A Look At the New Jersey Fraud Scandal

Editor’s Note: This post is from regular contributor Norman Katz, Sourcing Innovation’s resident expert on supply chain fraud and supply chain risk. Catch up on his column in the archive.

Late July 2009: A 2-year FBI investigation results in FBI and IRS agents arresting five rabbis, three New Jersey mayors and two state legislators. All that was missing was the partridge in a pear tree.

The alleged frauds included human organ trafficking, money-laundering and political payoffs for favors. The perpetrators were caught when authorities exposed criminal activity through the different criminal enterprises. Monies and goods exchanged hands through business transactions involving domestic and international participants.

The perpetration of these frauds involved lots of people and likely relied on lots of trust. It is only through trusted relationships — honor among thieves — that organized crime can really be successful. Built on an otherwise shaky foundation when one support falls, when one person’s activities are compromised, the entire organizational structure’s stability is compromised to one degree or another.

A simpler analogy may be to say that the more pipes the easier to gum up the plumbing or to picture what happens to a house of cards (or dominos, etc.) when a supporting piece is removed.

When fraud is exposed, trusted relationships are often cast aside and knowledge leveraged to reduce penalties on individual players who would (gladly) sacrifice other participants to spare themselves harsh punishment. Any operational screw-up that resulted in exposure revealing the frauds could cause a domino effect that would ripple through the organization’s infrastructure and could bring down the entire enterprise.

Global supply chains contain many links and thus must rely on trusted relationships. The perpetration of a fraud in one supply chain link may manifest itself differently as it travels down the chain. The ripple effects of such a fraud may be felt at each chain link in terms of disruptions, problems and the need to take corrective actions. The notorious product recalls of the last few years were the result of failed trusted relationships.

What causes trusted relationships to fail? Certainly slip-ups that expose fraudulent behavior are one reason. Another reason is pure and simple greed and this is likely more indicative of trusted relationship failures in supply chains.

Controls must exist to provide parameters within which supply chain relationships function. On the purchase order item identifiers, prices and quantities are the controls which define how much of what is being purchased. The same applies for information on invoices as to what is to be paid. Controls also exist within business software applications like Enterprise Resource Planning systems, whether to limit transaction amounts or restrict functional use based on job role.

Monitoring of the controls provides oversight to ensure the controls are applicable and being followed. Even in criminal enterprises the business of business changes and controls that may have once worked may be rendered less effective or totally ineffective in the new business model.

Overall it’s still the people that matter. Gaps in controls will (only) be exposed by untrustworthy people who place their own greed and desires ahead of those of the enterprise which serves all and including customers, suppliers and employees alike.

Trust in enterprises starts at the top with senior management and flows down through the ranks. The enterprise that has the fortitude to value integrity above all else is certainly representative of one that can be trusted to do what’s right in all situations, and that’s the kind of enterprise you should look to conduct business with whether domestically or internationally.

Norman Katz, Katzscan

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