When does employee fraud occur?

It is commonly accepted that the presence of the three elements of the Fraud Triangle increases the risk of employee fraud: Motivation: The employee is somehow motivated to commit a fraud. Economic factors such as personal financial distress, substance abuse, gambling, overspending, or other similar addictive behaviors may provide motivation. The current national economic recession may serve to increase the incidence of such financial motivations. Opportunity: The employee has sufficient access to assets and information that allows him or her to believe the fraud can be committed and also successfully concealed. Rationalization: The employee finds a way to rationalize the fraud, convincing themselves that their actions are really justified. Such rationalizations can include perceived injustices in compensation or promotions, the idea that they are simply borrowing from the company and fully intend to return the assets at a future date, or a belief that the company doesnt really need the assets and wont even realize they are missing. In the context of facility management and property management, the risk of fraud does not usually relate to theft of real property, inventory, or other physical assets, but rather to the misappropriation of cash. These risks include the diversion of funds such as rental payments prior to their receipt by the company, or by schemes to wrongfully divert funds already held by the company through direct theft, payments to fictitious vendors or employees, kickback schemes, and the like. WHO ARE THE PERPETRATORS OF FRAUD? Perpetrators of fraud take many forms. Anyone can be a target. Here are some tips to remember:

Most perpetrators often look and sound very earnest. They are frequently students of human nature and masters of presentation. They know what people want and the best way to offer it in order to trick or tempt. Be leary of deals that are 'too good to be true' or involve high pressure. Perpetrators can appear very professional, friendly, and knowledgeable. False pretenses: They may disguise their criminal activity: o by joining professional organizations or churches o participating in community activities o forging a false "friendship" with their victims. This may be especially true in cases of fraud against the elderly. Be suspicious if a senior family member suddenly finds a new "friend" that convinces the senior to change his or her will, empty a bank account, or sign over investments and/or property. o creating a false 'identity'. Children especially may be vulnerable to this technique, especially when online. Warn children that the person across the web may not be what he or she claims. Be suspicious if your child has an on-line "friend" that asks the child to keep secrets or meet in person. o false relationships ("players.") Many men and women have suffered financial losses in a relationship where one party pretended to be in love while the victim showered the pretender with expensive gifts. Victims of fraud are especially vulnerable to repeated fraud. Often, criminals will maintain a list of successful attempts and will sell these names to other criminals. Thus, the victim is vulnerable to repeated attempts, many of which may be entirely different scams. If you have been a victim of fraud once and did, in fact, lose property or money, be especially cautious of schemes that promise to "reclaim" or "recover" your lost items for an advance fee. This is a popular fraud that adds insult to injury.

Fraud Perpetrator Profile: A Short Story

Nick Brignola

As I walked into the board room, I felt as if I has been here before. The room was large, about the size of a medium-sized classroom, and it smelled of fresh paint. It had a bluish hue. The room was laid out like a classroom. There was an overhead projector, which had been placed in the middle of an old, oak table, that measured about six feet long, which faced the front of the room. A movie screen laid on the wall as if it were a Persian rug, Twenty desk-chair combinations placed in a semi-circle, faced the front of the room, with two windows along the back wall, each with a set of white venetian blinds covering the view to the outside world. There was a door located at the back right of the room, leading out to a fire escape. I set my cup of coffee, half full, down on the table. I took my materials, which included name tags, overheads, a marker, one Watermark brand pen, and some sheets of paper, out of my brief case, and laid them next to the cup of coffee.

I had traveled here, to Washington, D.C, to present a paper I had written approximately two years ago. The subject of the paper was fraud and profiling the perpetrators of fraud. Nineteen employees of the government were to attend this presentation, which included fifteen FBI agents, the Director of the FBI, Louis Freeh, and three assistant U.S. Attorneys. Janet Reno could not be present at the presentation, although she had wanted to be, since she was involved in a drug trafficking case in California. It was about 8:30 AM and the presentation was to begin around 9 AM. The class attendees started to filter into the classroom throughout the next half-hour. As each one walked in, they picked up a name tag and wrote their name on it. At approximately 9 AM, every seat was full, except for one, and I began my presentation. "Good morning. I am Nick Brignola, CFE, and Id like to thank you Mr. Freeh as well as Ms. Reno, although she could not attend today, for inviting me here to speak to this group about fraud and how to profile fraud perpetrators." The class, a mixture of all races, sat attentive, and listened eagerly to what I was saying. It was refreshing to see interest in this subject, since I was a full time Professor and many times, my students looked as if they were half asleep at the beginning of class. I am the Professor that most of the students do not want when they choose their accounting courses. Im known for being a stickler on the exams. " According to the Report to the Nation on Occupational Fraud and Abuse, fraud within the United States costs businesses more than $400 billion annually. This encompasses everything from pilferage to sophisticated investment swindlers. As we sit here today, we must concentrate our efforts on formulating a plan as to who might commit fraud within an organization. Just like you FBI agents do with serial killers, we have to determine a profile of who might commit fraud within an organization. We must become more effective and efficient in using our resources that we have here at our disposal, and we must assist the companies of America with safeguarding their assets." Mr. Freeh, raised his hand at that point in time, and looked puzzled. "You mean that it costs our businesses that much every year in fraud ?" "Yes. Fraud and abuse costs employers an average of $9 a day per employee. Street crimes only cost the U.S. $4 billion annually. This is a very important situation in our world today, and one which we must discuss in depth. We will look at the typical perpetrator, what you can look for in firms when you are looking for fraud, and I will also speak to you about someone who may be committing fraud today as we speak. If you have any questions during my presentation, feel free to ask them. I will answer them to the best of my ability."

"First, I will discuss some of the general characteristics you might find in a profile of someone likely to commit fraud within an organization:

They are male. 3/4th of all frauds are committed by men. They are intelligent. Many times, they commit fraud for the challenge because they are bored with their job. They are very egotistical. They feel they are worth more than they may be, pertaining to their job classification. They are risk takers. They are not afraid to fail. They are rule breakers, like to take shortcuts, and they justify the breaking of the rules. They are hard workers, usually arriving early for work, leaving later at night and never taking vacations. This makes them seem like an unlikely candidate to management, since they are putting in more time. But, this is the time in which many of their fraudulent activities are occurring. They are under stress. You FBI agents know that serial killers often have instances of pre-crime stress. Pre-crime stress is an event that happens right before a serial killer begins the killing. This may be a marital break-up, loss of a job, financial difficulties, etc. It is not always a single event that pushes the killer to this crime. The same holds true for fraudsters. They have a stressful event that may cause them to commit the fraud, such as the aforementioned stressers. As an investigator, you want to know what type of stress the fraudster is experiencing at the time he committed the fraud. Many are married. Married employees commit the greatest number of frauds and cause the highest median losses. Many are members of management. Management are sixteen times more likely to commit fraud than nonmanagerial employees. Median loss is higher for males than females: $185,000 for males, $48,000 for females. People that commit fraud think the same way. One fraud leads to another, and a pattern is begun. "As you can see, these are just generalizations about the type of person that might commit fraud within an organization. This is our profile of a fraudster. To commit fraud three items must be present within the mind of the perpetrator: perceived need, perceived opportunity and rationalization of behavior. With these three items inside of the fraudsters diabolical mind, fraud is easily committed."

One of the district attorneys, named John Bucks, raised his hand. He had a question, but he seemed puzzled as to what he wanted to ask. Finally, he began. "Mr. Brignola. I have been sitting here listening to what you have to say about fraud and the characteristics of a fraudster. Thats all well and good, but I must wonder to myself, what type of organization would these people be working in ? Are there any industries which we should be on the lookout for ? Are there any industries which may be more prevalent to fraud ?"

"Thats a very good question John, and it brings me to my next point. The organizations that fraudulent activities occur within are very similar, regarding what they have or what they lack.. Its almost like victimology, which is part of criminal profiling. This method entails developing a complete history of the victim, including lifestyle, personality traits, employment, etc. This narrows the offender type dramatically, and assists the investigators in limiting the field of suspects in a particular case. I have done the same type of system with fraud, in that I have developed a profile for you and your partners as to the types of organizations that fraud occurs within. The organization is the victim in this example. Profiling will allow you, the attorney or the agent, to know a great deal about the type company you may be dealing with and how this fraud may occur within their organization. They are as follows:" [I threw a slide onto the overhead projector that contained the following information:]

The most costly abuses occur within organizations with less than 100 employees, so the small business is at a big risk regarding fraud. The education industry has experienced the lowest median losses.

 The real estate financing sector has experienced the highest median losses. A high growth industry" "These are the areas where you may want to concentrate your investigations, John. Also, here are characteristics you may find within a firm that may lead to fraudulent activities occurring:

Fraud is not perceived as a risk, or risks are not assessed Management ignores irregularities Morale is low High turnover within the firm Staff lacks training in the systems in which they operate on a day to day basis A rapid increase in revenues and profits A very strong, egotistical leader Profit is the ultimate goal. It is to be reached no matter what occurs to deter the organization or employee. Salary structure is tied to profits "These are just a few of the characteristics you might find prevalent within a corporation ripe for fraud."

"Although there have been multitudes of fraud committed during the past ten years, with men such as Barry Minkow, Michael Milken, and Ivan Boesky leading the way, fraud is increasing within the United States. These frauds have not increased awareness within most businesses in America. Awareness and education are the key to defeating fraud within todays organizations." The group seemed impressed with my summation. I had one area left to cover. Who could be a modern day example of fraud. I was not about to accuse anyone, but I did want to use the characteristics I had stated earlier as a guideline for presenting to you a likely perpetrator. This information that follows is not to be taken, in any way, as an accusation. It is for use only as an example, and thats it." My face was beading sweat, as I did not want the attorneys or FBI agents to run out on the information I was about to present and arrest anyone, or begin an investigation. It was only an example, and I wanted them to begin to think like a fraud examiner thinks. "The man I speak to you about is Larry Ellison, President and CEO of Oracle Corporation, the worlds largest vendor of database software and information management services . Ellison has been described as a charming and outrageous man that is obsessed with dethroning Bill Gates, Microsofts CEO." I looked out at the class and they were studiously recording every word that rolled off of my tongue. "Ellison has grandiose ideas about the way things will look in the future pertaining to the next generation of the computer age. He feels easy-to-use network computers will allow people onto the Internet for a cheaper price, somewhere around $500. Ellisons ultimate goal is to have Oracle software inside of every one of those computers. Microsoft software runs 85% of the computers in the world today and Ellison wants that piece of the pie Ellison has been divorced three times and has built a house that is "classier than Bill Gates", according to Newsweek. This $40 million palace is equal in price to Gates new home in Washington. Oracles obsession with Bill Gates pervades every part of his life, and it is rare that he completes a paragraph without some reference to the evil empire in Redmond, WA. Oracles revenues have more than doubled within the past two years, jumping from $2 billion in 1994 to more than $4 billion in fiscal year 1996. Profits have also more than doubled, going from $283 million in 1994 to $602 million in 1996. This may be a firm you want to watch for fraud. This is just an example though. These may be possible indicators of fraud occurring within a corporation. I know nothing about any fraud occurring at Oracle Corporation." There were no further questions and I finished with my presentation. "Thank you for coming today. I hope you learned a lot today regarding fraud, as well as what to be aware of out there. Use the skill sets you already have and apply them to investigating fraud. You will be successful. Thank you and have a great day."

After the completion of my presentation, Mr. Freeh thanked me and invited me back to his house for dinner. I declined the invitation, taking a raincheck for another day.

COMMON FRAUD SCHEMES Telemarketing Fraud When you send money to people you do not know personally or give personal or financial information to unknown callers, you increase your chances of becoming a victim of telemarketing fraud. Here are some warning signs of telemarketing fraudwhat a caller may tell you:

You must act now or the offer wont be good. Youve won a free gift, vacation, or prize. But you have to pay for postage and handling or other charges. You must send money, give a credit card or bank account number, or have a check picked up by courier. You may hear this before you have had a chance to consider the offer carefully. You dont need to check out the company with anyone. The callers say you do not need to speak to anyone including your family, lawyer, accountant, local Better Business Bureau, or consumer protection agency. You dont need any written information about their company or their references. You cant afford to miss this high-profit, no-risk offer.

If you hear these or similar lines from a telephone salesperson, just say no thank you and hang up the telephone. Tips for Avoiding Telemarketing Fraud: Its very difficult to get your money back if youve been cheated over the telephone. Before you buy anything by telephone, remember:

Dont buy from an unfamiliar company. Legitimate businesses understand that you want more information about their company and are happy to comply. Always ask for and wait until you receive written material about any offer or charity. If you get brochures about costly investments, ask someone whose financial advice you trust to review them. But, unfortunately, bewarenot everything written down is true. Always check out unfamiliar companies with your local consumer protection agency, Better Business Bureau, state attorney general, the National Fraud Information Center, or other watchdog groups. Unfortunately, not all bad businesses can be identified through these organizations. Obtain a salespersons name, business identity, telephone number, street address, mailing address, and business license number before you transact business. Some con artists give out false names, telephone numbers, addresses, and business license numbers. Verify the accuracy of these items. Before you give money to a charity or make an investment, find out what percentage of the money is paid in commissions and what percentage actually goes to the charity or investment. Before you send money, ask yourself a simple question. What guarantee do I really have that this solicitor will use my money in the manner we agreed upon? Dont pay in advance for services. Pay services only after they are delivered. Be wary of companies that want to send a messenger to your home to pick up money, claiming it is part of their service to you. In reality, they are taking your money without leaving any trace of who they are or where they can be reached. Always take your time making a decision. Legitimate companies wont pressure you to make a snap decision. Dont pay for a free prize. If a caller tells you the payment is for taxes, he or she is violating federal law. Before you receive your next sales pitch, decide what your limits arethe kinds of financial information you will and wont give out on the telephone.

Be sure to talk over big investments offered by telephone salespeople with a trusted friend, family member, or financial advisor. Its never rude to wait and think about an offer. Never respond to an offer you dont understand thoroughly. Never send money or give out personal information such as credit card numbers and expiration dates, bank account numbers, dates of birth, or social security numbers to unfamiliar companies or unknown persons. Be aware that your personal information is often brokered to telemarketers through third parties. If you have been victimized once, be wary of persons who call offering to help you recover your losses for a fee paid in advance. If you have information about a fraud, report it to state, local, or federal law enforcement agencies. Identity Theft

Identity theft occurs when someone assumes your identity to perform a fraud or other criminal act. Criminals can get the information they need to assume your identity from a variety of sources, including by stealing your wallet, rifling through your trash, or by compromising your credit or bank information. They may approach you in person, by telephone, or on the Internet and ask you for the information. The sources of information about you are so numerous that you cannot prevent the theft of your identity. But you can minimize your risk of loss by following a few simple hints. Tips for Avoiding Identity Theft:

Never throw away ATM receipts, credit statements, credit cards, or bank statements in a usable form. Never give your credit card number over the telephone unless you make the call. Reconcile your bank account monthly, and notify your bank of discrepancies immediately. Keep a list of telephone numbers to call to report the loss or theft of your wallet, credit cards, etc. Report unauthorized financial transactions to your bank, credit card company, and the police as soon as you detect them. Review a copy of your credit report at least once each year. Notify the credit bureau in writing of any questionable entries and follow through until they are explained or removed. If your identity has been assumed, ask the credit bureau to print a statement to that effect in your credit report. If you know of anyone who receives mail from credit card companies or banks in the names of others, report it to local or federal law enforcement authorities. Advance Fee Schemes

An advance fee scheme occurs when the victim pays money to someone in anticipation of receiving something of greater valuesuch as a loan, contract, investment, or giftand then receives little or nothing in return. The variety of advance fee schemes is limited only by the imagination of the con artists who offer them. They may involve the sale of products or services, the offering of investments, lottery winnings, found money, or many other opportunities. Clever con artists will offer to find financing arrangements for their clients who pay a finders fee in advance. They require their clients to sign contracts in which they agree to pay the fee when they are introduced to the financing source. Victims often learn that they are ineligible for financing only after they have paid the finder according to the contract. Such agreements may be legal unless it can be shown that the finder never had the intention or the ability to provide financing for the victims. Tips for Avoiding Advanced Fee Schemes: If the offer of an opportunity appears too good to be true, it probably is. Follow common business practice. For example, legitimate business is rarely conducted in cash on a street corner.

Know who you are dealing with. If you have not heard of a person or company that you intend to do business with, learn more about them. Depending on the amount of money that you plan on spending, you may want to

visit the business location, check with the Better Business Bureau, or consult with your bank, an attorney, or the police. Make sure you fully understand any business agreement that you enter into. If the terms are complex, have them reviewed by a competent attorney. Be wary of businesses that operate out of post office boxes or mail drops and do not have a street address. Also be suspicious when dealing with persons who do not have a direct telephone line and who are never in when you call, but always return your call later. Be wary of business deals that require you to sign nondisclosure or non-circumvention agreements that are designed to prevent you from independently verifying the bona fides of the people with whom you intend to do business. Con artists often use non-circumvention agreements to threaten their victims with civil suit if they report their losses to law enforcement. Health Care Fraud or Health Insurance Fraud

Medical Equipment Fraud: Equipment manufacturers offer free products to individuals. Insurers are then charged for products that were not needed and/or may not have been delivered. Rolling Lab Schemes: Unnecessary and sometimes fake tests are given to individuals at health clubs, retirement homes, or shopping malls and billed to insurance companies or Medicare. Services Not Performed: Customers or providers bill insurers for services never rendered by changing bills or submitting fake ones. Medicare Fraud: Medicare fraud can take the form of any of the health insurance frauds described above. Senior citizens are frequent targets of Medicare schemes, especially by medical equipment manufacturers who offer seniors free medical products in exchange for their Medicare numbers. Because a physician has to sign a form certifying that equipment or testing is needed before Medicare pays for it, con artists fake signatures or bribe corrupt doctors to sign the forms. Once a signature is in place, the manufacturers bill Medicare for merchandise or service that was not needed or was not ordered. Tips for Avoiding Health Care Fraud or Health Insurance Fraud:

Never sign blank insurance claim forms. Never give blanket authorization to a medical provider to bill for services rendered. Ask your medical providers what they will charge and what you will be expected to pay out-of-pocket. Carefully review your insurers explanation of the benefits statement. Call your insurer and provider if you have questions. Do not do business with door-to-door or telephone salespeople who tell you that services of medical equipment are free. Give your insurance/Medicare identification only to those who have provided you with medical services. Keep accurate records of all health care appointments. Know if your physician ordered equipment for you. Investment-Related Scams Letter of Credit Fraud

Legitimate letters of credit are never sold or offered as investments. They are issued by banks to ensure payment for goods shipped in connection with international trade. Payment on a letter of credit generally requires that the paying bank receive documentation certifying that the goods ordered have been shipped and are en route to their intended destination. Letters of credit frauds are often attempted against banks by providing false documentation to show that goods were shipped when, in fact, no goods or inferior goods were shipped. Other letter of credit frauds occur when con artists offer a letter of credit or bank guarantee as an investment wherein the investor is promised huge interest rates on the order of 100 to 300 percent annually. Such investment opportunities simply do not exist. (See Prime Bank Notes for additional information.) Tips for Avoiding Letter of Credit Fraud:

If an opportunity appears too good to be true, it probably is. Do not invest in anything unless you understand the deal. Con artists rely on complex transactions and faulty logic to explain fraudulent investment schemes. Do not invest or attempt to purchase a letter of credit. Such investments simply do not exist. Be wary of any investment that offers the promise of extremely high yields. Independently verify the terms of any investment that you intend to make, including the parties involved and the nature of the investment. Prime Bank Note Fraud

International fraud artists have invented an investment scheme that supposedly offers extremely high yields in a relatively short period of time. In this scheme, they claim to have access to bank guarantees that they can buy at a discount and sell at a premium. By reselling the bank guarantees several times, they claim to be able to produce exceptional returns on investment. For example, if $10 million worth of bank guarantees can be sold at a two percent profit on 10 separate occasionsor traunchesthe seller would receive a 20 percent profit. Such a scheme is often referred to as a roll program. To make their schemes more enticing, con artists often refer to the guarantees as being issued by the worlds prime banks, hence the term prime bank guarantees. Other official sounding terms are also used, such as prime bank notes and prime bank debentures. Legal documents associated with such schemes often require the victim to enter into non-disclosure and non-circumvention agreements, offer returns on investment in a year and a day, and claim to use forms required by the International Chamber of Commerce (ICC). In fact, the ICC has issued a warning to all potential investors that no such investments exist. The purpose of these frauds is generally to encourage the victim to send money to a foreign bank, where it is eventually transferred to an off-shore account in the control of the con artist. From there, the victims money is used for the perpetrators personal expenses or is laundered in an effort to make it disappear. While foreign banks use instruments called bank guarantees in the same manner that U.S. banks use letters of credit to insure payment for goods in international trade, such bank guarantees are never traded or sold on any kind of market. Tips for Avoiding Prime Bank Note Fraud:

Think before you invest in anything. Be wary of an investment in any scheme, referred to as a roll program, that offers unusually high yields by buying and selling anything issued by prime banks. As with any investment, perform due diligence. Independently verify the identity of the people involved, the veracity of the deal, and the existence of the security in which you plan to invest. Be wary of business deals that require non-disclosure or non-circumvention agreements that are designed to prevent you from independently verifying information about the investment. Ponzi Schemes

Ponzi schemes promise high financial returns or dividends not available through traditional investments. Instead of investing the funds of victims, however, the con artist pays dividends to initial investors using the funds of subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds or when a sufficient number of new investors cannot be found to allow the continued payment of dividends. This type of fraud is named after its creatorCharles Ponzi of Boston, Massachusetts. In the early 1900s, Ponzi launched a scheme that guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial backers, the scheme dissolved when he was unable to pay later investors. Tips for Avoiding Ponzi Schemes:

Be careful of any investment opportunity that makes exaggerated earnings claims. Exercise due diligence in selecting investments and the people with whom you investin other words, do your homework. Consult an unbiased third partylike an unconnected broker or licensed financial advisorbefore investing. Pyramid Schemes

As in Ponzi schemes, the money collected from newer victims of the fraud is paid to earlier victims to provide a veneer of legitimacy. In pyramid schemes, however, the victims themselves are induced to recruit further victims through the payment of recruitment commissions. More specifically, pyramid schemesalso referred to as franchise fraud or chain referral schemesare marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out. Tips for Avoiding Pyramid Schemes:

Be wary of opportunities to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment. Independently verify the legitimacy of any franchise or investment before you invest. Market Manipulation or Pump and Dump Fraud

This schemecommonly referred to as a pump and dumpcreates artificial buying pressure for a targeted security, generally a low-trading volume issuer in the over-the-counter securities market largely controlled by the fraud perpetrators. This artificially increased trading volume has the effect of artificially increasing the price of the targeted security (i.e., the pump), which is rapidly sold off into the inflated market for the security by the fraud perpetrators (i.e., the dump); resulting in illicit gains to the perpetrators and losses to innocent third party investors. Typically, the increased trading volume is generated by inducing unwitting investors to purchase shares of the targeted security through false or deceptive sales practices and/or public information releases. A modern variation on this scheme involves largely foreign-based computer criminals gaining unauthorized access to the online brokerage accounts of unsuspecting victims in the United States. These victim accounts are then utilized to engage in coordinated online purchases of the targeted security to affect the pump portion of a manipulation, while the fraud perpetrators sell their pre-existing holdings in the targeted security into the inflated market to complete the dump. Tips for Avoiding Market Manipulation Fraud:

Dont believe the hype. Find out where the stock trades. Independently verify claims. Research the opportunity. Beware of high-pressure pitches. Always be skeptical.