Loose Controls, Lack of Proper Due Diligence Opened the Door to Fraud
A major pharmaceutical company engaged CRI Group to conduct an integrity due diligence and conflict of interest investigation. The focus of the action was to uncover unethical practices, including bribery and corruption, by senior employees. The client’s corporate security department had received conflict of interest complaints that reportedly involved a range of employees, from sales personnel on up to the chief financial officer (CFO).
CRI Group investigators quickly launched a risk assessment of the company’s third-party relationships, which included several interviews with identified vendors and suppliers to help ascertain the engagement process and associated risks. This process uncovered the fact that the client had no policy or code of conduct concerning ethics, compliance and standards for appointment of vendors, suppliers and local agents. Most troubling was the fact that in most cases, senior management simply referred business opportunities to friends and family members.
These findings (and the complaints that preceded them) called for a comprehensive investigation and integrity due diligence process by CRI Group. Investigators found one of the vendors, which was deeply engaged in procurements and the supply of services for the client over the past five years, raised serious red flags. The vendor’s letterhead lacked a physical address, and the only contact information listed was a single cell phone number. It was clear this vendor warranted further investigation.
CRI Group’s investigators used site visits, background checks and interviews to determine that the suspicious vendor was not a company at all – but a single person. Not just any person, however – a public records check with a national database revealed that this individual, who was posing as a major vendor, was none other than the brother-in-law of the client company’s CFO. Worse still was the fact that this obvious fraud was being conducted right under the noses of procurement and finance professionals at this large and well known pharma company.
CRI Group investigators discovered that the individual’s residence was being utilized as warehouse to help facilitate the fraud. A comprehensive litigation records check with local and regional courts found that the subject was previously convicted in federal court and spent three years in prison for the charges of selling counterfeit products, physician samples and expired medicines; further regulatory checks found that his pharmacist license had been cancelled.
Following the investigation, it was communicated to the client that:
- A high fraud risk environment was created through the non-compliance of certain procurement rules, and a lack of integrity due diligence and proper risk management.
- Serious conflicts of interest were exposed, connected to high level executive positions and benefiting those in positions of power.
- The company has been exposed to highly unethical practices and could face regulatory and other government action.
- The client may also face civil and criminal investigations and liability, damage to the client’s reputation, and loss in shareholder trust, all of which could adversely affect the company’s financial well-being.
There is no substitute for proper due diligence and risk management procedures. Without them, organizations (like this unfortunate pharma company) face serious consequences that include fraud, conflicts of interest and corruption. While CRI Group’s investigation uncovered these serious ethical breaches, they had been allowed to continue for at least five years – more than long enough to inflict serious harm on any company.