The Fraud Examiner


Case Study: When a Kickback Turns Deadly
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By Mary Breslin, CFE, CIA

August 2015


When we talk about kickback schemes, people tend to envision the movie portrayal of two shady characters in a dark alley sporting fedoras and trench coats passing payments while glancing over their shoulders. While that may have actually been the case somewhere at some point, fraudsters today are much more sophisticated and kickback schemes can lead to serious — and sometimes dire — consequences.

Many fraudsters rationalize kickback schemes by believing the company somehow owes them and no one is getting hurt. But that isn’t always the case. The metaphorical “hurt” associated with stealing aside, sometimes people get physically hurt — and in the case I am about to recount, the injury was fatal.

Quality assurance is an important function in most manufacturing companies, and in an industry as inherently dangerous as the mining industry, it is critical. In mining, tremendous time, effort and money are spent preventing accidents, as well as trying to understand what caused any accidents that do occur. Mining companies have complex, detailed safety programs and root cause analysis, all in an effort to protect their employees from accidents.

It is horrifying when a fatality occurs. It is even more horrifying to find out the fatality occurred because of an inferior product. But to find out that the inferior product responsible for a fatality was caused by a kickback scheme is unthinkable. Unfortunately, that is exactly what happened in this case.

A drill rig contains a large drill that creates the hole in the ground and also a mast — a support structure that provides stability and holds the drill in place. Frequently, these masts are made from solid pieces of steel to ensure there are no weak points in the structure. A mast endures tremendous pressure during the drilling process, and if it isn’t strong enough to withstand the pressure, it can snap.

A company I consulted for manufactured drill rigs, but in some cases the fabrication of the mast was outsourced to other companies who were believed to be better suited for the work — experts in steel…or so they thought. The product specifications were very detailed but at the same time simple. The four main poles of the mast must be solid steel. To ensure they met with contracted specifications, the company had its own in-house quality assurance technicians perform quality testing on every mast received from our suppliers.

Solid pieces of steel shouldn’t snap from routine drilling, but one day a drill mast did snap, and the individual manning the drill rig was hit by the mast and fatally wounded. As a company, they had seen their share of accidents, and they took every single one seriously. A thorough root cause analysis was performed, and what was found shocked everyone. The mast had snapped at a welding point. Wait, what? There weren’t supposed to be any welding points, so how could the mast snap at one?

Now they had an even bigger problem. At this point we suspected foul play, but hoped for… incompetence? As terrible as hoping for incompetence sounds, how could someone intentionally risk a life? In a case like this, it would have been quite easy to interview everyone, conduct the root cause analysis and come to the conclusion that it was just incompetence. With stakes this high, the individual responsible for the inferior product is not going to readily admit to any wrongdoing— and in fact they may be crafty enough to intentionally play the incompetence card.

First we looked at procurement and the vendors to see if we could find anything that looked unusual or like favored treatment with any of the vendors involved. After extensive research we found some anomalies in the procurement process of the main vendor involved. It looked like the last round of bids contained only one real bid: theirs. The other bids were fabricated from prior real bids —proposals from other vendors from prior proposal periods. Additionally, the pricing we were paying was higher than the actual bid. Hmm… why would the company ever do that? So we went to the vendor and asked them just that.

At first, the management team at the vendor company had no idea what we were talking about, so they pulled their own sales records. According to their records, the vendor company was being paid what they actually bid, not more. Additionally, it was discovered that the vendor company had been outsourcing the product to a subcontractor themselves. Well, what happened on that side of the fraud is a tale for another day (but think pass through, “looks-like” bank accounts and skimming).

Now we had proof of an actual fraud, one that had resulted in a fatality. Determining who the fraudster was and proving the receipt of kickback payments was easy. We continued to follow the money right into his bank account. The authorities picked it up from there and the fraudster is now spending time analyzing a different set of steel bars.

When I speak to young fraud examiners and auditors, many of them struggle to believe that kickbacks still happen. They think kickbacks are an “old school” fraud scheme (like the movie portrayal described above), and that the systems and processes in most companies today are too sophisticated to allow that to sort of thing occur. Wrong. It happens. In fact, kickbacks probably happen in most companies in one way or another. As systems and processes get more sophisticated, so do the methods of fraudsters. But the same fraud schemes persist. Don’t let preconceived ideas and assumptions about what kind of frauds fraudsters tend to commit prevent you from actively looking for kickback schemes. You could save a life.

 

Contact the ACFE
For more information, contact Sarah Hofmann, Public Information Officer, at (512) 478-9000 ext. 324 or SHofmann@ACFE.com.