PassThrough Schemes

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Pass-Through Schemes

• Individual Presentation by
• Casey Davis
• 12 March 2003

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Pass-Through Schemes

• Pass-through schemes are a form of the shell
  company scheme.

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What is a shell company scheme?
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Elements of the scheme

• Shell company
• Fictitious entity created for the purpose of
  committing fraud
• Usually file for an assumed name certificate
• Set up a bank account under this name
• Create a mailing address, usually PO Box

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Elements of the scheme

• Generate false invoices
• Can use excel, typewriter, or other home office
  equipment
• Invoice is for products or services never
  received

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How much could I loose?
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What makes a pass-through scheme

• In most instance of a shell company scheme no
  merchandise is ever received.
• In a pass through scheme the company actually
  receives the merchandise on the invoice.

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How does this work?

• Perpetrator is usually in charge of purchasing
  for the company
• When a purchase order comes in the perpetrator
  personally buys the merchandise from a vendor,
  and then sells that merchandise to the victim
  company through the shell company

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Example

• What are some red Flags

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Red Flags

• Unfamiliar Vendors
• Vendors that only have a PO Box address
• Vendor names that are only initials
• Rapidly increasing purchases from one vendor
• Vendor billing more than once a month
• Vendor address that matches employees address
• Signed endorsements on returned checks
• Payments broken into smaller amounts
• People involved in purchasing can approve new
  vendors
• Increased spending for the year but no increase
  in inventory
• Self generated invoices
• Non folded invoices

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How to avoid

• Evaluate and approve new vendors
• Obtain records on new vendors
• Check credit ratings
• Check for the company in the phone book
• Contact references for new vendors
• Investigate PO Box addresses for vendors
• Watch for variances from budgets
• Compare Prices

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The Case

• Victim Cement Making Company
• Culprit Lincoln
• The Heroes The Auditors

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The Case

• Lincoln was head of purchasing
• He also had the power to approve vendors
• He set up a shell company, Majors Co, and
  approved it as a vendor
• He began purchasing limestone for Cement Making
  Company through his shell company.
• After several months the shell company was the
  sole provider of limestone

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How was he caught?

• Irregular increases in raw material expenditures
• Auditors noticed an increase in limestone prices
  over the last year or about 50
• While talking to Lincoln they noticed that he was
  acting suspicious
• The noticed that he had approved the major
  supplier of limestone

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How was he caught?

• Upon further investigation they found that
• Lincoln and his wife were the corporate officers
  of Major Co.
• Major Co. had charged 60 more than its
  competitors

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Lincoln is confronted

• The auditors conducted an admissions seeking
  interview of Lincoln, and he broke
• He admitted to every thing

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Damage

• In 18 months Lincoln had managed to defraud the
  company of 1.3 million

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What happened to Lincoln

• Lincoln was forced to return all of the money
• Against the advise of the auditors he was not
  prosecuted
• The whole incident was kept quiet
• He is now chief purchasing agent for a limestone
  vendor

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Why did he do it

• Opportunity
• He was the head of purchasing and also had the
  power to approve vendors
• Pressure
• He had just started a new business for himself
• Rationalization
• He was passed over for a promotion he felt he
  should have got and he felt betrayed

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Summary

• In a pass-through scheme inventory is actually
  delivered
• Perpetrator usually works in purchasing
• Make sure to have good controls over the approval
  of new vendors

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Questions?