SWINDLERS AND CONS
IN
STATE GOVERNMENT
A Case Study of Payment
Card Fraud
STATE PAYMENT CARD PROGRAM

State Payment Card Program

In June 2007, Policy 29 went into effect

Made the State Payment Card the preferred method of payment

Small-value purchases under $2,000

For Business Purposes Only

Meant to improve vendor relations by accelerating payment process

Does not require bid solicitation

Does not require state issued purchase orders
THE FRAUD


Payment cards were improperly used by state employees in
management positions to buy items for personal use
Fraudsters were allowed to:

Determine needed items to purchase

Place orders for the items

Personally obtain items

Pay for items with a state payment card

Disguise personal items as legitimate work related
HOW WE GOT INVOLVED

New Business Owner

Life savings to buy business

Did not know much about running the business

Depended on current management in day-to-day operations

After learning the business and determining that fraud was
occurring the new owner

Obtained attorney

Attorney was former Assistant DA

Contacted Special Investigations
THE STATE PLAYERS

State Department “A”

State Department “B”

Maintenance Manager

Facilities Manager

30 Year Employee

10 Year Employee

No Oversight

No Oversight

Made All the Decisions

Made All the Decisions

No One Questioned

No One Questioned
THE BUSINESS PLAYERS

Former Business Owner

Current Business Owner

Store Management

Store Employees
THE SCHEME



State employees colluded with former business
owner and other store employees to obtain tax
free items for personal use and charged items to
their state issued payment card
Business owner charged up to 150 percent mark
up on purchases made by the state employees
State taxpayers paid for fraudsters to operate
their side businesses and complete personal
home improvement projects
WHAT WE DID

Time sensitive (former management found out)

Obtained records from current business owner

Review of relevant documents


Surveillance of homes, private businesses, state
properties
Interviews
STATE DEPARTMENT “A”
The Swindler
INVOICE REFLECTS “BOXES”
RECEIPT FOR SPEAKERS
SPEAKERS FOR HOME USE
SPEAKER BOXES FOR NEW HOME
INVOICE FOR “ICE MAKER”
CHANGED TO “120 VOLT”
NONCOMMERCIAL ICEMAKER
OTHER ITEMS DISGUISED

Pressure washer motor (that he wanted back)

Fog lights for his personal off-road vehicle

CB radio and antenna

Gallons and gallons of paint used for his side business

Painting supplies

Non-commercial refrigerators

Received cash for returned items bought with payment
card
SURVEILLANCE/INTERVIEWS

Work areas

Interviews with staff

Physical review of various work facilities
INTERVIEW WITH SUBJECT

Two investigators and department management

Obtained confession

Subject “A” admitted to theft and collusion with
former business owner
STATE DEPARTMENT “B”
The Con
INVOICE FOR LIGHT BULBS
PERSONAL VEHICLE TIRES
ALUMINUM GUTTERS VOIDED
GUTTERS VOIDED AGAIN
GUTTERS CHANGED TO “FLUSH VALVE KITS”
LOWES RECEIPT FOR GUTTERS
SURVEILLANCE

Car

House/Home Improvements

Work

Interviews with staff
ITEMS DISGUISED AS LEGITIMATE

Tools

Tree cutting equipment

Flooring material

Lumber

Pressure washer

Garage doors
INTERVIEW WITH SUBJECT

Two investigators and Director of Internal Audit

Appearance

Obtained confession


Subject “B” admitted to theft and collusion with
former business owner
Undertone of blackmail
SIGNS OF FRAUDULENT ACTIVITY

Vague item descriptions on invoices

Items that don’t seem like logical purchases

Unusual items purchased

Use of a middle man to purchase items that could be bought directly
with the payment card

Split invoices

Items that should have been purchased through another department

Internal control issues
REAL RISKS OF NO OVERSIGHT


Split invoices
Personal purchases disguised as legitimate work
related purchases

Personal items returned for cash

Use of middleman to inflate costs (huge markups)

Guaranteed business from state government
WHERE THE TWO CASES DIFFER
By Department and District Attorney’s Office
DEPARTMENT ACTION
State Department “A”





Department was
terminating with or
without confession
Two letters – one if he
confessed – one if he
didn’t confess
Confiscated accrued
annual leave
Coded fraudster “not for
rehire within the state”
Prosecuted
State Department “B”
Moved the fraudster
to another building
 Assigned a new
supervisor
 Procurement
privileges revoked
 Fraudster harassed
former building
facilities staff

DISTRICT ATTORNEY ACTION
State Department “A”
Prosecuted
 Plead guilty
 Two years plus
supervised probation
 Ordered restitution
 “We appreciate the
opportunity to have
represented the
Department”

State Department “B”

Since the department
declined to terminate
employment with the
subject we have
decided not to
prosecute
KEYS TO PREVENTING FRAUD

Upper management should be responsible and check
for appropriate purchases on the front-end

Provide training for the employee

Ensure the integrity of the employee

Ensure segregation of duties

Back-end monitoring of purchases

Zero tolerance
COMPTROLLER’S ACTION



Sent an immediate action notice to all state
departments to review vendor purchases
Required state departments to report the results
of their review back to our office
State contacted all vendors and reminded each
that it was inappropriate to present gifts to state
employees
QUESTIONS?
Melinda S. Crutchfield, CFE
Division of State Audit
Comptroller of the Treasury
Melinda.Crutchfield@cot.tn.gov
(615) 747-5308