Fraud Prevention Awareness for Managers

1. Fraud Prevention Awareness for Managers Sponsored by: The Department of Administration Risk Management and Tort Defense Division & The Office of Budget and Program Planning

2. Outline • Why People Commit Fraud. • Profile of the White Collar Criminal. • Types of Frauds Found in Government. • Interesting Fraud Facts. • What to Watch for and Why!!

3. Introduction The term “fraud” may be defined as: “Any means by which one or more people intentionally make a false representation of a material fact which is acted on by another party to that party’s detriment”.

4. Elements of Fraud • A material false statement. • Knowledge that the statement was false when it was uttered. • Reliance on the false statement by the victim. • Damages resulting from the victim’s reliance on the false statement. • Hard to prove intent!!

5. Occupational Fraud and Abuse Corruption Asset Misappropriations Fraudulent Statements Conflicts of Interest Cash Financial Bribery Inventory & All Other Assets Nonfinancial Illegal Gratuities Economic Extortion

6. Unknown • “Fraud prevention and detection is like a mortal’s need for air. When it’s present, it’s never noticed. When it’s missing, it’s all that’s noticed”.

7. My Favorite Quote “Fraud Looks a Lot Like Stupid”.

8. Prevention VS Detection • An ounce of prevention is better than a ton off treatment. • In order to prevent fraud there is a need to understand what fraud is and how to prevent minor frauds from becoming major frauds.

9. Know Thy Fraudster • What fraud perpetrators do. • They don’t play by the rules; (1) Ignore internal controls. (2) Compromise internal controls.

10. The Circle/Square Concept • Circle – Anti-Fraud procedures. • Square – What employees really do.

11. CAUTION Caution: Controls Do Not • Guarantee fraud will not occur. • Guarantee errors will not occur. • Guarantee management will abide by controls. • Guarantee fraud will be detected. • Guarantee errors will be detected. • Guarantee collusion will not occur. • Guarantee staff will follow controls.

12. Effects of Decreased Funding • Less money available for certain programs. • Less money available to perform routine audits. • More opportunity to commit fraud. • Fraudsters become more confident.

13. I. Why People Commit Fraud • 3 Reasons???

14. Opportunity Fraud Triangle Pressure Rationalization

15. Opportunity Lack of or weak internal controls. Lack of understanding. Collusion Change

16. Pressure Financial Employment Vices Unexpected events

17. Rationalization Belief that internal controls won’t detect them. Non-physical They deserve it. Its small, nobody will notice. I’ll pay it back later. Everybody does it.

18. Stand Up if You Are: • Over 40 years old. • Been working for your employer between 6 and 10 year. • Are in a management position. • Are a male. • Have a bachelors degree. • Married • Never been charged or convicted.

19. Good News The Profile is Changing

20. Profiles of Fraud Perpetrators • Less likely to be caught or turned in to law enforcement. • Less likely to serve long sentences. • Fraud perpetrators are older than normal prison population. • Better educated.

21. Profiles of Fraud Perpetrators • What is different about fraud perpetrators vs. college students? • More dishonest • More independent • More sexually mature • More socially deviant • Perpetrators are like us. They appear normal.

22. Unusual Behaviors • Unusual behaviors could include: • Compulsive behaviors such as alcohol abuse, legal/illegal gambling and drugs. • Unusual irritability, insomnia, inability to relax, fear of getting caught. • Defensiveness, argumentativeness, embarrassment around co-workers.

23. T H E E F F E C T O F P O S I T I O N • One of the strongest indicators of the size of the loss in an occupational fraud scheme is the employees position. • As the above data shows, schemes committed by managers/executives, on average, cause median losses of $250,000 – WHY?

24. T H E E F F E C T O F G E N D E R The following chart reflects the relative frequency and median losses for males and females. Losses from schemes committed by males were more than three times as high as the losses caused by females.

25. T H E E F F E C T O F A G E There is a direct correlation between age and median loss. Median losses for the oldest employees (those older than 60) were $500,000, which was 27 times higher than losses caused by employees under 26 years of age.

26. T H E E F F E C T O F E D U C A T I O N Losses caused by perpetrators who had college degrees were about 3.5 times as high as losses caused by perpetrators with only high school diplomas.

27. C R I M I N A L H I S T O R Y O F P E R P E T R A T O R S The following chart shows that only about seven percent of occupational fraud perpetrators were known to have been convicted for a previous crime.

28. III. Types of Fraud in Govt. • Bribery & Corruption • Fictitious Disbursements 90% of all Frauds involve corruption or misappropriations! Corruption, i.e., fraud committed in the form of kickbacks, gifts, or gratuities, cost employers $20 billion dollars per year.

29. Bribery & Corruption • Commercial Bribery • Illegal Gratuity • Economic Extortion • Conflicts of Interest

30. Commercial Bribery • Giving or receiving (or offering or soliciting). • Any “thing of value”. • To influence • A business decision. • Without the employer’s knowledge and consent.

31. Illegal Gratuity • Giving or receiving (or offering or soliciting). • Any “thing of value”. • For or because of • An official act. An illegal gratuity is a lesser included offense of bribery.

32. Elements of Corruption • Economic extortion • Conflicts of interest

33. Economic Extortion • A demand of payment by the recipient. • To refrain from discriminating against • A business decision.

34. Conflict of Interest • An agent taking an interest in a transaction. • Which is actually or potentially adverse to the interest of the principal. • Without disclosure to the principal.

35. Conflicts of Interest • Has an undisclosed financial interest in a transaction which has actual or potentially adverse ramifications for their employer. • Sets up a bogus contractor or vendor or buys through a broker or middleman that the employee controls. • Is involved in other business ventures with a supplier or contractor. • Has an interest in a business that competes with his or her employer. • Accepts inappropriate gifts, travel, entertainment, or “fees” (kickbacks) from a vendor. • Negotiates for or accepts employment with a supplier.

36. Red Flags of Conflict of Interest • Unexplained or unusual favoritism of particular contractor or vendor, e.g.: • Payment of unjustified high prices. • Purchase of unnecessary or inappropriate goods or services. • Continued acceptance of high priced, low quality work.

37. Red Flags of Conflict of Interest • Contracting or purchasing employee lives beyond means. • Contracting employee fails to file Conflict of Interest or Financial Disclosure Forms. • Keen interest by the contracting employee in a particular vendor. • Employee declines promotions from a procurement position.

38. Red Flags of Conflict of Interest • Close socialization and inappropriate gifts. • Contracting employee appears to conduct side business.

39. Red Flags of Conflict of Interest • Vendor EIN matches employee SSN. • Vendor address is incomplete. • Vendor address is a mail drop.

40. Methods of Making Illegal Payments • Gifts, travel, and entertainment. • Cash payments. • Checks and other financial instruments. • Hidden interests. • Other methods.

41. Gifts, Travel, and Entertainment • Wine and liquor (consumables). • Clothes and jewelry for the recipient or spouse. • Sexual favors. • Lavish entertainment. • Paid vacations.

42. Gifts, Travel, and Entertainment • Free transportation on corporate jets. • Free use of resort facilities. • Gifts of the briber’s inventory or services, such as construction of home improvements by a contractor.

43. Cash Payments • The next step is usually cash payments. • Cash is not practical if large sums are required. • The use of currency in major transactions may itself be incriminating.

44. Checks and Other Financial Instruments • As the scheme grows, illicit payments are often made by normal business check, cashier’s check or wire transfer.

45. Hidden Interests • In the latter stages of sophisticated schemes, the payer may give a hidden interest in a joint venture or other profit-making enterprise.

46. Other Methods • Loans • Payment of Credit Card Bills. • Transfers at Other Than Fair Market Value. • Promises of Favorable Treatment .

47. Fictitious Disbursements • Check tampering schemes • Purchase schemes • Expense reimbursement fraud • Payroll fraud

48. Purchase Schemes • Personal purchases with company funds. • False invoicing • Altering existing purchase orders/requisitions • Related-party businesses

49. Billing Schemes Shell Company Non-Accomplice Vendor Personal Purchases

50. Billing Schemes • The perpetrator uses false documentation to cause a payment to be issued for a fraudulent purpose. • Actual disbursement is issued as would a legitimate disbursement.