Chapter 7: Billing Schemes

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Chapter 7 Billing Schemes
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What Are Billing Schemes?

• Schemes attacking purchasing function
• Cause organization to buy goods/services that are
  nonexistent, overpriced, or not needed
• Perp submits bogus invoice or other support
• Victim organization issues a check
• Perp collects payment

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Billing Schemes

• 244 billing schemes were reported, with a median
  loss of 250,000.
• Billing schemes are the most common and most
  costly form of fraudulent disbursement.

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Common Billing Schemes

• Shell company schemes
• Non-accomplice vendor schemes
• Personal purchases with company funds

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Billing Schemes Breakdown of Cases

• Of 244 billing schemes reported, over 90 were
  either personal purchases or shell company
  schemes.
• Billing schemes are the most common form of
  fraudulent disbursement.

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Billing Schemes -Median Losses
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Shell Company Schemes

• What is a shell company?
• Fictitious entity
• Created for purpose of committing fraud
• Only exist on paper
• Usually consist of bank account and mail drop
• Generally registered with state or county (perp
  needs registration to open bank account)

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Shell Company Schemes

• Usually invoice for services, not goods
• Services not tangible, harder to verify
• How shell company invoices get paid
• Perp has authority to approve payment
• Supervisor rubber stamps purchases
• Perp prepares bogus support documents
• Collusion among several employees

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Shell Company Schemes

• Pass-through schemes
• Variation of standard shell company scheme
• Perp assigned to purchase goods/services for
  company
• Uses shell company to buy the items on credit
• Shell company sells items to employer at inflated
  price
• Pays off shells credit, excess is profit

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Shell Company Schemes Countermeasures

• Question invoices that have residential address
  or mail drop for mailing address
• Look for invoices with lack of detail
• Missing phone , fax , invoice , tax id, etc.
• Investigate invoices with no sales tax
• Sort payments by vendor, look for
• Consecutive invoice numbers
• Consistent payment amounts, round numbers

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Shell Company Schemes Countermeasures

• If suspicions about vendor arise
• Look up vendor in phone book
• Contact others in industry
• Visit address to verify existence
• Independently verify delivery before paying
• Periodically run comparison reports between
  vendor/employee addresses
• Maintain up-to-date vendor list

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Identifying the Perpetrator of a Shell Company
Scheme

• Check articles of incorporation, dba
• Conduct surveillance on mail drop
• Review support who requests, authorizes
  purchases?
• Review cancelled checks for bank acct info
• Dont pay invoice, see who follows up
• Search workstation of suspect for evidence

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Billing via Non-accomplice Vendors

• Perp overbills company on behalf of existing
  vendor
• Vendor not involved in the scheme
• Two common techniques
• Pay-and-return
• Counterfeit invoices

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Billing via Non-accomplice Vendors

• Pay-and-return scheme
• Controls over returned checks may be more lax
  than outgoing checks
• Perp double-pays invoice, sends check to wrong
  address, etc.
• Tells recipient a mistake was made
• Asks for check back
• Steals the returned payment

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Billing via Non-accomplice Vendors

• Counterfeit invoices
• Perp generates bogus invoices, similar to
  existing vendors
• Easy to do with desktop publishing
• Company cuts check
• Perp steals check or has it delivered to mail drop

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Non-Accomplice Vendors Countermeasures

• Sort invoices by vendor, look for unusual
  invoice numbers, change in address or style
• Mail checks immediately after signing
• Restrict access to accounts payable records and
  addresses
• Investigate excessive purchases from particular
  vendor

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Non-Accomplice Vendors Countermeasures

• Independently spot-check purchases with vendors
• Install system to prevent duplicate payments
• Require all incoming mail to be opened by
  mailroom all incoming checks logged (to prevent
  pay-and-return)
• Instruct bank not to cash checks payable to
  organization

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Personal Purchases with Company Funds

• Perp uses company checks to buy personal items.
  Common examples
• Home supplies/construction
• Side business
• Pay medical, utility, credit card bills, etc.
• Merchandise may be returned for cash

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Personal Purchases with Company Funds

• Methods of payment
• Perp has approval authority for invoices
• Altered or bogus support documentation
• Initiate fraudulent purchase requisitions
• Buy on running accounts/purchase orders
• Use company credit card

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Personal Purchases Countermeasures

• Require all purchases to be delivered to
  centralized receiving department
• Separate purchasing and receiving functions
• Investigate any purchases that are ordered
  drop-shipped to unusual location
• Question purchases that do not appear to have a
  business purpose
• Review any purchases made without management
  approval

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General Billing Scheme Red Flags

• Invoices cannot be traced to shipments
• Multiple payments to single vendor on same date
• Pattern of purchases just below review level
• Unusually quick turnaround on invoices
• Departments/employees consistently over budget
• Payments to multiple vendors for same product

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General Billing Scheme Red Flags

• Extreme inventory shortages
• Expenses increase dramatically
• Unexplained rise in cost of goods sold
• Unexplained decrease in gross/net profits
• Excessive materials orders
• Goods not purchased at optimal point
• High level approval of a low level transaction

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Billing Schemes Controls

• Invoices, purchase orders and receiving reports
  must be matched before payment issued
• Purchasing department should be independent of
• Receiving
• Shipping
• Accounting

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Billing Schemes Controls

• Purchases must have management approval
• Maintain a current approved vendor list
• Use competitive bids for major purchases
• Vendor purchases should be reviewed for abnormal
  levels
• Control methods should be implemented for
  duplicate invoices/purchase orders