Archive for the ‘White Collar Crime’ Category

Why Companies Can Be Easy Targets for Fraud

Tuesday, June 1st, 2010

by Barry Brandman                                 

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.

Posted in Cybercrime, Embezzlement, Fraud, Home, White Collar Crime | No Comments »

Finding Cost Effective Solutions in a Tough Economy: It’s Time to Think Outside the Proverbial Box

Sunday, January 3rd, 2010

by Barry Brandman

It’s no secret that the warehousing and transportation industry has been hit hard with rising costs and shrinking profit margins. With experts projecting an extended economic recovery, logistics executives are struggling with  some difficult financial decisions.

The knee jerk reaction of some when it comes to asset protection  has been to arbitrarily cut spending.  However, many companies have learned a painful lesson, which is this:  in tough economic times, security risks can be significantly higher than in normal times.

Because employees are now faced with the harsh realities of wage freezes, overtime elimination, benefit reductions, and possible job cuts, a percentage adopt the mindset that puts them in an adversarial position with their companies. When faced with rising personal expenses and reduced income, many look for an alternative means of financial support.

Employees can become resentful and sometimes even vindictive as they perceive management’s cost cutting initiatives not as a financial necessity, but as a personal attack. A percentage of the workforce may then adopt the mindset of “I’m going to do it to them before they do it to me.”  Consequently, many companies have experienced an increase in both the number of security related problems they’ve incurred as well as an escalation in inventory theft.

One distributor that recently contacted us had experienced their highest single spike in inventory shrinkage in the last 15 years.  Another company was recently victimized for over $240,000 in theft related losses by a group of long term employees who admitted they had never resorted to dishonesty prior to the last six months.

What oftentimes enables these types of crimes to take place are the reductions that some companies have made to their loss prevention programs, which have created new opportunities for individual theft, fraud and collusion, not to mention product tampering and sabotage.

Many senior executives have  asked me the best way to balance  the pressures of making needed cost reductions and the increased risk of security threats that many companies find themselves facing.  My response to this question is to search for innovative ways to reduce their security expenditures without increasing their exposure to security threats.

One  illustration of how this can be accomplished involves a company that has eight locations and one new facility on the drawing board. After carefully analyzing their security expenditures, we questioned why they intended to spend the sum they budgeted for the proposed video system in their new distribution system.

The cost for the CCTV system was, in our opinion, approximately $32,000 more than we thought it needed to be. As it turned out, this cost factor was being driven by their desire for pan/tilt/zoom (P/T/Z) cameras. When we questioned why they thought they needed them, rather than using fixed position cameras, it became apparent that there was not a well thought out reason for their selection.  Essentially they were going in this direction because that’s what they had in their existing facilities.

We pointed out the inadequacies of using Pan/Tilt/Zoom cameras in their type of operating logistics. After listening to our rational, they agreed with our logic. We also explained that fixed cameras were not only a fraction of the cost, but how they would actually provide them with a higher level of security.  Avoiding P/T/Z cameras would also save them money on repairs, being that fixed cameras have fewer moving parts and require far less service.

By utilizing the cameras we recommended, as well as substituting the type of digital video recorders their vendor had proposed with a model that we knew was of equal quality (but without some bells and whistles that we considered unnecessary), we were able to cut their capital investment by more than 52%.

Another illustration involved a company that was spending in excess of $2.8 million dollars a year in guard service  for their facilities in North America. After a study of their operating logistics and visiting several of their sites, we explained that all their facilities could be effectively protected and monitored from one central location if they utilized the right technology and security practices. The savings, even with the investment needed for the new technology, will exceed $1 million in the first year alone.

In a difficult economy, necessity does demand innovation. Rather than arbitrarily cutting budgets with a broad ax, which can end up costing far more, savvy  executives have learned that there are oftentimes ways to strategically reduce expense without increasing risk.

Posted in Blue Collar Crime, Home, Uncategorized, White Collar Crime | No Comments »

4 Tips for an Effective Hotline Program

Thursday, November 12th, 2009

by Barry Brandman

Honest employees, who don’t want to work alongside thieves, substance abusers and other unsavory types, will oftentimes not come forward because they’re fearful about getting dragged into a potentially uncomfortable or even dangerous situation.

This fear factor is not completely unfounded. In fact, there is an actual term for it: “whistleblower syndrome”. There have been hundreds of cases of employees receiving threats, having their property damaged and even being assaulted after informing management about a dishonest coworker.

However, companies cannot afford to be naive and unaware about illegal and unethical activity taking place. White and blue collar employees who commit fraud, embezzlement or inventory theft, as well as harassment or discrimination can easily cost their companies six and even seven figures.

Workplace substance abuse can be equally costly. One distributor was sued for over two million dollars after a worker who tested positive for cocaine caused a serious injury to a coworker with a forklift. Prior to trial, statements were taken from an array of employees who testified that drugs were widely used and sold inside the distribution center. Fearful of the consequences, the distributor agreed to a significant settlement with the injured worker rather than go to court.

Confronted with these realities, it’s imperative that management open up a line of communication with their workforce. To be effective however, this communication line must make the employees feel safe and secure. Otherwise, it will not be nearly as effective as it needs to be.

Following these 4 guidelines will dramatically increase the success of your hotline program:

  • Offer Callers Total Anonymity, Not Just Confidentiality. The difference is that offering confidentiality means callers have to trust that you won’t reveal their identity. However, if you provide anonymity, i.e., you never require callers to provide their names, you’re giving them the security that they want and therefore increasing the odds of getting them to tell you what they know.
  • Outsource. It’s a proven fact that employees feel far more comfortable speaking with someone who won’t recognize their voice, speech pattern or accent. Additionally, callers prefer to speak with experienced professionals who routinely deal with these types of security related problems.
  • Promote It Positively and Consistently. You can avoid the “Big Brother” syndrome if you carefully word your posters and handout materials so they emphasize the benefits (which are many) of working in a theft-free, drug-free environment.
  • Talk About the Program As Often As Possible. During new employee orientations and communication meetings take some time to explain how the program operates. The more employees understand how the program works, the more likely they’ll be to use it when they become aware of illegal or unethical activity.

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White Collar Crime on an Upward Trend

Monday, October 19th, 2009

by Barry Brandman

In one confidential survey, nearly 25% of the companies responding revealed that they had been victimized by some type of fraud within the last 12 months. Thefts of intellectual property are on the rise as well. An estimate from one study puts that loss alone at more than $60 billion.

The old axiom that crime doesn’t pay has been repeatedly proven wrong. The truth of the matter is that crime does pay, and it pays quite well. To add insult to injury, the culprits oftentimes don’t pay any taxes like legitimate wage earners.

Theft of proprietary information, embezzlement, the misappropriation of company funds and vendor kickbacks are only some of the ways that white-collar criminals strike today.

It’s always difficult for top management to accept the idea that a high level colleague could be bilking their company. While it’s understandably difficult to face this reality, executives who go through denial oftentimes pay a high price for not at least considering the possibility that there could be a problem and looking into it.

Many CEO’s assume that their firms are protected from fraud because their financial professionals will uncover any type of impropriety. This however, is typically not the case. Accountants and auditors can only examine so much quantitative data. Additionally, financial experts are usually kept busy making sure that tax obligations are met, reports are prepared on time and bottom line numbers are balanced. If the white-collar criminal camouflages the fraud so it appears to be standard operating procedure, the chances of being caught are not very good.

This is best illustrated by one individual who had defrauded his company out of several hundred thousand dollars via a simple, yet effective scheme.

In his position, he had responsibility for approving invoices from an array of vendors for various goods and services. Once an invoice left his desk with his initials, it was processed for payment. His first step in the fraud was to set up a “shell,” i.e., a nonfunctioning company whose sole purpose was to be used for the scam. Next, he rented a mailing address in another city and established a local telephone number that forwarded calls to an answering machine at his home. The next step was to print up legitimate looking company invoices and envelopes.

He began forwarding invoices to his company for nonexistent financial and insurance consulting services. Initially, he treaded lightly, keeping the invoices relatively modest. However, after seeing that no one questioned the bills, he began increasing the amounts and sending them with greater frequency. Within 3 months, he was defrauding his firm out of more than $5,000 a week. This went on for more than two years before anyone even remotely suspected a problem.

Unfortunately, the opportunity to score big creates a great deal of temptation. These crimes occur more frequently than most realize. However, make no mistake. Companies are being victimized with alarming frequency and experts expect the problem to get worse.

Don’t Be Too Hasty to Make Accusations

Never confront a suspect unless you have strong evidence that they’ve committed the crime. Although the first inclination on the part of some CEO’s and CFO’s is to speak one on one with the co-worker, this is definitely not a good idea.

One senior vice president admitted that one of the biggest mistakes he ever made was to think that he’d elicit a remorseful confession from a purchasing executive by giving him the opportunity to cleanse his soul. After explaining why he suspected that the executive was guilty of accepting kickbacks, the senior vice president was shocked when the co-worker vehemently denied any wrongdoing. While the senior vice president had strong circumstantial evidence, he had not conducted a proper investigation and his facts were not complete or conclusive. The purchasing manager’s aggressive response forced the senior vice president to back pedal.

The company was subsequently unable to take decisive action because the senior vice president had decided to short cut the investigative process and prematurely confront the suspect. To make matters worse, the purchasing executive was then able to destroy evidence of his wrongdoing once he learned he was under suspicion.

When there are indications of fraud, conduct a thorough investigation. The objective is to develop enough factual evidence so that an unbiased determination can be made as to whether there was unethical and/or illegal conduct. Always keep in mind that the burden of proof is on the company to show guilt, not on an employee to prove their innocence.

 

 

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How Vulnerable Is Your Company to Cybercrime?

Wednesday, October 7th, 2009

by Barry Brandman

Cybercrime can literally be launched from any place on the globe. Unauthorized entries into corporate servers and networks can result in fraud, the theft of proprietary information, the misappropriation of company funds, as well as highly destructive and costly sabotage.

There are generally three categories of those who illicitly seek to penetrate corporate computer systems.

One group, which has grown significantly, is motivated by political or philosophical beliefs. They have vendettas against certain corporations or industries. You’ve seen groups such as these staging protests at national and international economic summits. Taking their beliefs to an extreme justifies their efforts to sabotage networks and data communications.

Another group of hackers, sometimes referred to as “script kiddies”,  are predominantly driven by mischief. Hacking into servers and websites, and then defacing them, is in essence cyber-vandalism. To many, it has become a game of matching wits – theirs against corporate or government IT experts who are entrusted with protecting networks.

A third category of attackers is driven by greed, and in certain respects can be the most dangerous form of hacker. In many cases, they are highly sophisticated, well financed and have successfully stolen classified data from government, organizational and corporate websites and networks. In fact, there are international crime organizations specializing in cybercrime as well as solo “cyber guns-for-hire” who will attempt to penetrate a corporation’s network for the right price.

With the downturn in the economy, company employees have become another area of risk. One investigation involved a company executive who became vindictive as he witnessed the value of his stock options plummet. As a personal vendetta directed at senior management, he accessed highly confidential files, including customer lists and marketing plans, and sent them to a competitor.

Experts fear that for every cyber related fraud, theft and embezzlement that is uncovered, there could be as many as 80-100 crimes that go completely undetected.

Cyber Crime Risk Assessment

Here’s a basic diagnostic self-evaluation that can help you evaluate just how vulnerable your server, network, proprietary data and internal communications may be:

  • Do you, at least once per month, verify that your data is actually being backed up the way you think it is?
  • Are passwords used by your employees a minimum number of characters and numbers (or are they relatively easy to crack because they consist of nicknames, birthdays, etc.)?
  • Are employees automatically required to change their passwords at least three times per year?
  • Does your company regularly update your operating system and software packages with the most up-to-date patches?
  • In the last 12 months, have you had experts perform a penetration test where they attempt to deliberately circumvent your firewalls and hack into your servers?
  • Is all company e-mail encrypted?
  • Does your company utilize effective intrusion detection products that will help detect, identify and stop unauthorized access?
  • Have you analyzed your network architecture to identify vulnerable points of entry for viruses?
  • Is your server in a highly secured room, protected by controlled access electronics, alarms (intrusion and temperature) and video equipment? If so, are the security clearances periodically reviewed to determine whether modifications are needed?
  • Do you have the ability to uncover employees sending damaging information from your company’s e-mail systems?
  • Does your company’s disaster recovery plan incorporate storing backed up data at an off-site location and making contingency plans for employees to work elsewhere if they can’t get to company offices?
  • Are employees given orientation and training regarding protecting company networks and following established security policies?
  • Are comprehensive background investigations performed on candidates and employees who will have access to classified data?
  • Are there follow-up background investigations conducted when employees are transferred or promoted into high security positions?
  • Is there a confidential 800 number available and effectively promoted for employees to anonymously call if they suspect or know of illegal or unauthorized activity by a co-worker, vendor or contractor?

If you haven’t answered yes to at least ten of these questions, your company may well be an easy victim, and it’s probably time to take  action.

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