Thomas Marsh CFE

Senior Director of Investigations -BEI

Role of the Compliance Officer in Fraud Prevention and Detection

What can be learned from Internal Investigations to prevent financial exploitation of the elderly?

The Intent to Deceive

The Simple Definition of Fraud

“ Intentionally inducing a course of action by deceit or other dishonest conduct, involving acts or omissions or the making of false statements, orally or in writing, relied upon by a third party, with the objective of obtaining money or other benefit from, or evading a liability to, an individual or organization ”

What is Criminal Fraud?

Knowledge is LiabilityImplied Knowledge

Managers can bear responsibility for fraud regardless of whetherthey actually had direct knowledge of a fraud being committed. Implied through the duties assigned to managers and supervisors is the belief that they should have known about the fraud.

Lack of attention to the performing of key controls required of management or supervisory associates helps to foster an environment in which fraud could flourish bearing culpability tothe manager as an accessory to the fraud.

InsurersInsurers

GovernmentGovernment

CustomersCustomersOwnersOwners

ManagersManagersStockholdersStockholdersCreditorsCreditors

Insider tradingRelated party transactions False credit cards

Hot chequesFraudulent F/SSecurities fraud

Theft of trade secrets

Employee bribery

Short shipmentDouble billingFalse invoicesEmployee bribery Expense account

paddingPersonal PurchasesTheft of cash and

property

Phantom AssociatesManipulation of dataFalse benefit claims

Padded payrollFalse Invoicing

False Loss Claims

Tax evasionCost Report Fraud

False Claims

CompetitorsCompetitors

VendorsVendorsSuppliersSuppliers

ConsultantsConsultants

EmployeesEmployees

The Company

Common Fraud Types

Pressure

(Motive)

Concoct Scheme

(Opportunity)

Perception of Detection

(Will I Get Caught)

Yes No

Maybe

Abandon Thought of

Fraud

Commit Fraud

10-80-10 Rule

How Fraudsters Think

Concoct New Scheme

(Opportunity)

10% Discovered

Detection Controls

90% Stopped

Prevention Controls

$Motive

RationalizationOpportunity

Conditions for Fraud to Occur

Fraud Triangle

• Poor Internal Control• Low Fraud Awareness• Rapid Turnover of Employees• Weak Subordinate Personnel• Absence of Mandatory Time Off

• Financial Pressures• Personal Habits (Gambling, Drugs. Alcohol)• Work Related Factors (Overworked, Underpaid, Not Promoted)• Achieve Financial Results (Bonus, Compensation)

• I am only borrowing the money and will pay it back• Nobody will get hurt• The organization treats me unfairly and owes me• It’s for a good purpose• It’s only until my finances improve

1. Direct Financial Loss

2. Lost Time to Rectify the Problem, (staff wages etc)3. Diversion of Management Resources4. Cost of External Resources5. Damage to Business Reputation and Image6. Negative Impact on Morale7. Possible Loss of Valuable Staff Members8. Loss of Management Confidence9. Consequential Financial Loss

Impact of Fraud

A person who wants to commit fraudneeds you to:

InferRely

AssumeBelieve

Something False

Criminals exploit your weakness in orderTo commit fraud. Such as your:

Degree of Ethics Trust

Sense of Fair Play

Good Nature

Gullibility

Lack of Attention to Detail

Predictability

I cdnuolt blveiee taht I cluod aulaclty usednatnrd waht I was rdgnieg. The phaonmneal pweor of the hmuan mnid. Aoccdrnig to rscheearch at Cmabrigde Uinervtisy, it deosn’t mttaer in what oredr the ltteers in a word are, the olny iprmoatnt tihng is that the frist and lsat ltteer be in the rghit pclae. The rset can be a toatl mses and you can still raed it wouthit a porbelm. This is bcuseae the huamn mnid deos not raed ervey lteter by istlef, but the wrod as a wlohe.

Amzanig huh? Yaeh and I awlyas thought slpelingwas ipmorantt

Who is Responsible for Fraud Prevention and Detection?

MANAGEMENT

1. Responsible for day to day business operations

2. Responsible for developing and implementing controls

3. Have authority over the employees, systems, records

4. Have knowledge and authority too make change

5. Have responsibility to act and set the “Tone at the Top”

The Tone at the Top.

Employees who view their leaders as honest and ethical people are more inclined to

emulate that behavior. The opposite is also true. Don’t give employees an excuse to be

unethical or dishonest.

Characteristics which may influence the Probability for Asset Misappropriation

1. Dissatisfied Employees

2. Employees with past history of dishonest or illegal conduct.

3. Employees with known financial pressures or personal vises.

4. Significant changes in employee lifestyle or behavior.

How Well Do You Know Your Employees?

Accounting AnomaliesAccounting Records are often forged altered or missing

Internal Control SymptomsLack of Segregation of Duties, Lack of Physical Safeguards, Lack of Proper Authorizations, Over-riding of Existing Controls, Inadequate Accounting System

Analytical AnomaliesProcedures, Results, or Relationships that are to unusual or unrealistic to be

believable

Lifestyle SymptomsVery Few Perpetrators Steal and Save

Behavioral SymptomsInsomnia, Increase in Drug, Alcohol & Smoking use, Irritability, Inability to Relax,

Argumentativeness

Fraud IndicatorsFraud Indicators

Finding The TruthSymptoms can sometimes be present when fraud doesn’t exist.

Lifestyle changes may have occurred because of inherited money

Documents may have been legitimately lost

The ledger may be out of balance because of an unintentional error

Suspicious actions and behavior may be caused by family dissention or personal problems

Unexplained analytical symptoms may be the result of changes in economic factors or business policies

A tip may be motivated by a grudge from an envious or disgruntled employee.

Internal Controls

Procedures Taken To:

1. Protect resources against waste, fraud and inefficiency

2. Ensure accuracy and reliability in accounting data

3. Secures compliance with codes of conduct and policy and procedures

False Claims Act

Miscoding of expense on the books and records of the company whether intentional or unintentional can cause the company to submit a false claim to the state and/or federal government. By definition violations of the False Claims Act can occur either through a direct or indirect act on behalf of the company's associates. Violations of the act can occur by an action of an associate that "causes the submission of a false claim". This occurs even if the submitter of the claim did not know the data being submitted was false.

Failure to adhere to these controls can be construed as having "reckless disregard"for the recording and reporting of the data.

Prosecution under the False Claims Act extends beyond the Company as an entity and will impact any and all individuals responsible for ensuring the accuracy of the submitted data. This would include those individuals who authorize and initiate transactions and have the responsibility to review and approve the transactions prior to submission to the Company. Federal Prosecutors can hold everyone who has a role to play in the internal control process accountable for their level of due diligence performed.

Key Control“Segregation of Duties”

1. Provides a more difficult environment to commit fraud

2. Potential to catch routine errors before flowing into financials

How To Segregate DutiesCategorize a process function into one of four

main groups

(CARE)

C – Custody

A – Authorization (Approval)

R – Record Keeping

E – Examination (Reconciliation)

Types of Cash Misappropriations

1. Skimming (Taking money before being formally recorded on the books and records of the facility)

2. Larceny (Taking money after being formally recorded on the books and records of the facility)

3. Fraudulent Disbursements

(Embezzlement)

Skimming (Usually used with a “Lapping Scheme”)

1. Decrease in “Cash” Received

2. Increased Accounts Receivable

3. Delays in Accounts Receivable Posting

$ Embezzled

Payment Received

From

Payment Applied To

How Lapping Works

A

A

B

B

C

Y

Z

Z

A

A

• Slowing accounts receivable turnover.

• Increased write-offs of accounts receivable.

• Delays in posting customer payments.

• Delays in processing refunds on account.

• Customer complaints.

“Red Flags” of Lapping

Larceny

1. Altered Deposit Slips

2. Increased Customer Payment Complaints

3. Increase in Deposit “In Transit” or “Outstanding”

Fraudulent Disbursement

1. Increase in “Soft Expense”

2. Employee Address matches Vendor Address

3. Vendor Address is a P.O. Box

4. Vendor Name is Vague as to its Business Purpose

5. Increase in Voided or Destroyed Checks

Three Questions Common to Fraud Investigations

1. Why wasn’t the fraud caught?

2. How did the fraud happen?

3. How can we prevent fraud from happening again?

Conflict of Interest

A duty to promote one interest

but

Chooses to promote a competing interest instead.

Occurs in situations where a person has:

Competing Interests include those of:

Friends

Relatives

Business Associates

Their interests are promoted instead of the interests of the person or entity to

which a fiduciary duty exists.

CONFLICTS OF INTEREST

There are two keys to discharging conflicts of interest.

DISCLOSURESituations giving rise to, or those that could be perceived as, conflicts of interest must be disclosed.

RECUSALAfter disclosure is made, the person with a conflicting interest must not participate in judging the merits of that interest. This usually means he or she must abstain from making decisions or promoting the competing interest.

Disclosure and removing oneself from participation in the merits of the interest, allowing for an independent unbiased third party to oversee the interest, will successfully discharged the conflict.

A person commits the crime of “Financial Exploitation”of an elderly person if such person knowingly and by deception, intimidationintimidation, or force obtains control over the elderly person’s property with the intent to permanently deprive the elderly person of the use, benefit or possession of his or her property thereby benefiting such person or detrimentally affecting the elderly person.

ELDERLY EXPLOITATION

1. Age 75 or older;2. Women;3. Dependent for Basic Needs4. Suffering from Physical or Mental

Illness.

Victims of Exploitation

CaregiversMost often those caregivers who suffer from:

Stress - When added to personal and financial problems, the strain of daily caring for residents can cause frustration. Unrelieved stress increases the possibility of physical and emotional abusephysical and emotional abuse.

Debt, Alcohol, Drugs, and Gambling – Financial pressures arising from overwhelming debt and personal vises such as alcoholism, drug addiction and gambling habits play a major role in elder financial exploitationfinancial exploitation.

Who Can Be Potential Abusers?

Physical abuse - victims are kicked, punched, slapped, beaten--even raped. Pain, injury or death may result.

Neglect - failure to provide medicine, food or personal care (such as help to the bathroom) are common forms of abuse. Over medicating is abuse, too. Older people may be forced to live in unsanitary conditions, or in unventilated, poorly heated or cooled rooms.

Financial exploitation - abusers may steal or mismanage money, property, savings or credit cards. Older people may be forced to sign a will or turn over assets.

Psychological/emotional abuse - older people may be intentionally isolated or denied companionship. Abusers may threaten or verbally attack them.

Types of Elder Exploitation

hh Maintain a Healthy Level of Professional Skepticism Maintain a Healthy Level of Professional Skepticism

hh Scrutinize Supporting DocumentationScrutinize Supporting Documentation

hh Question Validity of EntriesQuestion Validity of Entries

hh Review Reports & Information for Potential ErrorsReview Reports & Information for Potential Errors

hh Produce & Provide Accurate and Reliable InformationProduce & Provide Accurate and Reliable Information

Employee’s Role

A Wise Chinese Philosopher once said:

“Trust Others -

But Still Keep Your Eyes Open.”