Many corporations are susceptible to a fraud scam so arcane that most fraud examiners know nothing about it.
Promotional funds fraud is the embezzlement of hundreds of millions of dollars annually from the promotional budgets of consumer product manufacturers. Companies normally use these legitimate funds to pay supermarkets to sell their goods and display them in prominent spots. Most company departments (except for the sales staff) know nothing about the amounts of these funds so trade-spending moneys can transform easily into slush accounts, especially if companies lack good internal controls. I first discovered trade-spending fraud while working at a $6 billion corporation as the new director of corporate internal security in the early 1990s.
One morning, George â€“ a manufacturing controller who worked for the vice president of finance for the consumer products division â€“ was standing at my office door with a napkin in his hand. He said he was concerned about something and he thought I should know about it.
As George talked, he referred to his notes on the coffee-stained napkin. He said he had received a call from the controller at a supermarket chain, one of our retail customers. The controller said two of our salespeople went to one of their grocery stores in Birmingham, Ala., and told the new manager they wanted to buy supplies for their office and keep the change for petty cash. The check was made out to the supermarket in the amount of $300. George (not his real name) said he thought this may have been customary procedure but he didn’t want to assume anything. (See sidebar article, "Chasing the Barking Dogs.")
George later sent me a fax of both sides of the check, which he had removed temporarily from the accounting system. The check showed me four important things: it was drawn from our corporation’s trade promotional fund, the sales manager of the Alabama region signed it, it was processed through a cash register, and change was given.
I called the administrative assistant of our national sales vice president and asked her if I could receive a list of all our sales offices and food brokers. From that information, I found we didn’t have an office building in Birmingham, but our salespeople worked out of their homes. I gave all this information to my supervisor â€“ the vice president of finance for the consumer products division â€“ and we recruited a customer services employee to help gather all the checks written by the Alabama sales region in the past two years.
The Alabama supermarket manager’s description of the two men who bought the office supplies matched the description of our Alabama sales manager and sales representative. Both had been good employees for our company for almost 20 years and were well-liked by colleagues. The sales manager was a deacon in his church.
The thousands of checks we reviewed, however, told much different stories. I found $360,000 in canceled checks from various supermarkets with the same type of cash register marks on the backs indicating that change had been provided. I knew I was on to something.
Description of Trade Spending
While I was conducting this investigation I also was educating myself about promotional funding. Here’s a simplified explanation of what I learned. In most situations, a consumer products manufacturer (which could make anything from canned goods to paper towels) pays a supermarket to sell its products. The manufacturer wants the supermarket chain to buy, for instance, 100,000 cases of a product per year, but at the same time, the chain wants the manufacturer to pay by separate check for the right to sell the product in the stores.