“Finding Fraud and
What To Do With It.”
New York State Department
of Transportation
February 5, 2010
Edward T. Dominelli, CFE, MPA
BST Forensic Accounting and Litigation Services
Offices: New York - Albany
Goals and Objectives
Organizations involved in transportation-related
construction, both public and private, can take
proactive steps to mitigate the risk of fraudulent
activity on their projects. This session will
discuss suggested steps such organizations
can consider to better deter and detect
fraudulent activity, and what they need to do
when fraud is detected or suspected to ensure
appropriate follow-up and investigation.
2
What is fraud?
Fraud is any intentional act or omission
designed to deceive others, resulting in
the victim suffering a loss and/or the
perpetrator achieving a gain.
Managing the Business Risk of Fraud: A Practical Guide, prepared by
IIA, AICPA, and ACFE
3
Why do people commit fraud?
4
Who commits construction fraud?
• Project Manager
• Superintendent
• “Clerk of the Works”
• Construction Manager
• Contracting Officer
• Architects
• Engineers
• Controlled Inspectors
• Estimators
• Contractors
• Subcontractors
• Materials Suppliers
• Corrupt Union Officials
• Organized Crime
• Labor Coalitions
• Other?
5
“Fraud prevention and detection is
like a mortal’s need for air. When it’s
present, it’s never noticed. When it’s
missing, it’s all that’s noticed”
Author: Unknown
6
Why must we address fraud?
Requirement of ARRA Program
Fraud happens in all organizations
Public Safety
Fiduciary duty to protect public
assets
7
Why must we address fraud?
Mitigate risk
Limit liability
Protect organizational reputation
Promote transparency in operations
8
Fraud Mitigation Process
Finding Fraud – Prevention and
Detection
Responding to Fraudulent Activity
9
Finding Fraud – Key Steps
Management Commitment
Recognize Relevant Fraud Schemes
Identify High Risk Areas
Establish Prevention/Detection
Measures
10
Management Commitment
Acceptance That Fraud Exists
Set as Management Priority
Develop/Revise Code of Conduct
• agency level - conflicts of interest, gifts
• business partners
• embody in documents, i.e. contracts
11
Recognize Relevant Schemes
Review agency history
Review professional literature
Consult with “experts”
Identify “Red Flags”
12
13
Conduct Risk Assessment
Where are we most vulnerable?
Focus on high risk areas
14
Establish Prevention/Detection Measures
Design/Implement Internal Controls
Examples:
•
•
•
•
•
•
•
•
•
employee/vendor ethics policy
contractor/vendor due diligence
separation of duties
change order review process
random contract audits
independent project estimates
original supporting documents
worker identification system
analyze bidding patterns
15
Due Diligence Steps
• Check References
• Public Database Search
• Visit Projects Completed
• Review Subcontractors
• Speak with Peers
• Enforce Subcontracting
Limits
• Similar Scope, Size and
Complexity
• Check Debarment Lists
• Review Bid Pricing
• Verify Licenses
16
Establish Prevention/Detection Measures
Set Fraud Reporting Requirements
•
•
•
•
•
mandated reporting
anonymous reporting - Hotline
whistleblower protection
internal and external resources
“When in doubt, report it.”
17
REPORT FRAUD, WASTE & ABUSE
One of the core missions of the Recovery Board is to prevent fraud, waste, and mismanagement of
Recovery funds. Recovery.gov gives you the ability to find Recovery projects in your own
neighborhood and if you suspect fraudulent actions related to the project you can report those
concerns in several ways:
Submit a Complaint Form electronically
Call the Recovery Board Fraud Hotline: 1-877-392-3375 (1-877-FWA-DESK)
Fax the Recovery Board: 1-877-329-3922 (1-877-FAX-FWA2)
Write the Recovery Board:
Recovery Accountability and Transparency Board
Attention: Hotline Operators
P.O. Box 27545
Washington, D.C. 20038-7958
The Recovery Board is committed to helping ensure these funds are spent properly, but we cannot do
it without your help. Additionally, the Recovery Act provides protections for certain individuals
(whistleblowers) who make specific disclosures about uses of Recovery Act funds.
Source: Recovery.gov
18
Establish Prevention/Detection Measures
 Education
• employee training - fraud schemes, red flags, altered
documents, reporting requirements
• contractor/vendor awareness
 contractor/vendor code of conduct
 “zero tolerance”
 incorporate into contract language
 discuss in bidders meetings/vendor interviews
 reinforce in routine communications
 posters
19
Fraud Response Plan
 Prepare Plan in Advance – Don’t wait until it
happens!!!
 Investigative Process
•
•
•
•
consistent
timely
impartial
professional
 Identify Investigative Resources
• internal - IG, SIU, Counsel’s Office, Internal Auditor
• external – USDOTIG, NYSDOT, NYSOIG, State Police,
FBI, District Attorney
20
Evidentiary Considerations
 Evidence collected will be disputed
for three reasons:
•
Legality of the acquisition of the
evidence
•
Integrity of the evidence
•
Interpretation of the evidence
21
Evidentiary Considerations

Preserving and Protecting Evidence
•
•
•

Interviewing Witnesses
•
•
•


documents – paper and electronic
physical – i.e., core sample
chain of custody/illegal search issues
false imprisonment issues
self-incrimination issues
union contract issues
Maintain Confidentiality – “Need to know.”
Let the “Pros” Handle It
22
Employee Fraud Indicators
- Sudden change in work habits – tardiness, productivity,
reliability
- Sudden change in lifestyle – living beyond means, clothing,
cars, jewelry, vacations, cash
- Sense of entitlement, complaints of being underpaid
- Sudden change in personality/appearance
- Prior history of misconduct/criminal history
- Excessive unscheduled absences/tardiness
- Evidence of mounting financial difficulties – collection agency
calls, wage garnishments, borrowing money from co-workers
23
Employee Fraud Indicators
- Complaints from vendors (contactors, consultants, suppliers)
- Difficulty contacting during workday, unavailability
- Unreported outside employment/business activities
- Unwillingness to be away from job for extended periods, no
vacations
- Non-acceptance of promotions
- Failure to share important information with supervisor or
subordinates
- Resistance to supervision/oversight
- Reluctance to delegate to subordinates
24
Employee Fraud Indicators
- Excessive non-work related phone calls or emails during the
workday
- Consistent failure to follow established procedures/overrides
established internal controls
- Poor record-keeping/inadequate documentation to support
decisions or transactions
- Non-cooperation with auditors/inspectors
- By-pass chain of command
- High turnover of subordinates
- No/limited segregation of key functions within work unit, weak
controls
25
Employee Fraud Indicators
- Untimely bank deposits/bank reconciliations
- Consistent math errors in computations
- Alteration/falsification/destruction of official records
- Socialization with vendors
- Soliciting/accepting gifts and gratuities from vendors
- Frequent, unexplained meetings with vendors behind closed
doors or off- site
- Meeting with “unfamiliar” people in office
- Failure to enforce contract provisions with vendors
26
Employee Fraud Indicators
- Consistent use of same vendors
- Vendor’s insistence to deal with a specific representative
- Personal intervention to get certain vendors paid
- Referral of certain vendors to perform work
- Referral of subcontractors to primes
- Limited/restricted competition for procurement of goods and
services
DON’T IGNORE RED FLAGS. THEY MIGHT MEAN
NOTHING, BUT THEN AGAIN …..
27
Questions
28
Thank you
Edward T. Dominelli, CFE, MPA
BST Valuation and Litigation Advisors
Forensic Accounting and Financial Investigations
26 Computer Drive West
Albany, NY 12205
1-800-724-6700, ext 133
edominelli@bstco.com
29