businesses are making the recovery far more difficult than it needs to be. Don’t believe me? Would you believe Pamela Passman, the president and chief executive officer for The Center for Responsible Enterprise and Trade (CREATe.org)—a Washington-based non-profit industry group focused on responsible business practices?

“Failure to address the challenge of trade secret theft costs industry billions of dollars each year and can have devastating reputational, financial, and legal impacts for individual companies and the global economy as a whole.”

CREATe.org just released a report entitled Trade Secret Theft: Managing the Growing Threat in Supply Chains‘. The report claims that trade secret theft costs industry billions of dollars annually and serves as a critical impediment to innovation, job creation and sustainable economic growth.

What does the US economy need today? How about innovation, job creation, and sustainable economic growth! US companies are literally allowing one element of the solution to the country’s economic woes to slip through their fingers into the hands of foreign competitors – many of which reside in China. Chapter 3 of the CREATe.org report states that “The weak rule of law in many countries makes it all but impossible for multinational corporations to address trade secret theft after the fact”.

Once a trade secret is gone, it is gone for good. No second chances.

Many companies sound concerned, but what are the really doing to combat the threat? Passman states the following,

“Over the past several months, we have engaged with representatives from more than a hundred multinational corporations and have been struck by the deep and pervasive concern over trade secret theft. We heard universal agreement about the need for broader awareness of the challenge and better practices and systems to help address the issue internally and externally with suppliers and business partners,”

Sorry folks, talk is cheap in this situation. In many cases, the companies that “lose” trade secrets have only themselves to blame. This is not a new problem! There is plenty of evidence available from law enforcement and non-profit agencies such as CREATe to show that trade secret theft happens on a regular basis. Goodness knows how many instances are covered up and never hit the business press.

I sincerely hope that CREATe report triggers action. The US is an intellectual property powerhouse but we can’t keep giving the stuff away. In my next post, I’ll highlight some basic steps that companies can take to protect their trade secrets. No magic bullets, but certainly more than many companies have in place right now.

As it relates to intellectual property theft prevention, “the ball” is firmly in the court of US companies. Let’s hope no one steals it before they realize that they have it.

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

Interesting article: How CIOs Can Learn to Catch Insider Crime (with help from yours truly…)

I thought my readers might be interested in an article that CIO magazine just published on insider crime. A writer from CIO magazine interviewed me about a month or so ago and I am proud to say that I am quoted extensively throughout the article. Here is just one of my sound bites:

“I’ve yet to meet any C-level person who says, ‘I’m so proud that we have 500 people preventing fraud.’ It’s not what people want to put out there as a badge of honor. It’s a necessary evil.”

Please check out the full article. In my opinion, the writer did an excellent job discussing insider fraud from a number of angles.

I hope you enjoy the article. Please let me know what you think!

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

Payroll and inventory fraud – are you next?

Apparently, there is quite a bit of money to be made from gourmet mushrooms (no, not that kind). So much so that Gino Silva and Steven Perei, both employees with D’Artagnan, a mushroom distributor set up their own company in direction competition with the employer.

Starting in December 2007, Silva and Perei made sales on behalf of their own company, Mediterra, then stole D’Artagnan’s inventory to complete the sale. To conceal the theft, Silva enlisted the help of D’Artagnan’s inventory control specialist to manipulate purchase order records and alter inventory records. This scheme was simple, yet quite brilliant – by using their employer’s inventory for their new company, top line sales essentially equaled bottom line profit. Why pay for inventory when someone else can foot the bill? The mushroom scheme lasted just over 12 months.

The mushroom scheme was not Gino Silva’s “first rodeo”. From 2005 to 2008, Silva was vice president of operations for Philips Accessories and Computer Peripherals. While working there he conspired with others to add “ghost” employees to the company’s payroll that ended up being paid approximately $1.2 million for nonexistent services (Ghost employees may be real people or fictitious but they do not work for the company).

Silva pleaded guilty to the payroll scheme in December 2008. In June 2009, he received a 27 month sentence and a restitution order for $843,414. In April 2011, Silva pleaded guilty to the mushroom scheme, and in March 2012 received a 28 month sentence, a year of supervised release and $71,179 in restitution for the mushroom scheme.

Silva committed two very different frauds and was eventually caught and sentenced twice. Is he a criminal mastermind? Certainly not, but he still managed to defraud two companies with relative ease. Will he commit a third fraud once he is released from prison? Who knows? But, the temptation may be too great… and this time, he probably knows how not to get caught!

I can tell you that there a literally thousands of companies that he could join and commit exactly the same frauds without being caught for at least a year. Is your company next?

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

Oh what a tangled web we weave… what happens when you can’t trust anyone?

Of all the government agencies to steal from, the National Security Agency would probably be the last one on my list. If just half of what the media says they can do is true, surely, they have the capability to uncover a fraud perpetrated by a vendor.

Yet, Bechdon which made metal and plastic parts for the NSA, successfully defraud the agency over a ten year period. The father son team of William and Donald Turley overbilled the agency for hours that their company never worked. As an aside, I am curious as to why the NSA would pay for parts produced by the hour and not on a fixed price basis, but I suppose we’ll never know the reasoning behind that decision.

The father son duo both confessed to the fraud during clearance interviews as part of the process for bidding on sensitive NSA contracts. Surprisingly, they confessions came over a year apart. William Turley confessed in March 2006, and Donald the following year in April (Why it took the NSA more than a year to complete the second interview is anyone’s guess).

Now for the twist that all good stories involving the NSA should have… Enter Christina Turley Knott, William Turley’s daughter and Donald Turley’s sister…

Christina is by far the more accomplished fraudster. She managed to embezzle $4.5 million from Bechdon without the knowledge of her father or brother! Presumably, while the father and son were busy bilking the NSA, they didn’t pay attention to the fraud happening beneath their noses. Christina will be sentenced shortly for her fraud, but initially the family declined to turn her in as they feared she would disclose the NSA overbilling scheme.

The moral of the story? Don’t expect your employees to act in an ethical manner if they see your company’s leadership defrauding others. The “tone at the top” is often thrown around as important to preventing fraud. In this case we can see what happens when owners or senior executives abandon their ethics at the front door. There is no honor among thieves, especially when there are millions up for grabs. Just ask the Turleys…

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