Fraud Investigation & Prevention
Experiences, Trends & Practical Tools
Dr. Ricardo Gomez
EY FIDS
Page. 1
What the
books
will tell
you
Statistics
► The majority of occupational frauds were
committed by staff at the employee or
managerial level: 42 % employee,
36% manager, 19 owner/executive
► Median loss by position: 75.000 $
employee, 130.000 $ manager, 500.000 $
executive
► Median loss by gender: 185.000 $ male;
83.000 $ female
► 52% of fraudster are 31 – 45 years old
► 67 % of fraudsters are male
* Data from ACFE`s 2014 Global Fraud Survey on more thank 1400 fraud
cases cross industries.
Page. 2
EY FIDS – Dr. Gomez
What the
books
will tell
you…
…and why some
statistics are pretty
useless
Behavioral Red Flags
► Living beyond one’s means (36 % of cases)
► Experiencing financial difficulties (27 % of
cases)
► Unusually close association with
vendor/customer (19 % of cases)
► Control issues; unwillingness to share
duties (18 % of cases)
► “Wheeler-dealer” attitude (15 % of cases)
► Divorce/family problems (15 % of cases)
► Irritability, suspiciousness or defensiveness
(13 % of cases)
► Addiction problems (8 % of cases)
► Refusal to take vacations (7 % of cases)
* Data from ACFE`s 2014 Global Fraud Survey on more thank 1400 fraud
cases cross industries.
Page. 3
EY FIDS – Dr. Gomez
What I
will tell
you
Profiling is key –
sector profiling
Know where to look
Page. 4
EY FIDS – Dr. Gomez
Fraud occurred in 2007-2010
Fraudster Profile
►
Mr. X, 31 years of age, Senior Buyer at globally retail
group
►
Turkish Immigrant, flamboyant, over-confident, show-off
personality, drives a E Class Mercedes AMG
Fraud Scheme
►
Average whipped cream retail selling price 1,09 - 1,19
EUR
►
Selling price for this item 1,89 EUR – with content
identical to the competitor´s product for 1,29 EUR
►
Retail market selling price (in other supermarkets) for
“light” /”lactose-free” whipped cream 1,29 – 1,99 EUR
►
Slow sales due to high selling price
Came to light
►
Through a change in the vendors contact person
Damage Risks
►
Scheme applied in three countries, total kickbacks
378 TEUR
►
Not included were image damages for expensive
products on the shelf
►
Not included are risks penalties by authorities due to
e.g. vertical price fixing – Antitrust & Competition
Page. 5
Fraud occurred in 2006
Fraudster Profile
►
Mrs Y, 29 years of age, Senior Accountant at globally
operating electronic equipment production and retail
group
►
German, introvert, no vacation in three years, no show
at social gatherings from the firm, very quiet
Fraud Scheme
►
Transfers from corporate bank accounts to bank
accounts controlled by her
►
Through a system of fake invoices by phantom
companies
►
Invoices were labelled “marketing services”
►
Invoices were just below the 4-eyes principle threshold
of the firm
►
Sign off was regularly included into a sign off process of
lowest management, enclosed in a large stack of other
payment documents to sign off
Came to light
►
Through a change in the Financial Director of the
business unit
Damage Risks
►
Scheme applied in one country, total transfers of 320
TEUR
Page. 6
Sector
Profiling
is key
Create red flags map
List of typical noncompliance
Page. 7
EY FIDS – Dr. Gomez
Lessons learned
Create a red flag map – sector focussed
Which are the typical red flags in your specific sector?
Common red flags – structured by Cresseys Fraud Triangle
►
►
►
Pressure: Overextended growth targets, gender structure (clearly more males?)
Opportunity: Compliance/Audit culture? Who does the Audit Chief report to? Interest of the C-level in integrity
topics; strength/effectiveness of corporate controls, especially in the areas of
►
Expansion
►
Buying Procurement
►
Marketing
Rationalisation: Bonus frequency, bonus levels, transparency of bonus, non-bonus-related gratifications,
culture/sense of pride in belonging to company
Sector specific red flags – structured by Cresseys Fraud Triangle – Example: Retail
►
►
►
Page. 8
Pressure: Overextended sales targets, national retail market share, trust of employees in corporate strategy
Opportunity: Compliance/Audit culture? Is the head of buying higher ranked than the head of audit?
►
Who signs and documents the buying contracts
►
How often are tenders performed / long standing suppliers, with little tender history
►
Mid-sized suppliers (1 to 300 EUR mill TO) with specific, non-comparable products listed for long period of
time with poor profitability development
►
Gondola-end offers or private label assortment growth with no strategic reasoning/with poor profitability
Rationalisation: Bonus levels, lease car size/policy, sense of pride in belonging to company (helpless against
the discounters / online retail?
EY FIDS – Dr. Gomez
Lessons learned - Private & Public Sector
Sector Example: Buying Organisations
Which are the typical areas of non-compliance in
buying organizations?
►
Bribes from suppliers
►
►
►
►
Un-challenged, long standing supplier relationships
►
►
►
►
►
Through elevated prices and non-traceble kick-backs, through preferred logistic suppliers, through preferred
(marketing) agency costs
Financial damage of the organization, lack of productivity due to inflated selling prices to the customer
The sophisticated cover up: in order to still sell in spite of inflated price - prioritization of non productive product
lines in (OoH)-Marketing, e.g. store positioning (double placement, gondola end, etc.) – leads to lack of
productivity at gondola end & marketing areas per m2 and bottom line
Substantial suppliers (top 150 per country business unit) with more than 3+ years without tender or
More than 1+ year without yearly negotiations
Un-transparent bonus accounting, lack of bottom line/margin visibility to
Management/CFO/Head of Audit
Later bonus “parked” at third parties in order to be pulled by the end of the FY
Private Label top-line growth without margin productivity development
►
Page. 9
Risk of margin unattractiveness & questions raised about reason for listing/growth
EY FIDS – Dr. Gomez
Lessons learned - Private & Public Sector
Sector Example: Pharma Organizations
Which are the typical areas of non-compliance in
pharmaceutical organizations?
►
Fee for service agreements
►
►
►
Product Development agreements
►
►
►
Red flags: Who has the ownership interest in the product? Patent rights holders should not serve as clinical
investigators for that product
Red flags: When in doubt: analyze the ownership/interest structure of the product (patent rights or rights to
royalty payment)
Gifts
►
►
►
Promotional speakers, presentations and demonstrations at the pharma company, advisory boards (HCP
provides insights such as product strengths or weaknesses)
Red flags: Must be documented in a written contract, occasion must be clearly specified
Modest and inexpensive gifts are allowed under most international pharma companies compliance regulations
Red flags: What is customary in the market? Never in cash, always must be recorded
Travel, lodging, meals
►
►
►
►
Page. 10
Book all travelling and lodging through centralized travel agency
Red flags: Nationally organized travel & lodging
Red flags: Side trips, trip extensions, lavish travel entertainment, extra costs by spouses or guests of the HCP
Red flags: daily allowance agreements, normally not put into written contracts
EY FIDS – Dr. Gomez
What
real life
will tell
us
Page. 11
EY FIDS – Dr. Gomez
Dr. Ricardo Gomez Alcazar
Executive Director
Fraud Investigation and Dispute
Services (FIDS)
+34 915 727 255
+34 619 016 956
Ricardo.GomezAlcazar@es.ey.com
Ernst & Young, S.L.
www.ey.com/es
© 2015 Ernst & Young SL
Pág. 12
All Rights Reserved
Organization and Management Model for Crime Prevention
Torre Picasso. Plaza Pablo Ruiz Picasso, 1
28020, Madrid
Retail Experience
EY FIDS Spain
Back up
Retail Experience
EY FIDS
Introduction - Retail Case Example: Project Cream
►
►
►
Average whipped cream retail selling price 1,09 - 1,19 EUR
Selling price for this item 1,89 EUR – with content identical to the competitor´s product for 1,29 EUR
Retail market selling price (in other supermarkets) for “light” /”lactose-free” whipped cream 1,29 – 1,99 EUR
Delivery
Delivery
Payment
Payment
►
378 TEUR
►
►
►
►
Page. 14
Slow sales due to high selling price
Scheme applied in three countries, total kickbacks
378 TEUR
Not included were image damages for expensive
products on the shelf
Not included are risks penalties by authorities due to
e.g. vertical price fixing – Antitrust & Competition
Delivered Risk Map and implemented 10 Controls
EY FIDS – Dr. Gomez Alcazar