How to Find Fraud and Corruption

Recipes for the Aspiring Fraud Detective

Nigel Iyer

• Verlag: Routledge
• Jahr: 2019
• ISBN:
  9781351724777
• Auflage: 1
• Thema: Commerce
• Thema: Commerce Général

In a typical working environment in which 'fraud and corruption' is as normal as a headache or as common as a cold, everyone in the organization has a role to play in finding and deterring fraudsters. Despite universal acknowledgement that these things may be illegal but still prevalent, managers still treat them as 'someone else's problem' or 'something that happens to other businesses, not ours'. This book shows, in simple terms, how everybody can become a successful fraud detective. A series of proven and easy-to-follow recipes show how to find the tell-tale signs of fraud and corruption and work with colleagues to deal with fraud smartly, keeping the organization you work for healthy and clean.

The skills taught in this book are based on over 25 years' experience of successfully finding and dealing with fraud and corruption, all around the world. How to Find Fraud and Corruption offers wayfinding techniques for identifying and recognizing common frauds such as: suppliers who charge too much; sharp business partners and consultants who are taking you for a ride; customers who take but prefer not to pay. It also shows how to spot and unravel more complex but equally serious and common frauds: hidden connections to dirty money centres (the illegitimate side of tax havens); bribes paid as a shortcut to get business; creative numbers fraud (inflation of sales figures or suppression of costs); conflicts of interest involving individuals inside or outside the business. The final chapter is a short story (based on a real case) which illustrates a fraud detective's challenges, whether they are a reluctant whistleblower, someone who cannot turn a blind eye even if they would prefer to, or even the accused.

Accessible and practical, this book is for everyone who wants to stop fraud, including those working in accounting and finance, management, specialist functions, such as audit, compliance and security, and anyone else who aspires to be a fraud detective and stop fraud and corruption.

Part I:
FRAUD AND CORRUPTION MADE SIMPLE

Chapter 1
What is a fraud detective and how can I become one?

I am curious, then I am alive.¹

Everyone can be a fraud detective

The word ‘detective’ can easily conjure up images of the amateur sleuth or ‘gumshoe’ in the USA, living an exciting life but also sneaking up on people or, worse still, infringing on their privacy. So let’s clear up any misunderstandings up right at the start of this book.

A fraud detective is anyone with a keen eye for detail, a healthy sense of curiosity, a calm and analytical mind, a desire to speak up about fraud and corruption (so long as they are encouraged to do so) and a constructive mind-set on how to deal with it. You don’t need to do anything illegal or sneaky. Just simply fill the growing vacuum left by so few people actually spotting fraud early.

To show how simple it can be to spot fraud, and how we often do it unconsciously a lot of the time, but then don’t follow our instincts, let’s get in touch with the fraud detective inside each and every one of us by putting ourselves in the shoes of the person in each of the following three situations. See if you spot the red flags that something may be wrong in each of the three scenarios. Do you get that ‘spine-tingling’ sensation that something may be wrong and, if so, are you able to stay with that feeling long enough to make an educated guess as to what it could be?

Case 1:1

You are selling the electric cycle which you bought just over a year ago. Less than an hour after your advert went online, you receive an offer that is 10 per cent above your asking price from a Mr John Jones. He would prefer to pay in cash, but you can discuss payment terms when he comes round to look at the cycle later today. When you meet John, he suggests that he pays you 80 per cent of the money now in cash, and the remaining 20 per cent next week after he has tested out the bike. You will receive the balance from his company JJ Investments Ltd, a British Virgin Island company with an address and bank account in London.

Even though it is just a bike, what does your healthy sense of curiosity tell you about John Jones and the deal he is proposing?

Case 1.2

You are having some renovation work done on your apartment. You receive a pretty hefty invoice from the builders just before Christmas, which is reasonable enough, given the work they have done, but your attention is drawn to the following charges:

Cement and plaster:	€1000
Plumbing services (cost €850 + 20% admin charge)	€1020
Sundry materials and tools	€500

While the builders have been OK so far, what is it that just caused you to blink?

Case 1:3

You and your colleague are both going to a conference which is a two to three hours' drive away. You decide to lift-share as you live close to each other with you driving. On the way back, he explains that you can both claim separate mileage allowances. And when you stop for a meal at a motorway service station, he is careful to ask for separate bills so you can both charge them on your separate expense claims.

if you agreed to this, what risks are you taking and what red flags might you eave behind?

In Case 1.1, you could say that cash is cash, and you have no idea why John Jones is sitting with so much cash. He may be offering you more than the asking price but will you ever see the remaining 20 per cent? Since he is leaving no financial trails other than the name of a company in the British Virgin Islands (which may be just a front or even not exist), how do you know if he really is John Jones? (And since you have 80 per cent of the cash, do you really care?)

Case 1.2 is much more ‘down to earth’. Your brain probably was drawn to the round sum for ‘cement and plaster’. Shouldn’t the builders specify how much they used and charged you just for what they used? Have they just rounded things up and hoped you would not notice? And you know a plumber was there but you thought he was going to send you an invoice, not one via the builders which is marked up by 20 per cent. And what’s this about sundry materials and tools? If you had not looked closely, you could be contributing lots to their Christmas Bonus.

Finally, Case 1.3 is a little more personal. You have every right to claim your own mileage since it was your car and you drove. It seems as if your colleague is also going to claim for mileage he did not incur. Of course, he is entitled to claim for the meal but will some clever fraud detective not notice that he and you ate at the same motorway service station and start to say that you were in the same car? And if someone else knows that you went together, then your colleague is technically defrauding the company. Worse still, even though it seems trivial right now, and it is trivial too, people might say that you knew about it and did not try to dissuade him or even report him. Sometimes the simplest things can get complicated and you might get tarred with the same brush one day as well.

These three examples are simple illustrations that fraud and corruption, in its widest sense, is simply part of everyday life.² But it also does not mean that most people, such as the builders, John Jones or your lift-sharing colleague, are particularly sinister or evil. But when we get that feeling something may be amiss, we should not just shrug it off, assume that there must be an honest explanation to everything, or put it down to paranoia. The mind often registers red flags before the eye, so when you get that funny, spine-tingling feeling, let it linger for a while, just to figure out what exactly it is that troubles you. If in the end you found that things are OK, you will not be troubled any more. Alternatively, if momentarily you embrace your own healthy curiosity and find it justified, you will probably start to understand what is going on and you will be doing yourself a favour. There are times in life when it pays to say to yourself, ‘I have a bad feeling about this . . .’.³

But given how little fraud and corruption is detected early, the world is certainly crying out for more able fraud detectives. Fraud and corruption, in fact, is like litter – there is a lot of it around in certain places and it needs more than just a few specialists to sort it out. Imagine a future where as many people as possible are engaged in helping their organizations to detect and deal with it as early as possible.

Having a sense of purpose and knowing your target

Before starting to be a fraud detective, we should ask ourselves, ‘Why am I doing this?’, ‘What is the purpose?’. And in this case, we also need to address the question, ‘Why should I bother looking for fraud?’ Surely with all the scandals which abound, the tsunami of new laws, rules and regulations imposed by governments to try to clamp down on the epidemic, fraud and corruption must soon be a thing of the past? So what is special about a book calling for everybody, from the CEO, the management team and the board, down to the assistant accountant, sales clerk and, in fact, everyone else who makes the team tick, to look for fraud and corruption?

Fraud and corruption has been around for centuries. In simple terms, it involves you or and your organization being cheated or deceived by a deliberate and unethical act done by someone else. At a very personal level, you or your organization could be:

• taken advantage of by a supplier or a seller of goods or services;
• duped into giving too much away to someone else (a customer);
• misused by an agent, consultant, middleman or similar opportunist;
• in hot water because inadvertently you became involved with dirty money (whether its cash, funds in a front company, or part of a dirty money constellation as depicted in Chapters 2,4 and 6);
• cheated by someone who works for or with you;
• coerced into receiving or giving bribes;
• relying on false figures or information;
• or in any other way be involved in illegal, dubious or unethical activities.

Even at this simple, personal level, each of the above comes with a cost – you lose money, or you lose face, or you lose that motivation and joy of life which keep us going. Put plainly, no one likes to be cheated. These basic plots of fraud and corruption are represented in the wheel in Figure 2.1, called the Wheel of (mis)Fortune,⁴ which is used as a navigator throughout this book.

Fraud and corruption, by nature, is hidden and deceptive, and usually only revealed when a scandal breaks, by which time the damage is done and the losses in monetary, reputational and cultural terms are high. It is often here where the ‘blame game’ starts and the costs often skyrocket even more.

And, to add insult to injury, you realize with hindsight that the tell-tale warning signs had been there all along. How could you have been so naïve not to see them before? And that is where the key lies. We can see the warning signs, or red flags, earlier, much earlier in fact – but only if we really want to.

Innovation and fresh thinking

I hope that you have come so far that you think it’s a promising idea that fraud and corruption should be spotted early but that this doesn’t happen much in the world today. So, we need to innovate and think afresh. We need to allow ourselves to dream what is possible and challenge the boring and safe alternatives. We can do the following:

• Learn to overcome the stigma that discovering corruption and fraud is unwelcome news and embrace every incident as a future loss which can be stopped now!
• Appreciate when people are proactive, and 'democratize' the role of spotting fraud (rather than looking for scapegoats when things go wrong).
• Support and foster cultures which recognize that early detection prevents people digging themselves into a deeper hole and sees fighting fraud all about saving careers rather than ending them.

But to do this, you should be prepared, at least to start with to join the minority. Most people don’t like finding fraud early. In the film, Minority Report (2002), which was based on the 1956 book by Philip K. Dick, the futuristic concept of ‘pre-crime’ was launched. The combination of historic data banks, live feeds and precognitive abilities had led to highly successful predictive policing, spotting the crimes before they got out of control or even occurred, thereby reducing actual crime by 99.8 per cent.

This notion of pre-crime is inspiring as it can also be applied to fraud and corruption, albeit maybe in a less theatrical way. Replace the data banks in Minority Report with historical money flows, live data with the vast amount of up-to-date public information, use pictures and live feeds available on the internet, and instead of the magical precognitive extra-sensory perceptive abilities, you use just good old-fashioned intuition and healthy curiosity, then you are almost there.

Your personal reasons for stopping fraud and corruption could of course be many. It could be your sense of justice, or that you want to save or just reduce waste in your organization (or the world), or it could be that you just enjoy the thrill of being a fraud detective and out-smarting the bad guys. Whatever your reasons, you should know that it’s possible. But be aware, while you might not be branded a whistleblower you are still likely to be in the minority . . . for a while at least.

Take the opportunity to overcome the obstacles

When a bomb explodes in a building, it is tremendously sad. It also creates more work for the rescue services and paramedics, the police launch an extensive manhunt and investigation, the media have their fill of stories, and so on. But if the bomb was detected early and rendered harmless in time, no one would die and a huge amount of cost and suffering would be avoided.

Finding fraud and corruption is also about identifying and defusing ticking time-bombs. There is, of course, a risk involved but one which can be minimized by proper training. But there is also one risk we still need to be prepared to take and that is the risk of sometimes getting it wrong. It can happen.

We need to confront and overcome three obstacles:

1. the shock factor;
2. ticking boxes blindly;
3. relying on someone else to spot it for you.

Obstacle 1 The shock factor

As far back as we can remember, stories about companies, organizations and people being defrauded, or committing fraud have caused excitement in the media. Often the public, goaded on by the press are ‘outraged’ or ‘shocked’ by what they read at the time and the search for scapegoats starts with a fury. But in the long run, we have short memories and often do not learn from history. We tend to be shocked again . . . and again! If we examine the phenomena more closely what we see is that fraud and corruption is rather common, and not that exciting after all. It’s just that the media need to tell a story, and conflict sells! But fraud and corruption goes on . . . business as usual.

Obstacle 2 Ticking boxes blindly

Every time there is a major scandal, there is a call for even stricter and better rules and regulations that will stop whatever happened from happening ever again. ‘Stricter and better’ rules tend to boil down to the word ‘more’. And more rules translate in their turn to even more work for the regulators, the lawyers, the administrators and the accountants and auditors . . . exactly the people whom we expected to find fraud early and stop it in the first place. The bureaucracy of ‘compliance’, which is in fact a rather new word in layman’s language, has mushroomed. Whether you are opening a bank account, buying a plane ticket on the internet, or approving a new customer or supplier, we have entered the world of Obsessive Compliance Disorder (or ‘OCD’, as it maybe should be known). We are supposed to read mountains of new rules and the small print and then since we never really get time to read them, and most people never understand what the paperwork is for anyway, we blindly just tick the box without protesting. Everyone does so and nothing would get done otherwise.

Obstacle 3 Relying on someone else to spot it for you

Because of the constant bombardment of media headlines on corruption and fraud and increasing ‘OCD’, the person in the street is more aware that fraud and corruption could affect them too. The only catch is, everyone relies on those ‘guardians of our economy’, auditors and regulators to spot fraud and corruption before it attacks us . . . except they don’t do so (or they don’t want to). ...

Inhaltsverzeichnis

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of figures
• List of tables
• How to use this book
• Preface
• Acknowledgements
• Note on the text
• Part I: Fraud and corruption made simple
• Part II: Recipes for the aspiring fraud detective
• Part III: Don't panic: there is always a way to resolve things!
• References
• Index