The Risk of Fraud at Small Businesses

Fraud is a threat to all organisations. But small businesses can face an even higher level of risk. They don’t have the same level of anti-fraud controls in place as larger corporations. They often have employees handling several different roles, including within the accounting department. At many small businesses, it is not uncommon for a single employee to handle accounts receivable, accounts payable and bank reconciliations, for example. Without proper segregation of duties, a trusted employee can take advantage of their situation and steal from their employer for years before being detected.

Statistics from the Association of Certified Fraud Examiners (ACFE) show that “The smallest organizations tend to suffer disproportionately large losses due to occupational fraud. 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.” That comes from the ACFE’s 2014 Report to the Nations on Occupational Fraud and Abuse.  

There are some things that small business owners can do to try to protect their company from fraud. Among them:

Implement Employee Background Checks

CRI Group has conducted background investigations for clients in which we’ve found that individuals have lied about their education, their work history, and even their criminal background.

Remember that it only takes one dishonest employee to sink an entire business, so making proper hiring decisions is crucial. Pre-employment background checks provide an increased level of security, especially for positions that involve handling cash, merchandise or accounting duties.

Establish an Employee Code of Conduct

Make sure your staff know that fraud and other unethical behavior won’t be tolerated at your company. Adopt a code of conduct, communicate it to staff and make sure all new employees sign it at the beginning of their employment.

Segregate Duties

While this can be a challenge for smaller companies, it is important to divide activities so that no single employee has too much control over certain are of the business. For example, the person who has custody of the checks should not have the authority to sign them. Payroll checks should be approved and signed by the business owner.

Don’t Skip Audits

Conducting regular audits will not only act as a control for fraud – it will also help you uncover waste and other inefficiencies and problems with your business. They should be performed annually or more often if possible.

If You Suspect Fraud, Get Help

When the red flags of fraud do appear, it is important to take action immediately. Most small businesses don’t have a fraud expert on staff, nor the expertise to handle such an investigation themselves. Call a third party. At CRI Group, our agents are trained to handle any type of investigation, no matter how large or small. A consultation can help you determine what next steps need to be taken.

Fraud will always be a serious threat to small businesses. But by having controls in place and educating employees, any organization can increase their protection and minimize risk. 

CRI Group: Gold Sponsor for Global Ethics Summit

CRI Group is proud to be a gold sponsor for the 7th Annual Global Ethics Summit, 10-11 March 2015 in New York. The theme of this year’s event is “Elevating Value Through Integrity: How Leading Companies Accomplish Excellence Worldwide.” The Summit, hosted by Ethisphere Institute and Thomson-Reuters, has lined up an excellent list of speakers and it promises to be an enlightening two-day affair.

Speakers include Robert F. Smith, Founder, Chairman and CEO of Vista Equity Partners; Andrea Illy, Chairman and CEO of illycaffè S.p.A.; Melvin T. Stith, Dean Emeritus and a professor at the Martin J. Whitman School of Management at Syracuse University; Korin Neff, senior vice president and corporate compliance officer at Wyndham Worldwide; Cindy Moehring, Chief Global Ethics Officer for Walmart; and many others.

The agenda will include panel discussions such as “The CEO Conversation,” “Leadership Lessons From the Top,” “The 2014 Anti-Corruption Landscape” and “Third Party Risk, the Supply Chain and the Value of Trust,” just to name a few.

Corporate ethics and compliance are areas that all businesses must take seriously. The best approach toward an ethical corporate culture comes from the top of the organization. Having an ethical code of conduct, monitoring for red flags and evaluating controls and responses on a regular basis are crucial elements of an ethical corporate culture.

At CRI Group, our investigations have sometimes taken us into businesses that were lacking corporate ethics. This inevitably leads to fraud or other criminal behavior, sometimes in the form of bribery, collusion or other means. In many cases, the victim organisation did not have an ethical code of conduct nor a “zero-tolerance” environment to deter unethical behaviour. This usually came at great cost to the victim, with a lesson learned – better to be proactive than to try to pick up the pieces left from unethical acts.

Our experts are trained to help business leaders set a tone at the top of their organisation and establish an ethical environment. With the right knowledge and a commit to maintaining such an environment, companies can be better protected and prevent and detect more unethical acts.

These and other related issues will be at the center of discussion at the 7th Annual Global Ethics Summit, and that’s why we are glad to be a part of it. We hope to see you in New York in March.

Healthcare Fraud Case: Where, Exactly, is the Hospital?

Healthcare fraud is a continuing threat. Whether perpetrated by providers, patients or insurance carriers, fraudsters will often go to any lengths necessary to try to accomplish their schemes. I’m reminded of a recent case in which CRI Group was engaged by a client to verify some hospital bills that had been presented for reimbursement. The client felt that something was amiss, and indeed it was.

When we conducted our investigation, we learned that the address on the bills was not current – the hospital had closed that location nearly two years prior due to a dispute among doctors. The hospital had since reopened, but its new location was nearly 10 km away from the previous address. Obviously, there was no business reason for the hospital to send out its bills listing the old address.

Our investigation continued. Further inquiries found that there was no record for the invoice or the patient in hospital records at all. The bills were fake. They were forged, with a fake stamp and a phony patient name. When given this information, our client was saved from paying out fraudulent bills with money that most likely would have never been recovered.

Cases such as this happen around the world on a constant basis. Fraudulent claims get paid out when a company is too busy, or perhaps too trusting, to perform proper due diligence and take the steps needed to verify every piece of information presented to them. Even within the industry, legitimate healthcare providers are sometimes caught red-handed perpetrating schemes like upcoding and unbundling, services not rendered, kickbacks and self-referrals, and – quite disturbingly – performing medically unnecessary procedures. Experts are trained to look for red flags in healthcare billing and investigate further when they suspect something might be fraudulent.

In our case, there were some good lessons for any accounts payable personnel to heed:

  • Always beware of red flags in the billing process
  • Verify payment and billing information
  • Check all documents for authenticity

Healthcare fraud will continue to claim victims and raise the cost of healthcare for people everywhere. A few months ago, we discussed in this space whether digital payments will help reduce it. Whatever the case, it is clear that companies need to take a proactive approach to preventing healthcare fraud. Some schemes are very complex, and traditional methods will not uncover them. Business leaders should ensure that they have the resources and expertise to effectively catch fraudulent schemes before they are paid out. 

Where is Joe Lewis?

An interesting story that remained mostly under the radar a couple of weeks ago is, for the most part, still a mystery today. The question is what happened to a UK currency trader named Joe Lewis and – just as important – what happened to up to £130 million in investors’ money that was under his responsibility? By press accounts, it sounds like a Ponzi scheme similar to Bernard Madoff’s case has been underway in Britain for at least 5 years. If the allegations are correct, Lewis’s investors should be extremely concerned.

Ponzi schemes are a simple concept: Money from new investors is used to pay off existing investors, creating the illusion that the fund is earning money. Over time, more new money is needed to keep paying off on fictitious gains and keep the Ponzi afloat. Eventually, the pool of new investors – and the money – runs out, and the pyramid falls apart. Such schemes are illegal in the developed world, including (of course) the UK.

When Madoff was exposed, he owed billions in fake earnings to investors who had been taken on a nearly 10 year ride – many of whom saw their life savings evaporate. It is feared that Lewis orchestrated a similar scheme, and that he admitted as much in a recent email to clients. As reported in the Telegraph:

In an email sent to clients a fortnight ago, Mr Lewis admitted that his company, JL Trading, had stopped operating in 2009 after suffering heavy losses on disastrous foreign exchange deals.

He confessed in the email that he had continued taking people’s money for the next five years in an attempt to turn his fortunes around, but that all those attempts had failed.

In an email sent a month earlier – in response to growing concern from investors trying to get their money out – he claimed that his company was having “a stressful time” releasing $197 million (£126 million) from American brokers because of US red tape.

It is discouraging to think that several years after Madoff’s shocking scheme was exposed, other Ponzi schemes are still operating with impunity, without detection – at least until the money has simply dried up. Lewis has disappeared, by the way. According to the article, he has not been seen at his apartment for weeks and is not responding to emails or phone calls. It is unclear as to whether there is a legal action against him at this point. But it stands to reason that, if the allegations are correct, he will soon be a wanted man.

Sadly, it is doubtful that much of his investors’ money remains to be recovered.

Bribery and Corruption: The Slow Wheels of Justice

First and foremost, we at CRI Group would like to wish you a happy new year and a prosperous 2015. We also hope that things like fraud, corruption and other adverse business practices will show a decline in the new year – but unfortunately, that is unlikely to happen. So the next best thing is to hope for more detection and swift justice.

Happy New Year from all of us at CRI Group

Happy New Year from all of us at CRI Group

A recent article in the New York Times suggests, however, that justice in several high-profile bribery and corruption cases has been anything but swift. In “Foreign Bribery Cases That Can Drag On and On,” Peter J. Henning examines cases in China and elsewhere that take years to resolve through legal channels. Henning writes:

It is fitting to recall a quote attributed to the famous Chinese General Sun Tzu that the “wheels of justice grind slow but grind fine” as Avon finally resolved an investigation into payments and gifts provided to government officials in China – some six years after it began.

Avon voluntarily reported itself to the Justice Department and the Securities and Exchange Commission in 2008, and last week it agreed to pay $135 million in fines and civil penalties over violating the Foreign Corrupt Practices Act. As part of the deal, the company’s Chinese subsidiary pleaded guilty to a conspiracy charge while the parent accepted a deferred prosecution agreement.

Henning also notes the Walmart case, in which company officials allegedly paid extensive bribes to facilitate business in Mexico. Apparently, the issue drags all the way back to 2005, when the company is suspected of shutting down the earliest inquiries into “questionable payments.”

Then there is the latest high-profile case: Alstom, which we wrote about last week. In short:

The scheme was discovered, however, and now Alstom is having to pay for it. Under a deal with the U.S. Department of Justice, who is prosecuting Alstom under the Foreign Corrupt Practices Act (FCPA), the company has admitted guilt and agreed to pay a $772 million penalty to the U.S.

Some of the Alstom instances in question, specifically certain contracts in Poland, stretch back to the late 1990s. The bulk of cases investigated by the U.S. Justice Dept. occurred between 2000-2011, according to news reports. This may serve as another example that efforts to enforce anti-corruption laws are moving, but very slowly.

A paradox here is the fact that business, on the other hand, moves quickly – within a just a few years, a company can change quite a bit. Executives move on to other opportunities, markets change, product lines and even the mission of the business itself might undergo a radical shift. By the time an organization is punished, the people responsible may be long gone – and perpetuating unethical acts elsewhere.  

Governments need to do better at investigating cases and prosecuting them (when the facts warrant such action). Perhaps in 2015, we will see more enforcement, and it will be done in a timely manner. Yet it will still be up to corporations to be vigilant, police themselves and put anti-fraud and anti-corruption controls in place to avoid such lengthy and messy ordeals altogether.

“Old Friend," Other Characters Mean Serious Trouble for Alstom

“Mr. Geneva” … “Quiet Man” … “Old Friend” … These mysterious names were part of a shady scheme by Alstom, a French energy/transportation giant, to facilitate bribes in countries like Indonesia, Egypt and Taiwan, among others. The names referred to consultants that Alstom used as go-betweens when making illicit payments to government and business officials in those countries.  It was an attempt to keep the corruption at arm’s length – and, more importantly, keep it a secret.

The scheme was discovered, however, and now Alstom is having to pay for it. Under a deal with the U.S. Department of Justice, who is prosecuting Alstom under the Foreign Corrupt Practices Act (FCPA), the company has admitted guilt and agreed to pay a $772 million penalty to the U.S. The news is detailed in this New York Times article, which notes that the fine is “the largest ever levied by the United States for foreign bribery.”

When you read about the case, it quickly becomes clear that this wasn’t just a few bad actors whose actions tarnished the Alstom name (and are now costing it money). On the contrary, the schemes appear to be very brazen and endorsed by the highest level of the company itself. The following from the NYT article stands out:

When some officials expressed concern that one consultant had provided only pocket money, Alstom retained a second consultant to ensure that the officials were satisfied, recounted Leslie Caldwell, assistant attorney general. In Saudi Arabia, Alstom retained at least six pseudo-consultants, including two close family members of high-ranking government officials, to bribe officials at a state-owned electricity company to secure about $3 billion in contracts.

They also knew what was taking place was illegal. Apparently, at least one internal question about the shady dealings was met with an immediate cover-up:

At one point, a member of Alstom’s finance department sent an email that questioned an invoice for “consultant services” tied to a contract in Egypt. She was informed that her inquiry could have “several people put in jail” and was told to delete all previous emails regarding the consultant, Ms. Caldwell said.

It is worth noting that at least one journalist has questioned whether it is proper for the U.S. to be levying fines in a case such as this, in which the bribes were paid to foreign companies, by a foreign company. None of the illicit acts touched U.S. jurisdiction, at least in a traditional way. But that’s the catch with the FCPA: a company need only be doing business with the U.S. in order to be subject to enforcement, regardless of where the crime occurs.

One thing seems certain – this won’t be the last such prosecution. And with the UK Bribery Act and other countries following suit with their own regulations, committing brazen bribery schemes just became a little riskier. Is your company protected from employees or third-party partners who might be secretly conducting unethical business? CRI Group’s Anti-Corruption and Regulatory Investigations can help you assess your risks and proactively address any problem areas that could affect your business.