FRAUD STUDY - Why Double Invoicing is a Dirty Word
On September 9, 2016 A Blog, Global Trade, Onesourse, James Carniero reported:
“ While there may be perfectly valid business reasons for generating multiple commercial invoices for a single import transaction, the mere existence of a dual invoice model is likely to set off alarms if discovered by Customs and Border Protection (CBP) Import Specialists or Auditors, and Immigration and Customs Enforcement (ICE) Special Agents. That is why there needs to be solid, approved processes and systems in place to manage international transactions when multiple invoice situations exist.
As an example where there could be legitimate reasons for multiple invoices; consider a transaction where a company has set up a related party intermediary to handle an intercompany transfer pricing model. This could create a scenario where a non-related supplier is selling to the intermediary, and the intermediary is then creating a second invoice to represent a transfer price sale between the intermediary and the related importer. This assumes that there has been adequate internal legal, tax, and trade compliance review of the pricing to ensure compliance with both the Internal Revenue Service (IRS) and Customs and Border Protection (CBP) regulations regarding transfer pricing and related party transactions.
Another example could be an importer’s usage of the First Sale Rule, which if all aspects of the rule are followed, allows the import declaration value to be the sale between a foreign seller and a middleman as opposed to the subsequent sale between the middleman and an importer”.
Fake invoice fraud occurs when fraudsters submit an invoice, or other request for payment that is not genuine in the hopes that your business will pay it.
Invoice fraud can be committed with varying levels of sophistication, in its simplest form the fraudster simply submits an invoice to your business and hopes you will pay it. As the invoice is unlikely to bear any relation to your actual suppliers or your purchases this should be relatively easy to spot.
At a more sophisticated level fraudsters use various techniques to obtain information about your company and your suppliers so that they can submit demands for payment that are more credible. Cybercrime techniques deploying hacking and phishing can be used to either directly access information or give the fraudsters the appearance of being part of your company. For example they might send an email that looks like it’s come from one of your employees that either requests payment or requests information that makes their fraud more believable.
Another tactic that may be deployed involves social engineering. Fraudsters may contact your staff in order to obtain further information or to push the case for payment. They know the times when you’re likely to be busy or less alert, for example, Friday afternoons are a busy time for companies involved in property sales, so that’s when they’re likely to ring. For other businesses they understand that you may have a reduced number of staff or less experienced, temporary staff during the summer months.
The additional information gleaned through these methods means that the fraudsters can submit more convincing invoices that look like they come from your genuine suppliers and are for products or services you actually purchase. Another technique this level of knowledge allows them to deploy is to submit a request for change of bank account details. With letterhead that looks convincing like that of your genuine suppliers they will write to tell you that you need to update your records with their new bank account details. Of course the new details are those of a fraudster and when you think you are paying your genuine supplier the money will unfortunately end up with the scammers.
Invoice fraud has become a sophisticated enterprise that can have more than one stage and present in different forms that are not always easy to spot.
Billing Schemes – Cash Frauds
What is occupational fraud?
Occupational fraud is fraud committed by an employee on an employer in the course of their employment. They are more common and cause more financial loss to businesses than frauds committed by third parties. As employees will continue to work at the business, they will generally try to hide these frauds permanently, meaning that occupational fraud can be committed over an extended period of time.
What is a billing scheme?
This is a fraud that attacks the payments system of a business. It is designed to cause the business to make a fraudulent payment to the employee, whilst recording the payment as a legitimate business expense.
The employee will usually submit a false bill for payment through the normal process, and manipulate that approval and payment process and use whatever influence he or she may have to get the bill approved for payment. This is how the fraud got the name ‘billing scheme’. Once the payment has been approved and recorded as a legitimate expense, it is effectively hidden in the business’s records.
Description of Billing Fraud
- What are the benefits of this fraud to the fraudster?
- How are billing schemes done?
- Creating a False Entity
- Creating a False Invoice
- Getting false invoices approved
- Lessons to be Learned
- Prevention and Detection
Description of Billing Fraud
Most thefts require the thief to physically remove the stolen item from the victim’s premises. Frauds involve hiding the theft in the records. Fraud would be easier to commit if the victim would deliver the stolen item to the fradster. It would be even better if the victim would authorize the delivery of the item and recorded the delivery as a proper business transaction – thereby hiding the theft themselves.
This is what a billing fraud is designed to do. It aims to have a business make a payment to the employee and record that payment as a legitimate business expense. The result is no different from someone stealing money from the cash register. Payments made under a billing scheme are not legitimate business payments and the business does not receive any benefit for the payments. It is theft by deception.
WHAT ARE THE BENEFITS OF THIS FRAUD TO THE FRAUDSTER?
The benefits to the employee committing the fraud are:
- they probably do not need to take anything off site, as the money is sent to them;
- the payment does not need to be covertly converted to cash to be useable; and
- the payment is recorded as a business expense, so the fraud should be hidden.
The greatest of the benefits is that the fraud is automatically hidden once it has been committed. The only real chance of the scheme being uncovered after the payment is made is during a detailed examination of financial statements that leads to these particular payments. This is not common in smaller businesses and generally not common unless someone actually suspects that fraud has been committed.
All billing schemes have one common purpose regardless of their form: to get the victim to voluntarily make a payment to or on behalf of the employee and record the payment as a legitimate business expense. If done correctly, the victim should never realize that they have been a victim of a fraud.
HOW ARE BILLING SCHEMES DONE?
A billing scheme has three major parts:
1. the creation of a false entity to receive the payments. The employee may open a bank account in the name of the false entity, or they may decide to cash the cheques in some other manner and not have an account that can be traced if the fraud is discovered.
2. the creation of the false invoice submitted for payment. This is usually the easiest part of the fraud. This can be done on a cheap computer and printer.
3. the manipulation of the payments system so that the false invoice is approved and the payment is made. How this is done will depend on what position the employee has in the business and what influence they can have over the payment process.
CREATING A FALSE ENTITY
The employee must submit a false invoice to generate the payment. The invoice must be in the name of some entity that will be accepted as – or assumed to be – a legitimate supplier. The employee will not want to submit an invoice in their own name, so it is common to conduct a billing scheme through a fictitious or false entity, or through an accomplice.
It is safer for the employee to issue false invoices from an entity created for that purpose, rather than issuing false invoices under their own name; from a known supplier; or altering a legitimate invoice from a known supplier. Using your own name in a fraud is just plain stupid. Issuing or altering invoices from an innocent supplier may cause inquiries with or from that supplier, and that will uncover the fraud.
But the benefit of using a supplier known to the business is that the name will be recognized and there is less risk of anyone questioning the invoice. The problems are that the payment will have to be kept out of that supplier’s account – there is a risk that the fraudulent payment will be made to the real supplier – and the payment will have to be misdirected to the employee and converted.
Using a false entity with a name very close to a real supplier and its own bank account solves these problems. There is no need to create a company structure or business registration, a simple letterhead and invoice printed on a personal computer will suffice as it creates the illusion of a real entity. Australian Company Numbers and Australian Business Numbers can simply be invented. The invoice only has to look the part of a real invoice, especially if the employee is the person authorizing invoices for payment.
Also incorporating a company or business name could leave a trail leading to the employee. Having a completely fictitious entity removes that problem, but it does create the problem of presenting the cheques or opening bank accounts. Sometimes it is simpler to create a business name – using a false name and addresses – to be able to open a bank account. Otherwise the cheque will have to be converted. This may be overcome by using an accomplice with a bank account.
The employee can get the benefit of a name known to the business by creating a false entity with a name that is very similar to a known supplier. If the business already deals with a supplier called ABC Pty Ltd, a false entity with the name ABC (Aust) Pty Ltd may be created. The same A.B.N and A.C.N. as the real supplier can be used on the invoices. Anyone looking at the false invoice will recognize the name but may not realize that it is a slightly different. The cheque for the false entity is sent to another address – to the employee.
CREATING A FALSE INVOICE
All billing schemes are similar in that, regardless of what entity receives the payment, the employee must create a false invoice and any other supporting documentation required to have that invoice paid. The fraud is built around getting this false invoice – the false bill – approved and paid.
The employee has to produce an invoice that will pass the scrutiny of the person who authorizes invoices for payment. This assumes that the person authorising the payments actually pays attention to the job and properly reviews the material for payment – or is not the fraudster himself. Therefore, the most obvious suspects for this fraud are the people that either authorize invoices for payment or make the payments. Authorising your own false invoice is easy.
The employee has a few options. They can:
(a) create a false invoice from a fictitious entity and have the payment sent to an address in that entity’s name where it can be collected;
(b) create a false invoice from a supplier that already deals with the business, and redirect the payment of the false invoice to another address where it can be collected and converted to cash;
(c) issue a false invoice from an accomplice, whether a known supplier or not, and have the payment directed to that accomplice where the proceeds can be split;
(d) obtain a legitimate invoice from an innocent non business supplier for a personal purchase, and have the invoice approved for payment as a business expense – this is very similar to a false purchase fraud.
The aim of the first three options is obtaining money. The aim of the fourth option is obtaining some goods or services and having the business pay for them, although the end result is still the theft of monies.
GETTING FALSE INVOICES APPROVED
The difficult part of the fraud – and it may not be difficult at all – is getting the invoice approved and paid. This may be easy if the dishonest employee is the person in charge of approving invoices, or the person that approves invoices is not always attentive to their job, particularly when they are being told that the invoice is fine for payment by a trusted employee. The employee may;
(a) have the invoice approved through the normal business system.
This is easy if the employee can approve the invoice themselves. If not the invoice will have to be submitted and go through the normal channels. The employee may be able to have it approved by someone that does not pay a lot of attention to the documents put in front of them. Dishonest employees target people that sign whatever they are told is alright to sign. Once the invoice has been approved in the appropriate department, the chances of it being questioned are greatly reduced.
(b) forge an approval on the invoice and send the invoice to the payments department.
The false invoice may be noticed if the approval person is paying attention, so the employee may wish to bypass the authorization process. In that case they can forge an authorization from that department and send the invoice to be paid. This is easier if the two process are conducted by different people. If the same people authorize and draw the cheques, the invoice may have to pass through the authorization process.
(c) draw the cheque for the approved invoice
The employee may be the person that draws cheques to pay approved invoices. They will then simply be able to include their false invoice in the bundle of invoices to be paid. This may entail having to forge an approval for recording purposes and attaching it to the cheque so that the documents look the part when it is to be signed. But as the invoice should have gone through the authorization process already, no one is likely to question the cheque drawn. The employee may have to target someone to sign the cheque that does not pay attention to what they are signing and assumes that all authorisations are legitimate.
(d) be able to sign the cheque
If the employee is the person that signs the cheques, they may bypass the approval process entirely – the same as above – but not run the risk of the person who signs cheques noticing something wrong. The employee will just include their false invoice into the list of payments, and draw and sign the cheques. The only problem may occur if, even though they can sign a cheque, they cannot get access to draw the cheque.
If the employee also draws the cheque for signing, issuing the cheque is easy, so only the facade of approval needs to be performed. The employee will have to decide whether to leave the invoice unapproved and hope no one notices, or forge the authorization and hope no one notices.
This assumes that different people undertake these tasks. In some small businesses, one person will receive the invoice, approve it, draw the cheque and possible sign the cheque. With complete control over the system, that one employee will be able to place an invoice in the system, approve it and have it paid.
The fraudster worked as an office manager and was a trusted long time employee. Part of the job was approving invoices for payment. His supervisor did not check the invoices properly before payment was made as they had already been approved.
ABC Pty Ltd was a regular supplier of computer services to the company. The employee generated invoices from ABC (Aust) Pty Ltd, a fictitious entity registered for the purpose of the fraud. The paper work contained the ACN and ABN of the real ABC Pty Ltd.
The employee created false invoices and approved them for payment. These were paid through the normal payments system. The payments were directed to a post office box set up for that purpose and deposited into a bank account opened in the name of ABC (Aust) Pty Ltd with the registration documents.
XYZ Pty Ltd was a panel beater. The employees had the authority to order any parts required for their jobs. The invoices were sent for payment once the materials were received. Some employees ordered parts under the company name for their own personal use and submitted the invoices for payment, stating that the parts were for jobs. No formal approval process was required, so the invoices could not be tracked to any particular employee.
The business owner trusted his employees and did not keep sufficient records to be able to determine what the parts were to be used for, or what job they were ordered for. The employees kept the parts and the company paid for them. The lack of job controls did not allow detection of the fraud until the company failed.
Lessons to be Learned
1. Money in the bank is vulnerable to fraud. Money may be stolen directly from the bank account by submitting false invoices and having those invoices authorized for payment.
2. The theft of cash through a billing scheme does not need to be hidden. The fraud hides itself as a legitimate expense.
3. False invoices may be generated to look like they come from legitimate or known suppliers, or a completely fictitious entity.
4. Billing schemes rely on the authorization process not detecting that an invoice is not for goods or services supplied, or the employee bypassing the authorization process.
Prevention and Detection
Some things to look for
(i) Cash shortages or decreased profits when most costs are within budget. A billing scheme inflates expenses – usually one particular expense – and hence reduces profits and available cash. That particular expense will be larger than budgeted or expected.
(ii) Increases in one or some expenses (in total or by percentage) above budgets or what is determined reasonable compared to turnover. That expense item may be used to record payments from billing schemes. Horizontal and vertical analysis of these items may highlight suspicious accounts for further examination.
(iii) Abnormal levels of purchases from a particular supplier. The supplier’s name may be being used by the fraudster to submit false invoices. Checking the details on the invoices may show that some of the invoices are different from the others or suspicious in some manner. Verifying invoices with the real supplier will highlight false invoices.
(iv) Suspicious details on invoices, including:
- Lack of detail. These may be details of the goods or services purchased, details of the supplier, missing incomplete or suspicious phone numbers or address.
- Irregular invoice numbers from valid suppliers. This may occur when the fraudster is using a name that is very similar to a valid supplier.
- Questionable amounts on invoices. Amounts that are always too regular should raise suspicion.
(v) Missing documentation. The employee may destroy the documentation used to generate a payment once the payment has been made. It may later be assumed that the document has just been lost. The lack of documents will frustrate investigations into suspicious payments.
(vi) Purchases delivered to offsite locations may indicate that the fraudster has purchased an item in the name of the business and is having it delivered to himself offsite.
SOME BASIC CONTROLS
(i) Where possible the separation and rotation of duties between:
(1) the person making the orders and submitting the invoices for payment;
(2) the person preparing the cheques and banking records;
(3) the person recording the transactions in the businesses records; and
(4) the person signing the cheque.
(ii) Invoices should be approved by one person and that person should not draw the cheques or have the authority to order goods or services. This person should be completely independent to the other processes.
(iii) Purchases should be done with pre-numbered purchase orders. All suppliers should be given authorized orders and invoices should not be authorized for payment unless they match authorized orders.
(iv) Random checks on invoices may locate fictitious entities being used for billing schemes.
(v) Using pre-approved suppliers with pre-approved mailing addresses limits the opportunity of using a fictitious entity to conduct the fraud. Any invoice from a supplier that is not pre-approved should be verified before payment is made.
(vi) The use of electronic payments to pre-approved bank accounts will stop cheques being diverted to fraudulent entities.
(vii) Randomly check the name and addresses of suppliers, particularly when the only address on the invoices is a postal address.
(viii) Audit purchases with pre-approved suppliers to look for payments to similarly named suppliers. An approved supplier’s name, or a very similar name, may be used by a fraudster without their knowledge
What’s Dual-Invoicing Fraud?
Dual-Invoicing Customs Fraud Case: A Lesson for Retailers (and Others)
A third-party supplier to a major multi-channel electronic retailer pled guilty in U.S. federal court to the criminal charge of intentionally defrauding the United States of more than $1 million in customs duties. The supplier, Fai Po Jewellery (H.K.) Co., Ltd. (“Fai Po”), was ordered to pay nearly $2 million in criminal fines and restitution and placed on probation for a period of three years.
According to the U.S. Department of Justice, Fai Po ran a double-invoicing scheme under which it fraudulently evaded the payment of U.S. customs duties by invoicing the U.S. purchaser for the true cost of the goods, while enclosing with the shipments invoices that intentionally understated the value of the merchandise (the merchandise involved was subject to high U.S. duty rates). The invoices that accompanied the shipments were used by an express courier/customs broker to clear the goods. As noted in the U.S. Immigration and Customs Enforcement (“ICE”) press release, the U.S. purchaser was not aware of the scheme (i.e., the U.S. purchaser was not the importer of record) and did not benefit from it.
Implications for US Retailers
While the media and legal blogs have focused on the direct implications for the foreign supplier, the case is also instructive for U.S. retailers or other importers who purchase goods on “delivered” terms.
In the retail industry, it is quite common for retailers to purchase merchandise on “delivered” terms and to have suppliers be responsible for importing the merchandise into the United States. Under such an arrangement, the retailer generally does not receive copies of the entry documents submitted to U.S. Customs and Border Protection (“CBP”), as the supplier, or its designated customs broker, acts as the importer of record of the merchandise. Although a U.S. retailer does not act as the importer of record under such an arrangement and may, in fact, have limited knowledge in connection with the information submitted to CBP regarding the importation of the merchandise, such an arrangement does not shield the retailer from potential liability for duties owed to CBP, as the retailer may still be the “ultimate consignee” of the merchandise under U.S. customs law.
In addition, a U.S. retailer under such an arrangement may be exposed to potential civil penalties under 19 U.S.C. §1592. In this regard, U.S. customs law prohibits any person from entering or attempting to enter merchandise into the United States by material and false statements or acts or by material omissions, and from aiding or abetting a person to commit the foregoing violations. See 19 U.S.C. §1592(a)(1)(A)-(B). U.S. courts have held persons other than the importer of record liable for violations of 19 U.S.C. §1592.
Actions to Consider
The lesson for U.S. retailers here is that arrangements with third-party foreign suppliers to purchase merchandise on “delivered” terms do not necessarily insulate the retailers from potential liabilities under U.S. customs law. U.S. retailers who utilize such arrangements should review agreements with their suppliers to ensure that the suppliers are required to include invoices with each shipment of merchandise. In addition, retailers should make certain their internal controls include procedures to review their purchase orders against the suppliers’ invoices to ensure that the prices match, as well as procedures for addressing any situations in which the prices do not match.
A retailers that recognize the risks associated with such arrangements can take steps to minimize the likelihood of finding themselves in a situation similar to that of Fai Po’s customer. Having documented internal controls to address such risks and evidence that such controls are followed can also reduce the risk of potential penalties under U.S. customs law.
Why would an ambitious government official salivate over the prospect of busting open a double invoicing scheme? Take for example a case reported by ICE back in July of this year.
A clothing manufacturer based in China agreed to pay around for cheating the government through a double invoicing scheme (read the announcement:
Clothing importer, manufacturer to pay $13 million fine for evading customs duties
NEW YORK — A China-based clothing manufacturer agreed Wednesday to pay more than $13 million for engaging in a double invoicing scheme to defraud the United States out of millions of dollars in customs duties. The civil settlement is the result of an investigation by U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigation (HSI) and U.S. Customs and Border Protection (CBP).
Motives Far East and Motives China Limited admitted to and accepted responsibility for under-reporting the value of its imported merchandise and agreed to pay nearly $13.4 million to the United States under the False Claims Act.
ICE HSI Special Agent-in-Charge Angel M. Melendez said: “Motives disguised the true value of goods imported into the United States to cheat the government out of millions of dollars in customs duties. This scheme backfired, now Motives will pay millions for trying to skirt America’s customs laws. Trade fraud threatens the U.S. economy and restricts competitiveness of U.S. industry in the world markets. HSI and CBP maintain a zero-tolerance policy when it comes to these types of predatory and unfair trade practices.”
Manhattan U.S. Attorney Preet Bharara said: “Motives evaded millions in customs duties by presenting false invoices to U.S. Customs and Border Protection. With this lawsuit and the accompanying resolution, which involves admissions and the payment of over $13 million, Motives is being held to account for its unlawful evasion of customs duties.”
CBP Director of New York Field Operations Robert E. Perez said: “CBP takes trade fraud, such as undervaluation, very seriously. We are proud to partner with HSI and the Southern District to level the playing field for legitimate traders by steadfastly enforcing U.S. trade laws.”
The government’s complaint, filed in Manhattan federal court, alleges that from approximately 2009 through 2013, Motives, which regularly manufactured and/or imported apparel into the United States, conspired with clothing wholesalers fraudulently to underpay customs duties owed to the government by making false representations in entry documents filed with CBP about the value of the imported merchandise.
Pursuant to the scheme, Motives created and/or used two sets of invoices: one that undervalued the garments and was presented to the government for calculation of the appropriate duty, and the second that reflected the actual value of the garments. Motives presented to the government invoices with the lower value on the entry forms, thereby defrauding the government of millions of dollars in customs duties.
As part of the settlement, Motives admitted, acknowledged, and accepted responsibility for engaging in the following conduct from 2009-2013:
- repeatedly preparing and presenting to the government commercial invoices for apparel being imported into the United States that reported less than the total value of the goods imported;
- repeatedly representing to the government that its documentation contained, to the best of MOTIVES’ knowledge, correct and true information such as prices, values, and quantities;
- repeatedly receiving from apparel wholesalers an amount in excess of that recorded on the commercial invoices; and
- repeatedly failing to disclose to the government the separate invoices reflecting the true value of the apparel, and instead reporting only the lesser amounts listed in the commercial invoices, which the government then used to assess customs duties.
The allegations of fraud stated in the complaint were first brought to the attention of federal law enforcement by a whistle-blower who filed a lawsuit under the False Claims Act. This type of scheme is ripe for penalties under the False Claims Act, which reads in part:
“… any person who…knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, …is liable to the United States Government for a civil penalty of not less than $5,000 and not more than $10,000, as adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990 …, plus 3 times the amount of damages which the Government sustains because of the act of that person.”
On a much smaller scale, but indicative of CBP’s alertness to double invoicing, take for example the situation on the Southern Border where I worked as a U.S. Customs Import Specialist. For small shipments that fall under the limit required for formal entry (goods valued at less than $2500) processing, the informal entry process is simple enough that a truck driver can get away with making the declaration on behalf of the importer. If a CBP inspector suspected that the value of the shipment was unreasonably low (not only saving the importer in duties but the expense of having to make a formal entry), one of the first things the inspector would do is search the glove box of the truck to see if they could find a “real” second invoice. It is a no-brainer for the inspector to try and locate one.
What should importers do to remain above suspicion and not waste time trying to explain the legitimacy of an import transaction where a CBP audit or inquiry reveals the existence of multiple invoices? Importers should have documented policies and processes in place that lay out the entire import process and where the data populating the invoices is derived. There also needs to be in place documentation supporting any intercompany transfer pricing arrangements or first sale initiatives.
Scaling the business, achieving operational efficiencies, maintaining compliance, and performing internal assessments are all made easier by incorporating a Global Trade Management (GTM) solution with a company’s enterprise system, and can go a long way to giving CBP a level of comfort for what at first glance to them can seem like an attempt to do something illegal”.
DETECTING AND PREVENTING ACCOUNT-PAYABLE FRAUD
Money missing within a company may be the result of miscalculations, but there’s also the chance it could be fraud from within the company. Though you may never want to suspect an employee of fraud, there are times when you need to know exactly how to detect it and how to prevent it.
Who is Doing it?
First, it’s important to know who the culprits typically are in these situations and how they are able to smuggle money out of the company. According to the Association of Certified Fraud Examiners, most instances of fraud in a business are committed by associates based in the accounting department. This can be largely attributed to their intimate knowledge of the company finances. Other potential culprits can include upper management as they may have an air of authority that employees in lower positions tend not to question.
How do Employees Commit Fraud?
The most common way employees are able to sneak money out without being detected is called an “accounts payable scheme.” This is more complicated than just writing themselves a check from the company or using the company card. Under the guise of a legitimate transaction, fraudsters can transfer money to an unnamed account. The more transactions there are in a company, the easier it is to let one illegitimate transaction slip through the cracks without anyone noticing.
Understand the Security in your Accounting System
This security is built into the system and will prevent accounts payable fraud unless it isn’t used. This lapse in security might occur due to an improper delegation of duties or just general lack of awareness or know-how on the part of management. Educate yourself about the security system and ensure that it is always used effectively.
Internal Control Policies
If you establish a system within the company that outlines certain rules, regulations, and expectations, employees will be much more likely to strictly adhere to them. Enforce these policies when they are broken and the chances of it happening again become slimmer. Random inspections throughout the year may also help to remind employees of the importance of adhering to these regulations. Verify that every purchase and transaction is received and accounted for, and that products aren’t misappropriated by employees.
Proper Delegation of Duties
Things can get lost in the shuffle when you don’t know who is in charge of what. Become intimately aware of each account payable employee’s job description; even rewrite it to include proper delegation of duties. That way everyone is clear on what their role is and can be held accountable if they are found doing something that is not in their job description.
Data Mining Tool
There are third-party data mining tools that can be used to analyze your accounts payable transactions on a regular basis. Rather than painstakingly going through the data and numbers yourself, the tool will filter through the data and determine what is going to the right place, at the right time, in the right amount, and what is not. For example, fraudsters often do their dirty work off the clock on a weekend, evening, or even on a holiday – when no one is looking. Data mining tools can easily make note of this and catch any culprits.
Internal Control Review
Before you submit an email, you reread it to be sure there are no typos or misspellings. The same applies to accounts payable transactions, but even more so because you are dealing with the company’s money. With an internal control expert on staff, you can get an annual review of your accounts payable function and make mistakes a thing of the past.
Businesses both big and small should have preventative measures in place to properly deal with instances of fraud and to prevent it from happening. The cost and lengths it takes to protect your business are a fraction of the cost you might be forced to pay in the event of fraud.
10 Ways to Identify Accounts Payable Fraud
by Christine L. Warner, President of Automated Auditors, LLC
When Sarbanes-Oxley was passed in 2002, many companies were forced to take an in-depth look at internal Accounts Payable controls. Implementing internal controls takes time, but may prove to be a very cost-effective measure if any fraud or leakages are found. Here are a few approaches you can try to tighten up your A/P audit. They require some degree of data mining and programming capability but are fairly straightforward to implement.
1) Duplicate Payments
Duplicate payments in most cases may not be fraud-related, but continue to be a significant A/P leakage that is both preventable and recoverable. Mark Van Holsbeck, Director of Enterprise Network Security for Avery-Dennison, estimates that corporations make duplicate payments at the rate of 2%. Two percent may not sound like much, but if your company’s A/P invoices total $75 million, duplicate payments may account for $1.5 million. Take a look at the statistics:
- Medicare - The Dept of Health & Human Services’ Inspector General estimated that Medicare made $89 million of duplicate payments in 1998.
- Cingular - We have once again discovered that payments made online as an Electronic funds payment for TDMA accounts, have been deducted twice from the customer's checking account.
- Medicaid - We identified at least $9.7 million in such duplicate payments during our two-year audit period, and estimated that as much as $31.1 million in additional duplicate payments may have been made.”
In a rush to find the overpayments, many companies have emerged: A/P Recap, Automated Auditors, AP Recovery, ACL, CostRecoverySolutions, and more. That these companies are thriving is a testament to the fact that duplicate payments still occur at an alarming rate.
Many software packages have some controls over duplicate invoices but it usually takes some in-depth querying to find them all. For example, many accounting packages do a duplicate invoice check and prevent you from keying in a duplicate invoice number for the same vendor. But just add an “A” to the invoice number or change a penny and you are on your way to a duplicate payment. Another common mistake is found in vendor files; duplicate vendor numbers for the same vendor is the number one cause of duplicate payments.
Here is what we recommend for developing an accurate and comprehensive dupe payment report:
1) Implement the 5 basic dupe searches if you haven’t already. These are:
A programmer in your IT department will be able to help you with the SQL code for these joins. The SQL code will look something like this to create the first report “EEEE”:
CREATE TABLE DUPES_EEEE AS
FROM INVOICES A, INVOICES B
WHERE A.VENDORID=B.VENDORID AND
A.ID <> B.ID
The ID field should be a unique record identifier to distinguish one record from another. In Microsoft Access, these fields are usually created by using the data type “AutoNumber”. In open code, a field such as this can be easily created using a counter and incrementing it by 1 for every record (COUNTER = COUNTER + 1).
2) Implement some fuzzy-matching
Implementing “similar” fuzzy-matching instead of exact matching is what makes this approach more accurate and powerful than many. We define “similar” to mean the following:
Invoice numbers are considered similar if they are exact after stripping out any zeros and any alphabetic characters as well as punctuation characters.
Invoice dates are considered similar if the difference between the dates is less than a designated amount such as 7 days. For example, if you entered "7" days for the date tolerance, then all invoices with a date different of 7 or less would be considered similar. We generally set the date tolerance to 21 days to catch duplicate payments made 3 weeks apart; this often eliminates catching legitimate rent payments.
Amounts are considered similar if they meet one of three criteria:
- the amounts are 5% +/- the other amount
- one amount is exactly twice as much as the other, i.e. $220.15 and $440.30
- the amounts start with the same first 4 digits, i.e. $123.45 and $1,234.55
Try using similar matching on the invoice number, date, and amount fields when you conduct your next duplicate payment audit – your reports will be shorter and more accurate!
2) Benford’s Law, What is it?
Benford's Law (which was first mentioned in 1881 by the astronomer Simon Newcomb) states that if we randomly select a number from a table of physical constants or statistical data, the probability that the first digit will be a "1" is about 0.301, rather than 0.1 as we might expect if all digits were equally likely. In general, the "law" says that the probability of the first digit being a "d" is
Where ln refers to the natural log (base e). This numerical phenomenon was published by Newcomb in a paper entitled "Note on the Frequency of Use of the Different Digits in Natural Numbers", which appeared in The American Journal of Mathematics (1881) 4, 39-40. It was re-discovered by Benford in 1938, and he published an article called "The Law of Anomalous Numbers" in Proc. Amer. Phil. Soc 78, pp 551-72. 
You can actually re-create this function in Excel quite easily. In one column, type 1, 2, 3, through 9, making 9 rows in cells A1 through A9. In the second column, cell B1, type the function “=ln(1 + 1/A1) / ln(10)” and copy this function for cells B2 through B9 and it will create the probabilities
How is it used to identify fraud?
If we know the normal frequency of digits, then we can identify digit frequencies that violate that normal behavior. For example, Benford concluded that, out of a group of numbers, the first digit will be “1” about 30% of the time. Similarly, using the same function, we can expect the first digit to be “8” about 5.1% of the time. Expected frequencies for each first-digit of the invoice amount are shown in the graph below:
If we review Accounts Payable invoices and determine the first digit of the invoices is “8” 50% of the time, then we may have either many legitimate payments that start with “8”; or we may have fictitious invoice amounts. Fraudsters will often create an amount that starts with a higher number, like 8 or 9, not knowing that auditors are now equipped to identify these abnormal payments.
3) Rounded-Amount Invoices
People who commit fraud often create invoices with rounded amounts, which are invoices without pennies. Yes, you would think the fraudster would have “cents” enough to do otherwise. An easy way to identify rounded-amount invoices is to use the MOD function in Excel. Suppose your invoice amount is $150.17; then MOD(150.17,1) gives you the remainder of dividing 150.17 by 1, which is .17. So, using the MOD function with a divisor of 1 on a no-pennies amount would leave us a remainder of 0. Additionally, try to rank your vendors by those with a high percentage of rounded-amount invoices. To do this, just calculate each vendors’ number of rounded-amount invoices and divide it by the total number of invoices for that vendor, obtaining the percentage. Then rank by descending percentage to review the most suspicious vendors first.
4) Invoices Just Below Approval Amounts
People who commit fraud are not always the “sharpest knife in the drawer.” Suppose an A/P clerk knows the different dollar thresholds for management approval. For example, a supervisor may only be allowed to approve invoices of $3,000 or less, while a manager may be allowed to approve invoices of $10,000 or less, and so on. Suppose this A/P clerk and a manager decide to skim off some extra dollars together. What is the easiest way to get the most money? Create an invoice just below the approval level of that manager: $9,998 when the approval level is $10,000; or $2,978 when the approval level is $3,000.
To identify these potentially fraudulent invoices, try this: identify invoices that are 3% (or less) LESS THAN the approval amount. For example, if your approval amount is $3,000, then any invoice that is between $2,910 and $2,999 would be flagged as suspicious.
5) Check Theft Search
Most Accounts Payable departments conduct a reconciliation of Accounts Payable with the monthly Bank Statement to identify any discrepancies between the two. This process can also be instrumental in identifying check fraud. One simple way to spot potential check fraud is to identify missing check numbers or gaps in reconciled checks numbers. This is usually indicated on the bank statement with a ‘*” or ‘#’ to indicate the check number is not sequential.
Another more advanced way is to conduct a reverse Positive Pay electronically. By merging your check register, A/P file, and bank statements together, you have the power to identify stolen checks. Better yet, if your bank has OCR (Optical Character Recognition) abilities, then you can identify the actual payee on the check.
Speaking in technological terms, you have 3 different data bases describing 1 activity. Use the 3 data sources to find any discrepancies in the 1 payment. If your check numbers are unique, try merging all 3 data sources by the check number and compare each of the following fields:
Using SQL code or another programming language, identify all of the checks that are in one data base and not the other. In addition, identify all of the checks that are in all 3 data sources but have different payee names or different amounts and dates.
6) Abnormal Invoice Volume Activity
Monitoring vendor invoice volume is one way to alert you to abnormal behavior. Rapid invoice volume increases may indicate a legitimate increase in business, but also may indicate that a fraudster has become more confident in stealing money. Either way, the increase may warrant further investigation. Suppose a vendor has 2 invoices one month and 70 the next – you may want to know why even if the reason is not a fraudulent one.
To calculate the percent increase in invoice volume from month to next month, find the difference in number of invoices and then divide by the number of invoices in the first month. In our example, going from 2 invoices to 70, the difference (68) divided by the number of invoices in the first month (2) represents a 3,400% increase. Setting the threshold percentage is the key here; when doing audits, we like to set the threshold percentage at 300% or higher. Setting the threshold at 300% will catch increases from 3 to 13, which may not be interesting, so you may also want to set a minimum number of records that you are interested in, such as 50 as your second month’s number of invoices. Setting the threshold at 300% will also catch more interesting increases, such as 50 to 220.
7) Vendors with Cancelled or Returned Checks
Cancelled and returned checks do occur in the course of a normal Accounts Payable month. What is more uncommon is a vendor with many cancelled checks or a regular pattern of cancelled checks. Cancelled checks are usually legitimate transactions; however, a cancelled check can be returned to the wrong hands and re-written to the fraudster. Below is a true story of how a clerk turned a returned check into a fraudulent one:
“An un-cashed disbursement check was returned to an accounts payable clerk for disposition because she originated the invoice entry. The clerk put the check in her desk and forgot about it for several months. Upon cleaning her desk, she discovered the returned check. When she checked the paid history, she realized the supplier had returned the check when it was determined to be a duplicate payment of an invoice. She also noticed that the payee name had been printed slightly below "Payee" on the check. With a bit of effort she managed to align the check and insert her name above the original payee in a print similar to the original, along with an "or" designation following her name. The fraud was caught by an accounts payable auditor searching for duplicate payments and who was asked by the supplier to furnish proof of duplicate payments by providing copies of both cancelled checks. “
This algorithm is easy to implement. Calculate the number of cancelled or returned checks for each vendor and divide by the total number of checks for that vendor. Then, sort this list by descending percent so that your most suspicious vendors are at the top of the report
8) Above Average Payments per Vendor
This algorithm identifies invoices that are way above average for a particular vendor. Suppose a vendor normally has invoices ranging from $1,000 to $3,000; suddenly an invoice shows up for $25,000. You may want to investigate this abnormality and can do so using this alert pattern.
This algorithm is also easy to implement: For each vendor, calculate the average and standard deviation of the invoice amount. Then, calculate a z-score for each invoice amount:
z-score = (invoice amount – average amount) / standard deviation
Then, flag all vendors with a z-score above 2.5, indicating the payment is more than 2.5 standard deviations above the mean. If your report is still too large, try increasing the z-score threshold to 3.0 or higher.
Using this algorithm alone, we were able to catch employee fraud occurring in a mid-size health manufacturing company. The fraudulent employee was receiving a pay-check every other week in the amount of $500 to $1,000 when, all of the sudden, 3 invoices for $40,000 each appeared. Because $40,000 was significantly greater than this employee’s average payment, the payments were flagged for further research. What made the invoices even more suspect was that they occurred on or near the same date and had no invoice number. After alerting the new controller of the suspect payments, the new controller was aware that an employee had left in a legal “scuffle” but was not aware of the $40,000 checks that were stolen.
9) Vendor / Employee Cross-Check
“Trust but verify”. Most employees are generally trustworthy! But it does not hurt to conduct some data mining to make sure they are. Here is a simple approach to cross-check your vendor and employee files to see if perhaps an employee has set up a fictitious vendor.
Try merging your vendor file and employee file by the following variables:
- Tax ID Number
- Phone Number
- Bank Routing Number
If you have a good programmer, try doing some fuzzy-matching on these fields as well. For address, try extracting JUST THE NUMBERS in the street plus the zip code, and then compare these numbers. This eliminates matching on noise words such as “Drive” and “Suite”.
Also, try doing some fuzzy-matching on tax ID number as well, just in case there was a typo in the data entry. If you specify that the tax IDs are equal if they are even 1 digit off, you may catch a vendor/employee ring!
This algorithm made it possible to detect a real employee (“Kathy”) whose SSN was the same as a company EIN (tax ID number). The company name, which we will call “ABC Inc”, happened to be on the same street, city, and state as a person with the same last name as the employee (presumably her spouse). Without this pattern, the employee fraud may have gone undetected.
10) Vendors with a Mail Drop as an Address
This algorithm compares vendor addresses with mail-box drop address such as “Mail Boxes, Etc”. Some fraudsters will use mail drops as their address instead of a P.O. Box, to hide their fraudulent activity. Not all of the vendors appearing on this list will be fraudulent, because a vendor may in fact be right next to a Mail Boxes, Etc. However, the list provides a unique approach to reviewing vendors who also may show up on another alert list.
(To obtain a copy of the mail-drop table, contact the author of this document). Or, if you have time, you can also search for Mail Boxes, Etc. on www.411.com and put the addresses in a database and then conduct your address matching accordingly.
Occupational fraud is a growing problem. In fact, the Association of Certified Fraud Examiners (ACFE) estimates that 5% of all revenue is lost to occupational fraud every year. Fraud is not 100%preventable but there ARE steps you can take to both prevent and detect fraud on an ongoing basis. At a minimum, scan for duplicate payments every 6 months, and perform an annual cross-check between your vendor file and employee file. With these two steps alone, you may be able to pinpoint leakages that otherwise may go unnoticed.
About the Author
Christine L. Warner is the President of Automated Auditors, LLC, and has over 20 years of experience in data mining, fraud detection, statistical analysis, and complex customized programming. She has authored several articles on using data mining to detect fraud, such as "Death Fraud: This Identity Theft is Alive and Kicking", co-authored with Cheryl Hyder, for which they received the Hubbard award in 2011 for most influential article published in Fraud Magazine (ACFE). Christine has served as the Deputy Project Director of a Medicaid Integrity Contractor audit for the entire Northeast region of the U.S., and has personally developed over 50 healthcare fraud algorithms, as well as an entire suite of Accounts Payable fraud algorithms.
7 TIPS TO AVOID ACCOUNT-PAYABLE FRAUD
The Accounts Payable department is a prime target for fraud. Criminals looking to exploit your business take advantage of AP departments buried in paperwork to submit phony invoices and hope they’ll slip by as legitimate.
A single fraudulent invoice might not impact your company too much. However, over time invoice fraud can become quite a costly problem. Foiling invoice fraud is often frustrating, but implementing these tips will significantly reduce the risk of your company falling victim.
1) Employ 3-Way Matching
If you can match each invoice to a purchase order and receipt of goods, then you’re much less likely to pay a fraudulent invoice. Most fraudsters won’t bother fabricating three separate documents.
2) Watch Invoice Amounts
Amounts on invoices can provide clues that the invoice isn’t on the up-and-up. If your company requires additional review for invoices over $1,000 (for example), checks squeaking by right under that threshold (such as $999.98) should raise suspicion.
3) Keep Up Moral
Invoice fraud can come from inside the company or from an outside source. Happy employees are unlikely to commit fraud and more likely to catch fraud from outside sources. If they don’t have reason to complain, then they’re more likely to care about doing right by the company.
4) Check On Vendors
Fraudulent invoices are typically issued under fake business names or use a legitimate name but a fake address or bank account number. You’ll want to look up any new vendors to make sure they’re legitimate and find the address on Google maps. If the address is residential or a post-office box, that’s a big red-flag. Also, check-in with your existing vendors directly if their account information changes.
5) Track Invoice Activity
If you’re tracking invoice activity, you’ll be able to notice when something changes. For example, one vendor typically submits 5 to 10 invoices a month and suddenly you see 50 from them in a single month. It might be legitimate, but you’ll still want to get in touch with them and double-check.
6) Implement “Fuzzy Matching”
Duplicate payments are one way to commit invoice fraud – fraudsters submit a near-perfect copy of a legitimate invoice and hope no one notices one payment is going to a different account number. Sometimes they’ll also change date, invoice number, or amount. You’ll need a program that allows for “fuzzy matching” to catch near-duplicates as well as identical invoices.
7) Employ Automation
Automation in the AP department gives you the tools you need to more effectively implement all these other tips for preventing fraud. It’s probably the single most important step you can take to stop invoice fraud.
POTENTIAL SCHEME: FALSE, INFLATED AND DUPLUCATE INVOICES
A contractor or supplier can commit fraud by knowingly submitting false, inflated or duplicate invoices with the intent to defraud, either acting alone or in collusion with contracting personnel as the result of corruption.
“False invoices” refer to invoices for goods or services not rendered. “Duplicate invoices” are fraudulent if issued knowingly with the intent to defraud.
Duplicate, false or inflated invoices often are used to generate funds for bribe payments.
“Knowingly” typically is defined as:
- Actual knowledge of falsity
- Deliberate ignorance of truth or falsity (“willful blindness”)
- Reckless disregard of truth or falsity
Knowledge and intent can be proven directly, for example, by the admission of the subject, the testimony of a co-conspirator or other witness with direct personal knowledge, or by documentary evidence, such as an incriminating email.
Knowledge and intent also can be proven circumstantially, by, for example, showing that the subject knowingly altered or forged supporting documentation, lied to investigators, attempted to obstruct the investigation (e.g., by intimidating witnesses) or refused to produce pertinent records.
A pattern of prior similar “errors” or misrepresentations, beneficial to the subject, also can be used to show willfulness and rebut the typical defense of accident or mistake.
GENERAL RED FLAGS OF FALSE, INFLATED OR DUPLICATE INVOICES
- Weak controls over the review and payment of invoices
- Discrepancies between contract or purchase order, receiving documents and invoices
- Discrepancies between contractor’s billings and supporting documents
- Invoice is in a round number amount if that is unusual
- Total payments to a contractor exceed total contract or purchase order amounts
Red flags of false invoices:
- No receiving report for invoiced goods or services
- Invoiced goods or services cannot be located in inventory or accounted for
- No purchase order for invoiced goods or services
Red flags of inflated invoices:
- Invoice prices, amounts, item descriptions or terms exceed or do not match:
- Contract or purchase order terms
- Receiving records
- Inventory or usage records
- Discrepancies between invoice amounts and supporting documents
Red flags of duplicate invoices:
- Multiple payments in the same time period:
- In the same or similar amount to the same or related vendors
- On the same invoice or purchase order
- For the same or similar goods or service
- Multiple invoices with the same:
- Description of goods or services
- Invoice number
- Purchase order number
- Total amount paid to vendor exceeds invoiced amounts.
CASE EXAMPLES OF FALSE, INFLATED AND DUPLICATE INVOICES
A former employee of an international consulting firm reported that the company’s South Asian branch agreed to pay a kickback in exchange for a contract award, with the bribe to be financed by the submission on false and inflated invoices. The investigation disclosed the following.
The firm’s contract provided that it was entitled to be reimbursed for the actual costs of certain expenses, such as the purchase of computers and office equipment, up to a stated maximum. The company always invoiced for the maximum allowed, and attached receipts and other supporting documents in amounts that matched or exceeded the ceiling amounts.
The purported suppliers said in interviews that most of the receipts the company submitted were forged and inflated. Other receipts were in the names of non-existent companies, suggesting that no items were actually purchased. The investigators then exercised audit rights and discovered two sets of records, one indicating the actual cost of the purchased items and the other the inflated, submitted amounts. The company’s accounting staff admitted in interviews that they prepared and submitted the inflated invoices and forged receipts to support them, claiming that they did so at the direction of the local office manager.
The local manager denied any knowledge of the false invoices, and denied that the firm paid a bribe to obtain the contract. The international donor moved to debar the firm world-wide for fraudulent practices, in the expectation that the company’s senior management would agree to disclose the bribe payments and cooperate in an effort to mitigate its sanctions.
BASIC STEPS TO DETECT AND PROVE FALSE, INFLATED OR DUPLICATE INVOICES
- Identify and interview all complainants and confidential sources to obtain further detail.
- General Interview questions
- False, inflated or duplicate invoices questions
- Contracts and purchase orders
- Invoices and supporting documents
- Work completion reports
- Receiving records
- Payment records
- Inventory and usage records
- Test and inspection reports
“TOP FIVE” DUE DILIGENCE BACKGROUND CHECKS
Background Check Number One
Is the company a legitimate business, with credentials and experience it claims in its bid or proposal?
Many companies involved in corrupt or fraudulent practices are shell companies, organized solely for the purpose of obtaining fraudulent contracts, without any staff or permanent business premises.
The following checks will help identify them:
· Does the firm have a website or appear on the Internet, in a manner consistent with its purported size and experience, and the firm’s representations in its bid or proposal?
· Is the firm listed in on-line or hard copy telephone, business or Chamber of Commerce directories, appropriate to its claims?
· Are the company’s listed address and telephone numbers correct? Do reverse address and telephone searches to identify the real persons or companies listed at the address or telephone number.
· Use map and satellite photo sites where available to view the purported premises.
Primary sources of information:
· General information sites on internet
· US and international telephone directories
· Corporate registries and business directories
· Dun and Bradstreet
· Address, map and satellite photo sites
On-site background checks for smaller or local firms not listed on the Internet:
· Call and visit purported business location; check local telephone, business and corporate directories.
Background Check Number Two
HAS THE FIRM OR INDIVIDUAL BEEN THE SUBJECT OF DEBARMENT, SUSPENSION, INVESTIGATION, LEGAL ACTION OR NEGATIVE PUBLICITY?
Primary sources of information:
· Lists of firms and individuals debarred by International Financial Institutions and other organizations:
· Debarment and suspension lists
· Compliance sites
Media reports on firms and individuals involved in development projects, including reports of investigations and allegations of wrongdoing:
· Media reports
· Compliance sites
US and international court records on firms and individuals involved in development projects:
· US and international court records
· Compliance sites
On-site background checks for smaller or local firms not listed on the Internet:
· Check with prior clients, employers and donors, local NGO’s and trade associations and local media sources.
Background Check Number Three
DOES THE FIRM HAVE THE CAPACITY (EXPERIENCE, PERSONNEL AND RESOURCES) TO DO THE PROPOSED WORK? Primary sources of information:
· Check if a bidder, contractor or consultant has the necessary experience and resources to perform the proposed contract:
· Dun and Bradstreet (see Global Research Solutions function)
On-site background checks for smaller or local firms not listed on the Internet:
· Check references with prior employers and donors, local business directories and trade associations.
Background Check Number Four
DOES A PROPOSED CONSULTANT HAVE THE EDUCATIONAL CREDENTIALS AND EXPERIENCE CLAIMED IN HIS OR HER CV? Primary sources of information:
· Use these links to verify the claimed education and professional credentials for staff and consultants submitted by consulting firms:
· Verify educational credentials
· General information sites on the internet
· Compare questioned CV’s or proposals to other submitted CV’s and proposals; check references and colleagues from prior projects.
On-site background checks for smaller or local firms not listed on the Internet:
· Check references and contact prior supervisors and colleagues of the proposed consultant or staff member.
Background Check Number Five
DO FURTHER BACKGROUND CHECKS ON FIRMS AND INDIVIDUALS WHO ARE THE SUBJECT OF ALLEGATIONS OR CONCERNS. Primary sources of information:
· See these links for background information on individuals – including project, government and donor officials – involved in development projects:
General news and information sites on the internet
Search free sites for useful information on firms and individuals involved in development projects, including, for example:
· Company websites and information, e.g.,
· Information on conducting effective background searches:
· Lists of debarred firms and individuals, e.g.,
· Address, maps and satellite photo sites, e.g.,
· Reverse address and telephone number searches, e.g.,
· On-line telephone and business directories, e.g.,
· On-line corporate registries, e.g., in the UK:
· US real property ownership records, e.g.,
· US local county real property websites, e.g.,
· Social net working sites, e.g.,
· Freedom of Information Acts Portals, e.g.,
· Corruption monitoring sites, e.g., India:
GENERAL NEWS AND INFORMATION SITES:
· www.eiu.com (The Economist Intelligence Unit)
DEEP WEB SEARCH ENGINES TO CONDUCT MORE IN-DEPTH INQUIRIES:
· People searches:
· Subscription research sites:
· See information on the deep web:
SEE PRIOR VERSIONS OF A CURRENT OR EXPIRED WEBSITE:
· www.archive.org (The Wayback Machine)
ADDRESS, MAP AND SATELLITE PHOTO SITES
The address, map and satellite photo sites lifted below can be used to, among other things:
· Confirm a listed address for a firm or individual
· Identify other firms or individuals at a listed address, through reverse address searches
· Identify “high risk addresses” (mail drops, etc.) and match them to the listed address of firm or individual consultant
· View photos of a location to determine whether it is a business office or residential location, or, if a job site, to confirm that works have been performed
MAPS AND SATELITTE PHOTO SITES:
www.google.com (search by name, address, email and telephone number)
www.google.maps.com (check “street view” to view address)
www.bing.com/maps (select “aerial,” then “bird’s eye” to view address)
www.zillow.com (for residential property views and property information)
ADDRESS AND TELEPHONE DIRECTORIES:
www.yellowpages.com (US and international listings; do reverse address searches)
www.whitepages.com (US and international listings; do reverse address searches)
Real-time satellite photos (payment for service):
COMPARE LISTED ADDRESSES TO “HIGH RISK” ADDRESSES:
US AND INTERNATIONAL PUBLIC RECORDS
The sites below contain primarily US public records, including business flings, real property ownership and motor vehicle records.
US COUNTY AND STATE WEBSITES
DEBARMENT AND SUSPENSION LISTS
Click on the links to see current lists of debarred and suspended firms and individuals.
WORLD BANK DEBARMENT LIST:
US GOVERNMENT DEBARMENT LISTS:
REGULATORY DATA CORP (compliance site)
COMPRENSIVE LIST OF DEBARMENT SITES:
US AND INTERNATIONAL ANTI-BRIBERY ENFORCEMENT ACTIONS:
The subscription sites listed below provide comprehensive background information related to corruption and fraud on firms or individuals, such as media reports, litigation records and debarment lists, which can be used by to determine if the parties present a corruption or fraud risk.
· http://www.ontotext.com/case/basel-financialIntelligence (ARIS program)
· www.ethixbase.com (Monitors SEC filings and media; lists international corruption statutes)
· www.fcpablog.com (FCPA and related cases)
· www.kyc360.com (On-line anti-money laundering community)
· www.ocr-inc.com (Global trade compliance site: good coverage of international watch lists)
On-site background checks on individuals not listed on the Internet:
Check local public records and contact witnesses familiar with the subject.
Independently verify the correctness of the submitted invoices, e.g.,
- Confirm that invoiced services were delivered as claimed; e.g., inspect written work product to confirm that it is not copied, clipped from the internet or boilerplate
- Inspect and confirm that the quantity and quality of invoiced goods were delivered as claimed; contact the contractor’s suppliers to confirm this if necessary
- Inspect and test works and materials to confirm that they met the specifications as invoiced
- Invoice number
- Invoice amount
- Invoice date
- Invoice item description
- Purchase order number
The failure to meet contract specifications constitutes a Fraudulent Practice.
Elements of Proof of Fraudulent Practices
Fraudulent Practices can be defined as:
“Any act or omission, including a misrepresentation, that knowingly or recklessly misleads, or attempts to mislead, a party to obtain a financial or other benefit or to avoid an obligation.”
Elements of proof
- Any act or omission
- Including a misrepresentation
- That knowingly or recklessly misleads, or attempts to mislead
- A party
- To obtain a financial or other benefit
- Or to avoid an obligation
Any act or omission
A fraudulent “act” could include, for example, forging a document or signature or altering (backdating, etc.) a document.
An “omission” refers to knowingly and willfully failing to disclose a material fact, for example, that a contractor has been debarred, to obtain an improper benefit or avoid an obligation.
Including a misrepresentation
A misrepresentation refers to a false statement of fact (e.g., “our company employs 2000 people,” when in fact it employs ten) and generally not to an opinion (“Our company is the leading contractor in the area.”) An exception might be an opinion as to the correctness of a financial statement, issued by an accounting firm, which it knows to be false or which it issued recklessly.
Proof of a misrepresentation should be done in two stages: first prove the representation through one set of documents or witnesses, and then prove that it was false by a second set of documents, or witnesses with direct personal knowledge of the falsity.
That knowingly or recklessly misleads, or attempts to mislead
“Knowingly” means that the subject acted with actual knowledge that a statement was false and would tend to mislead the recipient.
“Recklessly” means that the subject:
o Acted without knowing whether the submitted facts were true or false, or did not make an adequate inquiry to determine the truth, or
o Acted with willful blindness as to the truth or falsity of the statement, i.e., deliberately failed to determine the correctness of the facts, or to put in place procedures that would enable it to do so. “Reckless” implies that the subject acted with something “more than mere negligence.”
Knowledge and intent can be proven directly, for example, by the admission of the subject, the testimony of a co-conspirator or other witness with direct personal
knowledge, or by documentary evidence, such as an incriminating email.
Knowledge and intent also can be proven circumstantially, by, for example, showing that the subject knowingly altered or forged supporting documentation, lied to investigators, attempted to obstruct the investigation (e.g., by intimidating witnesses) or refused to produce pertinent records.
A pattern of prior similar “errors” or misrepresentations also can be used to show wilfulness and rebut the typical defense of accident or mistake.
Includes a public or private person or organization, such as the Project Implementation Unit, the borrower or the Bank.
To obtain a financial or other benefit
For example, to be short listed, to receive a contract award, or to inflate a payment request.
Or to avoid an obligation
For example, to avoid performing work to contract specifications, or to avoid refunding overpayments received under the contract.