THIS POST IS CONTINUED FROM PART 31, BELOW--
The FATF standards on money laundering and terrorism financing category as “preventive measures”.
These preventive measures require financial institutions to identify their clients, create client profiles, weed out those who from the start look like they may be bad guys or controlled by bad guys, and then monitor the account activity of accepted clients to see if that activity varies from what is expected or reflects the kind of activity that known bad guys have undertaken in the past.
Financial institutions are then supposed to look further into the questionable client activity and report to the government when they suspect the client may be a criminal, including a terrorist. Key to the process of successful activity monitoring is an understanding of what known bad guys have done in the past. Studies of these past actions are known as typologies, which can include special “red flag” indicators for particular types of nefarious activity.
The problem with adding terrorism financing to the list of activities that financial institutions were required to look for, and requiring them to report to the government when they suspected they saw it, was that the FATF didn’t actually know how bad guys financed terrorism.
It was one thing for governments to use their considerable investigative resources to identify terrorists or terrorist organizations and then pass those names along to financial institutions so that those institutions could verify whether they had any such clients, but yet another to ask financial institutions to identify terrorists based on their clients’ transactions alone.
Until recently, the FATF’s and member governments’ attempts to develop terrorism financing typologies and red flags had been fitful, incomplete, and based largely on a small number of cases that were often not even relevant. The United Nations Counter-Terrorism Implementation Task Force (CTITF) undertake a comprehensive study of terrorism financing.
The Counter-Terrorism Committee is a subsidiary body of the United Nations Security Council. the United Nations Security Council unanimously adopted resolution 1373, which, among its provisions, obliges all States to criminalize assistance for terrorist activities, deny financial support and safe haven to terrorists and share information about groups planning terrorist attacks.
The 15-member Counter-Terrorism Committee was established to monitor implementation of the resolution. While the ultimate aim of the Committee is to increase the ability of States to fight terrorism, it is not a sanctions body nor does it maintain a list of terrorist groups or individuals..
While the Counter-Terrorism Committee is not a direct capacity provider it does act as a broker between those states or groups that have the relevant capacities and those in the need of assistance
In 2012, HSBC, one of the world’s largest banks, settled with the U.S. Government, avoiding criminal prosecution of its executives, for helping to launder money for Mexican drug cartels as well as Al Qaeda. HSBC provided a “gateway for terrorists to gain access to U.S. dollars and the U.S. financial system.”
HSBC agreed to forfeit 1.256 billion dollars, the largest forfeiture amount ever by a financial institution for a compliance failure. They don’t care as long as there is NO jail term. The lost money can be made up in days .
Because they were let off with zero criminal charges, the bank was allowed to go back to crooked business as usual.
The Organized Crime and Corruption Reporting Project published a comprehensive narrative that details how billions of dollars were moved from Russian sources to bogus shell companies before traveling further into various banks, and ultimately numerous companies that inadvertently accepted corrupt funds.
Money entered the Laundromat via a set of shell companies in Russia that exist only on paper and whose ownership cannot be traced. Some of the funds may have been diverted from the Russian treasury through fraud, rigging of state contracts, or customs and tax evasion.
Money that might have helped repair the country’s deteriorating roads and ports, modernize the health care system, or ease the poverty of senior citizens – was instead deposited in a Moldovan bank.
HSBC, which is headquartered in London, processed US$545.3m in Laundromat cash, mostly routed through its Hong Kong branch
A great number of banks accepted these funds easily, and the scheme touched upon at least 96 countries receiving the tainted money including the United States, with money ending up at Citibank and Bank of America. The OCCRP reported that “the 21 shell companies fired out 26,746 payments from their various Trasta Komercbanka and Moldindconbank accounts” between 2011 and 2014.
Earlier estimates of laundered money were wrong, recent projections have increased that number to as much as $80 billion.
The suspected “architect” behind this massive undertaking is Moldovan businessman Vyacheslav Platon.
US Congress could close this loophole by passing a simple, two-page law requiring the beneficial owner of a company to be identified whenever a U.S. company is formed. Treasury submitted a legislative proposal to Congress that provides a framework for closing this loophole once and for all.
Delaware is well-known for its incorporation businesses, but it’s no worse than any other state in this regard. With about $100 and 20 minutes, you can go to a U.S. state’s website and form a company without disclosing the name of the person who will own or control it.
Professional incorporation agents set up hundreds or even thousands of these companies and then sell them, in some cases to those looking to move money surreptitiously.
Criminals have learned that American companies have an easier time obtaining bank accounts, and so they incorporate here in large numbers. Financial investigators often come across U.S. shell companies in their money hunts — and that may be where the trail ends.
WE ASK DONALD TRUMP TO STOP THIS NONSENSE !
U.S. shell companies have the dubious distinction of being the only money laundering method where secrecy is provided by a government entity.
Stopping terrorist financing and money laundering are bipartisan issues, and Congress’s support for the work of my office is broad and deep on outside –but shallow and fickle inside . Whenever legislators have tried over the years to pass laws similar to the one recently proposed by Treasury, interested stakeholders have defeated the bills every time.
This is simply unacceptable.
To mitigate the threat, the Treasury Department issued a rule that will require U.S. banks opening accounts for a company to obtain and verify the identity of the company’s beneficial owner. That will help with companies that choose to bank here, but it won’t stop criminals who use U.S. front and shell companies to open bank accounts abroad.
And the burden for disclosing the true owners of companies should fall primarily on those incorporating the companies in the first place. To set this right will take an act of Congress—but as long as US congressmen are in Jew Rothschild’s payroll this wont happen.
After all Rothschild’s world financial empire is held together by shell companies
Chun Doo-hwan was the the fifth President of South Korea from 1980 to 1988. President Chun was convicted in Korea in 1997 of receiving more than $200 million in bribes from Korean businesses and companies.
President Chun and his relatives laundered some of these corruption proceeds through a web of nominees and shell companies in both Korea and the United States.
The former president and chief executive officer of BizJet International Sales and Support Inc., a U.S.-based subsidiary of Lufthansa Technik AG with headquarters in Tulsa, Oklahoma, that provides aircraft maintenance, repair and overhaul services, was caught in a scheme to pay bribes to foreign government officials.
Bernd Kowalewski, 57, the former President and CEO of BizJet, pleaded guilty in US federal court in, to conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and a substantive violation of the FCPA in connection with a scheme to pay bribes to officials in Mexico and Panama in exchange for those officials’ assistance in securing contracts for BizJet to perform aircraft maintenance, repair and overhaul services.
Kowalewski and his co-conspirators paid bribes directly to foreign officials to secure aircraft maintenance repair and overhaul contracts, and in some instances, the defendants funneled bribes to foreign officials through a shell companies.
WELL, HUNDREDS OF SUCH CRIMES ARE HAPPENING IN INDIA.
WE NOT KNOW HOW TO CATCH THESE CRIMINALS.
UNCLE OTTAVIO QUATTROCCHIs WIFE MARIA BABY ONCE KICKED AN UNIFORMED JAWAN WITH HER POINTY ITALIAN PUCCI ( OR WAS IT GUCCI ) SHOES , JUST BECAUSE HE DARED TO RUN A METAL DETECTOR ON HER.
I WILL BECOME McWOLF AT THIS RATE
Most naturally occurring data sets follow a strange rule called Benford's Law.
This rule allows you to predict how often each number 1 through 9 will appear as the first non-zero digit in the data set.
Benford's Law can be used to analyze financial data and identify red flags. If the data doesn't look anything like the distribution predicted by Benford's Law it may mean the numbers have been manipulated.
Benford's law, also called the first-digit law, is an observation about the frequency distribution of leading digits in many real-life sets of numerical data. The law states that in many naturally occurring collections of numbers, the leading significant digit is likely to be small
For example, in sets which obey the law, the number 1 appears as the most significant digit about 30% of the time, while 9 appears as the most significant digit less than 5% of the time.
By contrast, if the digits were distributed uniformly, they would each occur about 11.1% of the time. Benford's law also makes (different) predictions about the distribution of second digits, third digits, digit combinations, and so on.
It has been shown that this result applies to a wide variety of data sets, including electricity bills, street addresses, stock prices, house prices, population numbers, death rates, lengths of rivers, physical and mathematical constants, and processes described by power laws (which are very common in nature). It tends to be most accurate when values are distributed across multiple orders of magnitude.
The law could be used to detect possible fraud in lists of socio-economic data submitted in support of public planning decisions.
Based on the plausible assumption that people who make up figures tend to distribute their digits fairly uniformly, a simple comparison of first-digit frequency distribution from the data with the expected distribution according to Benford's Law ought to show up any anomalous results.
Following this idea, Mark Nigrini showed that Benford's Law could be used in forensic accounting and auditing as an indicator of accounting and expenses fraud. In practice, applications of Benford's Law for fraud detection routinely use more than the first digit.
Benford’s Law gives the expected patterns of the digits in tabulated data and it has been used by auditors and scientists to detect anomalies in tabulated data
If somebody tries to falsify, say, their tax return then invariably they will have to invent some data. When trying to do this, the tendency is for people to use too many numbers starting with digits in the mid range, 5,6,7 and not enough numbers starting with 1.
This violation of Benford's Law sets the alarm bells ringing.
TIME FOR A KHAINI BREAK !
ALL THIS IS COPIED FROM ANCIENT KERALA MATH
THE VEDIC GOLDEN MEAN 1.618 ( SRI YANTRA ) , THE FIBONACCI SERIES ( VEDIC SERIES ) AND BENFORDs LAW , ARE ALL INTERRELATED.
The Fibonacci numbers are
0, 1, 1, 2, 3, 5, 8, 13, ... (add the last two to get the next)
The golden section numbers are
0·61803 39887... = phi = φ and
1·61803 39887... = Phi = Φ
In numbers that appear in tables of physical and chemical constants. and similar tabulations, the digit 1 appears as first digit almost three times more often, as one would expect
Fibonacci and Lucas numbers tend to obey Benford's law
Benford offered a general "law of anomalous numbers. The probability that a random decimal begins with digit p is
log (p + 1) - log p
The first digits of Fibonacci and Lucas numbers tend to obey very closely the formula of probability offered by Benford.
The Lucas numbers or Lucas series are an integer sequence named after the mathematician François Édouard Anatole Lucas ( stolen from Kerala Math ) who studied both that sequence and the closely related Fibonacci numbers.
Lucas numbers and Fibonacci numbers form complementary instances of Lucas sequences.
Similar to the Fibonacci numbers, each Lucas number is defined to be the sum of its two immediate previous terms, thereby forming a Fibonacci integer sequence.
The first two Lucas numbers are L0 = 2 and L1 = 1 as opposed to the first two Fibonacci numbers F0 = 0 and F1 = 1. Though closely related in definition, Lucas and Fibonacci numbers exhibit distinct properties.
All Fibonacci-like integer sequences appear in shifted form as a row of the Wythoff array; the Fibonacci sequence itself is the first row and the Lucas sequence is the second row.
The Wythoff array ( stolen from Kerala Math ) is an infinite matrix of integers derived from the Fibonacci sequence .. it can also be defined using Fibonacci numbers or directly from the golden ratio and the recurrence relation defining the Fibonacci numbers.
Like all Fibonacci-like integer sequences, the ratio between two consecutive Lucas numbers converges to the golden ratio.
THE RATIO OF SUCCESSIVE TERMS IN A FIBONACCI SEQUENCE TEND TOWARDS THE GOLDEN MEAN.
THE DIGITS OF ALL NUMBER MAKING UP THE FIBONACCI SERIES TEND TO CONFORM TO BENFORDs LAW
THE FIRST DIGITS OF THE FIRST 100 FIBONACCI AND THE FIRST 100 LUCAS NUMBERS APPROXIMATED THE EXPECTED FREQUENCES OF BENFORDs LAW
( IT FITS BETTER IF WE INCREASE THE NUMBER FROM 100 TO 1000 AND THEN FURTHER TO 2000 )
My revelations now jump to 35.0%
ALL THOSE WHO THINK HINDUS ARE HEATHEN PAGAN SAVAGES , PLEASE RAISE YOU FUCKIN’ HAND .
ALL RIGHT SHOVE IT RIGHT BACK INTO YOUR ASSHOLES
Below: The Sri Yantra which contains TOE, is drawn with the Vedic Golden Mean as the base ( 1.618 )-- it was drawn in ancient days , when the white man was was doing GRUNT GRUNT for language and living in caves, clubbing down animals and eating them raw..
THE WORLD MUST KNOW THIS TRUTH
EVERY VESTIGE OF MATH KNOWLEDGE CAME FROM INDIA, TILL THE WHITE INVADER LANDED IN INDIA
A fraud audit is a proven way to identify fraud. Locating and recognizing shell companies in your accounts payable file is a critical task for today’s fraud auditor. The process starts with effective data mining designed to locate favored vendors, false billing, and pass-through fraud schemes.
The fraud audit procedures will focus on proven techniques to determine if the vendor is a shell corporation using the physical existence, legal existence, and the business capacity audit program
Wherever there is huge financial fraud-- shell companies are associated . While shell companies are frequently linked to multiple forms of scams, law officials are unable to prosecute all cases because state agencies do not collect enough ownership information on company formation documents.
Thus, they leave no paper trail for the government to trace back to a particular individual or individuals.
All inherent schemes have two aspects: the entity structure and the fraudulent action. The first step is building the fraud scenarios within the audit scope. The second is building the audit response to the identified fraud scenarios.
Fraud scenarios involving vendors, customers, and employees tend to use a false entity structure to commit the fraudulent activity. Within each category, there will be permutations that will affect the fraud auditing testing procedures.
The most common false entities are:
• The entity was created by the perpetrator, vendors, or customers. Vendors and customers are either legally created or exist in name only. When the entity exists in name only, the entity verification procedures will detect the false entity. For legally created entities, the fraud auditing testing procedure should link the incorporation date to first business date. As a guide, when the entity incorporation date is within 90 days of first business transaction date, that is a red flag of a false entity or a favored entity.
• The perpetrator assumes the identity of a real entity such as a vendor, customer, or employee. Therefore, the address or telephone number within the company master file for the entity should not match the address or telephone number of the entity verification procedures. A caveat exists in the passthrough fraud scheme where one of the perpetrators is employed at the real source of the goods or services, so it is possible to obtain a match of records.
When the entity is determined to be a real entity, there are generally three possible outcomes:----
• Favorite entity status indicates the entity is real, but there might be a real or perceived conflict. If there is a conflict, the fraud scenario would be dependent on the nature of the account, or else there is no fraud scenario occurring.
• The fraud scenario links to a real entity, whereby a decision tree would aid in the determination of the type of scenarios occurring.
• No fraud scenario is occurring. When the entity is established as a real entity, a decision tree can direct the auditor to the inherent scheme structure for the applicable core business system.
For the red flag to be an effective audit tool, the event must be observable and must be incorporated into the fraud audit program. Red flags by their nature cause an increased sensitivity to the likelihood of a fraud scenario occurring.
Not all red flags have the same weight with regard to fraud susceptibility. The weight of a fraud red flag correlates to the predictability of a fraud occurrence. Therefore, the auditor needs to interpret the importance of the red flag to the fraud scenario and be able to arrive at a conclusion regarding the occurrence of the fraud scenario.
There are four categories of red flags: data, documents, internal controls, and behavior.
The categories are intended to aid the auditor in identifying the red flags in an orderly fashion, whereb, the auditor should not view the process as a right or wrong exercise, but instead know that certain items can occur in multiple categories.
For example, a vendor invoice number can be a data category red flag observed through the use of data mining or a document category red flag observed through the application of audit testing procedures.
In addition to the four categories of red flags already mentioned, there are also two other types of red flags:---
Trigger red flags and awareness red flags.
With the trigger red flag, the event is sufficient enough to require the auditor to perform fraud audit procedures to determine if creditable evidence exists to suggest that the fraud scenario is occurring.
As a guideline, there should be no more than five trigger red flags per category, and preferably only three trigger red flags per category. To the contrary, with awareness red flags, the event is not sufficient to require the auditor to perform fraud audit procedures.
However, the totality of all the awareness red flags will require an auditor’s judgment on the need to perform fraud audit procedures. While both might lead to the performance of fraud audit procedures, the underlying reasons differ.
As a guideline for internal control audits, a red flag that links to a fraud scenario via a key control is denoted as a trigger red flag, whereas, a red flag that links to a fraud scenario via non-key controls is denoted as an awareness red flag.
A trigger red flag is similar to the traditional audit use of red flags, whereby when an internal control is not working, it “triggers” a red flag.
The use of trigger and awareness red flags will change in fraud audits or specific point analysis, whereas the link is directly associated with concealment strategy and the elements of the fraud scenario.
Boards of directors, stockholders, management teams, and professional standards all expect internal auditors to respond to the risk of fraud in core business systems. Within a company's accounts payable file, shell companies are being used to steal millions of dollars from companies or to conceal bribery payments which violate anti-bribery and corruption laws.
Red flags are used by management to build fraud detection controls and by the auditor as the basis for questioning the legitimacy of the business transaction.
For the red flag to be an effective audit tool, the event must be observable and must be incorporated into the fraud audit program. Red flags by their nature cause an increased sensitivity to the likelihood of a fraud scenario occurring. Not all red flags have the same weight with regard to fraud susceptibility.
The weight of a fraud red flag correlates to the predictability of a fraud occurrence. Therefore, the auditor needs to interpret the importance of the red flag to the fraud scenario and be able to arrive at a conclusion regarding the occurrence of the fraud scenario.
There are four categories of red flags: data, documents, internal controls, and behavior. The categories are intended to aid the auditor in identifying the red flags in an orderly fashion, whereby, the auditor should not view the process as a right or wrong exercise, but instead know that certain items can occur in multiple categories.
For example, a vendor invoice number can be a data red flag observed through the use of fraud data analytics or a document red flag observed through the examination of the vendor invoice.
Red flags are similar to the concept of circumstantial evidence in a legal proceeding. The red flag is an inference test. It is not the observance of a red flag but the totality of the weight of all red flags observed through the data collection process.
The process of detecting shell corporations is a two-step process.
The first step is to conduct fraud data analytics interrogation routines, which are designed to locate vendors that are consistent with the data profile of a shell corporation or transactions that are indicative of a shell corporation.
The second step is to perform audit procedures which are designed to pierce the concealment strategy or reveal the truth. The data mining strategy is a two-fold process. The first step is to build the data profile for the fraud scenario. The second step is to understand how the sophistication of the concealment strategy impacts the fraud data analytics.
Government registration: All entities have a legal registration. Employees have birth records and corporations have registration requirements with an applicable government office. The first step is to establish whether the entity is legally created, then gather identifying information that can eventually be linked to other pertinent information. Names of registrars; officers' addresses; and dates related to entity creation, dissolutions, or changes tend to be the critical information.
Real companies tend to have insurance. The fraud testing procedure would consist of a request of the certificate of insurance. Fortunately, such a request is a normal control procedure in many companies, but for fraud audit purposes, the need is to examine the certificate to take note the date of coverage and types of coverage.
Although the methodology for conducting a fraud audit is different from traditional auditing, the internal auditor employs many of the same skills and tools as is used in a traditional audit. Fraud audits are a blend of new methodologies and traditional audit tools
Fraud investigation consists of a multitude of steps necessary to resolve allegations of fraud: interviewing witnesses, assembling evidence, writing reports, and dealing with prosecutors and the courts. Because of the legal ramifications of the fraud examiners’ actions, the rights of all individuals must be observed throughout.
Unlike a financial audit, fraud examinations should never be conducted without proper predication. Each fraud examination begins with the prospect that the case will end in litigation. To solve a fraud without complete and perfect evidence, the examiner must make certain assumptions.
This is not unlike the scientist who postulates a theory based on observation and then tests it. In the case of a complex fraud, fraud theory is almost indispensable. Fraud theory begins with a hypothesis, based on the known facts, of what might have occurred. Then that hypothesis or key assumption is tested to determine whether it’s provable.
The fraud theory approach involves the following steps, in the order of their occurrence:--
Analyze available data.
Create a hypothesis.
Test the hypothesis.
Refine and amend the hypothesis.
Accept or reject the hypothesis based on the evidence.
With that said, fraud examinations incorporate many auditing techniques; however, the primary differences between an audit and a fraud investigation are the scope, methodology, and reporting Although fraud examination and auditing are related, they are not the same discipline. So how do they differ?
First, there’s the question of timing. Financial audits are conducted on a regular recurring basis while fraud examinations are non-recurring; they’re conducted only with sufficient predication.
The scope of the examination in a financial audit is general (the scope of the audit is a general examination of financial data) while the fraud examination is conducted to resolve specific allegations.
An audit is generally conducted for the purpose of expressing an opinion on the financial statements or related information. The fraud examination’s goal is to determine whether fraud has occurred, is occurring, or will occur, and to determine who is responsible.
The external audit process is non-adversarial in nature. Fraud examinations, because they involve efforts to affix blame, are adversarial in nature.
Audits are conducted primarily by examining financial data. Fraud examinations are conducted by (1) document examination; (2) review of outside data, such as public records; and (3) interviews.
Auditors are required to approach audits with professional skepticism. Fraud examiners approach the resolution of a fraud by attempting to establish sufficient proof to support or refute an allegation of fraud.
As a general rule during a financial fraud investigation, documents and data should be examined before interviews are conducted. Documents typically provide circumstantial evidence rather than direct evidence.
Circumstantial evidence is all proof, other than direct admission, of wrongdoing by the suspect or a co-conspirator. In collecting evidence, it’s important to remember that every fraud examination may result in litigation or prosecution.
Although documents can either help or harm a case, they generally do not make the case; witnesses do. However, physical evidence can make or break the witnesses. Examiners should ensure that the evidence is credible, relevant, and material when used to support allegations of fraud.
Fraud examiners are not expected to be forensic document experts; however, they should possess adequate knowledge superior to that of a lay person.
In fraud investigations, examiners discover facts and assemble evidence. Confirmation is typically accomplished by interviews. Interviewing witnesses and conspirators is an information-gathering tool critical in the detection of fraud. Interviews in financial statement fraud cases are different than those in most other cases because the suspect being interviewed might also be the boss.
Auditing procedures are indeed often used in a financial statement fraud examination. Auditing procedures are the acts or steps performed by an auditor in conducting the review.
According to the third standard of fieldwork of generally accepted auditing standards, “The auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit.”
Common auditing procedures routinely used during fraud examination, as during financial statement examination, are confirmations, physical examination, observation, inquiry, scanning, inspection, vouching, tracing, re-performance, re-computation, analytical procedures, and data mining; these are all vital tools in the arsenal of both practitioners as well as of all financial assurance professionals.
There are four basic detection methods for accounts receivable frauds. They include matching deposit dates, customer confirmations, accounting cut-off analysis, and trend analysis on written-off accounts. Account receivables frauds can be prevented through the adequate segregation of duties.
The collection of cash, posting of accounts receivable, and the writing off of old uncollectible accounts receivable should all be done by different personnel if possible. Also, some customer receipts can be made to a lock box rather than to the company’s normal mailing address. This allows the customer to make payments directly to the bank and therefore eliminate time delays.
Most inventory fraud is detected through missing financial documentation, physical inventory counts, or analytical review. If the company’s cost of sales has risen significantly from one period to the next, this could either be because of legitimate reasons or because embezzlements in significant amounts are being charged to the inventory accounts.
The purchasing function of a business is particularly vulnerable to employee abuses. Typical schemes involve fictitious invoices, over-billing, checks payable to employees, and conflicts of interest.
Purchasing fraud doesn’t necessarily require collusion with another employee or an outsider, although it often occurs. There was a case where a vendor opened up a credit card account for the personal use of a client company’s purchasing officer.
The fraud examiner can also use the computer to facilitate analytical review of timing of bids, patterns of bids, amount of work, patterns of new vendors, and similar trends.
A false billing fraud affects the purchasing cycle, causing the company to pay for nonexistent or non-essential goods or services. Most false billing frauds involve a service, since it is easier to conceal a service that is never performed than to conceal goods never received, the most common billing scheme is setting up one or more bogus vendors.
There are several ways to do this. The most common is to create a fictitious vendor (often called a shell company), open a bank account in the shell company’s name, and bill the victimized company. The perpetrator then creates an invoice and sends it to his employer. Invoices can be professionally produced via computer and desktop publishing software, typewritten, or even prepared manually.
Often, the most difficult aspect of a fraudulent billing scheme is getting the false invoice approved and paid. In many instances of billing fraud, the person perpetrating the fraud is also the person in the company who is authorized to approve invoices for payment.
Another popular means of getting invoice approval is to submit invoices to an inattentive, trusting, or “rubber-stamp” manager. Furthermore, perpetrators often create false supporting documents to facilitate approvals and payments, e.g., voucher packages.
A perpetrator can also use a shell company to perpetrate a pass-through billing scheme: the perpetrator places orders for goods with his shell company, has his shell company order the goods from a legitimate supplier at market prices, and then sells those goods to his employer at inflated prices.
The fraud lies in the fact that the victimized company is buying the goods it needs from an unauthorized vendor at inflated prices. The perpetrator “profits” from the inflated prices gained while acting as an unauthorized “middle man” in a necessary company transaction.
Rather than utilizing shell companies to over-bill, some employees generate false disbursements through invoices of non-accomplice vendors. In what is called a pay and return scheme, the perpetrator makes an error in a vendor payment to facilitate the theft.
One way to do that is to overpay or double-up on payments, request a check from the vendor for the excess, and steal the check when it arrives.
Another scenario is to pay the wrong vendor by placing vendor checks in the wrong envelopes, then calling the vendors to explain the mistake and requesting the return of the checks. When the checks return, they are stolen. The support documents are sent through the accounts payable system a second time; and these checks are sent to the proper vendors.
Another scheme involves purchasing personal items with company money. One popular way to do this is to make a personal purchase, then run the unauthorized invoice through the accounts payable system.
If the perpetrator is not in a position to approve the purchase, s/he may have to create a false purchase order to make the transaction appear legitimate or alter an existing purchase order and have an accomplice in receiving remove the excess merchandise.
Another way to purchase personal items with company money is to have the company order merchandise, then intercept the goods when they are delivered. To avoid having the merchandise delivered to the company, the perpetrator often will have it diverted to his home or some other address, such as a spouse’s business address.
A third way to purchase personal items with company money is to make personal purchases on company credit cards. No matter which of the approaches is used, the perpetrator will either keep the purchases for personal use or turn the purchase into cash (or a credit card refund) by returning the merchandise.
Red flags usually present when a false billing fraud is taking place, including:----
An unexplained increase in services performed (services that were paid for, but never performed);
Payments to unapproved vendors;
Invoices approved without supporting documents;
Falsified or altered voucher documents; for example, altering a purchase order after its approval;
Inflated prices on purchases or orders of unnecessary goods and services;
Payments to an entity controlled by an employee;
Multiple payments on the same invoice or over payments on an invoice;
Personal purchases with company credit cards or charge accounts;
Excessive returns to vendors, or full payment not received for items returned;
A vendor with a post office box address.
Employers should be thoroughly briefed on benefits for fighting fraud, reducing error and sharing knowledge that a well-planned and executed vacation and concurrent testing policy can bring to the fraud prevention effort.
The efficacy of modern fraud prevention programs has been vastly improved by advances in data mining, analytics and the near ubiquitous cloud based storage and availability of client transactional data; the advances, however, have been accompanied by some confusion on the part of fraud prevention professionals in the incorporation of these new tools into an effective, risk based, prevention program.
Three common sources of confusion usually arise during the implementation process of analytically supported fraud prevention schemes; first, is the confusion between the continuous monitoring of transactions (made possible by data mining and analytics coupled with enterprise risk management approaches for the identification of high risk business processes) and continuous auditing for fraud.
Second is the need to understand the role of the continuous auditing for fraud in high risk business processes as a meta control (i.e., as a control of controls) and third is the concern of separation of duties (i.e., who will do what when actual instances of suspected fraud are identified by the process).
The continuous, analytically based, monitoring of high risk business processes found to be especially vulnerable to pre-identified, attempted fraud scenarios is a dynamic process (i.e., the fraud examiner/auditor can turn analytical procedures on and off by re-configuring tests based on what fraud scenarios and levels of accompanying risk s/he feels are presently most active as threats.
By continuously monitoring particular, configurable high risk items, continuous testing for the presence of likely fraud scenarios constitutes a wholly new control level, acting as a meta control.
For example, a bank’s analytically based loan transaction system can issue an alarm regarding the presence of a suspected component of a fraud scenario and issue an alarm, under pre-specified circumstances, to the bank manager’s supervisor as loans to a given customer exceed pre-authorized levels.
This fraud prevention program measure thus increases the number of configurable controls (e.g., choosing to issue an alarm and when) by going past simple continuous monitoring all way to the level of continuous auditing/testing and subsequent management alert.
Implementing this type of approach to fraud prevention generally means taking the following general types of steps:--
—identifying the client’s high risk business processes for scenario testing. The choice of high risk business processes should be integrated into the annual fraud prevention plan and the enterprise risk management (ERM) annual review. This exercise should be integrated with other compliance plans (for example, with the internal audit annual plan, if there is one).
—identify rules that will guide the analytically based fraud scenario testing activity; these rules need to be programmed, repeated frequently and reconfigured when needed. As an example, a financial institution might have defined a critical component of a given fraud scenario; in response the bank monitors all checking accounts nightly by extracting files that meet the criteria of having a debt balance that is 20 percent larger than the loan threshold for a certain type of customer.
—determine the frequency of testing for the critical fraud scenarios and related business processes; this is important because the chosen frequency of testing has to depend on the natural rhythm of the subject business process including the timing of computer and business activities and the availability to the client of fraud examiners and auditors with experience of the underlying fraud scenario.
—cost benefit analysis needs to be performed; only the most high risk business processes vulnerable to a given frequently occurring fraud scenario should be continuously tested; once the threat is determined to have subsided (perhaps by the application or tightening of prevention controls) shut the continuous testing down as no longer cost effective.
—mechanisms must be in place to communicate positive testing results to business owners and the communication must be independent, objective and consistent; all the parties who will address elements of the suspected fraud and whose role requires taking some pre-defined action under the identified fraud scenario must be informed.
The evolution of fraud prevention programs to incorporate analytically based fraud evaluation and examination testing on a continuous and near continuous basis is a giant step for the fraud examination and auditing professions.
This evolution will take time, substantial attention from senior management and additional costs and resources as continuous fraud auditing activities are implemented and extended; these efforts will have a lasting effect on the future of both professions.
One of the biggest challenges of detecting, investigating and preventing employee fraud is the fact that there are so many types of fraud and theft that require different methods for discovery.
Every department presents opportunities for employees to steal, although it’s been widely reported that a disproportionate percentage of theft is carried out by employees in senior positions and that employees involved in accounting and finance are the most frequent offenders.
Most employee fraud schemes fall into the following fraud categories:----
Bribery and Corruption
To prevent and detect asset misappropriation:---
Conduct thorough background checks on new employees.
Implement checks and balances.
Separate the functions of check preparer and check signer.
Rotate duties of employees in accounts.
Conduct random audits of company accounts.
Don’t pay commission until goods are services have been delivered.
Keep checks in a locked cabinet and destroy voided checks.
Implement an anonymous ethics hotline to encourage employees to report wrongdoing.
To prevent and detect vendor fraud:------
Conduct thorough background checks on new employees.
Implement checks and balances on payments to vendors.
Separate the functions of check preparer and check signer.
Rotate duties of employees in procurement.
Conduct random audits of vendor files.
Conduct due diligence when setting up vendors by verifying:
Vendor’s business name
Tax Identification Number (TIN)
PO box and street address
Vendor contact person
Use data mining to uncover anomalies and patterns.
Compare vendor addresses with employee addresses.
Implement a dual review process for master vendor file management.
Review the vendor master file to check that volume of billing is reasonable and consistent.
To prevent and detect accounting fraud:-----
Implement tight internal controls on accounting functions.
Separate the functions of account setup and approval.
Conduct random audits of account payable and accounts receivable records.
Assign a trusted outside contractor to review and reconcile accounts at regular intervals.
Rotate duties of employees in accounts payable and accounts receivable.
Make it mandatory for employees to take vacation time.
Set up an automated positive pay system to detect fraud.
Data theft can include:----
Trade secret theft – theft of proprietary information to sell to a competitor
Theft of customer or contact lists – a departing employee copies or downloads lists of the company’s contacts to either sell or use
Theft of personally identifiable information (PID) – an employee steals or shares credit card numbers, client lists or other valuable PID to sell to other parties
To prevent and detect data theft:----
Restrict access to company proprietary information to only those who need it in the course of their jobs.
Set up IT controls to alert management of large data downloads or transfers or downloads and transfers that occur at odd times.
Purchase software that alerts management of suspicious activity on a company network, such as an employee trying to access sensitive information.
Dispose of confidential information properly, by shredding documents and completely removing data from electronic devices before redeploying or disposing of them.
Use strong passwords for all computers and devices that can access sensitive information.
Implement a clean-desk policy that prohibits employees from keeping sensitive information on their desks while they are not present.
High profile empllyee frauds, such as bribery and kickbacks, can damage much more than a company’s finances. The reputational hit from a corruption accusation can deter business, affect employee morale and affect an organization’s stock price.
These frauds can include:----
Bribes – An employee pays or provides a benefit to an official to secure an advantage for the company or for the employee.
Kickbacks – An employee receives payments or benefits from third parties in return for business advantages or for unauthorized discounts.
Shell company fraud schemes – An employee or company officer may use a shell company to launder money, pay bribes, divert assets or evade taxes.
Product substitution – A contractor, acting on its own or in collusion with an employee in the purchasing company, substitutes inferior or counterfeit materials for the materials specified in the contract.
To prevent and detect bribery and corruption:---
Have a strong code of ethics and ensure everyone in the company, from the top down, knows what it says and puts it into practice.
Ensure those at the top levels of the company set an example that makes it clear that bribery and corruption are not tolerated.
Discipline employees who breach the company’s code of ethics.
Conduct due diligence on all third parties your company does business with.
Look for product substitution red flags such as:----
High numbers of tests or failures
Unusually high numbers of repairs or replacements
Lack of warranty information in packaging
Products that don’t look like the product ordered
Conduct a risk assessment to look for areas to watch more closely
Train all employees on bribery and corruption prevention
Reward employees for ethical behavior
Employee Fraud Detection Tips. Watch for the following red flags:---
Employees with a lavish lifestyle that doesn’t match their salary
Employees who don’t take vacation
Employees who routinely stay late and work on weekends
Frequent tips or complaints about an employee
An employee who reluctant to share his or her job function
Large number of write-offs in account receivable
Employees who seem to feel the rules don’t apply to them
The best way to detect employee fraud is through tips, which is why implementing a whistleblower hotline can be the best deterrent.. Employees who know that there’s a hotline and a company culture that encourages its use have more than just the bosses to be worried about. Every employee becomes the eyes and ears of the company.
The most important task for tracing and tracking shell companies and contacts is to be able to document the linkage between all the information uncovered. The amount of leads, dead ends and information can be overwhelming; a single piece of important information could go unnoticed or unlinked.
Most investigators can't afford expensive mapping technologies. The next best option is a free online mapping and relationship tool, www.draw.io, which investigators can use to create easy relationship diagrams for presentations and reports and keep track of inter-related connections.
Map every piece of information — no matter how small. An address or phone number could be the key to uncovering the shell network. Search online for various combinations of phone numbers and addresses.
Shell incorporators might have been vigilant in concealing public records' information on involved entities, but they may have been careless when setting up the corresponding website addresses.
Using "Who is lookup" search engines, you can discover:----
Physical addresses of websites.
Website administrators and their contact information.
Website creation dates.
Evaluating online presence--Shell incorporators have a hard time faking an active and robust online presence because these companies technically don't exist. What constitutes a robust online presence?
The existence of a well-designed website.
The presence of other online content.
Periodic and regular updates of information.
Contact email addresses that are linked to a legitimate website address, not free email accounts.
The evidence is clear: Shell companies exist, they are plentiful, and their connections and networks can be vast. Depending on the size and international breadth of your organization, it could be a victim or an unwitting pawn. Reviewing and monitoring your internal data will reduce your risk of involvement with a shell.
Review all available internal data that contains contact, banking, address and ownership information, such as vendor/customer data, wire transfer data, ship to/ship from locations for sales and purchases, purchase orders and invoice support documentation.
What should you be looking for?----
Information that doesn't make sense given the nature of the business relationship with the entity.
Entity information mismatch: address, phone, fax, ship to, bank, cell contact, etc. in different geographic locations.
No discernable online presence when compared to the goods/services and the amount of money changing hands.
The entity "representative" is associated with numerous other companies.
Payment is made to or received from an unrelated third party. (Review incoming/outgoing wire transfer documents.)
Stay current with the latest on shell companies, international corruption, fraud and asset diversion, and money laundering. Screen information on your customers, vendors and employees.
Cross-reference known bad actors and shell companies against the entities with which you're doing business. Contact authorities if you're the victim of a shell company scheme.
TO BE CONTINUED-
CAPT AJIT VADAKAYIL