According to the ACFE, a lack of effective internal controls are the primary contributing factor in nearly one-third of fraud cases. Why is this? For many companies, the issue stems from the effort it takes to change set processes. Boosting internal controls isn’t difficult, but it does involve taking time to reassess company procedures. For smaller businesses, the challenge often lies in the lack of resources or staff.Read More
An act of fraud rarely occurs without subsequent acts to hide it. In the time after a fraud takes place, perpetrators are working in multiple ways to either circumvent controls or take advantage of a lack of controls.Read More
If you see a weather forecast that a blizzard or big storm is coming, you would most likely rush to stock up on food, water and other necessities. Similarly, if you knew fraudsters were targeting your organization, you would no doubt try to anticipate their actions and prepare accordingly.Read More
Mandy Moody, CFE
ACFE Content Manager
One technique I have heard anti-fraud team leaders discuss is brainstorming fraud scenarios with their teams. In-house investigation teams will sit down in a room and think of ways to defraud their company and carry out the frauds from the beginning to the end. This gives teams a way to step outside what they see every day and identify any potential loopholes or gaps in controls. While this exercise may prove valuable, it still doesn't capture the truly outlandish frauds out there. As many of us who read fraud headlines lately know, sometimes there are fraud stories you just can't make up.
Here are some recent news stories sure to leave you speechless:
- A slippery slope: This lawsuit is bananas. Kmart Corp has been sued by a New Jersey company that accused the retailer of ripping off its full-body banana costume design for its “Totally Ghoul” banana men’s Halloween costumes. Read the full story.
- YOLO: A woman who claimed to insurers that she could barely walk but was seen bungee jumping on Channel 4's Coach Trip has admitted fraud. Read the full story.
- A carnivorous crime: A South Texas juvenile justice department employee is accused of stealing $1.2 million worth of fajitas over nine years through county-funded purchases. Read the full story.
Do you know of any ridiculous fraud stories? Share them on Twitter and Facebook with the hashtag #cantmakethisfraudup.
Ron Cresswell, J.D., CFE
ACFE Research Specialist
On August 18, 2015, the Securities and Exchange Commission (SEC) announced a $14.8 million settlement with Bank of New York Mellon (BNY Mellon). According to the SEC, the bank violated the Foreign Corrupt Practices Act (FCPA) by giving valuable internships to the relatives of foreign officials. This case is a good reminder that bribery can take many forms. It is not limited to envelopes of cash. Under the FCPA, companies may not offer “anything of value” to improperly influence a foreign public official. Violations may result from expensive gifts, travel and entertainment expenses, charitable contributions or even internships.
The BNY Mellon Case
The case arose from an existing business relationship between BNY Mellon and the sovereign wealth fund of an unnamed Middle Eastern country. A sovereign wealth fund is a government-owned investment fund. BNY Mellon managed and serviced the fund, which held more than $55 billion in assets.
Two officials of the fund repeatedly and aggressively requested student internships for their relatives (two sons and one nephew). BNY Mellon hired the three relatives as interns, even though they did not meet the rigorous admissions criteria for the bank’s internship program. Two of the internships were paid, and one was unpaid. The paid internships were paid at a higher rate than was customary. In addition, the internships were longer than usual, and they were customized to provide a uniquely valuable work experience for the recipients. In emails, high-level BNY Mellon employees made it clear that the relatives were hired in an effort to retain and increase the bank’s business with the fund. One email stated that BNY Mellon “was not in a position to reject the request from a commercial point of view.” Based on this evidence, the SEC found that the internships violated the anti-bribery provisions of the FCPA.
The SEC also determined that BNY Mellon violated the FCPA’s internal controls requirement. While BNY Mellon had a broad FCPA policy, the bank failed to ensure that its employees understood the policy and received appropriate training, especially with respect to hiring. Human resources personnel were not trained to flag potentially problematic hires. Senior managers had the authority to hire individuals without any review by legal or compliance staff. The SEC found that BNY Mellon’s internal controls were not tailored to address the specific corruption risks inherent in the bank’s business.
The settlement with the SEC included $8.3 million in disgorgement and $1.5 million in prejudgment interest. It also included a $5 million penalty. The penalty probably would have been higher if BNY Mellon had not cooperated with the SEC’s investigation.
The BNY Mellon case is an important reminder that bribery is not limited to cash payments. The FCPA prohibits companies from offering anything of value to improperly influence foreign officials, including jobs or internships.
Since the SEC has signaled that hiring practices will be subject to scrutiny, companies must have hiring policies and procedures that take into account FCPA risks. These policies and procedures should include appropriate FCPA training for all employees. Human resources personnel should be trained to flag unusual hires, which should then be reviewed by legal or compliance staff.
As evidenced by the actions of BNY Mellon, broad FCPA policies are insufficient. Businesses should take care to specifically tailor internal controls to the corruption risks faced by their individual business.