Traveling in High Style on the Organization’s Dime, Part 1

Travel fraud is categorized as a fictitious expense scheme. In the ACFE's Occupational Fraud and Abuse Classification System (the "Fraud Tree"), the crime is a subset of fraudulent disbursements, which is a subset of cash schemes. Travel fraud is one of the most common forms of fictitious expense schemes I've encountered during my career. Instead of overstating a real business expense, as many fraudsters do, these employees simply invent travel activities and submit completely false expense reports. Some organizations routinely pay these false claims because they have inadequate internal controls to detect them. Thus, these organizations issue checks for unauthorized business purposes, which the perpetrators then use for personal benefit. There are many travel fraud schemes, and we'll try to cover a variety of them in this and the next two columns.

FICTITIOUS VICINITY TRAVEL CLAIMS

Employees have valid vicinity travel expenses when they use their personal vehicles to drive from their primary places of business to other locations while performing official business activities for their organizations. The organizations reimburse employees for miles driven, normally at the rate established by the Internal Revenue Service (IRS). This travel is usually a round trip from one point to another in the city in which the individual works. However, it also can be a round trip from one city to another on the same business day when no hotel stay is required. Organizations normally do not reimburse per diem and meal costs with vicinity travel unless the employee is out of the office for at least a certain number of hours during the business day. The number of hours per day varies among organizations.

Unfortunately, some unscrupulous employees choose to file false vicinity travel claims with their employers for miles they did not travel.

CASES NO. 1 AND 2  

In separate cases, two employees at a Washington state agency filed false vicinity travel claims over almost identical five-year periods and received unauthorized payments for expenses they did not incur. Documents on file at the agency for other official activities, such as telephone records, vehicle use logs, time and attendance and leave records and credit card purchases, clearly demonstrated that the information the employees reported on their travel vouchers was inconsistent with actual events.

Their "footprints of presence" in their offices proved their vicinity travel claims were false. For example, while these various agency records indicated the employees were in their Western Washington offices in Olympia on the dates of travel, their vicinity travel claims indicated they had completed round trips by personal automobile from Olympia to a number of cities all over the state on the same day. In my opinion, they did this to avoid preparing and filing travel claims, which included false hotel bills for overnight trips they did not take. It was simply easier this way. Mark's unauthorized vicinity travel claims totaled $47,916, and Barbara's totaled $33,475.

The agency's internal auditor detected this fraud during a routine audit when reviewing an unusually high number of vicinity travel payments that had been made to Mark during the current year. His travel frequency just did not appear to be reasonable when considering his footprints of presence in the office for other official duties during this same time period. That auditor then designed computer inquiries from the attributes in the case to further search the agency's database for other employees who might have submitted similar claims and so detected Barbara's fraud. The internal auditor determined that these two employees acted independently of each other, even though they committed the same crime the same way and even worked in the same department. Surprisingly, they did not collude in the frauds.

Mark's vicinity travel claims included 589 fictitious trips from the 774 he reported (76 percent). Similarly, Barbara's vicinity travel claims included 357 fictitious trips from the 501 she reported (71 percent).

The local U.S. attorney's office handled the prosecution of these cases because the losses involved travel expenses, which the two fraudsters charged to the agency's federal programs - $8,018 for Mark and $17,365 for Barbara. In plea-bargaining agreements, both employees pleaded guilty to six counts of theft.

The federal prosecutor agreed to deferred sentencing in each case if the individuals agreed to make restitution prior to their sentencing dates for about 40 percent of the loss amounts indicated in the internal and external auditors' reports. Both employees complied. The reduced loss amounts and audit costs used for restitution in these cases came about because the federal prosecutor had pressed charges for shorter periods of time than the auditors reported, which indicated that the statute of limitations had expired on many of the fraudulent transactions.

Mark and Barbara, both long-term employees, lost their agency jobs. Mark mortgaged his house to make restitution, and Barbara sold her house to make restitution. She avoided jail time to prevent the loss of a new job, but her husband sued her for divorce when her actions became public knowledge. The federal prosecutor abandoned further restitution for the remaining losses because neither employee had any additional resources. The prosecutor said, "You can't get blood from a turnip."

Mark and Barbara's supervisors failed to adequately review and match their employees' submitted time and attendance records and vicinity travel vouchers. Mark and Barbara submitted time and attendance records promptly at the end of each month so the agency could charge their activities to appropriate federal programs. However, they submitted their vicinity travel vouchers at least a week later. So, their supervisors did not compare the information presented on both records to determine if everything appeared to be reasonable and legitimate.

State agency employees commonly submit the two different sets of documents - travel vouchers, and time and attendance records - at different times. For example, the employees in the state agency I worked for submitted time and attendance records promptly so the agency could bill clients for audit services. However, they often submitted their travel vouchers at least a week later.

Managers who want to ensure all employee travel is legitimate must take time to review these records together. During this review, supervisors should ensure that all vicinity travel mileage is reasonable and reimbursed at the rate authorized in the organizations' policies and procedures manuals. Ideally, this rate should be the same as the allowed IRS mileage rate to eliminate tax problems for employees. Management also should look for any obvious irregularities, such as: a) employee travel claimed on days when the individual was absent from the workplace for sick or annual leave purposes, or b) employee travel claimed for out-of-town travel and to other destinations at the same time. In other words, an employee can't be in two places at once.

APPROVAL FOR TRAVEL CLAIMS FOR KEY MANAGERS

1. All reimbursements have been made at rates specified in organizations' policies and procedures manuals.
2. All expenses are reasonable and properly supported by receipts.
3. All expenditures are for legitimate business purposes, such as no personal trips, no travel expenses for family members and no first-class airline travel, which is typically prohibited.

However, some organizations still do not heed these important messages. And as with many other types of expense fraud, these schemes often succeed because of poor internal controls. When organizations do not require supporting documents for certain travel expenses, fraudsters simply lie about how much they paid for reimbursable expenses. Obviously, this condition makes it difficult for anyone (such as managers, auditors and prosecutors) to prove the validity of employee travel expense claims.

CASE NO. 3

LESSONS LEARNED

• Managers and fraud examiners must analyze the "footprints" of individuals' presences in the office when determining whether it is even possible for the employees to take and report vicinity travel.
• Supervisors should compare the information shown on employees' time and attendance records and travel vouchers at the same time to determine if everything appears to be reasonable and legitimate. Supervisors should know about the travel activities of subordinates and look for any obvious irregularities.
• Managers and fraud examiners, when analyzing travel vouchers submitted by key managers, should determine if they have signed their documents and if independent parties within the organization have reviewed and approved them.
• Organizations should include travel-expense reporting policies and procedures in their employee training programs.
• Auditors and fraud examiners should review the organizations' policies and procedures carefully because travel fraud schemes often succeed when poor internal controls exist.
• Employees and supervisors should review their official telephone charges before their organizations pay them. They also should safeguard the confidentiality of all telephone system access codes.  

TRAVEL FRAUD CAN BE ANYWHERE