Character and Behavior: The Other Red Flags of Fraud

GUEST BLOGGER

Mary Breslin, CFE, CIA
President, Empower Audit

I sat in front of my boss, the general counsel for the organization I worked for, waiting for our meeting to begin. I was still searching for the right words to explain to him why I wanted to widen the scope of an audit in Zambia and conduct some specific fraud auditing techniques. I wasn’t sure whether or not I should admit that while my team had found some exceptions on day one of the audit, my real suspicions had arisen from the Zambia general manager’s personal behavior.

Two issues had been identified: First, a cash advance had been taken out by an employee on behalf of the general manager and given to an individual who was not an employee. After some careful questioning, it was revealed that the individual was the general manager’s mistress, who needed money to pay her rent while he was out of the country on a business trip. The advance had been repaid by the general manager immediately upon his return. As a part of that conversation, it was also revealed that he requested the cash advance because he didn’t want his wife to see a large cash withdrawal from his bank account. Okay, not a great guy, but nothing I hadn’t seen before. It was a clear policy violation for use of the funds, but it had been repaid.

The second issue came later that day during a payroll and benefits review. Apparently the general manager had added a new dependent that year to his benefits, and we assumed he and his wife had adopted a child while living in Africa. When I asked accounting, they introduced me to this “dependent” who happened to be in the office — his wife. And I mean his “other” wife. In many parts of Africa polygamy is still practiced, however this gentleman was from England and I knew he had a wife and two children — also his dependents — still in England. Add the mistress to this cozy arrangement and I was starting to get pretty concerned. Wouldn’t you?

After having dinner with the general manager and, I admit, a few beers later, he confessed his love for women, pretty much all women, and admitted there might be other wives. Wait, what?

I explained my concerns regarding the general manager’s character to my boss, and we dug a little deeper and crossed over into a true fraud audit. Based on what we found, that quickly turned into a fraud investigation.  

So what did we find? To start, we found four wives in four countries… and a couple of mistresses. We also found a company he owned with a wife in South Africa that was established strictly as a pass-through scheme for supplies. We found $18 million worth of tax payments that were misappropriated — not used to pay taxes. The tax authorities had actually been getting ready to take action against us. And there was more.  In addition to the obvious issues — all of the women — and the financial pressure those issues caused him, there were other red flags. The general manager was a micromanager and a control freak. He required his staff to bring him every file and document we requested for his review before they would give it to my team. I generally call that a “clue.” Luckily for the organization, this was a profitable location. By bringing in a skilled executive to control the money, the company was quickly able to get the location back on track. So what happened to the general manager? I’m not sure, maybe I could ask one of his wives. Actually, because he was such a profitable general manager, he was “counseled” and he kept his job. It happens.

A Few Halloween Treats to Enjoy

GUEST BLOGGER

Cora Bullock
Asst. Editor, Fraud Magazine

Halloween may come once a year, but the tricks of fraudsters unfortunately happen year-round. I am happy, however, to report that there are some treats to be celebrated this year.

Trick: Countrywide, later bought by Bank of America, used a program called "The Hustle" to fast track mortgage loans without checking for fraud, then sold the loans to Freddie Mac and Fannie Mae, where they often defaulted, to the tune of a cool $1 billion. Countrywide did this while at the same time telling officials that they had tightened their standards.

Treat: A jury voted unanimously that Bank of America was guilty of fraud because of that program.

Trick: Abbott Laboratories actively marketed their drug Depakote, used for bipolar disorder, migraines, and epileptic seizures, for uses other than those the FDA approved. It claimed that doctors could prescribe the drug for schizophrenia and for the aggression that stems from the beginning stages of dementia. This wasn't the case that it had good evidence backing up their claims — it had conducted no studies or trials testing Depakote for these other uses. It "had in fact halted clinical trials that had been undertaken to determine if Depakote was useful in treating other issues because it found that the drug caused some concerning side effects."

Treat: The Justice Department ordered the company to pay more than $1.5 billion.

Trick: Tax return fraud is rampant - someone here at the ACFE discovered that he had been a victim when he tried to file his tax return and was told that a tax return with his Social Security number had already been filed. The Wall Street Journal reported in January that, "The Treasury Inspector General for Tax Administration last summer reported discovering an additional 1.5 million potentially fraudulent 2011 tax refunds totaling in excess of $5.2 billion."

Treat: Recently, a sting in Miami nabbed 45 people accused of running a huge tax fraud scheme in which the group stole at least 22,000 identities to attempt to receive $38 million in tax refunds (around $11 million was paid).

So as you continue to fight fraud tricksters, remember that there are always treats in the form of prosecutions, arrests and restitution.

The Drug Dealer's Accountant

SPECIAL TO THE WEB

By Kevin Berry, Ph.D., CFE and H. Charles Sparks, Ph.D., CPA

The home of former U.S. vice presidential candidate Sarah Palin now has another claim to fame. In spring 2012, the U.S. Internal Revenue Service (IRS) charged a Wasilla, Alaska, tax preparer with six counts of preparing false tax returns. Two factors make this scheme particularly interesting: 1) the tax preparer laundered illegal drug profits by setting up a fake company to mask the true source of income and profits and 2) even though the preparer had little professional and technical training and limited experience, the deception was innovative and complex.

Normally, authorities charge tax evaders when the criminals either underreport illegal activities or don’t report them at all. Interestingly, in this case, the tax preparer went one step further: The false business she created for her client allowed him to obtain credit through local financial institutions.

This fraud scheme will be relevant especially to small- and medium-size banks and credit unions, auto finance companies and even mortgage companies because they often don’t have expert in-house fraud groups that can detect questionable clients or customers. These financial institutions, when vetting self-employed individuals and small businesses for creditworthiness, normally rely heavily — if not exclusively — on federal income tax returns. (A coauthor of this article serves on the board of a local credit union with assets of $125 million. Its loan policy explicitly requires the most recent two years of federal tax returns for small business and self-employed borrowers.) Firms that examine potential borrowers seldom investigate tax return information beyond obtaining and comparing IRS copies. This is poor procedure as we show in this case.

Beginning in the spring of 2007, Jamie Powell (not her real name) began preparing false tax returns for a local drug dealer we’ll call BJ, and his wife. The returns reported a portion of BJ’s illegal income as legitimate construction company profits. Powell, who also apparently bought drugs from BJ, worked hard to make his income look legitimate even though she lacked accounting education or extensive professional experience. (Powell billed DJ and his wife tax preparation fees that were 20 times greater than those she charged her legitimate clients.)

The elaborate scheme included fake sales receipts, purchase invoices and bills of sale and other supporting source documents just in case the IRS audited BJ. The reported income omitted enough of BJ and his wife’s true income so they could also qualify, and receive, the earned income credit. Eventually, Powell prepared and filed prior year false income tax returns back to 2003 for BJ and his wife. They used these false returns to apply for and obtain loans to purchase vehicles and obtain credit cards.

Read the full article on FraudMagazine.com.