Investigating Fraud

Webster’s Dictionary defines fraud as “deception in order to gain by another’s loss; craft; trickery; guile.” As the owner of a private investigation company, I have found that on a practical level, fraud is much more — and takes on many diverse scenarios. Fraud is a loose term that is somewhat overused within the industry, and even could be the scapegoat of other underlying problems. Often, “fraud” is thrown up to management to gain their attention or to make the potential problems seem worse that what they are so that bigger budgets can be obtained for the security division. The ineffectiveness of certain security functions, policies or personnel issues can often be the real underlying issue.

THE TRUE DEFINITION OF FRAUD

Improperly labeling a situation as fraud can present legal ramifications. Therefore, a potential crime should not be addressed as fraud until it is precisely designated as such. In addition, close communication with the police and district attorney’s office should be maintained to insure that the fraud investigation meets the basic criteria for successful prosecution. Of course, not all organizations want to prosecute the offender(s) due to negative press. Under these circumstances, the investigator should be careful of their terminology to prevent any possible lawsuit.

Fraud can take place in any level of an organization. Typically, there is internal and external fraud. Internal fraud primarily deals with employee-related fraud, whereas external fraud presents itself through those outside of an organization. The apparent link between the two seems to be the existence of circumstances that make fraud attractive to a particular organization or circumstance.

For example, a person who is well-versed in check cashing scams may pass the illegal instrument at a store that does not have good check approval policies. In contrast, a vice-president of a bank may attempt to juggle the figures on an account to cover their embezzlement if they are in charge and have discovered a “fail-safe” plan for covering up their crime. In each example, both subjects were presented with a set of circumstances that lent  themselves to a particular type of fraud.

Because there are so many types of fraud, an investigator has to be able to be versatile enough to adjust to each particular situation. The premise is the same:

  • Identify the elements of the crime
  • Trace the leads
  • Secure the evidence
  • Identify the culprit

Seems easy enough until you go from investigating a computer fraud to a worker’s compensation fraud, which have different elements altogether. Therefore, to better understand the investigation of fraud, I will use examples of actual cases our agency has worked.

CASE STUDY NO. 1: BANK FRAUD

Our agency was contacted by a bank that indicated one of its tellers had found some “discrepancies” in the records and was concerned about the possibility of internal fraud. We immediately identified those tellers who had access to the money and tape registrars in question, initiating a background investigation to determine whether any of the subjects appeared to have dramatically changed their economic status recently or had obvious financial problems.

Secondly, we began to audit the records in question to positively identify a crime and the amount of money believed missing. Next, we began to interview the tellers and their supervisors regarding their normal operating procedures and their personal lifestyles. We were able to narrow the scope of the investigation down to several factors through these tactics. The initial results indicated that there was at least $150,000 that had been embezzled over a two year period. In addition, we discovered some problems in the accounting and the accountability process of the tellers.

The investigation also began to point to a supervisor who appeared to have a more affluent lifestyle than her income would provide. What we eventually learned through various record checks and interviews with neighbors of the suspected supervisor would astound our client. The supervisor was being considered for promotion to vice-president of the bank and therefore our client kept directing the investigation away from the subject. However, we were able to confirm that the subject had been accepting large deposits from a local car dealership and then taking the money for herself. When the dealership made their next deposit, she would let that cover the prior deposit and then embezzle whatever was left over.

By interviewing the neighbors, we discovered that the employee had been taking her neighbors and friends on all-expense paid weekend excursions to Las Vegas. Unfortunately, the money had been spent, but the bank was able to correct its policies and prevent any further loses. The resulting investigation revealed internal fraud, which could have been prevented if proper procedures and policies had been in place.

CASE STUDY NO. 2: TRUCKING COMPANY FRAUD

Our agency was employed to investigate a possible fraud and/or conflict of interest. The client, a trucking company, suspected a vice-president of operating a trucking company of his own in direct competition and in violation of company policy. Our agency initiated the investigation by checking the county assumed name records, the Secretary of State and State Comptroller’s records, finding listings in all three identifying the vice-president as the owner of a separate trucking company.

Although this proved that a conflict existed, we still had not obtained the information needed to show that any damages had occurred to our client’s business. Therefore, we initiated surveillance and were able to obtain video documentation of the vice-president using his trucks, along with our client’s trailers, to haul merchandise from our client’s customers.

This was still somewhat circumstantial, so our agency set up a “new” operation that needed our products hauled to our clients and contacted the vice-president for a bid. The subject was called at our client’s office and when he met with our investigators, he presented a bid from our client and from his own company. We could now demonstrate that direct competition was being conducted.

Additional interviews with some of our client’s customers resulted in our agency obtaining copies of invoices that the vice-president’s personal company had been paid, which helped show actual damages. In this case, the internal fraud included theft of clientele information, theft of services, and redistribution of assets. The client could have avoided some of these issues if they had paid attention to the supervisor’s periodic written ratings by his subordinates (anonymous) and had adhered to their policies regarding client relations.

CASE STUDY NO. 3: JEWELRY COMPANY FRAUD

A client called our agency after an employee had apparently changed her lifestyle, which included more expensive clothes, jewelry, a new car and a conversation in which she was overheard saying that she had bought her mother a mink coat. Our client knew that her salary was less than $17,000 and she would not be able to afford these luxuries. A background investigation was initiated with very little significant information being obtained. The next step was to observe the subject’s activities at work through the use of hidden video cameras. Sure enough, the subject was observed sneaking company checks from a supervisor’s desk. The investigation revealed that she would make the checks out to some of her friends, who would cash them and then split the profit. Through an audit of the books, it was discovered that she had been responsible for fraud in excess of $100,000.

While conducting this investigation, our cameras also documented one of the roots of the problem. The company checks were locked in a cabinet with only one supervisor per shift having the key. The supervisors were supposed to keep a log of each check as they were checked out and the oncoming supervisor was supposed to check the log against the checks before signing off on the supervisor’s sheet to relieve the off-duty supervisor. The cameras found that none of this was occurring and that the supervisors would get 10-15 checks at the start of the shift and place them in their desk drawer for convenience. The desk drawer was not locked and was unattended for at least two hours per shift. Needless to say, opportunity presented itself one too many times.

CASE STUDY NO. 4: COMPUTER FRAUD

Our agency was recently employed to determine who was breaking into our client’s computer program after hours. The client was located in a 12-story office building and had fewer than twenty employees, none of whom were suspected. The first glaring problem was the lack of computer security that our client was using. We convinced the client to install computer security programs, assign access codes and to turn all of the computers off at night.

Next, we installed hidden video camera lenses which were placed in wall clocks, smoke detectors and an exit sign, all linked to a 48-hour, long-play video recorder. This system was then tied to motion detectors, which would trip the system. Unfortunately, against our advice, the client called an employee meeting to discuss the problem and the solutions that they had taken. After these measures were taken, no further break-ins occurred. Since we had already crossed out the possibility of modem access, it seemed somewhat apparent that an employee was responsible for these break-ins. Our focus therefore changed to educating the client regarding internal fraud and providing policy breaches.

The next step involved conducting background investigations on their employees to better identify any party with characteristics towards criminal behavior. Through these and other searches, we concluded that one employee had taken on too much debt and had decided to blame their employer for the situation. The employee had decided to break in to various files to gather confidential information on the business, its clients and other employees. Fortunately, enough circumstantial information was developed to allow investigators to approach the subject, who subsequently confessed to the plot.

This situation could have been prevented using several different methods. First, the client failed to have any computer security programs in place, even though they had financial information, accounts, human resource files and product development documents on the system. We convinced the client to purchase some off-the-shelf security programs that force employees enter codes to start up the system and different codes to get into different areas of the system. The computer mainframe, as well as each terminal, is now turned off each night to help prevent access by modem.

In addition, all lines, including the computer telephone line, is forwarded to an answering service each night. An internal “employee satisfaction” questionnaire was developed in an attempt to keep abreast of employee attitude changes, and supervisors are now encouraged to take employees to lunch once a month to enable a rapport to be established so that employee dissatisfaction and problems can be addressed in a non-threatening work environment.

SUMMARY

As you can see, fraud is very diverse and can easily be misdiagnosed. In some of these situations, the client could have easily continued to be victimized by fraud. The use of a good internal awareness training program, adherence to policies and practical observation can help stem fraud.

If you suspect that your company is the victim of fraud, contact the professionals at Kelmar Global.

Kelly E. Riddle is the President of Kelmar and Associates Investigations (www.KelmarGlobal.com) as well as a certified member of the Texas Association of Licensed Investigators (https://www.tali.org/).

Kelmar Global

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