Category Archives: Fraud

Societal Damnation 40: Crime / Piracy

These damnations have been around longer than supply chains, and they aren’t going away any time soon. THe only difference is that today the types of crime an organization is exposed to today are much more varied than the crimes an organization was exposed to in the past. For example, terrorist attacks, identity theft, and cybercrime were not something the average large organization had to deal with on a regular basis, if at all.

But now, terrorist organizations, many of which are composed of individuals who are ex-military or trained by military and/or government agencies, are becoming common in many countries where there is significant civil unrest or animosity towards a people or government. And these terrorist organizations often target large shipments of goods that they need to sustain their efforts near the territories that they are based in — and this is not just restricted to weapons but also includes fuel, food, clothing, and personal electronic devices. It’s not just common thieves and criminal groups plotting to steal a few boxes or empty an 18-wheeler when the driver takes a lunch break — it’s a terrorist organization planning to steal an entire convoy of 18-wheelers (because they want the trucks too).

It used to be that identify theft was when one person impersonated another to fool an unsuspecting individual at a company or bank to gain access to funds or products, and this could easily be protected against by good security measures, passwords, and biometrics, but now we have the situation where the identify of entire companies is being stolen. This has become especially prevalent in the US since the introduction of MAP-21 (which SI likes to call RIP-21) which resulted in thousands of small transport companies going out of business when the minimum bond was increased from 10,000 to 75,000. Shortly after this happened, some very enterprising individuals decided to setup fake companies that pretended to be the company that was out of business. They faked registration documents, insurance certificates and bonds, and personnel records, presented themselves to 3PLs that the company previously worked with (stating that they managed to raise the bond money and were back in business), and even presented themselves to large manufacturers and retailers the company used to do business with. When contracts were awarded, they acquired trucks, hired drivers, and made deliveries. Some of them even operated just like a legitimate company for months until they were trusted with a multi-million dollar shipment of products that would fetch a similar sum on the black market — then they vanished overnight with millions of dollars of products. (See SI’s post on how increased cargo theft is the next impact of MAP-21.

And cybercrime has hit entirely new levels. It used to be that the best a hacker could do was steal a bank account number and password, do an ACH transfer, and make off with the operating account. But now, hackers can infiltrate your networks and make off with all of your bank account numbers and passwords, hack other networks and replace the corporate director and officer records, falsely represent themselves as your company to banks and lenders (by stealing the identities of your corporate officers and then hacking your virtual private networks and spoofing your IP addresses to access your bank accounts in what appears to be a legitimate access by the bank), take out massive loans and not only make off with every dollar in every account you have, but leave your company on the hook for millions more. And that’s if the hackers are being nice. Plus, while the hackers are at it, they hack your merchant terminals, steal all of your customer’s credit card information, sell it on the black market, and leave you with a massive media black eye that puts your brand reputation in the toilet.

If you thought the Fraud and Corruption (as chronicled in Damnation 41) was bad, just wait until you have to deal with the new terrorists, identify fraudsters, and cyber-criminals. And if you survive this first wave, then you get to deal with the Somali pirates! (And they are a whole lot meaner than the Saskatchewan pirates.)

Societal Damnation 41: Fraud and Corruption

Fraud and Corruption is everywhere and running havoc on your organization and your supply chain. A recent Kroll Global Fraud Report in late 2013 found that 70% of companies were affected by fraud in the prior 12 months, which represented an increase of 15% over the previous twelve months. In other words, at the time, 7 in 10 companies were hit by fraud in the previous year. But it gets worse. The Economist at the same time also found that fraud was on the rise and predicted that it would continue to rise. If the rate of increase remained steady, then 4 of 5 businesses got hit with fraud last year and 9 out of 10 business will get hit with fraud this year. Yowzers!

Moreover, Procurement Fraud can be particularly costly and damaging, in both the public and private sectors. For example, a recent article over on Supply Management on how “Councils [were] told to do more to tackle Procurement Found” found that there were 107,000 cases of Procurement fraud detected by local authorities in 2012-2013 that combined accounted for £s; 178 million! And this is just a drop in the bucket when compared to the total amount lost by the UK public sector to fraudulent purchasing on an annual basis, an amount that was estimated at £s;2,300 million in 2012! Zoinks!

It’s harder to find good numbers for the US, but a 2011 report by Computer Evidence Specialists found that Fraud cost the US $1.32 Trillion in 2010, of which 733 Billion was Corporate (with 68% committed by corporations and 32% committed by employees). This number might sound surprising but when you consider that between 2000 and 2007 a small South Carolina parts supplier collected about 20.5 Million from the Pentagon between 2000 and 2006 in fraudulent shipping charges, including $998,798 for sending two 19-cent washers to an Army base in Texas, it puts things in a different light. (Source M4Carbine.net archives.) Hamana, hamana!

If your organization is not on full alert 24/7, it is going to get hit with fraud from somewhere in the organization or the supply chain. It’s just a matter of time before an attempt is made. This fraud can take many forms, which can include, but are not limited to:

  • invoices from non-existent suppliers
    usually submitted by an employee for services (not received) or goods of questionable origin to try and defraud the company of money (or by a random third party trying to hope a small invoice slips through unnoticed)
  • invoices from suppliers for off-contract goods and services
    usually for smaller dollar amounts for services “to be received” or for goods that are priced above standard list price for “emergency provision and delivery” where a supplier is trying to eek out more revenue or an employee is colluding to get a kickback
  • bait-and-switch
    where the supplier promises you the newest high-end laptop with the top-of-the-line processor and memory chips, but you actually get last year’s model which has depreciated 30% less (because, not being an IT shop, the supplier thinks you won’t know the difference) or charges you for Grade 5 Bolts when in fact they are only Grade 2 Bolts (and which you intend to use in commercial busses used to transport passengers, giving you a legal liability as well as a case of fraud)
  • inflated T&E claims
    where meetings across town are 50 miles instead of 10, all meals are $1 below the per diem limits, significant “entertainment” charges (especially on the first and last day where the employee or manager was actually entertaining friends and relatives), etc. (or, and this happened, the same receipt is accidentally submitted on consecutive expense reports)
  • inflated performance claims
    where a buyer “negotiates” a year-end rebate in exchange for guaranteed volume at unnecessarily higher prices next year so that he can exceed his savings target and get a bigger bonus
  • “lost” / “damaged” stock
    that is “walked” off the truck by an employee during a pre-lot entry inspection or, if the merchandise is un-returnable / too costly to return, declared damaged and purchased at pennies at the dollars by an employee who will resell the undamaged products on his own

In other words, fraud can happen anywhere, and at any time, and if a Procurement organization is not vigilant, it will happen to them. Fortunately, steps can be taken to reduce the chances of most of these frauds. Having a policy that invoices will only be accepted from approved suppliers, that all invoices from approved suppliers for non-contracted goods and services and/or for goods and services at non-contracted rates will prevent most external fraud from slipping through the system. (Collusion can still bypass the best of controls, but, unless the system is hacked, you know exactly who perpetrated the fraud in this instance.) Having T&E limits without budget manager approval, automatic zip-code based mileage checks, and fixed per-diems (while more costly) can weed out a lot of T&E fraud. Careful inspections and a two-step process can minimize the chances of a bait-and-switch and good stock being written off. And waiting a quarter to verify the numbers then and now before issuing a bonus will discourage many employees from trying to inflate their savings (or sales) claims.

However, no system is perfect and a lot of process transformation, and diligence, will be required to minimize the risk of fraud and corruption and limits its impact if it does happen. For Procurement, it’s another damned if you do (as the effort takes time and resources away from good category management that is often the largest source of value generation) and damned if you don’t (as the losses from a single fraud could wipe out most of the captured savings).

If Software Has to Embed Games To Make You Want To Use It …

Then the software isn’t worth using in the first place!

When Pierre mentioned a YouTube video of a “first-person shooter” (FPS) game for SAP PO (Purchase Order) approvers to blow away those pesky POs in his recent piece on Gamification in Procurement [Looking Beyond the Technology] (Plus content on Spend Matters), I thought he was being satirical! But he was being factual. And it’s pathetic that this concept exists.

While I agree that gamification has potential as a learning tool, the fact that you have to consider putting games inside your software to get people to use it says, no, screams something — YOUR SOFTWARE SUCKS and no one should be using it in the first place when there are dozens of other options.

In other words, when Pierre said that this is where gamification really runs the risk of going off the rails and resembling the proverbial hammer looking for the nail I not only have to agree, but take it one step further and emphatically state that this is where gamification goes completely off the rails.

Supply Management technology should help you get your job done efficiently and effectively. If it’s done right, and accomplishes this goal, you will want to use it because you’re overworked, underpaid, and will do whatever it takes to get the job done and get home before it’s time to go to bed and start the cycle all over again. Because, while you like games, you’d rather go home and play a tabletop Euro-game with your family where you not only get to challenge your problem solving skills and teach the next generation the basics of supply and demand and resource management, but actually enjoy some time with your family.

So, while Pierre is right in that games, properly applied, can be powerful learning tools (and why SI ran a whole series on the Board Gamer’s Guide to Supply Management), they are educational and modelling tools that need to be used appropriately — not misused to mask crappy software. So, when it comes to games, apply the theory (and, yes, game theory is great), and leave the FPS to the war-gamers.

Are Money Launderers Putting Your Trade At Risk?

According to a recent article in the Economist, Trade is the Weakest Link in the Fight Against Dirty Money. And, as a result, your supply chain is threatened. But let’s back up a bit. The article starts off by noting that:

Cuddly toys don’t have to be stuffed with cocaine or cash to be useful to traffickers. A few years ago American customs investigations uncovered a scheme in which a Colombian cartel used proceeds from drug sales to buy stuff animals in Las Angeles. By exporting them to Colombia, it was able to bring its ill-gotten gains home, convert them to pesos and get them into the banking system.

But this is not the only way cartels are abusing trade. For example, we also have mis-invoicing, and the example of:

A front company for a Mexican cartel might sell $1m-worth of oranges to an American importer, while creating paperwork for $3m-worth, giving it cover to send a dirty $2m back home. One group of launderers was reportedly caught exporting plastic buckets that cost $970 each from the Czech Republic to America.

And now, to make matters worse, as chronicled in Drug Cartels are ruining Cinco de Mayo, in addition to using trade to launder dirty money, when they don’t get their way, drug cartels are using violence to take control of high-value shipments, bolstering their ability to not only launder money across borders but control entire commodity markets in a country, which means they make large profits off of their money laundering activities.

So, you have:

  1. Old-Fashioned Laundering where money is converted to products, shipped, sold and converted back to money
  2. Mis-Invoicing Laundering where money is converted to products, bought low, and sold high
  3. Market-Manipulation Laundering where cartels force products high on the market through demand manipulation so they can buy high, sell slightly higher, and not attract attention because the products are being bought and sold near market price

And each threatens your supply chain.

With old-fashioned laundering, a trading partner could be buying and selling your product to launder money, putting your company at risk of being identified as an accomplice to money laundering.

With mis-invoice laundering, your company is part of the money laundering scheme, which means someone in your company is part of the money laundering scheme, and this could bankrupt your company if the DoJ swoops in and shuts your company down while the mess is sorted out.

With market-manipulation laundering, if you are a buyer or a seller of the product being manipulated, you are affected as your costs can quickly skyrocket and your product lines will be at risk if your competition senses the situation and scoops up available inventory before you do.

Unfortunately, there’s not much you can do on your own except maintain vigilance and make sure that your supply chain is not involved. You do this by way of regular auditors from independent third parties who report not to the people doing the trading and keeping the books, but the CEO and CFO who could be criminally on the hook if the money laundering schemes of terrorist organization are aided and abetted by the company.

Price Fixing is on the Rise. Only the US Can Stop It!

But will it?

As per these recent articles in the Economist on Cartels: Just One More Fix and Boring Can Still be Bad, competition authorities have uncovered several whopping conspiracies in recent years, including one in which more than 20 airlines worldwide had fixed prices on approximately $20 Billion of freight shipments. (In 2010, the European Commission fined 11 Air Cargo Airlines €800 Million for operating a worldwide cartel which affected cargo services within the European Economic area – namely Air Canada, Air France-KLM, British Airways, Cathay Pacific, Cargolux, Japan Airlines, LAN Chile, Martinair, SAS, Singapore Airlines and Qantas.)

In addition, investigators are still unravelling a huge network of cartels among suppliers of a wide range of car parts, including seat belts, radiators, and foam seat-stuffing. And the European Commission recently fined five marks of automative bearings $1.32 Billion and raided a number of manufacturers of car exhaust systems. On the other side of the Atlantic, Brazilian prosecutors have charged executives from a dozen foreign train-makers accused of rigging bids for rail and subway contracts in the country’s main cities.

This is despite the fact that enforcement has gotten tougher, smarter, and more coordinated, the fact that firms can expect staggering fines, and bosses can go to jail … unless they are in the United States. As the latter article states American courts, only too ready to lock up other types of miscreants for a long time, have rarely jailed egregious price-fixers for anything like the maximum of ten years that the law allows. But what do you expect from a country that won’t even jail executives who got caught knowingly laundering Billions for Mexican Narco-Terror Cartels? As per this recent article on BoingBoing, on HSBC Settlement Approved, there were no criminal charges, only 5 weeks’ profit in fines, and deferred bonuses for laundering Billions for Narco-Terrorists. That’s right, they still got their bonuses! (But whatever you do, don’t feed the birds, since you go to jail for feeding birds. [Source: myfoxtampabay.com “sebring woman headed back to jail for leaving bread out for crows”)

Until significant mandatory jail sentences are enforced for all executives involved in price-fixing, given the still-low risk of detection, collusion pays. After all, best case is you succeed undetected and make a few Billion. Worst case is you get caught, pay some of your ill-gotten gains in fines, and go back to business.

And stiffer fines aren’t the answer — if fines inflict so much damage on guilty companies, they will undermine competition as new entrants will be afraid to enter the market in fear that their efforts to keep costs in line with the competition will be seen as price fixing that could net them fines that would put them in bankruptcy.

The only answer is stiff prison sentences against executives, and the only major country that is unwilling to pursue them is the country that controls 25% of the global GDP – the US. So while you can do a lot to detect price-fixing and, if possible, avoid it by way of big data, statistical tests, market research, and collaboration with authorities – until the US DoJ and Courts step up and do the right thing, price fixing will likely remain a major problem.