Ron Warmington

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ACFE Back to Basics
Fraud WHO commits it... and WHY?
Ron Warmington Sept 15th, 2005
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Who, What, When, Where, Why... and How?...
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So... WHO commits Fraud... and WHY?...
?
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CROOKS... Because...
They're GREEDY !!
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Ingredients for SUCCESS

• Energy
• Commitment
• Determination
• Coolness under Pressure
• A Passion for Perfection
• Charisma

A potential Leader?
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Ingredients for SUCCESS

• Energy
• Commitment
• Determination
• Coolness under Pressure
• A Passion for Perfection
• Charisma

Or a Crook?
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Youll know a crook as soon as you see him
Right?
Wrong !!
Never, ever, underestimate the opposition
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Youll know a crook as soon as you see him
Right?
Wrong !!
Never, ever, underestimate the opposition
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You cant see charisma on paper Michael
Levi, Professor of Criminology University of
Wales
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Who Commits Fraud?

• Your Top Salesman
• Your Most Valuable / Most Trusted Employee
• Your IT System Administrator other Superusers
• Your Own Manager / Director
• Your Best Customer
• Your Best Broker / Dealer / Intermediary
• Organised Criminals (beware of Placements)
• Hackers (it sometimes starts just as Fun)
• Terrorists
• And all the rest !

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So... Do they all LOOK like Crooks?...
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Can we maybe tell them by... the CARS they drive?
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From our Hall of Fame...
Herynks Shelby Mustang

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From our Hall of Fame...
The Vicars Car

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And... for Goodness sake don't for a
moment think they are all STUPID?...
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And heres someone using an electric
drillstanding barefoot on a metal ladder in a
swimming pool
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Crooked Employees
.
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In a survey by Leicester University,
70 of the 2,000 people questioned admitted
they would commit fraud, if they knew
they would get away with it. Placed in this
context, no-one should be surprised that employee
fraud is growing.
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Of all employees about a quarter will be honest
in any event, half will be as honest as they
have a chance to be, and a quarter will actually
be motivated to be dishonest.   Dr. Raj Persuad
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Employees
Motivated to be Dishonest
Always Honest
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As Honest as they have to be
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GEs experience is MUCH BETTER than this
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3 Key Components
Heat
Fuel
Oxygen
Needed to sustain Fire
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3 Key Components
Opportunity
Rationalisation
Pressure
Opportunity
Trigger Employee and Management - Fraud
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• CIFAS Fraud Indicators - Some Warning Signs
• Staff under stress without a high workload -
  marked personality changes
• Always working late
• Reluctance to take leave
• Unexplained wealth or living beyond apparent
  means
• Sudden change of lifestyle
• Customer complaints of missing statements,
  unrecognised transactions
• New staff resigning quickly
• Cosy relationships with suppliers / contractors
  
• Suppliers / contractors who insist on dealing
  with just one individual
• Rising costs with no explanation
• Key employees having too much control or
  authority without audit checks
• Employees with external business interests

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Types of Employee Fraud

• Collusion with Customers, Dealers / Brokers /
  Intermediaries / Agents in both Soft and
  Hard Fraud (Application or Underwriting /
  Credit Approval) or in Money Laundering
  including acceptance of bribes kickbacks
• Expense Account abuse
• Sourcing fraud (payments for non-existent of
  low-value items / services)
• False invoicing (watch out for those
  Consultancy fees!)
• Bid rigging
• Diversion of income
• Time sheet falsification
• Insertion Fraud (adding fraudulent
  transactions)
• Theft of customer funds (take care re. Dormant
  Accounts)
• Computer programming / operations fraud
• Sale of customer-confidential or
  business-sensitive information
• Extortion / Blackmail
• Conflicts of Interest
• Getting the job in the first place through
  Deception (false claims in CVs, etc.)

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And what fraud committed by MANAGEMENT... these
are the biggest cases of all...
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Some of the highest value frauds are conducted by
company owners or senior employees. The victims
are shareholders, customers and members of the
public. There have been cases where the
fraudsters fail to differentiate between company
funds and their own, borrowing the former to
finance lavish lifestyles or to speculate, and
then finding themselves unable to replace the
money. Similarly, there have been cases where
the declared profits of companies have been
inflated in order to keep a company afloat, or to
maintain or increase share prices, thus
safeguarding or increasing the value of a
director's share options. Source NCIS United
Kingdom Threat Assessment of Serious and
Organised Crime 2003
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Companies killed off by FRAUD
Worldcom
Maxwell
Who's next ?
B C C I
Enron
Ferruzzi
Polly Peck
Kidder Peabody
Ferranti
DeLorean
Long-term Capital Management
Banca Bohemia
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And then there's that special breed The
Traders...
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The Rogue Traders - Hall of Fame
USD Millions

• Codelco Chile (Juan Pablo Davila 1991-1994)
  175
• Salomon Brothers (Paul Mozer - 1991) 290
• Morgan Grenfell (Peter Young - 1992) 300
• Kidder Peabody (Joe Jett - 1994) 350
• Merrill Lynch (Rubin - 1990) 380
• Princeton Economics (Martin Armstrong - 1999)
  950
• Daiwa Bank (Toshihide Iguchi - 1995) 1,100
• Showa Shell Sekiyu (Fujita - 1990) 1,100
• Barings (Nick Leeson - 1995) 1,240
• Metallgesellschaft (Benson - 1991) 1,340
• Sumitomo (Yasuo Hamanaka - 1996) 2,600
• AIB/Allfirst (John Rusnak - 2002) 750

Over 10 Billion Dollars !!!
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Rogue Trader Cases - Features

• Midas Touch / Untouchable Star Trader
• Insularity / Tribal Behaviour
• Domineering / Bullying character
• Nonsense answers
• Risk Management inadequacy
• Mid / back office outpaced

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Rogue Trader Cases - Features

• Ethical mismatch
• Legend effect
• Bonus greed factor
• Inexperienced management
• Inadequate supervision
• Seniors lack courage
• Ineffective recruitment vetting

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Geek Fraud...
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Case Study 1
Czech Employee IT Fraud
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Case Study 1 Investigations, Asset Recovery,
Process Repair

• Senior IT Analyst / Mr Fixit
• Had access to live data
• Lots of red flags
• Approx USD 7 million stolen over 3 years
• Detected by good internal controls
• Extensive use of technology in Investigation in
  order to unravel complex fraud and trace assets
• 100 Asset Recovery
• Employee jailed for 7 years

• Lessons Learned rolled out globally

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Case Study 2
Two Wrongs sometimes DO make a Right
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Case Study 2 Investigations, Asset Recovery,
Process Repair

• Senior IT Analyst / Mr Fixit
• Had access to live data
• Lots of red flags
• USD 250,000 stolen in two frauds on one day
• Detected by good internal controls (Bank
  Reconciliation at 0700 hrs next morning)
• Extensive use of technology in Investigation in
  order to unravel complex fraud
• 100 Asset Recovery
• Employee arrested
• More Lessons Learned already rolled out globally

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So WHY do they do it?... Employee Fraud Red
Flags...
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Employee Fraud - Red Flags
The environment
Opportunity
Rationalisation
Pressure

• Aggressive productivity goals
• Business in state of flux
• Perception of senior management greed
• Perception that fraud wont be punished
• Empowerment without supervision
• Legacy systems / outdated controls
• Flawed meritocracy
• Inadequate pre-employment screening
• High staff turnover rate

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Employee Fraud - Red Flags
The environment, contd
Opportunity
Rationalisation
Pressure

• Account Reconciliation problems
• Substantial difference write-offs
• Sloppy control environment
• Weak budgetary / cost centre controls
• Loyalty glue dissolving
• Weak / absent Internal Audit
• Strong Organised Crime presence
• Downsizing / layoffs
• Poor communication

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Employee Fraud - Red Flags
The person
Opportunity
Rationalisation
Pressure

• Works all hours weekends
• Extensive knowledge of / access
  to key
  processes
• Knows all the answers
• Mr / Ms Fixit
• Expensive hobbies / passions / vices
• Fancy car / motorcycle / boat
• Spouse plus secret boyfriend / girlfriend
• Inherited money from Rich Uncle

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Employee Fraud - Red Flags
The person, contd
Opportunity
Rationalisation
Pressure

• Mood swings / aggressive behaviour
• Little job satisfaction / bored
• Unshareable problem
• Disillusioned / distressed
• Disagrees with Performance Rating
• Dissatisfied with Bonus

When Pressure, Opportunity and Rationalisation
combine, FRAUD often follows