False Vendor Scheme

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False Vendor Scheme
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Outline for today

• Definition
• How it works
• The red flags
• Investigative steps
• Prevention ideas
• Specific examples
• Conclusion

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What is a False Vendor Scheme?

• A fraudster uses a fictitious vendor to cause the
  victim company to issue payment for fictitious
  purchases

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Characteristics

• Shell Company scheme

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How It Works

• Form a Shell Company
• Open a bank account
• Create false documentation
• Get payment authorized

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Related Red Flags

• Internal control problems
• Lack of segregation of duties
• The rubber stamp supervisor

• Watch for employees that
• live beyond their means
• never want a vacation

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Red Flags of False Vendors

• The cheesy invoice
• Services why?
• Unfolded invoices
• Nonexistent/invalid telephone number
• Anomalies in documentation
• P.O. Boxes
• Check endorsement

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Investigation

• Obtain background information

• Business registration records

• Refer to directories

• Visit the business address

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Investigation

• Accounting Analysis

• Obtain documents

• Analyze the information

• Determine suspects
• Conduct interviews

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Prevention Ideas

• Watch for red flags
• Internal controls
• Set the tone at the top
• Establish a fraud policy
• Random audits
• Background checks
• Anonymous fraud reporting
• Watch and educate employees

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Cheryl Brown, fraudster

• Administrative assistant
• Created fictitious invoices
• College issued checks
• An accomplice cashed the checks

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Cheryl Brown, fraudster

• How did she get caught?
• Conclusion

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Elgin Aircraft

• Self-insured for health care
• Claims processing
• Claims payment

• How could someone commit fictitious vendor fraud
  here?

14
Elgin Aircraft

• The observant auditor

• Manager of claims payment department
• Enjoyed chauffeured limos to lunch
• Didnt like vacations

• 12 million fraud loss

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Elgin Aircraft

• How could they have prevented/detected it?

• Mandatory vacations
• Employees receive confirmation
• New doctors were never approved
• Asking questions

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False Vendor Scheme Summary

• Billing for fictitious purchases
• Serious problem for business
• Effective prevention
• Be proactive

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False Vendor Scheme
Any questions?