Easy Come, Easy Go: Examining Fraud on the Loading Dock

Recently, in Las Vegas, the chef in charge of a restaurant in one of the better known hotels was terminated when management learned that the chef was ordering items for the hotel’s gourmet restaurant and diverting them to his own restaurant in a nearby upscale neighborhood. The items were delivered daily by the same driver to the hotel’s loading dock, where the chef would always inspect and sign for the delivered items.

Red flags went up when an audit conducted on the restaurant over a six-month period showed that more than half of the food items coming in were never sold. In reality, better than half of the items ordered were never even delivered to the hotel, but – upon the chef’s direct orders – were taken straight to the chef’s own restaurant, where his brother would receive the goods. The chef’s restaurant, not surprisingly, was a huge success, and it was partly due to the restaurant’s reputation that the hotel managers were able to put the pieces together and figure out that their best chef was ripping them off. The extent of the fraud was so extreme that the accounting department later learned that even the toilet paper used at the chef’s restaurant was paid for by the hotel.

The loading dock plays a critical role in a company’s ability to function profitably. A poorly run loading dock is a death sentence for an otherwise vibrant business. The functions that take place on loading docks are as varied as the businesses themselves, but the one thing common to all docks is their vulnerability to fraudulent activity.

Generally, loading docks serve two distinctly different functions: shipping and receiving. Depending on the type of business, the dock functions may be heavily weighed in one direction or the other. The resort industry – hotels, casinos, and amusement parks, for example – primarily receive products, while retail Internet sales primarily are involved in shipping. Manufacturers, additionally, have products flowing in both directions.

Numerous studies over the years have shown that manufacturers prosper when products received are scheduled in such a way that on-hand inventory is kept at a minimum, and product output is maximized. The bottom line is that businesses with tight controls over dock functions are more likely to be successful in their respective industries. To examine the problem of fraud on the loading dock, here are a number of cases involving hotels, restaurants, and retail stores.

Trucker Scams  

Drivers who work for food and beverage distribution companies are responsible for delivering products daily to hotels, restaurants, and grocery outlets. These drivers are in a prime position to conduct fraud by diverting the products on their trucks and selling them for personal profit. Drivers on specific delivery routes inevitably develop relationships with the workers on the various loading docks. These relationships give truck drivers keen perspectives on loading dock operations for numerous businesses. Through observation and conversations, drivers can learn how tightly loading dock operations are run, which dock workers are diligent or lazy, or even worse, which workers are ready, willing, and able to engage in fraud.

Food and beverage distribution companies unwittingly play into this fraud by giving delivery drivers information about their clients’ financial situations. For instance, drivers sometimes are told that certain restaurants are on a cash-only basis, meaning they’re to collect only cash for items delivered. This knowledge lets drivers know which businesses are strapped financially and possibly more susceptible to wayward business proposals. A driver, if so inclined, can turn his route into a profitable sideline business.

Suppose a driver who delivers to a hotel with several restaurant outlets knows that the hotel’s dock procedures are weak, and that items delivered are rarely, if ever, counted or weighed. The driver then has an opportunity to pull items from the hotel’s order and stash them in the truck. Upon delivery to the hotel, he shorts the establishment several steaks and the dock manager unknowingly signs for the full order.

The driver then goes to Restaurant B, knowing that the owner is in a tight financial situation or on a cash-only basis. The driver advises the owner that he has a certain number of steaks or other product that he can sell at a discounted price on a cash-only basis. The driver pockets the money, no paperwork is generated, and the fraud is perpetrated. The driver and the financially strapped restaurant owner are happy, and the hotel takes the hit. If this type of fraud is done on a small scale at a number of locations, it can provide a driver with a substantial tax-free income, because it’s difficult to track and catch. And if the perpetrator is caught for an offense, he probably won’t be charged for more than a misdemeanor since the cash he stole is small. (However, if he is charged for several thefts, the total amount could lead to a felony charge.)

When trucker scams are discovered, the drivers are typically fired and the companies do their best to keep the incidents under wraps. Unfortunately, this allows the terminated drivers to find new jobs driving for other companies or working on other loading docks, and the fraud continues. The general mindset of the perpetrator is, “I work my tail off, and I’m not paid enough money for the type of work I’m doing. I’m entitled to a little extra.” Once the justification allows the fraud to start and the extra money starts coming in tax free, the hook is set and it’s virtually impossible for the perpetrator to stop. In today’s business environment filled with Internet start-up millionaires, it’s becoming easier and easier for dock workers, who are still involved in heavy manual labor, to believe they’re getting the short end of the stick.

Damaged Goods Scam  

Handling damaged goods on the loading dock should always be a major concern. Fraud can be rampant if the controls to properly document, process, and handle damaged goods aren’t strongly enforced or carefully reviewed.

For example, an electronics retail superstore became a victim of this type of fraud when it gave low priority to managing its damaged goods. Whenever incoming products were identified as “damaged in transit,” the loading dock personnel would set the items aside. Arrangements had been made with the various product manufacturers to not send the products back to the point of origin, but rather to ship the items by UPS to the respective product’s local repair facility.

The damaged-in-transit items were pulled off the receiving paperwork and not recorded in the superstore’s inventory. Instead, they were shown as having been shipped out for repairs. Because the superstore had no control over the repair time and the items weren’t yet official inventory, the superstore didn’t pay for the items until they were returned. Because more work was involved when these products were returned, no one really stayed on top of the process.

When the repaired items were returned to the superstore’s receiving dock, the accounting department would match the items with their original receiving paperwork for that order, and then pay the manufacturer separately.

Two dock receivers, knowing how lax the system was, began re-labeling the repaired items as soon as they arrived on the dock and shipping them to an address belonging to one of the receiving clerk’s brothers. This brother would take the merchandise to a rented storage facility, where the culprits would later unbox and sell the items at a local flea market. The fraud was as simple as putting a new label on the box and moving it to the other side of the dock for UPS pick-up.

An investigation commenced when several manufacturers questioned why they were never paid for their repaired products, and the superstore’s accounting department responded that the products were never received. The investigation was a mess; everyone from the receivers at the superstore and the repair facilities to the numerous UPS truck drivers were suspects. The investigators learned that many items shown as “sent for repair” in the superstore’s books never arrived at the repair facilities. Conversely, there were items shown in the repair facilities’ books as having been received, repaired, and shipped back to the superstore; however, those items were never counted as inventory at the superstore.

The two loading dock receivers from the superstore both had quit to take better paying jobs before the investigation began. Investigators were left with dozens of signatures on shipping documents that didn’t match anyone working, or ever having worked, at the superstore.

Investigators speculated that this fraud netted close to $150,000 over a six-month period, but they never could gather enough evidence to target the suspects. The superstore eventually went bankrupt when it became clear that the accounting department had so many other problems, that this particular fraud paled in comparison to other internal frauds that came to light during the investigation.

The failure to properly track, account for, and process products moving on a loading dock is often a red flag signaling bigger problems that may exist deeper in the workings of a seemingly successful business.

Delivery Scams  

A large retail furniture outlet became the victim of a delivery scam when one of its loading dock employees, two delivery truck drivers, and a front office employee decided to conspire in a “get-rich-quick” scam. The front office worker generated sales paperwork showing that furniture was sold and needed to be delivered that day. This paperwork was sent to the loading dock, where the dock worker would pull the furniture and place it on the dock for the delivery truck drivers to load. The drivers, who would always place these special orders in the back of their trucks, would deliver the legitimate orders first, and then deliver the furniture in the rear of the truck to the front office employee’s home, which had plenty of storage room with a three-car garage. After returning to the furniture store with the deliveries completed, the drivers would turn in their paperwork to the dock employee, who would destroy the delivery orders that went to the three-car garage. He’d then call the front office employee and alert him to destroy his copy of the paperwork, as well as the entries in the company’s computer.

This scam went on for close to a year before investigators were called to determine why inventory kept disappearing. Surveillance cameras showed nothing unusual occurring, so an auditor with advanced computer skills was brought in from the company’s corporate headquarters. The auditor established that one employee – the front office worker – continuously logged on to the computer, but generated no records or work. The auditor set up a way to monitor the front office employee’s computer activity from a private office at the store. As a result, he observed the employee logging on to the computer to create sale and delivery paperwork, only to go back and delete the information at the end of the day. Closer observation revealed the interaction among the guilty individuals, and the police were called in to make the arrests. The courts ordered that the fraudsters pay thousands in restitution, and they all went to jail for short terms. The crooks later complained after serving their jail time that it was difficult to find work, which was necessary to pay the court-ordered restitution. The furniture store took the write-off rather than wait for the money from the crooks.

The Straight Robbery  

Some fraudsters skip the elaborate schemes and resort to outright theft. Here’s one of the more unusual cases.

After stealing the keys to their employer’s furniture warehouse, two dock workers returned to work in the middle of the night with a moving truck rented under a friend’s name. They opened the dock doors and began loading furniture into the truck. The surveillance camera on the dock had been broken earlier in the day when it was struck by furniture stacked too high on a forklift. The two workers had thought of everything except the alarm system, which, of course, went off when they entered the loading dock.

The police arrived just as the workers were finished loading the truck. The two men remained calm and convinced the police officers to let them go, explaining that they had a rush delivery ordered by their boss. They showed their employee IDs and admitted to the officers that they had “forgotten” to obtain the alarm code from their boss. The police officers let them go, and even helped the thieves close up the loading dock doors.

The workers came back to the furniture warehouse the next day as if nothing had happened. However, their secret didn’t remain a secret for long. Other warehouse personnel began complaining of an inventory shortage, and the store’s general manager noticed an added premium charge on the alarm company’s bill for responding to a call at the warehouse. The general manager put two and two together and called the police. The two employees were identified and arrested, and they later pleaded guilty. The police officers who responded to the call the night of the robbery were written up and given two-week suspensions.

It’s easy to make light of these seemingly brainless types of fraud, yet they aren’t funny at all. They occur every day all over the United States, representing millions of dollars lost to business. (Because businesses don’t report statistics to federal agencies or trade associations, accurate loss statistics don’t exist.)

Loading dock fraud can be reduced by integrating new technologies that gather information and observe employees. New bar code readers transmit information via radio signal to networked computer terminals. And hand-held digital scanners eventually will create video records of items and individuals who receive them. Also digital technology will allow management to insert transmitters into employee uniforms to visually record their names and images during merchandise transactions. However, as most fraud examiners know, nothing can replace good solid internal controls.

Frank Luizzo, CFE, is the director of security and surveillance at Hard Rock Hotel and Casino in Las Vegas, Nev. Previously, he was the general manager of United Coin Machine Company, and a senior agent with the Nevada Gaming Control Board’s enforcement division. He is a retired Nevada Highway Patrol state trooper.  

Joel Moskowitz, CFE, is Investigator and High Tech Crime coordinator with the Major Fraud Unit of the Clark County District Attorney’s Office in Las Vegas, Nev. He has served as the president and vice president of the Las Vegas Chapter.