The unwitting fraudster. Collusion is often the element people fail to consider when assessing fraud risk, despite the fact that frauds involving collusion require sophisticated systems to detect them and result in greater losses. According to the Association of Certified Fraud Examiners, when two or more people are involved in a fraud scheme, the median losses quadrupled from those of single perpetrators.
Generally, collusion is when two or more people work together to circumvent internal controls, such as segregation of duties. For example, one person may approve staff timesheets and the other verifies and processes payroll. If they agreed to ‘collude’ it would be possible to create fictitious employees and then process additional payments to themselves. While this type of fraud is increasing we are also seeing an increase in people unwittingly assisting fraudsters.
Recently we had a case where a business got caught in a long-running scam being perpetrated by one of their major clients. The fraudster was a senior employee and approached the business with an elaborate story. According to the fraudster, the company’s policy of only using approved suppliers was causing a significant disruption in the supply channel. Basically, they needed to hire a technical expert to complete some site work, but this person was not an approved supplier. The fraudster explained the expert had previously been hired by the business, but the new policy prevented rehiring. Ensuring the fraudster had the business owner’s attention, the fraudster stated that until the site work was carried out, their contracts would be delayed.
In true fraudster form, having explained the problem they then offered a solution. If they were willing to hire this expert on a subcontract basis then they could have the site work completed, contracts would proceed as scheduled, and therefore all concerned would be very grateful. Of course, for their trouble (administratively) the ‘subcontractor’ was willing to give a five percent discount on all invoices.
What could go wrong?
The arrangement worked well with work orders being sent, work was confirmed as complete and the invoices were paid. The business paid 95 percent of the budgeted monies to the ‘subcontractor’ and everyone was happy until the client was accused of collusion and fraud. As it turned out, there was no ‘subcontractor’ and the whole story was fictitious. The reality was the employee, as the purchasing officer for the company, generated fake work orders and signed off on completed works that never happened, and of course the ‘subcontractor’s’ bank account belonged to…yes you guessed it—the employee!
When the fraud was uncovered the fraud itself was never in dispute. What was in dispute was whether or not the business had knowingly colluded with a corrupt employee, who was ‘rubber stamping’ fraudulent invoices and ultimately receiving payment.
The business successfully defended the ‘unwitting participant’ claim, but what lessons can we learn from this scenario? Firstly, be diligent and sceptical no matter how important a client is, when requested to assist in bypassing a system—it should raise a red flag. Had the business confirmed the arrangement in writing directly with the company—this fraud would have been stopped before it began. Also, had they checked the ABN provided by the ‘subcontractor’ this would have identified the true ABN owner and raised questions that may have uncovered the fraud.
Author: Sharlene Anderson, Partner – Forensic Worrells VIC
Phone: (03) 9613 5500 –