Keys to the kingdom: Oilfield fraud

Jerry thought he had it made in the shade. As he began his company maintaining oil rigs and equipment, he'd found ways – the keys to the kingdom – to fraudulently bill his former employer as a contractor. He knew how to thoroughly exploit the system he'd helped devise. Learn lessons from this fictionalized version of an actual $2 million fraud case.

He didn’t take long to come up with the idea. As he put down the large Mason jar of sweet tea, Jerry scribbled down some additional notes in his company notebook, which he always kept by his side. He used it as some might use a thumb drive. It was a repository of his operational notes, passwords, musings and his business plans. Housed in this notebook was his dream to bring in more money than he ever thought possible.

While his dream was still a few months away from taking off, the reality was, Jerry needed cash today. He’d just paid for his eldest daughter’s wedding, his twin sons had just begun their sophomore year at college, and his youngest teenage daughter — who’d always had a sense of entitlement — was asking for a new car for her 16th birthday.

Jerry had also recently complained to several colleagues about the bills piling up, along with the 20 miles of his Texas ranch that needed new fencing. And his wife’s cosmetic surgery invoices were coming in fast and furious. The pressure for additional cash was heavy on his mind. These money woes took him away from the half-eaten chicken-fried steak and cold lump of mashed potatoes on the plate.

“No time to eat,” he said quietly as he scooted his chair back. He stood up, drained his tea, picked up the bill and left $20 on the counter as he quickly left the restaurant.

Speeding past the Pecos city-limit sign on his way back to his company field office, Jerry knew he had a long list of tasks to check off to get the new business off the ground.

A month later, he’d ticked off many of those to-dos and was well on his way to becoming the principal of his new venture, Diamond Machine Works. Never mind that he was still working for his employer, Desert Rose Petroleum. Never mind that Desert Rose’s conflict-of-interest policy prohibited employees from engaging in personal business ventures that could lead to divided loyalties. Had someone at Desert Rose been paying attention, they would’ve seen Jerry’s noncompliance with the policy. But no one seemed to notice or care. So, Jerry devoted himself to ensuring that Diamond would profit from Desert Rose’s lack of attention.

On a Friday afternoon, with a click of the mouse, his resignation letter hit his supervisor’s inbox. By the time his boss had read the electronic missive, Jerry had placed on each colleague’s desks his new Diamond business cards and a $100 Amazon gift card — a small token of his gratitude.

He also left each of them a handwritten note entreating them to consider his business when new projects became available. With or without the note, Jerry knew that his colleagues would most likely use his services.

“Why not?” he asked himself. “Everyone knows me, and I know that my rates will be lower than everyone else’s.”

He was also confident that Desert Rose would quickly add him to their approved vendor list without having to go through the time-consuming vendor-onboarding process. He reasoned that Mike, the Desert Rose employee who performed vendor due diligence, would give him the okay. Mike and Jerry had become good friends over the years. Jerry was correct; Mike approved Diamond in five minutes.

Jerry’s business model was very simple: provide general oilfield labor services, also known as roustabout services, to install and maintain equipment and other oilfield assets.

Jerry hired 10 men with broad ranges of experience. During their brief interviews, the prospective employees had said they wouldn’t mind working 12-hour days. In return, Jerry had promised to keep them busy five days a week with possible overtime hours on weekends and holidays. With a crew ready to work and a company issuing work orders, Diamond Machine Works was truly open for business.

Every evening, Jerry’s foreman, his “Pusher,” received work orders from Desert Rose. The next morning before the sun had a chance to peek over the desert plains, the crews would drive their company trucks to the “leases” (a term used by exploration and production companies to denote the leased property from local landowners) to complete their tasks. Workers took few breaks, and the last crews wouldn’t leave their jobsites until the sun dipped in the West. Work from Desert Rose was mostly consistent; it always had equipment on the aging leases that needed repair.

And, that’s how it went for the next three months. Regardless, Jerry’s income statement was in the red. He just wasn’t going to make his new company work if he stayed at the current rates and with his current business model.

Money pressures mount

On a Sunday afternoon, six months after he had left Desert Rose, he saw the handwriting on the wall. He’d have to make some tough decisions, which included letting some of his excellent performers go. Over the next couple of weeks, he’d hand out pink slips to half of his labor force. It hurt because he’d made some solid friends with his crew members. But the greater pain was the draining personal and company bank accounts.

For solace, and to stir the creative juices, Jerry returned to his notebook and began to jot down some questions: How can I bring in more to offset my debt? Can I offer more services without having to take out additional loans? How can I cut a few corners to squeeze out more margin?

If anyone had been watching his face as he finished writing down the last question, they would’ve seen his face relax. The proverbial lightbulb had turned on. Jerry saw some opportunities for committing fraud. He began to outline his mental checklist.

His first task was to text all the Desert Rose foremen: “Send me more jobs, I’m taking on more crews. Diamond is growing.☺” This text was the first lie but certainly not the last.

The next day, his Pusher’s phone was blowing up with texts, emails and calls from Desert Rose clamoring with new orders.

“I’ve got too many jobs,” the Pusher told Jerry. “I don’t have enough crews,” he said.

“Not a problem. Take on what you can, but send me all the details of the jobs you can’t do. I’ll sub it out.” Lie No. 2. Jerry had no intention of subbing out the work.

That evening, he invoiced Desert Rose for the work the Pusher’s crews had completed. The service hours were pretty much in line with what Desert Rose’s approvers expected, but Jerry knew that if he added a half hour here or maybe an hour there, it would still be allowed. He even brazenly invoiced Desert Rose for the work he couldn’t get to. He was very selective in what he chose to falsely invoice them for. He made sure it would be work that really could wait or could be considered simply busy work.

“Invoice 23654. Three hours and a two-man crew to spray the weeds and spread caliche around the well pad. That’s reasonable,” he said to himself.

The names on the invoice were fictitious. The work description was very much busy work. The total for Invoice 23654 was $360. He reasoned that this was an invoice that wouldn’t even get a second glance, and he was right.

In the previous year, Desert Rose’s accounting department had built in a new process that would automatically approve invoices below a $1,000 threshold. When Jerry worked for them, he thought it was a solid idea to free up foremen like him from some of the time-consuming process of invoice review. Now, he thought that the procedure was brilliant and would help further his scheme.

He smiled as he submitted the last invoice into Desert Rose’s online invoicing system and entered the total on his 10-key pad. All of today’s invoices totaled $15,750, a 45% increase from his previous largest daily amount. He could feel his tension drain away.

Stepping up the fraud with forged signatures

Over the next few weeks, he’d open the emails he’d received from Desert Rose’s online invoicing system and read that they’d been approved. One night after his family had gone to bed, he wondered if there was a way to bring in even more. First, he Googled the phrase “best way + forge + signature.” He scrolled down the search results page and opened the “WikiHow” page that piqued his interest. The instructions were fairly easy, and after a few tries, he had it. He pulled out the retirement card his former employees gave him and successfully forged many of their signatures.

The next day, bleary-eyed but humming along with massive amounts of caffeine, Jerry submitted a false invoice for $2,275. Because this invoice was over the automatic-approval amount, he had to include a forged signature of one of his former colleagues. Before he’d left Desert Rose, he’d forwarded several of his work emails to his home email. One of those contained a list of unique identification numbers for all the Desert Rose foremen.

Typically, employees don’t share this type of information among themselves, but Jerry and his former colleagues collected and distributed the list in case they had to approve each other’s invoices if someone were out sick or on vacation.

With the forged signatures and the unique identifiers, Desert Rose would process these invoices without much fuss or further review. The invoicing system raised some red flags, but the company didn’t have an official process to review or validate those flags, so the invoices were approved. Twelve hours later, Jerry received the automated email with “Invoice Approved” in the subject line.

“Genius, Jerry. This is too easy, especially when you have the keys to the kingdom,” he said to himself.

Pride before the fall

Two years later, on a chilly Saturday afternoon as he sipped his beer and watched his beloved Texas Tech Red Raiders play, he suddenly had this feeling come over him. The dream that he’d played out in his mind so many times years earlier had become a reality. His wallet wasn’t strained, his wife continued to seek out the latest beauty treatments and undergo new cosmetic surgeries, and the now 18-year-old daughter was a freshman in her posh condo, just a mile from where his Red Raiders were playing. Life was certainly good.

However, Jerry didn’t know that Desert Rose’s internal audit department had recently commenced several contractor audits. Audit wouldn’t have normally selected Diamond Machine Works because its annual expenditures didn’t meet the dollar-risk threshold. However, this year the audit department had begun to flag numbers of invoices and analyze keywords in invoices’ description fields. This latter area moved Diamond to the audit shortlist.

Desert Rose’s auditors had identified certain repetitive keywords that always appeared in the same order. For example, 25 invoices with service descriptions for the same group of leases for the same crew read, “Cleaned sight glasses, tightened valvs, and picked up trash.” The same three keywords in the same order with the same misspelled word “valve” had the auditors thinking there might be something more than just some contractor back-office issue.

The auditors’ hunch and keen data analysis paid off. When they made an unannounced visit to Diamond’s Pecos office, Jerry’s wife, Helen, quickly texted him “ASAP … come to office; auditors.” Less than 30 minutes later, Jerry was in the office. The auditors asked him to provide payroll and other employee records for the field employees. Jerry also downloaded and gave the auditors GPS data records for their trucks for the previous two years.

As the auditors inquired about Diamond’s operations, Jerry would frequently interject, “You know, you guys owe me for the last two months. I have a number of invoices that you haven’t paid yet.” His plea for money fell on deaf ears. It was true, he hadn’t been paid. But once the auditors identified numerous anomalies, Desert Rose’s controller had placed Diamond on “Payment Hold.”

Almost four years to the date of leaving Desert Rose, Jerry found himself dressed in a suit seated behind a long wooden table. The table hid his tapping feet and his sweaty hands. Resting his hands on the wool cloth, his fingers nervously strummed the material. The judge calmly read out the charges, which included multiple counts of identity theft, one count of wire fraud and one count of money laundering. Jerry’s attorney could proffer little. He reasoned that Jerry should serve three years. However, the judge ordered Jerry to serve 10 years and to pay back around $2 million in restitution. Desert Rose and the courts had taken away the keys and changed the locks. (See the case that this article is based on.)

Lessons for all of us:

• Provide ongoing conflict-of-interest and ethics training to ensure employees receive critical guidance on recognizing and handling conflicts.
• Ensure your new vendor due diligence policy addresses former employees who want to work as contractors for your organization.
• Perform periodic due diligence on current vendors to review vendor financial health.
• When your company has implemented automated-invoicing approval processes, perform periodic invoice reviews of random invoices to ensure reasonableness and validate that the controls are operating effectively.
• Develop a policy and process by which alerts from invoicing systems are investigated, reviewed and cleared.
• Perform a vendor audit risk assessment to identify potential audits. Ensure the risk assessment considers both financial and operational risks.
• Conduct ongoing vendor audits to ensure goods and services have been received and validate invoice amounts. 

Rick Roybal, CFE, is project manager at Martindale Consultants Inc. in Roanoke, Texas, and president of the Oil and Gas Vendor Roundtable. Contact him at rick@vendoraudit.org.