Occupational Fraud. Asset Misappropriation Fraudulent Statements Corruption 3/20/ ACFE Report to the Nations

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1 Detective Jackelyn Weibel, CFE Allegheny County District Attorney Investigations Unit Occupational Fraud Asset Misappropriation Fraudulent Statements Corruption 2012 ACFE Report to the Nations The typical organization loses 5% of its annual revenue to fraud. Frauds last a median of 18 months prior to detection. Asset misappropriation most common. Small organizations disproportionately victimized by occupational fraud. 85% fraudsters never charged or convicted previously. 1

2 Asset Misappropriations Cash Skimming Larceny Billing Disbursements Payroll SKIMMING Theft of cash BEFORE it enters the accounting system. (UNRECORDED SALES). Most difficult misappropriation to prove because usually there are no records of cash. Lapping Schemes Penn State kids cancer drive, local fire department BOOT drive, Salvation Army Red Kettle Campaign, kids sports team fundraisers. Middle School Secretary (Moon Township)~ $50,000 skimmed cash from kids fundraiser deposits. Convenience store manager(penn Hills) ~ $60,000 not ring up sales in register and pocketing money during register reconciliation. Inventory shortages Bookkeeper for medical practice pocketed customer co-pays and cash payments totaling $108, Church Volunteer(downtown) ~ $220,000 stole proceeds from gift card fundraisers. A/R Clerk (Downtown) ~ $51,000 stole incoming rental payments paid by cash. 2

3 LARCENY Theft of cash AFTER it is entered into the accounting system. Stealing money from the bank deposit. Reversing transactions (register voids). Usually requires journal entries to hide Car Dealer A/R Clerk ~ 80,000 stole cash from vehicle purchase and parts/service transactions and created false accounting entries to cover theft. Office Manager (Vet) ~ $425,000 stole cash receipts and used future check to cover shortage. Bank Teller ~ $93,500 cash withdrawals from elderly account holders. BILLING Perpetrator uses false documents (invoice, purchase order, credit card bill) to cause his employer/customer to issue a payment for what appears to be a fraudulent dl purpose. 3 types: Shell Company (usually provides service) Vendor Schemes Personal Purchases 3

4 EMS Secretary ~ $77,000 used EMS account debit card for her personal expenses. Meadows Purchasing Manager ~ $250,000 created 2 shell companies to provide cleaning to satellite locations. Office Manager ~ $57,000 personal expenses charged on company credit cards. Goodwill Controller ~ $50,000 Opened AMEX card in company name and used it for her personal expenses. PAYROLL 3 Types of schemes: Ghost Employee Commission Falsified Hours and Salary Schemes Medical Supply Company salesman ~ $79,000 created false invoices to obtain fraudulent commission. Shipped orders to UPS store and hid them in storage facilities. Payroll Clerk ~ $150,000 Extra and increased payroll. Trucking company payroll clerk ~ $200,000 extra payroll checks and stolen company checks. Office Manager/Payroll Clerk (vet multiple locations) ~$137,000 & $216,000 increased their payroll. Payroll billing company ~ $81,000 ghost employees. 4

5 DISBURSEMENTS Check Tampering Forged Maker Authorized Maker Altered Payee Forged Endorser Expense Reimbursements Borough Manager ~ $17, wrote checks to herself. Office Manager (Optometrist) ~ $200,000 wrote checks to herself and her creditors. Borough Manager ~ $180, wrote extra checks to herself and used borough credit cards/bank accounts for personal expenses. VP of Sales Manufacturing Company ~ $250,000 used same or fake receipts for monthly expense reimbursement request. Corruption Bribery Conflict of Interest Kickbacks Bid Rigging 5

6 Fictitious Revenues Fraudulent Statementst t Asset/Revenue Overstatement Concealed Liabilities or Expenses Timing Differences Fraudulent Statements Enron ~ Ken Lay, Jeff Skillings and Andy Fastow Adelphia ~ John and Timothy Rigas LeNature ~ Potlucky Family Crazy Eddies ~ Sam Anatar Fraud Triangle Pressure Opportunity Rationalization 6

7 Typical Offender Male Age years on the job College degree Accounting, Operations or Sales Department Initial Detection of Fraud Tip (50%) Management Review Internal Audit Accident Account Reconciliation Document Examination External Audit Monitoring Most Vulnerable Organizations Small Companies!!!! Banking/Financial Services Manufacturing Government and Public Administration Retail Healthcare Insurance Construction Technology 7

8 Organizational Red Flags Too much trust in key employees Lack of procedures for authorization No separation of duties Lack of independent checks on performance Department often skipped by auditors Lack of clear lines of authority Inadequate attention to details Individual Red Flags Employee living beyond his means (lifestyle) Overwhelming desire for personal gain Financial difficulties/high personal ldebt Control issues (unwilling to share duties) Refusal to take time off Unusual close association to vendor/customer Pay given not appropriate for responsibilities Undue family or peer pressure to achieve No recognition for job performance Addiction/Gambling Most Frauds Occur due to: Lack of internal controls Override of existing internal controls Lack of management oversight Poor corporate culture/tone at the top Lack of independent checks or audits Lack of employee education Lack of reporting mechanism 8

9 Internal Controls: Billing Install surveillance cameras Segregation of duties Review journal entries for write-off and force balancing entries Bank Reconciliations Review credit card bills Maintain and update an approved vendor list. Cross check employee SS numbers and addresses to vendor ID numbers and addresses. Review the back of all cancelled checks. Purchase authorization Payroll Employee must pick up his own paycheck Separate HR and payroll functions Review payroll checks and payroll summary sheets Segregation of duties Review 1099s at year end Track uncollected sales generated by salesman Randomly sample customers AR balances Check tampering Dual signature required No signature stamp Inspect cancelled checks Compare cancelled checks to accounting system entries Secure unused checks No checks to payable to Cash policy Require vendor checks to be mailed out Segregation of duties Positive Pay at bank 9

10 Expense Reimbursements Require detailed expense reports with original receipts Check receipts against employee vacation schedule and calendar Use travel agency for all travel expenses Require original ticket stubs for air and rail Look for: Amounts ending in 0 or 5 Reimbursements that fall just below the company approval limit Receipts that do not look professional Consecutively numbered receipts Better management oversight Fraud Prevention Tools On-going employee training Hotlines Increase perception of detection Segregation of duties Anti-fraud (Ethics) policies Rewards system Job rotation/cross training Mandatory vacations Surprise Audits Best Practices: Implement internal controls now ~ regardless of the size of the company. Separate staff duties immediately. A trusted employee is valuable but never let any one have the Keys to the Kingdom! Trust no one! Just because an employee has been a valuable employee does not mean that they would not steal from you. Trust your gut instinct. If something does not feel quite right, ask questions. Look at financial documents from 3 rd parties. 10

11 Identity Theft: World s Fastest Growing Crime!! Identity theft and identity fraud are terms used to refer to all types of crime in which someone wrongfully obtains and uses another person s personal data in some way that involves fraud or deception, typically for economic gain. -U.S. Department of Justice For the 13 th year in a row, identity theft was the #1 consumer complaint to the FTC. In 2012, identity theft reports increased by 32% to 12.6 million cases. Approximately 7% of adults in the United States were affected by identity theft. Florida, Georgia & California top 3 states. Florida double the reports than California. 70% of victims reported difficulty removing information stemming from ID theft from their credit report. Most at risk? Children 35% higher risk than adults. Smart phone owners 33% higher risk than general public. Persons with personal information on a social media site. Deceased people account for 25% of all identity theft. College students because they have good credit. Victims of data breaches have 9.5% higher risk 11

12 Discovery Is KEY!! 50% of victims discover their identity has been stolen within three months. 15% of victims do not discover their identity has been stolen for 4 or more years. Over 50 million Americans are utilizing a credit monitoring service. 44% of consumers view their credit reports using AnnualCreditReport.com or CreditKarma.com Personal Information is Everywhere! Billboard campaign in Western PA features deceased s name, address, date of birth, partial DL number and partial signature. On the Internet Public records on the Internet Free and easy access from home Information such as property ownership, tax assessments and civil court documents. 12

13 At Work Outgoing Mail Businesses and places of employment. Co-workers and visitors have easy access to information. Trash Cans Post it notes Most Common Theft Methods: Skim information from transactions inside a store. Paper mail theft. Hacking computer networks and databases. Redundant IT equipment (external memory sources). Shoulder surfing Dumpster diving Department of Veteran s Affairs, Blue Cross and Blue Shield SC Department of Revenue Hacked Sony Twitter Adobe Systems (October 3, 2013) Citibank Chase Apple I-Phone 13

14 Types of Identity Theft Medical identity theft Child identity theft Senior identity theft Government identity theft Financial identity theft Medical Identity Theft 25,000 Americans are victims of medical identity theft each year. The most difficult identity theft to detect. Thieves steal identities for the purpose of receiving free medical care and as a result create a false medical record for the victim. Consequences include: Incorrect treatment for victims; False health insurance claims filed; Denial of legitimate medical claims. Child Identity Theft 14

15 Minor s identifying information used by another person for imposter s benefit. Perpetrator may be family member or someone known to the family. Daycare workers, nannies, school employees, babysitter, relative, family friend. Targets children because of the length of time it takes to discover the theft. Children were targeted by scammers 35 times more often than adults, with 15% of the victims under the age of five. Senior Identity Theft In 2010, reports of identity theft targeting people 50 and older represented about 28 percent of the total 236,765 cases. More susceptible to acts of deception and manipulation. Worked diligently their whole life to achieve good credit. Seniors rarely check their credit reports. Government Identity Theft Also known as Documents/Benefits Theft Stealing personal information to obtain government assistance such as: Social Security retirement benefits; Social Security disability benefits; Medical insurance; Welfare benefits. Stealing personal information to obtain fraudulent income tax returns IRS identified 642,000 fraudulent tax returns. This is a 3 fold increase over SSA and IRS do not make initial contact using . 15

16 Financial Identity Theft Individuals or businesses can be affected. Personal information everywhere! Billion dollar business. Most common type of identity theft! Retail Merchants and Their Employees Restaurant Employees Bank Employees Drug Abusers Terrorist Groups Organized Crime Members Illegal Immigrants Your Family Members Your Co-Workers Your Employees Neighbors WHO?? WHERE?? Your mailbox Your trash Retailers Restaurants Grocery stores Hospital or health care facilities Discarded/stolen computers Internet Your motor vehicle ATM machines On the telephone Software sharing programs 16

17 HOW?? Phishing Theft of your trash ( Dumpster Diving ) Purse or wallet theft Dishonest employees Public Records Shoulder surfing Pharming Skimming devises Counterfeit documents EBay & Craigslist scams Wedge Identity Theft Schemes Database Hacking Social Engineering Dumpster Diving Skimming Spam - Spyware Dishonest Employee Radio Wave Credit Cards Counterfeit Cards Counterfeit Checks Counterfeit Docs CARD SKIMMING Suspect uses a wedge to store information. contained on credit card strip. Downloads info later to computer. Uses info to create counterfeit cards with your personal information. 17

18 ATM SKIMMING INSTALLING SKIMMER AT THE DRIVE UP ATM CREDIT CARDS Magnetic strip on back made up of tracks similar to an audio tape Information read by swiping card through a reader device Information includes: Your name Account number Issuing bank Standard ATM machine? 18

19 False front is attached to ATM with card reader to copy magnetic strip info on your card Look at the pamphlet holder Note the hole in the side 19

20 Camera/transmitter housed inside Camera can view keypad and monitor and send wireless picture up to 200 meters. Digital Robbery Thermal Imaging Allows ATM Theft From a Distance ATM pins can be stolen using a thermal imaging camera. When ATM users press keys to enter their PIN, they leave behind a residual heat from their fingers. 20

21 TOOLS OF THE TRADE Consumers Rights for Unauthorized Debit and Credit Card Use Fair Credit Reporting Act (FCRA) governs consumers right for fraudulent use of credit cards. Electronic Funds Transfer Act (EFTA) governs consumers right for fraudulent use of debit cards. Consumer protection is stronger for credit cards: Charge-back rights; Credit dispute rights; Credit line available now. 21

22 Debit and Credit Cards Not Equal Debit Cards: If you report within 2 days of discovery, loss is limited to $50; If you report between 3-60 days, loss limited to $500; After 60 days, no protection for fraudulent use of card! Credit Cards: Regardless of report date, loss is limited to $50. If credit card company has a zero liability policy, you still must report losses within 60 days of the fraudulent charges. Safeguarding Information Keep only what personal information is necessary. Properly dispose of sensitive material by shredding it. Utilize anti-virus software and firewalls. Limit access of sensitive information. Conduct background checks on all potential employees. Regularly educate and train employees on security issues. Require strong passwords that are not to be shared. Have a plan to respond to security incidents. Social-Media and Identity Theft Fraudsters are taking note of personal information such as your birth date on social-media sites. Use the highest privacy setting available. Do not accept friend invites from strangers. ANTIVIRUS SOFTWARE! 22

23 PREVENTING IDENTITY THEFT Promptly remove mail from mailbox and deposit outgoing mail in secure receptacles. Empty your purse/wallet of extra credit or ID cards including your social security card. Make a copy of all items in your wallet and keep in secure location. Examine all credit card and bank statements each month. Do not use birthdates, phone numbers or house numbers as PIN. Never write down your PIN. Report stolen credit cards or any transactions that you did not make immediately. Never respond to unknown or phishing s. Shred all solicitations, bills and document with any financial information using a cross cut shredder when discarding. Make inquiries on unexpected bills. If providing financial information over the Internet, ensure the information is encrypted and the site is secure ( Never give out information over the phone. Always shield your hand and the screen when using the ATM machine, even if no one is around. Consider placing a fraud alert on your account with all three major credit bureaus. Never leave transaction receipts behind. Order and review your credit report once a year at or 23

24 IMPORTANT CONTACTS Equifax Experian Transunion FTC FTC-HELP IFCC For victims of fraud on the Internet REMEMBER... When it comes to preventing white collar crime, internal controls are essential! Regardless how small your company is never allow one employee to control all of its vital functions! ~ ~ ~ Get good anti-virus software on your computer and smart phone. Monitor your credit report at least once a year. ~~~ Use common sense if something sounds too good to be true it s a scam! Detective Jackelyn Weibel Allegheny County District Attorney s Office 1444 Hillsdale Avenue Pittsburgh, PA (412) jweibel@da.allegheny.pa.us 24