FraudBasics: Fundamentals for all
I grew up on Chicago's south side during the early 1960s where I was raised around many blue-collar workers who performed hard physical labor, used lots of tools and always got their hands dirty. Perhaps that's why I developed the blue-collar investigative approach I've successfully used throughout 30-plus years in law enforcement and continue to use today as a CFE, private investigator and consultant. For the first 11 years of my career I responded to and/or investigated street crimes (shootings, rapes, illegal drugs, assaults, robberies, thefts, etc.). For the next 20-plus years I've mostly investigated complex white-collar crimes.
In this column, I'll describe one of my more recent investigations in which I utilized many skills learned over the past three decades. (To ensure anonymity I used fictitious names for the entities.) As this case will demonstrate, it's significantly important that fraud examiners use all of their investigative skills, resources and tools when conducting fraud examinations. This includes:
- Precise planning.
- Meticulous organization.
- Painstaking data analysis.
- Thorough interviews.
- Fastidious investigative activity documentation.
And, of course, you do all this while maintaining your integrity, trusting your instincts and persistently working hard.
INDICATIONS OF HUGE FAVORITISM
A large successful entity, which I'll call Huge Inc., awarded a multimillion-dollar contract to a brand new non-minority company that had few employees, no separate physical business facilities and intended to outsource most of the work. I'll call the new company Newbee LLC. The immediate red flag in the procurement was that many of the bidders for this contract submitted cost proposals to Huge that were much less than Newbee's. Some bidders had been in business for several years and bid half the dollar amount as Newbee.
My client — the Huge corporate headquarters — requested that I review the contract's bids, evaluations and the bid ratings. It became obvious to me that Huge highly favored Newbee during the bid-evaluation and rating process for the multimillion-dollar contract.
I found that the high ratings that Huge gave Newbee weren't supported, and the competitors' extremely low ratings didn't seem justified. I wondered why the Huge bid evaluators opted to spend twice the dollar amount than necessary to award a contract to a brand-new company.
With the assistance of a Huge Inc. computer forensics expert, I obtained copies of the company's employee emails from Huge's server. We used keyword searches to reduce the amount of emails for me to review to about 40,000 (still a lot). I found evidence in the emails that some of the bid evaluators and some high-ranking executives at Huge were personal friends with the owners of Newbee. In fact, I quickly determined that one of Newbee's co-owners was a former employee of Huge! I also discovered that Huge apparently showed favoritism when it awarded several additional contracts. I tabbed the significant emails because I suspected they might later be needed as evidence.
When I reviewed the files of the other contracts mentioned in the emails, I found a pattern that indicated that Huge officials had awarded contracts to several companies with ties to Newbee owners without obtaining competition, at seemingly inflated prices. Of the approximately 10 contracts I reviewed, it appeared that Huge awarded all of them by violating its internal contract policies.
ORGANIZATION IS NEXT TO GODLINESS
Staying organized is critical when conducting complex fraud investigations, especially if cases later end up in court. In the Huge Inc. case, I wanted to be able to quickly provide all players — my client, law enforcement and potential prosecution and defense attorneys — with the physical proof and corroborating documentation if they later asked for it. Of course, I also needed a system to retrieve information for myself. Therefore, I created electronic databases as well as physical paper folders to stay organized. I also created an electronic indexing worksheet (using Microsoft Excel) so I could quickly locate needed information.
Early in the examination, I created more than 50 separate individualized folders for future interviews, and I prepared separate lists of questions for each interviewee. In fact, I drafted many of my interview questions while I was reviewing contracts, emails and other documents. I printed some of the key emails and placed them in the appropriate interview folders along with other pertinent documents. I also tracked the interview preparation and completion progress in another Excel worksheet.
From experience, I knew I couldn't just drop off a bunch of emails and documents to my client or a judge or jury and expect them to understand the case. I needed the words from those actually involved — those who could honestly relate and/or later testify to pertinent facts as to what they did, said or witnessed.
Ideally, an interviewer should know the answers to most of the questions before asking them. Because I prepared in advance, I was able to conduct each interview with confidence.
Predictably, many of the Huge employees I interviewed started off with selective amnesia. A favorite interviewee line was "I can't recall." In response, I often just showed them paper copies of their emails, or I showed them other documents from the contract files, which caught them off guard. Having those separate interview files often paid off.
Every time they lied or failed to answer my questions, I professionally asked about the same topics again with different approaches. And I received complete answers without coercing them.
During the interviews, I used introductory questions, informational questions, closing questions, assessment questions and the all-important admission-seeking questions. (See the 2012 U.S. edition of the ACFE's "Fraud Examiners Manual," 3.203-3.204.) I prepared written summaries immediately after each interview.
After those interviews and my review of documents and emails, I established that some Huge managers and executives had instructed their contracting officials to award certain contracts to particular vendors. The contracting officials reluctantly did what they were told to do by their superiors. Because of the client's need for a swift, yet thorough investigation, I often worked about 70 hours per week and sometimes 18-hour days during the several months I worked on this case. It was all worth it when one Huge contracting official said to me, "Nobody ever expected anyone would link all of this together."
I had to interview some of the subjects more than once because in this complex fraud examination I kept identifying additional contracts that apparently Huge awarded with favoritism. It's always important to end every interview positively because you may need to go back for more information.
TOO CLOSE TO THE TOP
During my fraud examination, some managers implied that I was getting too close to the top, and I should "slow down." Because of the high profiles of some of the suspects, some suggested I simply close the case. However, the Huge corporate headquarters didn't hire me to wimp out. It wanted answers and for the system to work properly with integrity.
When I completed the fraud examination/investigation, I identified nine Huge employees who manipulated and circumvented rules to award millions of dollars in contracts to favored companies and unjustly eliminated fair and open competition. Also, Huge was wasting, not saving, a lot of money by improperly awarding the contracts. Interestingly, I never learned of or found any evidence of bribery or gratuities being paid or received. Some might say it was just a good ol' boy network.
In short, some of the Huge managers and executives sometimes dictated that employees disregard contract rules to favor select vendors. Subordinates did what they were told to do, even when they knew it was wrong — probably just to keep their jobs.
One Huge contracting official told me that after he initially had selected a low bidder for a contract, he had to subsequently reverse engineer the contract file so he could award the contract to a different contractor (at a higher price) because that's what a Huge manager had insisted.
I requested internal audit assistance during the fraud examination. Therefore, auditors reviewed other contracts that Huge previously awarded and meticulously examined contracting policies and procedures. The written policies and procedures were fine — they just weren't followed.
MY REPORT AND HUGE'S RESPONSE
At the conclusion of the fraud examination/investigation, I wrote a detailed report, which described the contracts I reviewed, the results of my interviews, the physical evidence I obtained (including emails), descriptions of what potential witnesses could testify about and my final findings. I also gave a copy of the report to Huge's internal legal counsel.
In the report, I also made some recommendations, including that Huge conduct a complete audit of all contracting procedures for the last few years; contracting managers and non-contracting executives needed to allow the contracting officials to solicit, evaluate and award contracts based on existing written policies and procedures without interfering; and contracting officials, who would be told to violate Huge's policies and procedures, should now be permitted to refuse these instructions and report the fraudsters to the highest levels of Huge management. A fraud hotline already existed (but maybe it was off the hook).
As fraud examiners, we usually have no real control of an entity's discipline or adjudicative decisions taken against apparent fraudsters. This case was no exception. Perhaps Huge wanted to avoid the negative publicity, which would have been generated when it filed criminal charges against the wrongdoers. Perhaps the business was concerned about potential lawsuits from losing bidders that weren't given a fair shot. But in the end, Huge elected to handle this case internally. The company forced some of the suspects to resign or retire, and it took administrative action against others.
Huge terminated Newbee's multimillion-dollar contract shortly after I began the fraud examination/investigation because of the apparent favoritism. To my knowledge, Huge hasn't awarded Newbee any new contracts.
Huge implemented my recommendations and those of the auditors to improve the integrity of the Huge contracting process.
As professional fraud examiners, our objective is to conduct thorough, well-documented and honest investigations. In my opinion, using the blue-collar approach that I learned in the south side of Chicago — hard physical work, using all the tools and getting your hands dirty — helps me dive into meaty, fun fraud cases and often exit with solid results.
Charles Piper, CFE, CFS, CRT, is a private investigator, consultant and owner of Charles Piper's Professional Services in West Tennessee.
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