St. Valentine's Day Massacre (revisited)

A false billing scheme case study, part 1

By Joseph R. Dervaes, CFE, CIA, ACFE Fellow

joseph-dervaes-80x80.jpg Fraud's Finer Points 



JulyAug-vday-gangster Alex was the assistant operations manager of a sports dome in a large city in Washington state. Because he was in a key position within the entity, he was able to compromise the internal control system by colluding with a legitimate vendor to manipulate purchasing transactions and cause his employer to issue disbursement checks for personal benefit. This false billing scheme resulted in losses of $491,829 within 10 years.

In the ACFE's Fraud Tree, false billing schemes are a subset of fraudulent disbursements, which is a subset of cash schemes. A false billing scheme attacks the disbursement and payable cycle with bogus claims that induce the victim organization to unknowingly issue fraudulent payments for goods or services, which it never received.

The perpetrator of these schemes usually is an individual whose duties include authorizing purchase transactions on behalf of the entity. However, in this case, the perpetrator approved his own purchases, even though this act wasn't part of his normal duties and responsibilities. After he approved the fictitious transactions, they continued through the normal disbursement cycle until the entity created valid checks for the expenses. The end result was that the perpetrator purchased many assets for personal benefit.

Collusion among employees is sometimes used to overcome a strong internal control environment. In this false billing scheme, the collusion was between the assistant operations manager (the employee on the inside) and a legitimate vendor (a company representative on the outside) who was very hungry for business from the sports dome.

Collusion is difficult to detect through normal audit procedures because no one can “see” the unauthorized or hidden activity in the background. Therefore, informed individuals who provide tips to the proper authorities about inappropriate activities detect most collusion cases.

When gangsters murdered seven men on Valentine's Day in 1929, this brutal Chicago massacre became the most notorious gangster killing of the Prohibition Era. It involved hostilities between two rival gangs — one led by Al Capone and the other by George “Bugs” Moran. No one was ever tried or convicted for these murders. However, the massacre brought Al Capone to the attention of the federal government. The rest is history, with Capone later convicted of federal tax evasion.

How does this past event relate to this false billing scheme? Well, only because the fraudster's 10-year run of raiding the treasury of the city's sports dome came to an abrupt end on this lovers' holiday. Unlike the Chicago murders, city police officers didn't fire any shots when arresting the assistant operations manager for fencing stolen property through multiple pawn shops. The police nabbed Alex during a traffic stop that specifically targeted him. He was on one of his frequent automobile trips to purchase items on behalf of the sports dome (and then later sell for personal benefit).  

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