5 Background Check Red Flags You’re Probably Missing

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Dennis Lawrence, CFE

Lawrence is a former U.S. Army Counterintelligence Special Agent and Investigations Manager at a publicly traded software company. He is a graduate of The Johns Hopkins University.

Whether vetting a new employee or an expert witness, we’re all familiar with the basic components of a background check. The industry standard includes a comprehensive criminal records search along with verification of educational credentials, employment history and professional licenses. Perhaps civil litigation searches and a credit report are thrown in as well. But are your background checks exploring the issues below that aren’t as easy to discover and could do the most damage?

  1. Secret companies and conflicts of interest
    Side businesses are becoming increasingly common as it is simpler today than it has ever been to set up your own website and LLC. However, these entrepreneurial projects aimed at earning extra income can potentially lead to conflicts of interest or outright fraud. How valuable would it be to learn that the new head of your IT department is purchasing marked up equipment and services from a company he quietly owns but is managed by a seemingly unrelated party? If you’re serious about boosting your capabilities in this arena, try testing out an investigative database offered by one of the big name legal research providers.
  2. Shell companies used to backstop employment history
    Individuals who have been let go from an employer may sometimes conceal a subsequent period of unemployment by representing on their résumé that they started their own business. Curiously, however, the business was only in operation until they found a new job six months later. I once observed a particularly clever Wall Street professional who had recently been released from prison create an LLC to backstop his employment history during his one-year jail sentence and used a co-conspirator as a professional reference. The bottom line is that all self-employment should be verified using state business records to prove the company’s legitimacy (when available), and copies of 1099s should be collected to verify that the company was actually earning money.
  3. Unverified military career with extraordinary claims
    As a federal employee who served in Afghanistan, I have a healthy respect for our veterans. Since joining Corporate America, however, I have been astounded at the number of background checks I have run on people falsely claiming to be decorated war heroes. In all cases, the purported military experience on their résumés fell outside the seven year scope which they knew was automatically subject to verification. It seemed as if they were hoping no one would bother to go further back and check their military service record. When in doubt about a particularly spectacular representation, request a copy of the individual’s DD-214 (Certificate of Release or Discharge from Active Duty) and follow up with an employment verification. You could learn a lot about someone’s credibility and state of mind.
  4. Recently issued social security number
    Social security number (SSN) validations tend to be overlooked even when they are included in a background check report. But what if your senior consultant purportedly born and raised in Ohio was only issued an SSN five years ago? A change in SSN, which is often accompanied by a name change, is a great way to start over in life, especially if your intent is to evade public records searches. A licensed attorney once vetted by our team went to extraordinary lengths to cover up his former life by using precisely this formula, albeit without success. The Social Security Administration offers a free SSN validator for registered users, so there is no excuse to refrain from conducting this basic due diligence and taking a moment to review the results.
  5. Inappropriate behavior on internet message boards and social media sites
    With the amount of time and resources spent verifying an individual’s résumé and searching online databases, it is ironic how often we forego using free sources of intelligence online. Facebook and LinkedIn searches are common sense, but what about slightly less obvious internet footprints? Reverse tracing a phone number on Google can lead to a scandalous internet message board posting, and searching for an email address can reveal a blog with loyalties to causes that may be of value in a litigation or investigative context. 

Use your creativity when examining someone else’s life – you never know when they could be using their creativity to undermine your job as an investigator.

Author’s Note: This article is for informational purposes only. It is the reader’s responsibility to ensure compliance with all applicable laws when conducting investigative activities.

How Will You Observe Fraud Week?

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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

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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.