Detecting Fraud the Old-School Way: How a Facility Tour Led to a Break in a Routine Audit

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Mary Breslin, CFE
President, Empower Audit

I recently returned from Jordan where I conducted a data analytics training for an internal audit banking group. As is often the case when learning to use data analytics within internal audit, people wanted to skip right to finding fraud. I wish it were that easy. While I sometimes feel like I could never conduct a fraud investigation without my data analytics tools, I've learned that I can never rely solely on analytics. We must continue to be students of the business and hone traditional methods while enhancing them with analytics. 

Many of my cases have been discovered and initiated by simply walking around and talking to people. One example is a recently settled federal case. Several years ago I was in Belgium at a factory location of an American company I worked for. I asked for a tour of the facility even though I knew most of my time would be spent with accounting records and documents. I wanted to understand the business. During my tour I spotted a large crate ready to be shipped. The core product was made in the U.S. and finished in Belgium before delivery to the customer. The crate was stamped “Made in the USA” in six-inch letters. Directly beneath that stamp was another that read “Ship to the Islamic Republic of Iran.” I did a double take. Iran was (and is) an embargoed nation — it was illegal to sell goods of any kind to Iran.

I assumed this was a lack of training, and the Belgian team wasn’t aware of the restrictions, and I proceeded as such. My team requested all sales to that customer, as well as to any other countries that were embargoed at the time for the prior 18 months. Much to my dismay, it was a long list of sales. 

In conversations with the general manager I reviewed the Code of Conduct and Handbook, where it explicitly forbade sales to those countries. I then reported the issue to the executive team and went about preparing the information that would be needed for counsel to self-report the issues to the necessary regulatory agencies. The situation was under control, right? But of course before my team and I went home, I added the location to our follow-up action plan for internal audit.

Three months later I returned to Belgium for an unannounced visit to the factory. Who stops by to see me? The general manager. She hands me a manila folder stuffed with evidence of the many sales to embargoed countries that had occurred since my departure just 90 days earlier, when it had seemed the executive team was clear on the problem and ready to make things right. As I flipped through the folder's contents I saw document after document that contained the written approval via email of every one of those sales by the COO himself. I was shocked. I immediately reported back to the executive team and was surprisingly met with the response, “We need those sales.” In their quest for revenue, executive management chose to break the law and go against legal counsel and internal audit’s recommendations. 

In the following week, our inability to agree on the handling of the issue resulted in my termination — as well as the termination of my entire team. The issue was then reported to the Securities and Exchange Commission (SEC) and appropriate regulatory agencies and a federal investigation ensued. In October of this year the case finally settled in court. The company pleaded guilty and paid a large fine. The executive management team has since been replaced.

If I had not walked the facility that day, the issue may have never been identified.  The likelihood of finding those illegal sales buried in all the sales for the year was minimal using normal audit techniques unless I knew to look specifically for that issue. While analytical tools can be invaluable, they should not replace understanding the business and the traditional methods — especially simply talking to people and touring a facility.

Top Fraud Predictions for 2015: Technology will shape the fight

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Scott Patterson, CFE
ACFE Senior Media Relations Specialist

Technology will give fraudsters an edge in 2015, but it will also provide new tools for organizations and investigators. Three of our experts weighed in on digital currencies, information security and other issues that will help shape the effort to prevent and detect fraud in the new year:

  • Technology will increase the sophistication of fraud schemes. This is an existing trend that will accelerate in 2015, according to ACFE Regent Gerard Zack, CFE, Managing Director – Global Forensics for BDO Consulting. “More and more we are reacting to reports of fraud with, ‘how did they do that?’” Zack said. “It’s a reflection of schemes becoming more complex and capitalizing on technology, including some of the new technology deployed by companies in the interest of improving efficiency. While simple frauds still exist, we are seeing a distinct proliferation of more complex fraud schemes.”
  • But technology (like data analytics) will also help catch tomorrow’s frauds. Zack is quick to note that for fraudsters, technology is a double-edged sword – as it will also be leveraged by the professionals trying to catch them. “There will be more breakthroughs in the use of technology to detect fraud – particularly in the use of visual analytics and also in the use of tools to mine unstructured data.”
  • Improving information security will be a major priority. More massive data breaches, like the ones that have stricken Home Depot, Target Corp. and other large retailers over the past two years, are likely to occur in 2015, according to ACFE Vice President and Program Director Bruce Dorris, J.D., CFE. “These breaches have exposed widespread vulnerabilities among organizations that store and maintain personal information, putting millions of individuals at risk,” Dorris said. “Considering that storage of data continues to grow at an exponential pace, more trouble lay ahead – and there is an increasing need for information security and protecting against data breaches.”
  • Digital currencies will shake up fraud risks for retailers and consumers. An increased acceptance of bitcoin and other digital currencies among merchants will signal a shift in fraud risk, according to Jacob Parks, J.D., CFE, Associate General Counsel at the ACFE. “Vendors/sellers face reduced fraud risks from ‘friendly fraud,’ where customers fraudulently cancel credit card or bank payments after receiving an item,” Parks said. “Digital currency transactions are generally permanent, which makes this scheme untenable. However, consumers face an increased risk of fraud by dishonest sellers, since the transaction is often not insured or protected by an agreement with a financial institution. Additionally, consumers using digital currencies have a reduced identity theft risk because the transactional data stored by the seller cannot be used by malicious parties to charge the customer (this also means vendors have a reduced risk of data breaches involving these customers).”
  • With protections for whistleblowers increasing, more people will step forward to report fraud. Dorris said that a decade ago, few countries had whistleblower protections. However, increased awareness about the harm caused by major frauds at organizations has led to legislators looking to whistleblowers to prevent or mitigate such crimes. “France, South Africa, South Korea, Australia and other countries have all taken substantial reforms to protect whistleblowers, particularly those who identify crimes in the public sector,” Dorris said. “U.S. policy has moved beyond simply protecting whistleblowers; it now has several programs that financially incentivize whistleblowing regarding bribery, tax evasion and corporate accounting fraud. The programs are largely still in the beginning stages, but have already had major payouts.”

With a new year also comes new threats. But, as many anti-fraud professionals know, just as the fraudsters think of new techniques to wreak havoc, the fraud fighters standing on the other side are armed and ready to prevent and detect it. 

Want more? Visit ACFE.com to find two more fraud predictions for 2015.

The ACFE Law Enforcement and Government Partnership: A Partnership that Benefits Your Agency

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Sarah Ellis, CFE
ACFE Partnership Manager

The start of the New Year often means a fresh perspective, and that is certainly the message we hope to convey with the release of our new Law Enforcement and Government Partnership (LEGP) webpages. We are proud to debut our new LEGP website with a renewed sense of professionalism and user-friendly navigation. Be sure to check it out at ACFE.com/LEGP.

You can easily view and download informational resources about the partnership, navigate through our list of current partners, learn about the benefits associated with joining and quickly get in touch with ACFE staff. Our newest members are now on the website immediately after partnering, and you can connect with more than 800 LinkedIn members in the public sector who are dedicated to fraud prevention and detection by joining the ACFE Law Enforcement and Government Partnership group on LinkedIn.

As mentioned, our informational resources are available for download including our new LEGP video featuring Angela Byers, Section Chief of the Financial Crimes Section of the FBI and Dom Blackshaw, Detective Senior Sergeant of the Western Australia Police. This video, narrated by actor Stacy Keach, highlights the benefits of becoming an LEGP member, having CFEs on staff and how an agency can go about joining the partnership.

We are happy to welcome our newest LEGP members: the Food and Drug Administration, Office of Criminal Investigations, Michigan Gaming Control Board and the New York State Insurance Fund – The Division of Confidential Investigations. Your agency is encouraged to become a partner alongside more than 100 agencies like these and unlock the opportunity to build a solid foundation of anti-fraud knowledge for your team.

Visit ACFE.com/LEGP to view partnership benefits and the newly-released informational video to help you get started. For more information on how to participate, contact Sarah Ellis, CFE at SEllis@ACFE.com.