In order for companies to effectively safeguard their assets, it’s beneficial to understand the critical mistakes made by corporations that have been victimized. After 30 years of performing white collar crime investigations, we’ve become all too familiar with the most common pitfalls that typically accompany fraud. 

 1.    A Lack of Awareness

Most executives prefer to believe that their management team would never embezzle funds, take kickbacks or sell highly confidential or proprietary information to competitors.  Understandably, it’s disconcerting to even consider the possibility that one of their trusted executives would be willing to commit a crime. 

However, as we’ve all learned, white collar crime does occur, and can have devastating financial and legal consequences.  Additionally, it’s commonplace to find that the perpetrators are long-term, highly trusted individuals.

  2.   An Over-Reliance on Accountants to Uncover Fraud

Many CEO’s feel that their companies are protected from fraud because they wrongfully assume that their accountants will detect most forms of white collar crime.  Unfortunately, this is a dangerous assumption to make and one that has proven extremely costly for many companies.

Accountants are typically concerned about making sure that tax obligations are met, financial reports are prepared on time, and bottom line numbers are balanced.  If the corporate criminal is devious and subtle in their endeavors, the odds of an accountant uncovering the theft are quite remote.

In one investigation, we found that the CFO had been fraudulently billing his employer over $180,000 a year.  He incorporated a “dummy” company, printed invoices, rented a mailing address, then forwarded and approved the bills when they arrived each month.  This went on for eight years before anyone suspected a problem, and it was not detected by accounting personnel.

Had the CFO done something blatant, like diverting company funds to his personal account or writing checks to his own name, I’m sure the accountants would have noticed it.  However, when fraud is committed within the system, it tends to look exactly like standard operating practices and won’t typically be red flagged.

  3.   Inadequate Policies and Procedures

Most companies that incur fraud-related loss don’t do enough to deter it from happening in the first place.  It’s important to remember that a good percentage of employees become dishonest after being exposed to the loopholes and opportunities that exist in their respective companies.  This blatant opportunity, combined with the temptation of pocketing a good deal of [tax free] money, oftentimes causes marginally honest employees to become company thieves.

From the standpoint of preventing employees from going bad, as well as having legal remedies available after a crime is uncovered, it’s prudent to adopt formal company policies and procedures regarding:

 •           Employee integrity and ethics.

 •           Soliciting or receiving gifts, gratuities or incentives.

 •           The proper safeguarding of  proprietary information.

 •           Working for a competitor while employed

 4.    Failing to Perform Comprehensive Background Investigations

One investigation that illustrates the importance of conducting comprehensive background investigations involved a purchasing executive who was shaking down vendors and receiving upwards of $300,000 a year in cash and gifts.  We caught him by setting up a sting operation, where one of our investigators posed as a vendor and documented the purchasing executive asking for an 8% kickback on each order he placed. 

When we confronted him with our evidence, the executive confessed.  During the interrogation, the purchasing agent admitted to falsifying his résumé and omitting several facts, including a previous employer that had terminated him for taking kickbacks.  The executive also admitted that he owed over $40,000 in credit card debt and had declared personal bankruptcy just two years before accepting his current position.

All factors considered, this was certainly not the type of individual you’d want in a responsible position.  However, none of these facts ever came to light prior to him being caught because the company neglected to conduct a comprehensive background investigation.  If they did, they would have uncovered some, if not all, of these relevant facts and certainly would not have hired him. 

Playing fast and loose with the information contained on résumés is not unusual.  We find that between 12% – 15% of the white collar candidates we perform background investigations on have deliberately falsified or deleted critical information from their resumes. 

 5.    Lack of an Effective Way for Employees to Report Illegal Activity

When it comes to uncovering internal theft, this is perhaps one of the most effective, yet overlooked solutions available to corporations today.

Have you ever wondered why law enforcement agencies almost always set up a confidential 800 number after a serious crime has been committed? Because a high percentage of cases are successfully concluded after confidential tips are phoned in by informed sources.

The same holds true for the private sector.  Our 800 Hotline number for example, has received calls regarding dozens of cases of white collar crime, that otherwise would not have been detected for months or even years.  In fact, some of our clients, after being notified about a fraud, instinctively reacted with shock and disbelief.  Only after checking out the information did they come to the painful realization that the caller’s tips were right on the money.

The reason an employee tipline is so effective is because it’s almost impossible to keep illegal activity a secret from co-workers.  There are always others who know, or at least have good reason to suspect, that another employee is committing a fraud.  The problem arises when the employees who possess this information fail to come forward because of an inherent fear of being exposed and having the culprits seek revenge.

That’s why a successful tipline program will offer callers anonymity, therefore guaranteeing them that their identities will never be revealed.  Additionally, callers should be able to speak with experienced security professionals, not switchboard operators, who will know how to fully debrief them, i.e., asking all the right questions, as well as developing a rapport, so callers feel comfortable providing the information. 

One caveat however:  no one should ever be punished or rewarded based solely on a call.  The information should be corroborated before any action is taken, so no one could use the tipline as a means to perform a character assassination on a co-worker they dislike.

Here’s an actual case history that resulted in a distributor losing over $180,000 of inventory. The methodology was simple, yet effective. By taking advantage of this company’s rapid growth and lax security controls (both of which created opportunity), a devious checker disproved the old axiom that crime doesn’t pay. Reality check: crime pays quite well, which is why it occurs so frequently.

OVERVIEW:

This distributor’s trucks would be loaded during the night shift. In the morning, company drivers would make their deliveries.

When this company shipped product, labels would be applied to the outside of each case picked. Management felt comfortable that extra cases being placed onto trucks would be noticed because they would not have an affixed label. In actuality, it wasn’t difficult to circumvent the system.

By printing duplicate labels, (if questioned, the checker would claim that some of the original labels did not print well, were damaged, or lost) he was able to have extra, unmanifested boxes placed onto the trucks of the drivers he was working in collusion with.  These truckers were able to sell the overloaded product at a steep discount and still make a handsome profit. In no time, the three employees were pocketing more than $10,000 a month in cash.

Management had no idea that they were losing this quantity of product until they took an inventory. The Director of Distribution initially balked at the possibility of theft. However, when the results of the next inventory indicated even more shrinkage, he realized that he could no longer remain in denial.

WHY THIS COMPANY WAS EASILY VICTIMIZED

(1) Although this company had purchased an expensive video system, the dishonest employees knew that no one ever watched the monitors or viewed recorded activity. Additionally, the cameras were not positioned strategically, nor was the right equipment purchased. The bottom line was that the video system didn’t prevent, or even slow down, the ongoing theft activity.

(2) The company failed to provide a risk-free way for employees to report confidential tips. Management assumed that their “open door policy” would be sufficient for workers to report illegal activity.

It was later determined that other workers knew that this checker was stealing, but kept this information to themselves. They were concerned about their identities being leaked if they confided in company executives. Only after the dishonest workers were apprehended did the employees come forward and reveal what they had known all along. If this company had an outsourced 800 tip-line that offered employees complete anonymity, the employees said they would have reported the dishonest checker.

(3) The company did not have an effective security auditing program that prevented and detected shipping dock collusion. Had they maintained periodic monitoring of their drivers and checkers via unannounced security audits, the thieves would have probably been exposed long before the thefts mushroomed into a six figure loss.