How Will You Observe Fraud Week?

GUEST BLOGGER

Scott Patterson, CFE
ACFE Senior Media Relations Specialist

This year’s International Fraud Awareness Week (Fraud Week) is November 16-22, 2014, and I’m excited to see that Official Supporters are already signing up and planning their activities to help raise awareness of fraud. While preventing and detecting fraud is a year-round endeavor, Fraud Week provides a unique chance for organizations to unite in bringing this global problem to the fore of the public consciousness.

Why is Fraud Week so important right now? According to our 2014 Report to the Nations on Occupational Fraud and Abuse, organizations around the world lose an estimated 5 percent of their annual revenues to fraud. When applied to the 2013 Gross World Product, this translates to a staggering potential projected fraud loss of nearly $3.7 trillion.

Here are just a few other important facts that every business leader should know:

• A single instance of fraud can be devastating. The median loss per fraud case in the ACFE study was $145,000, and more than a fifth of cases involved losses of at least $1 million.
• The median duration — the amount of time from when a fraud commences until it is detected — for a fraud case is 18 months.
• Tips are consistently the most common fraud detection method. Organizations with hotlines in place detected frauds 50% more quickly, and experienced frauds that were 41% less costly, than organizations without hotlines.
• The smallest organizations tend to suffer disproportionately large losses. Additionally, the specific fraud risks faced by small businesses differ from those faced by larger organizations, with certain categories of fraud being much more prominent at small entities than at their larger counterparts.

The ACFE founded Fraud Week in 2000 to help shine a spotlight on the global problem. The grassroots campaign encourages organizations of all sizes and industries to host fraud awareness training for employees, conduct employee surveys to assess levels of fraud preparedness, post articles on company websites, newsletters and social media, and team with local news sources to promote fraud prevention and detection. 

You can learn more about it at FraudWeek.com, and we hope while you’re there you sign up your organization as an Official Supporter (at no cost), and then check the site often, as we will be adding new resources (including a printable handout of fraud tips and a downloadable infographic) to help raise awareness. Currently, you will find white papers, PowerPoint presentations, podcasts, videos and other helpful items available for Official Supporters to access online.

It is great to have one week out of the year to put fraud prevention in the spotlight. Fraud Week is right around the corner. What do you have planned to help raise awareness?

Back to the Basics: Red Flags and the Fraud Triangle

GUEST BLOGGER

Jeremy Clopton, CFE, CPA, ACDA
Managing Consultant, Forensics and Valuation Services, BKD, LLP

When it comes to looking for ways to improve fraud detection and prevention efforts, sometimes it is best to get back to basics. By basics, I mean the very basics – shapes and colors.  

Criminologist Dr. Donald R. Cressey developed the Fraud Triangle to help examiners understand what leads individuals to commit fraud. Many people refer to the signs that indicate an individual is facing pressure, sees an opportunity or is beginning to rationalize behaviors as red flags. The key becomes identifying the red flags that indicate the legs of the Fraud Triangle are coming together, thus increasing the risk for a potential fraud.

The August issue of the Journal of Accountancy includes an article that examines the inner-workings of an $8 million dollar fraud. In the article, there are repeated examples of pressures (debt, a new baby, gambling, divorce), opportunities (approval access, password knowledge) and rationalization (paying off existing debt). After reading the fraudster’s part of the article it is clear that the Fraud Triangle was complete and, though they went unnoticed, there were multiple red flags. The latter half of the article, written by Dr. Mark Nigrini (author of Forensic Analytics and Benford’s Law), explains the controls and methods organizations should consider to help mitigate the risk of the fraud scheme perpetrated.  

This article emphasizes three important uses of data for fraud investigators:

• Fraud Triangle analytics – While this fraud took place back in the early 2000s, today the widespread use of email, social media and instant messaging provides a large volume of data for analysis. Analyzing these communications, as well as the related geo-tagging data, may help an investigator identify pressures, opportunities and rationalizations.  
• Control testing – One of the keys to this fraud scheme’s success was the ability of the fraudster to log in to the system under another individual’s credentials. In fact, there are multiple users’ credentials the fraudster described using during the scheme. Analyzing the access logs of various users with check request and approval authority is beneficial for both deterrence and detection. For example, most employees work off a single computer. Users that log in through multiple terminals may be indicative of a control issue.
• Payroll trends – The fraudster in the article stated his subordinate had to have the day off in order for the fraud to work. This provided the access needed to take the fraudulent checks. An analysis of the payroll detail, in this situation, would likely have shown an unusual pattern in vacation time for the subordinate. Typically used for vendor activity, trend analysis is also beneficial in analyzing payroll activity (or any activity with an expected pattern over time).

As technology changes, so too must our investigation methods. In 2004, when this fraud took place, it may not have been possible to use data for the three types of tests described above. Ten years later these are just a small subset of the ways fraud investigators use data. However, it all comes back to the basics of shapes and colors. Investigators use data to find the red flags indicating the legs of the Fraud Triangle are all in place.

Follow Jeremy on Twitter @j313 or at BKDForensics.com.

Nonverbal Communication Expert to Keynote ACFE Canadian Fraud Conference

AN INTERVIEW WITH

Christine Gagnon
Nonverbal Communication Expert and keynote speaker at the upcoming 2014 ACFE Canadian Fraud Conference in Toronto, September 7-10

How have you seen the study of nonverbal communication change over the past five years? Is it something that continues to evolve or do you see it as something that will always hold the same tenets?
Synergology, the study of nonverbal communication, has evolved quite a lot in the last few years. The discipline goes beyond recognition of facial expressions, the face representing a mere one-eighth of the body. Synergology now studies the whole body, scrutinizing it thoroughly. Each body part is analysed individually, as if it were a piece of a robot. Synergology uses the corporal lexicon, based on a classification of gestures.

Currently the synergology database contains tens of thousands of video sequences in support of the research. It is through this massive collection of real-life situational videos that synergologists have understood and underlined the importance of contextual embedding – in other words, the meaning of the same movement may be different in different situations. It should, therefore, be made perfectly clear that it is never enough to make a judgment based on one isolated gesture. Analysing only one gesture without considering other indicators can lead an observer to an unjustified conclusion. Seeing gestures as a coordinated system of signals is what sets synergology apart from other nonverbal communication assessment techniques.

This video database allows us to structure the nonverbal information it provides, to compare the same gesture done in different contexts, to control the nonverbal information by analysing the logical chain of events and finally, to witness the same gesture over and over again while cross-referencing it with other videos in order to reinforce its significance. Videos are added daily on our server, allowing us to validate or reject the connotation or sense given to a gesture.

Our students undertake preliminary work for dozens of research projects every year. Those results are taken to the next level of research if the findings are relevant and interesting. Investigators, psychologists, doctors and other specialists studying synergology conduct that research. Here are a few examples of preliminary research done by our students: Is it possible to detect whether or not a person is carrying a concealed weapon by analysing their body language? What are the main differences in the body language of guilty and non-guilty suspects when left alone during an interrogation? Are there nonverbal gestures indicating an upcoming confession. Is it possible to detect a particular body language according to the drug used? Etc.

One of our faculty members, Don Rabon, spoke at our recent U.S. conference about an upcoming trend that may affect the investigative interviewing process: the use of video interviews via Skype and other technologies. He warned that video interviews may cost interviewers valuable information gleaned from nonverbal cues and communication. How do you see technology like this playing a role in interviewing in the future?
To me, there are positive as well as negative aspects in using this technology. The communication is altered by the presence of a camera in a negative way. The answer to the question, “Are you comfortable in front of a camera?” is generally, “No.” Imagine a person being interrogated on top of it! The first part of an interrogation, called the small talk, is very important. It is where the interrogator creates a bond with the suspect and also where the suspect's basic body language is analysed. It is the starting point, the base on which it will be possible to detect changes when the suspect doesn't want to talk about a particular subject. The added stress of the camera will make the changes in the body language that much harder to detect. Also, the investigator will not see the whole gesture, body or environment, which may influence the interpretation of the gestures. However, if the interview is filmed for other reasons, such as being filed, it is then possible to review it in further detail to analyse it more carefully.

What do you most hope attendees will take away from your address?
My address is entitled “How to Manage Interviews and Question According to Gestures.” The most difficult part in synergology is to observe while holding a conversation -- see a gesture, analyse it and then find the right question to introduce the subject without being intrusive, thus jeopardizing the communication. My first goal with the attendees will be to reach the first step and detect the gesture, then find the right question to ask, and finally, to get them to act quickly in order to confirm or deny their impression. It will then be up to them to practice and improve their interview techniques though experience.

Read more about Gagnon and other keynote speakers at ACFE.com/Canadian. Register by August 15 to save CAD 100.

At Play in the Fields of the County Recorder's Office

SPECIAL TO THE WEB

Annette Simmons-Brown, CFE

It's easy to record a document onto the title of a real property. Typically one needs only to have the proper form of a real estate document — a "conveyance of ownership" instrument, a mortgage document, a lien form, a power of attorney, an affidavit — and the appropriate legal information about the property, access to a notary's approval (or just a notary's stamp or seal) and filing instructions for the county recorder's office (or comparable office in your local jurisdiction). Then, bingo, the document can be filed and recorded with no verification of the truth of the information it asserts. Easy filing — coupled with no need to verify the filing's substance — enable significant, varied and lucrative frauds.

Within six months, the Hennepin County Attorney's Office (HCAO) in Minneapolis, Minnesota, charged two separate defendants with various criminal offenses in which false filings of documents at the county's registrar of titles/county recorder's office played significant roles.

The defendants — both 34-year-old men with professional résumés in real estate and investments — stole hundreds of thousands of dollars by the time they were charged with racketeering and other assorted fraud-related counts. Their routine fraudulent activities highlighted the vulnerabilities of public systems that are entirely dependent on personal honesty. (Neither defendant knew each other, for which we can be grateful.)

In part one of this two-part article, we'll examine the peregrinations of one Trevor "Bam-Bam" Baker — a financial crime generalist and all-around tiresome individual. In part two, we'll examine the specialized antics of Rory Sykes — whom I call the Lizard King of Foreclosure Fraud. Although their schemes were different, their common playground was the county recorder's office, and their respective hauls were substantial.

THE ADVENTURES OF BAM-BAM BAKER

Trevor Baker was a 6'6" bruiser of a self-styled home builder/renovator and all-around real estate whiz in Hennepin County. Before he discovered the fraud potential in real estate, he worked for a national investment house as a sales and executive investment trainee and learned the logistical operations of this and similar companies. He later became a mortgage loan officer and a commissioned notary public in the mid-2000s. His bar buddies gave him the nickname Bam-Bam, for reasons that faileth human understanding, and so that's how investigators and prosecutors later referred to him.

Bam-Bam had eight business entities registered in three states: Lucerne Capital L.P., Lucerne Builders, Lucerne Group, Marketech Investments Inc. (two entities with the same name), Geneva Capital L.L.C., Geneva Trust and Geneva Capital Trust. Remarkably, all of these entities operated out of a post office box the size of a toaster oven at a UPS outlet in a Hennepin County suburb known for its higher median incomes and relative transience. Bam-Bam listed himself variously as the "qualifying person," "general partner," and "director of investments" for these entities.

Bam-Bam also had a mother, Pamela, who had some business integrity "issues"; an honest grandmother, Edith; a soon-to-be ex-wife, Melissa, who had a healthy income and an increasing contempt for Bam-Bam; and a soon-to-be ex-brother-in-law, Dennis, whom Bam-Bam could easily manipulate.

Melissa's contempt for Bam-Bam was well-founded. For although Bam-Bam had all of these wonderful business entities, Melissa never saw him build or renovate anything unless it was a residence in which he lived. He bought, built or renovated these residences by fraudulently obtaining large loans, and he facilitated these loans by regularly filing false documents with the county recorder's office. 

Read the full article on Fraud-Magazine.com.

How to Tame ‘Data in the Wild’

GUEST BLOGGER

Misty Carter, CFE
ACFE Research Specialist

Emails, social media posts, blogs, instant messages — what do they all have in common? For one, they are tools used by millions of people each day to communicate with the rest of the world. What else do they have in common? They help detect fraud. You might be wondering, “Why and how is a Facebook update relevant to fraud detection?” Consider how much new data is created every second. Think about how many posts, emails or text messages you personally send each day. Now think about how much of this data is never touched. 

To put it into perspective, a study conducted by International Data Corporation (IDC), a U.S. market research firm, estimated that text, also known as unstructured data, will account for 90 percent of all data created in the next decade. Unstructured data, sometimes referred to as “data in the wild,” is basically free-form data that has not been put into a structured format. Since unstructured data is a relatively unexploited resource for fraud examiners, it makes sense to use it in a way that can provide more insight into areas prone to fraud that might have been previously untouched.

Before coming to the ACFE, I spent 10 years working in the audit field. I found mining through text data during fraud investigations to be one of the most useful tools in my auditing toolkit. Today, many fraud examiners are using a similar data analysis method to help explain, understand, or interpret a situation or a person’s actions or thoughts. This type of non-traditional analysis is referred to as textual analytics. In fact, the FBI and Ernst and Young’s Fraud Investigation and Dispute Services Practice have used textual analysis on email communications from past corporate investigations to determine the most common words used by employees engaged in rogue trading and fraud. As a result of their analysis, they identified the top 15 keywords and phrases used by fraud perpetrators. This list of keywords can be used proactively to prevent fraud from occurring or spot it early in the process.

The use of keywords, however, is only one facet of analyzing textual data. The ACFE’s new online course, Textual Analytics, identifies various techniques that can help fraud examiners, including examples of how data from free-text fields, email, social media sites and other sources can be used to uncover fraud. This course provides an overview of different types of data and how it should be managed prior to being analyzed. It also explains how textual data can be used to assess fraud risk in areas that might not be on management’s radar. 

If you are looking for new and innovative ways to add value to your organization, this course will provide you with the tools necessary to effectively reduce fraud risk exposure while enhancing your fraud detection skills.

Read more about the new course.