Fraud Risk Management
An Investigation and Anti-Fraud
Primer
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• Moderator - Dorina Hertner
Director – Risk Management
7-Eleven Corporation
• Bill Leone
Partner
Norton Rose Fulbright
• Ryan Pratt
Partner
Ernst & Young
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What to Expect
• Define fraud and its affect on the organization
• Understand the investigative process
• Risk Management’s role in investigations
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Why people commit fraud: The Fraud Triangle
Opportunity
Lack of infrastructure
and controls in
locations
Layoffs and salary
cuts creates
personal financial
hardship
Companies are
decentralized with
inconsistent
internal controls
Companies are
downsizing,
impacting internal
controls.
Stressed and
disgruntled
employees may
have greater ability
to rationalize
improper actions
Opportunity to
Commit Fraud
Tight credit
environment
Internal and External
Pressure
Stock prices
are unstable
Pressure
More regulatory focus
increased
Budgets are decreasing.
Companies and organizations
are doing more with less
Large projects and
acquisitions
increases risks of
costs not being
noticed
Internal
Controls
Dissatisfaction
with compensation
compared to peers
and supervisors
Rationalization
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Types of Fraud
Three primary categories
Fraud tree
Corruption
Conflicts
of
interest
Bribery and
corruption/
FCPA
Illegal
gratuities
Fraudulent Statements
Bid-rigging/
procurement
Revenue
recognition
GAAP
Reserves
T&E
fraud
Theft of
data
Nonfinancial
(Disclosures)
Asset Misappropriation
Cash
larceny
Theft of other
assets –
inventory/
AR/
fixed assets
Fake
vendor
Payroll
fraud
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Case Study – DenColo Products
• Dencolo is a consumer technology company based in
the US
• Manufacturing in US and Japan with suppliers in
Thailand and Hong Kong
• In 2008/2009, the company went through difficult
times – reduced sales, margins
• Many departments, including risk management, were
downsized
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Case Study – The Rogue Risk Manager
DenColo Products receives a whistleblower hotline call Allegations
•Mickey Marks – VP of Risk – Multiple allegations
•No change in premiums in 5 years – in volatile markets
•Mickey is “too close” to broker - Jim Daniels – abdicating responsibility
•Multiple trips with broker including a “conference” in Hawaii two weeks
before renewal
•Claim support and data goes ignored – no one else allowed to handle claims
with insurers – suspect Mickey is not pursuing valid claims
•“Pretty sure” that Mickey is either taking kickbacks or accepting “gifts”
•Noticed invoices from MM Risk Services – Don’t know their task
*Elizabeth Craig – Assistant RM – is expected whistleblower
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Responding to a Whistleblower
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Take it seriously – set the tone
Respond promptly
Inform counsel – either external or internal
Assess credibility
Evaluate resources to respond
No retaliation
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Conducting an Investigation
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Involve counsel – internal or external
Preserve and protect information
Identify key players
Review communication and documents
Interview key players
Analyze accounting / financial data
Develop findings and report
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Email Analytics
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Case Study – Preliminary Findings
The investigation uncovered the following preliminary findings:
•DenColo’s insurance always underwritten by same London insurer
•Jim Daniels moved brokerage houses four times in last 7 years
•No claims were filed for Japan quake or Thailand flooding despite losses
•Emails between Mickey and Jim discuss how filing claims will “affect the
arrangement we have with London” and Mickey getting to “take a mulligan”
• Mickey’s time and expense show trips to Bermuda, Hawaii, Barbados and
Scotland titled “Insurer meetings”
• Mickey’s office has very little insurance materials but plenty of golf pictures
with Jim
• A review of vendor master shows that MM Risk Services was added six
months prior – Address on the account is Mickey’s daughter, Mattie Marks
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What’s Next?
Based on the preliminary findings what would you do next?
• Interview Mickey Marks
• Interview Jim Daniels
• Interview insurance carrier representative
• Analyze Mickey Marks’ expense reports further
• Review Mickey Marks’ bank records (as available)
• Interview Elizabeth Craig – Assistant risk manager?
• Analyze other programs / claims history – worker’s comp, product liability
• Analyze payments made to MM Risk Services
• Scrutinize additional vendors against known addresses related to Mickey
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Interviewing in Investigations
What…? How…? Could you tell me about…?
Open questions
Probing questions
Why…? Who…? Where…?
Hypothetical questions
Reflective questions
Closed questions to confirm
When…? What else …?
What if…?
To check my
understanding…?
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Case Study – Final Findings
Investigation is complete. Here’s what you found:
• Mickey Marks has been taking kick-backs for the last ten years
• “Taking a mulligan” was code for the annual payment he received
• The arrangement called for Mickey to discourage DenColo filing claims in
exchange for flat premiums and his annual “mulligan”
• DenColo’s insurers deny any knowledge of “the arrangement”
• Jim Daniels paid for all of Mickey’s travel expenses to the insurance
meetings, so Mickey pocketed all travel expenses he “incurred”
• Mickey had three vendors set up in the system with payments made directly
to accounts he controlled
• Including the “mulligans”, Mickey pocket nearly $750,000 over a ten-year
period
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Now What?
DenColo’s options
• Prosecution – Mickey Marks and any accomplices
• Recoup any available funds from Mickey
• Crime Policy – Claim misappropriated funds
• Errors and Omission claim
• Action against broker and/or insurers
• Report potential abuses to insurance regulators
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Contact Information
Dorina Hertner
Director of Corporate Insurance and Risk Management
7-Eleven Corporation
dorina.hertner@7-11.com
Bill Leone
Partner
Norton Rose Fulbright
william.leone@nortonrosefulbright.com
Ryan Pratt
Principal
Ernst & Young
ryan.pratt@ey.com
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KEEP THIS SLIDE FOR EVALUATION
INFORMATION/MOBILE APP ETC.
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