Detecting and investigating vendor fraud mvw

Detecting and Investigating
Vendor Fraud
Maribeth Vander Weele, President Vander Weele Group
© 2015 Vander Weele Group

Vander Weele Group Founded in 2003
by Maribeth Vander Weele, CPP, CIG
• Managed thousands of investigations in
private and public sectors.
• Former President of Illinois Association
of Inspectors General.
• Former Inspector General of Chicago
Public Schools. Oversaw Internal Audit,
Truancy and Security Functions.
• Authored book laying roadmap to 1995
reform of Chicago Public Schools.
Maribeth Vander Weele

1. Case Study
2. Cost of Vendor Fraud
3. Common Vendor Schemes
4. Characteristics of Fraudsters
5. The High-Risk Environment
6. Preventing Vendor Fraud
7. Detecting Vendor Fraud
8. Investigating Vendor Fraud
9. Case Study
10. Who We Are
Today’s Agenda

De’Tendre
Faucet:
Race to
Respectability
Case Study (fictionalized name and type of company)
• 25th Largest Bathroom
Supply Company
• Vendor to Major
Retailers
• Diversified Products,
Cutting-Edge
Technologies, Valuable
Patent

De’Tendre
Faucet:
Race to
Respectability
• Aggressive Expansion
o State-of-the-Art
325,000-Square-Foot
Facility Under
Construction
o Purchasing of New
Equipment
• Management Team from
Fortune 500 Companies

De’Tendre
Faucet:
Race to
Respectability
• Announced Entry into
New Markets
• Announced Multi-Media
Campaign
• High-Profile Charitable
Donations
• Political Gravitas

The
Troubled
Ending
• Company went bankrupt
with $800 million of
Liabilities
• Company Shut Down by FBI
• CEO and Officers Convicted
of Massive Fraud
• Two Sets of Books
• Lavish Lifestyles – Hidden
Assets
• Hundreds Lost Their Jobs

Toxic
Business
Relationships
• Customers Sued and
Were Sued
• Supply Chains were
Disrupted
• Vendors Lost Rightful
Payments
• Investors Lost Millions

The Cost of Vendor Fraud
 Criminal
Convictions
 Fines
 Damaged
Reputation
 Disrupted Supply
Chain
 Management
Changes
Alibaba.com CEO And COO Out Because Of Vendor Fraud
Alibaba.com CEO David Wei and COO Elvis Lee have resigned this morning after an
internal probe found that more than 2000 sellers on the e-commerce site were committing
fraud, in some cases to the knowledge of Alibaba staff. The Hanzhou, China-based Alibaba
told the WSJ that more than 100 sales staff (out of 5,000) were allowing fraudulent
suppliers to fake the business registration papers needed to set up shop on the site. In
some cases buyers never received items already paid for.
Vendor pleads guilty in Lifeline phone fraud case
A Mexican national pleaded guilty Friday for his role in a $27 million fraud case involving an
Oklahoma company and a federal phone subsidy program.
CPS employee accused of stealing $420,000 in fraud scheme
A Chicago high school technology coordinator created a list of nine fake vendors as part of
a fraudulent billing scheme that netted nearly $420,000, according to a report by the
Chicago Board of Education’s Inspector General’s office.
Computer Vendor at Center of Massive Fraud Scandal
In a deal with federal prosecutors last spring, Virginia-based SAIC paid $500 million to
authorities and admitted that it defrauded New York City on a computer contract that
exploded in cost from $73 million to nearly $700 million.
American Therapeutic Corporation Executives Sentenced To Jail In
$205 Million Fraud Scheme
Former executives of American Therapeutic Corporation (“ATC”) are going to jail for their
roles in a Medicare fraud and kickback scheme. Lydia Ward of Miami, a former program
ATC director, was recently sentenced in federal court to 99 months in prison and ordered to
pay up to $34.1 million in restitution. Hilario Morris, a former marketing executive and also a
Miami resident, was sentenced to 60 months in jail and ordered to pay up to $82.2 million in
restitution. Sandra Jimenez of Miami, another ATC marketing executive, received a 36
months prison sentence. She was ordered to pay up to $20.5 in restitution.

The typical organization loses
5 percent of its revenues to fraud
each year, according to the
Association of Certified Fraud
Examiners.

37 Percent of Schemes Studied Related to
Corruption:
• Conflicts of Interests e.g. Purchasing and
Sales Schemes
• Bribery – Invoice Kickbacks, Bid-Rigging
• Illegal Gratuities
• Economic Extortion

• Phantom Vendors and Falsified
Invoices
• Diversion of Inventory, Product, or
Equipment to the Black Market
• Conflicts of Interests
• Kickback Schemes
Common Vendor Schemes

• Identity Theft
• Insider Dealing Involving Real
Estate Leases
• Product Substitution
• Theft of Intellectual Property
• Insider-Initiated Hijackings
Common Vendor Schemes

• Lavish lifestyles, even when facing foreclosure
or bankruptcies.
• Live in the present. They don’t value slow
rewards or hard work. Nor do they consider
consequences.
• Initially play dumb when challenged and then
become outraged. They often make wrongful
accusations against critics.
• They take no responsibility for their actions.
Characteristics of Fraudsters

• Camouflage dark intentions with
flattery and gift-giving.
• May show signs of drug abuse.
• They believe they are smarter than
others – they buy their own lies.

Rationalization
• “I’ll pay back what I owe.”
• “I don’t get paid enough anyway.”
• “My family will leave me if I fall into
financial ruin.”
• “The company won’t lose any money.”

Motive
Significant Personal Debt or Expenses
• Gambling or Drug Habit
• A Lover
• High Medical Bills for a Family Member
• High Lifestyle
Need to feel successful but unwilling to work that
hard

Motive
Significant Business Pressures
• Need to demonstrate financial results.
• High degree of competition or market
saturation, accompanied by declining margins.
• Victim of rapid changes, such as collapsing
economy or changes in technology, product
obsolescence, or interest rates.

• Multi-million dollar contracts with vague
deliverables or insufficient supporting
documentation
• Purchasing procedures and processes in
disarray
• Excess inventory
• Inadequate vendor screening
• Lack of vendor audits
The High-Risk Environment

• Inadequate Segregation of Duties and
Authorizations/Approvals of Transactions
o e.g. Buyer can Change Inventory System or
Write Checks
o Finance Manager who writes checks conducts
reconciliations and opens the mail
• Poor processes to document transactions
such as credits for merchandise returns
• Inadequate controls over access controls

• Large amounts of cash on hand or processed.
• Inventory or supply items that are small in
size, of high value, or in high demand.
• Inadequate physical safeguards over cash,
investments, inventory, or fixed assets.
• Inadequate recordkeeping with respect to
assets.
• Lack of complete and timely reconciliations of
assets.

Lessons
from De’Tendre
#1
Follow
Intuition
Preventing Vendor Fraud
Our client was engaged in a
$220 million deal with
De’Tendre and began to get
nervous. It engaged us and
we returned with “red flags”
so serious that it terminated
the relationship.
Consequently, while others
lost hundreds of millions of
dollars, our client escaped
without losses.

Lessons
from De’Tendre
#2
Screen Vendors
through
Independent
Function
Ensure vendor screening
function is independent of
individuals incentivized to make
the deal work.
Our client wouldn’t have
become involved with the
company in the first place had
it not relied on an employee
star struck by the size of the
deal and the bonuses he would
gain from it.

Lessons
from De’Tendre
#3
Focus on
Operational
Red Flags
A standard vendor background
check examines litigation,
criminal history, bankruptcies,
judgments, liens and credit
reports. While these are
important, there were other
“red flags” in the De’Tendre
Faucet case that the
background screening
company was not hired to find.

Lessons
from De’Tendre
#3
Focus on
Operational
Red Flags
• Poor Company Infrastructure
• Litigation with Largest Customer
• Turnover in Management Team
• High-Volume of Online Customer
Complaints
• Notable Inconsistencies in Online
References
• Past Loan Default
• Stable – but then lowered - Credit
Agency Rating
• Low Credit Scores

Lessons
from De’Tendre
#4
Research the
Entire Family
Tree of
Companies
Fraudsters who open and
shut multiple companies
count on background
checks being performed
only on the most company.
In very significant deals,
make sure investigators
create a family tree of
companies.

Lessons
from De’Tendre
#5
Examine Third
Party Sources
In the case of De’Tendre,
the minority members of
the board engaged a law
firm and accounting firm to
look for fraud in the
organization, but the firms’
due diligence reportedly
turned up a dead end.
They may have examined
only what the fraudster
provided.

• Tone at the Top
• Adequate Segregation of Duties
• Rotate Buyers
• Strong Purchasing Procedures
• Well-Documented Vendor Invoices and
Payment Systems
• Search and Seizure Policies
• Strong Legal Contracts
Other Methods of Preventing Vendor Fraud

Tools of the Trade
• Tip Hotline
• Fraud Awareness Training
• Vendor Audits
• Data Analytics
Detecting Vendor Fraud

Data Analytics
Look for unusual
increases in vendors’
prices or rates in
conjunction with other
indicators of risk.

Look for large increases
in scrap, damaged
goods and/or reworked
product. Legitimate
product is often
disguised in one of
these categories and
diverted.

• Merge the employee and vendor
master files.
• Identify when an employee and a
vendor share the same address, cell
phone number, home phone number,
fax number, email address, or bank
account number. Test each data field
separately.
• Investigate anomalies.

• Identify instances in which a
reference or an emergency
contact for an employee is
also a vendor.
• Determine if employee
brought in the vendor and
whether vendor is receiving
increasingly more revenue
from your company.
Data
Analytics

• Identify instances in which the health or life
beneficiary of an employee is also a vendor.*
• For vendors with significant amounts of revenue,
investigate how and when the company became a
vendor and whether the employee was responsible
for bringing in the vendor.
• Ensure legitimacy of vendor.
* In compliance with HIPAA laws.
Data Analytics

• Identify companies being
paid that are not on the
approved vendor list.
• If number of unapproved
vendors is substantial and
routine, identify
unapproved vendors that
appear on other lists
requiring greater scrutiny.
Data
Analytics

Identify vendors with
nearly identical
names. Ensure funds
designated for one
have not been
diverted to the other
– a common ploy.
Data Analytics

• Identify all employees in the Accounts
Payable Department or characterized as
buyers and search Secretary of State
records to determine if they are principals
or registered agents of any company.
• Determine whether these companies are
vendors of your organization.
• Investigate to ensure no conflict exists.
Data Analytics

• Determine whether two or
more companies use the
same EIN / TIN number or
DUNS number. If so, verify
they are the same company.
• Look for unusual numbers of
adjustments to invoices after
they have been approved.
Data
Analytics

Identify contractors
with large numbers
of change orders.
Data Analytics

Look for rising usage of raw
materials not in line with
increases in finished goods.
Over time, the ratio of raw
materials to final product
should remain constant
unless legitimate production
errors create inordinate
amounts of scrap.
Data Analytics

Analyze raw materials
that have the greatest
percentage of increases
in unit prices and the
greatest increases in
volumes purchased.
Data Analytics

Case Study
Eddie, the Buyer (Fictional Name)
• Buyer for International
Manufacturer
• Purchased 5,000 steel parts a
year.
• Bought “bar stock,”
- raw material used in valves.
Investigating Vendor (and Buyer) Fraud

Case Study
Eddie, the Buyer
• Handled Millions of Dollars of Purchases.
• Disgruntled – Feeling Underpaid.
• Daughter in Bad Neighborhood.
• Found Opportunity for Kickbacks.
Investigating Vendor Fraud

Case Study
Eddie, the Buyer
• Terminated the previous suppliers
of bar stock.
• Awarded Richard the business.

Case Study
Richard, the Supplier
• Kicked back to Eddie the standard
10 per cent.
• Bought a boat and luxury items.
• Was addicted to cocaine.
• Underwent a divorce.
• Overspent and went bankrupt.

Case Study
John, Buyer of Richard’s Assets
• Found in boxes three canceled
checks
• from Richard to Eddie. Checks
were for
• small amounts of money.
• John notified CEO of the
International Manufacturer, Eddie’s
ultimate boss.

Case Study
• CEO authorized a full
investigation.
• Investigative steps included
data analysis.
• Our team obtained data on all
of Eddie’s purchases.

BAR STOCK HISTORICAL PRICES
Part # Vendor # 2004 2005 2006 2007 2008 2009 2010 2011 2012
R107000B02 A234 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40
R110000B02 A259 $4.44 $4.64 $5.33 $4.93 $4.94 $6.22 $5.78 $6.59 $5.70
R112000014 B001 $1.69 $1.64 $1.75 $1.69 $1.87 $2.17 $2.17 $2.22 $2.12
R105000000 B034 $0.47 $0.46 $0.49 $0.47 $0.52 $0.60 $0.60 $0.62 $0.59
R116000002 B035 $3.80 $3.69 $3.98 $3.79 $4.21 $4.87 $4.86 $4.99 $4.78
R112000015 B123 $1.94 $1.88 $2.02 $1.94 $2.15 $2.49 $2.48 $2.66 $2.44
R116000001 C163 $29.70 $28.84 $30.98 $29.64 $32.89 $38.91 $38.00 $38.90 $37.34
R124000U00 C234 $6.80 $6.60 $7.90 $6.79 $7.53 $8.72 $8.70 $8.93 $8.55
R120000002 C346 $4.95 $4.81 $5.16 $4.94 $5.48 $6.35 $6.33 $6.33 $6.22
R114000014 C834 $2.50 $2.43 $2.61 $2.49 $2.77 $3.20 $3.30 $3.38 $3.14
R112000B02 D234 $7.18 $7.51 $8.62 $7.97 $4.94 $10.05 $9.35 $10.66 $9.22
R121000001 D235 $5.58 $5.42 $5.82 $5.57 $6.18 $7.15 $7.14 $7.32 $7.03
R112000U02 K143 $1.94 $1.88 $2.02 $1.94 $2.15 $2.49 $2.49 $2.55 $2.44
R112000012 K234 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69
R113000U02 K234 $2.34 $2.27 $2.44 $2.34 $2.59 $3.00 $2.99 $3.07 $2.94
R116000U02 K932 $3.80 $3.69 $3.96 $3.79 $4.21 $4.87 $4.86 $4.86 $4.78
R116000U00 L011 $3.37 $3.27 $3.50 $3.36 $3.73 $4.32 $4.31 $4.42 $4.24
R113000U00 L043 $2.05 $1.99 $2.14 $2.05 $2.27 $2.63 $2.62 $2.69 $2.56
R120000U02 N123 $4.95 $4.81 $5.16 $4.09 $5.48 $6.35 $6.33 $6.50 $6.22
R121000U02 N323 $5.58 $5.42 $5.82 $5.57 $6.18 $7.15 $7.14 $7.32 $7.02
R110000003 N434 $1.25 $1.21 $1.30 $1.25 $1.38 $1.60 $1.60 $1.64 $1.57
R116000U03 U635 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37

BAR STOCK HISTORICAL PRICES
Part # Vendor # 2004 2005 2006 2007 2008 2009 2010 2011 2012
R107000B02 A234 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40 $3.40
R110000B02 A259 $4.44 $4.64 $5.33 $4.93 $4.94 $6.22 $5.78 $6.59 $5.70
R112000014 B001 $1.69 $1.64 $1.75 $1.69 $1.87 $2.17 $2.17 $2.22 $2.12
R105000000 B034 $0.47 $0.46 $0.49 $0.47 $0.52 $0.60 $0.60 $0.62 $0.59
R116000002 B035 $3.80 $3.69 $3.98 $3.79 $4.21 $4.87 $4.86 $4.99 $4.78
R112000015 B123 $1.94 $1.88 $2.02 $1.94 $2.15 $2.49 $2.48 $2.66 $2.44
R116000001 C163 $29.70 $28.84 $30.98 $29.64 $32.89 $38.91 $38.00 $38.90 $37.34
R124000U00 C234 $6.80 $6.60 $7.90 $6.79 $7.53 $8.72 $8.70 $8.93 $8.55
R120000002 C346 $4.95 $4.81 $5.16 $4.94 $5.48 $6.35 $6.33 $6.33 $6.22
R114000014 C834 $2.50 $2.43 $2.61 $2.49 $2.77 $3.20 $3.30 $3.38 $3.14
R112000B02 D234 $7.18 $7.51 $8.62 $7.97 $4.94 $10.05 $9.35 $10.66 $9.22
R121000001 D235 $5.58 $5.42 $5.82 $5.57 $6.18 $7.15 $7.14 $7.32 $7.03
R112000U02 K143 $1.94 $1.88 $2.02 $1.94 $2.15 $2.49 $2.49 $2.55 $2.44
R112000012 K234 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69 $1.69
R113000U02 K234 $2.34 $2.27 $2.44 $2.34 $2.59 $3.00 $2.99 $3.07 $2.94
R116000U02 K932 $3.80 $3.69 $3.96 $3.79 $4.21 $4.87 $4.86 $4.86 $4.78
R116000U00 L011 $3.37 $3.27 $3.50 $3.36 $3.73 $4.32 $4.31 $4.42 $4.24
R113000U00 L043 $2.05 $1.99 $2.14 $2.05 $2.27 $2.63 $2.62 $2.69 $2.56
R120000U02 N123 $4.95 $4.81 $5.16 $4.09 $5.48 $6.35 $6.33 $6.50 $6.22
R121000U02 N323 $5.58 $5.42 $5.82 $5.57 $6.18 $7.15 $7.14 $7.32 $7.02
R110000003 N434 $1.25 $1.21 $1.30 $1.25 $1.38 $1.60 $1.60 $1.64 $1.57
R116000U03 U635 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37 $3.37
$4.95 $4.81 $5.16 $4.94 $5.48 $6.35 $6.33 $6.50 $6.22

Case Study
• Approached interview as
operational audit.
• Mapped out procurement
and inventory processes.
• Established that Eddie
knew his job duties.

Case Study
Eddie said he knew he was
supposed to buy based on:
• Price
• Shipping Costs
• Supplier Reliability
• Supplier Capacity
• Site Visits to Supplier

Case Study
• Had evidence on only
Richard’s company.
• Obtained signed
confession on two more,
based exclusively on data
analysis.

Case Study
• Total kickbacks: $1.3 million.
• Recovered $924,000 the next
day.
• Recovered rest from
insurance company.

Case Study
• Why the steady pricing?
• Math on fluctuating prices
was too complex.
• Eddie didn’t want to do the
kickback math.

10
Investigative
Mistakes
1. Getting a confession but failing to
get it in writing.
2. Starting an interview with “Did you
Do It?”
3. Not understanding the complexities
of investigative law.
4. Using an employee’s Facebook
password to monitor what they are
saying.
5. Failing to implement a Search and
Seizure policy.

10
Investigative
Mistakes
6. Underestimating the potential for
an interview to turn violent.
7. Failing to search the work
computer when suspicions arise.
8. Failing to recognize the signs of
drug abuse.
9. Not understanding the Legal,
Regulatory and Policy
Requirements governing the
violation.
10. Underestimating the extent of the
misconduct.

A Word About Us – Our Services
Investigations
• Investigations of Vendor and Employee
Misconduct
o Procurement Schemes
o Embezzlement e.g. Payroll Fraud
o Price Fixing
o Supply Chain Schemes/Diversion of
Product
o Insider Dealing/Conflicts of Interest

A Word About Us – Our Services
• Data Analysis
o Improper Payments
o Identification of Fraud Indicators
o Pattern Analysis
• Forensic Accounting Services
• Program Evaluation/Operational Audits
• Compliance Monitoring

Thank-you for participating
If you have any questions, please feel free
to email them to:
Maribeth Vander Weele, President, Vander Weele Group
maribeth@vanderweelegroup.com
or
Joe Gerard, Vice President Marketing and Sales
j.gerard@i-sight.com
© 2015 Vander Weele Group
Illinois License numbers: 117.001231, 118.000306

Detecting and investigating vendor fraud mvw

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