Category Archives: Fraud

A Great Piece on the Real Drivers of Corruption in India over at K@W

Knowledge @ Wharton recently published a piece on the Real Drivers of Corruption in India and the Rest of the World that is a great read and great food for thought. Corruption is definitely one of the most important and topical issues in India today, and while we might like to think that the Zero Rupee Note would fix the problem, that’s just another one of Mario’s pipe dreams.

But the real insight into the article is that there is no innate difference, just differences of scale between business ethics in America and India. The differences that exist, which can be generally attributed to differences in the development, institutionalization, and capital generation stages of the two countries, are relatively minor and there are significant similarities between business in India today and business in America during the “robber barrons” age (from 1890 to 1934).

And while India has a common practice of using the politico-business nexus of “getting policies fixed, obtaining clearances, and resolving irregularities”, America lobbying, and, more recently, Super PACs (Political Action Committees), which often pour money into the pockets of potential senators and congresspeople than bribery in India ever could. After all, almost all major businesses understand the need to engage lobbyists. That is the price they pay for access to the U.S. Congress to fix policy, obtain legislative clearances, and influence political decision making. When you get right down to it, lobbying is just civilized, legalized, bribery.

However, since India doesn’t have a semi-structured “lobbying” process, the absence of institutional safeguards ensures that the process of influence peddling is a free-for-all. The authors argue that this is why the level of corruption in India is much larger than in America, but if you take a step back, there is nothing innately or structurally different between the American and Indian processes. In both countries, companies give money to people and groups they believe can help advance their cause.

However, the situation in India is now similar to the situation in America a century ago because of the recent waves of foreign capital flooding into India and the creation of a new class of billionaires — overnight — with the granting of spectrum licenses that allowed a select few to offer spectrum (mobile) based telecommunications services to a country with over a Billion people. As a result, the politicians, who made the awardees rich with the license grants, created a render unto Caesar what is Caesar’s type of demand, which was met because of the flood of money these Billionaires had at their disposal. But the truth is that, relatively speaking, the level of corruption in India is not much more than in America, the difference is that India is still in the “Wild West” phase of economic develop, and America has civilized the process of bribing through lobbyist intermediaries who, because they don’t make the Congressional vote, can’t guarantee results — but considering that the reality is that lobbyists who don’t get results don’t keep their jobs …

820K for a Las Vegas Conference? Amateurs! Just Ask The UK Public Sector.

I’ve been watching the headlines on Spend Matters and Spend Matters UK the last few weeks where they have been harping on the 820K GSA Conference in Las Vegas (and the fact that the GSA cited their maximum budget in advance with no intention of negotiating lower rates) and the lack of spending ethics in an organization charged with helping the Government save money. While this is an example of “excessive and wasteful” Procurement practice that is likely in violation of the policies of just about any Public Sector agency, it’s more of a personnel issue (with a few bad apples who like to misuse funds) than a Procurement issue.

This story, which broke in early, should be dwarfed by a much more important story that broke around the same time, that dealt with an amount 2,800 times as large. And that is, as first reported on SupplyManagement.com (to the best of the doctor‘s knowledge), the result of the 2012 Annual Fraud Indicator, as published by the National Fraud Authority.

According to the report, Procurement fraud, which made up the largest portion of the total loss, cost central government £1.4 Billion and local government £890 Million as a result of false and ‘double invoicing’, price fixing, altering payment details, and giving kickbacks to determine contract awards. Note that the first and last instances of fraud can only occur when someone on the Procurement team is taking part in the fraud. (And don’t tell me the buyer didn’t double invoice. While true, if he didn’t catch it, he’s guilty. It doesn’t take much work to check an invoice, and if you acquire a good P2P system, invoices are checked automatically against invoices in the system, rejected if obviously duplicate [same invoice #, etc.] and flagged if potentially duplicate [similar details, amounts, etc.].) If a large number of false or double-invoices slip through, then someone on the team is letting them. (Unless they are really, really stupid. But, hopefully, by now such people would have been eliminated from such a significant role given the focus on Procurement in the last decade.)

Think about that for a moment. £2.3 Billion or $3.7 Billion U.S. That’s an amount greater than the economy of at least 30 countries (Tuvalu, Kiribati, Sao Tome, Tonga, Dominica, Comoros, Samoa, Saint Vincent, Saint Kitts and Nevis, Vanuatu, Grenada, Solomon Islands, Guinea-Bissau, Gambia, Seychelles, Liberia, Antigua and Barbuda, Saint Lucia, Djibouti, Belize, Bhutan, Cape Verde, Maldives, Central African Republic, Sierra Leone, Burundi, Lesotho, Guyana, Eritrea, Fiji, Togo, and Suriname)! Gone. In the crapper. Down the drain. From fraud! So, Martha Johnson may have had her fun, while single-handedly propping up the economy of Las Vegas for a few days while doing so, but this wasteful spending (on real goods and services, though very heavily inflated in cost) was only a drop in the bucket compared to the money lost in public sector fraud every year.

The message — if you are a public sector organization, get an audit and do something about the fraud. If you don’t know where to start, get help. There are consultancies that specialize in this. Katzscan is one example.

Avoiding the 88 Million Dollar Fine

In our last post, we pointed out how the likelihood of a multi-million dollar fine, which could range from the $3.1 Million recently paid by Maersk to the $88.3 Million recently paid by JP Morgan, is increasing almost daily for an average mid-size multi-national that is importing and exporting regularly as more sanctions, specially designated nationals (SDN), and denied parties are being added to the OFAC (Office of Foreign Asset Control) and BIS (Bureau of Industry and Security) lists.

The problem is that with dozens of major country sanctions in the Federal Register; hundreds of individual sanctions against countries for specified commodities, services, or financial transactions; and thousands of names on the SDN, denied persons, and denied entities list, it is impossible to keep on track of the situation manually — even if you have a team of clerks and lawyers reading around the clock. You need an automated solution. But not any solution will do.

Why? You can’t just do a(n) exact name match. First of all, the individual doing data entry could make a typo — and all of a sudden instead of AIR CESS HOLDINGS LTD, it’s AIR CHESS HOLDINGS LTD, and you’re shipping to a denied national in the UAE. Oops! Secondly, the individual placing the order could slightly alter his or her (company) name so that the local delivery person still knows the shipment is for him or her (since no illiterate American is going to spell Abdelwadoud Abou Mossaab correctly and Abdelwadod Abou Mosab is the best you can hope for) but so that it doesn’t match on a name search. You also have to check for close (mis)spellings.

But this isn’t enough. If the spelling is off enough, it will still be missed. You also have to check by address. If the address is an exact match and the name could be a match, then it’s probably a denied party. But even address isn’t enough. A smart denied party that is a corporate entity will just open a new PO Box and abbreviate their name enough so that a simple match algorithm will fail. However, you could argue that you can combat this with a greater than 80% success rate with some good AI and AR (automated reasoning) and then argue that if you do screw up once, you could have the fine minimized by working with the OFAC and/or BIS and demonstrating due diligence, but even this is not enough.

First of all, if the company knows it is on a denied party list and wants to get product from the US bad enough, and it is a “holding company”, or has a parent “holding company”, the first thing it’s going to do if it’s smart is open a new subsidiary or sister company at a new address with a new Director and then approach a new mid-sized supplier who will be thrilled at the opportunity to get new business and who will likely cease checking once there are no partial matches on the sanctions or denied parties lists. And then the minute the Federal Government marks the company as associated with denied (terrorist) entity, you pop up as supplying contraband and, to be blunt, you’re in boiling water.

Secondly, it might not be you that violates the sanction, but one of your first tier suppliers who violates it on your behalf, which, depending on what sanction is violated, could be just as bad. For example, your logistics carrier could decide to load perfectly fine Cargo destined to sanction-free Egypt (at least where your cargo is concerned), which is ok, but then stop at a Canadian port to pick up cargo for Saudi Arabia, and then, before it drops your cargo off in Egypt, stops at a Saudi port where your cargo is contraband under export requirements. Then, because of bad record keeping, it can’t prove that none of your cargo was off-loaded in Saudi Arabia, and that all of the cargo made it to Egypt, and, again, you are in hot water.

In other words, a first generation Trade Data Management Solution that automatically scans the sanctions and denied party lists is not enough. It also has to keep track of corporate relationships and verify that the company isn’t a shell or entity acting on behalf of a denied company or entity, and that it’s suppliers and services providers are not violating import and export restrictions on its behalf.

I’ve seen solutions that do a great job of applying AI and advanced analysis to detect denied parties on the lists that would not be spotted manually, and I’ve seen solutions that do a great job of providing visibility into first, and even second tier, supply chain in terms of what product is where, when, and where it’s going to go — but I haven’t seen a solution that does both superbly. To be honest, it’s been over a year since I have seen the best companies like Integration Point, TradeCard, CDC Tradebeam, QuestaWeb, and EcoVadis have to offer with respect to denied party / sanction screening, so I am issuing a challenge to all Global Trade Management (GTM) and SCV (Supply Chain Visibility) Providers. Show me a solution that can prevent OFAC and BIS violations and fines 100% when used properly, and I’ll give you a 3-part series.

Will Your Supply Chain Avoid the 88 Million Dollar Fine?

Last year, JP Morgan had to pay $88.3 Million in fines for breaking U.S. embargo laws and trade sanctions, including Global Terrorism Sanctions Regulations and Weapons of Mass Destruction Proliferators Sanctions, in three incidents between 2005 and 2011 that involved Cuba, Iran and Sudan, as reported on AllGov. That’s a huge penalty that resulted from simply making loans and wire transfers. And in 2010, Maersk had to pay a $3.1 Million fine for using ships registered in the U.S. to carry commercial cargo to Sudan and Iran between January 2003 and October 2007. Another huge penalty for carrying goods that had never touched the US.

The issue at hand is trade sanctions and all of the pitfalls associated with them if you are US based, importing into, or exporting out of the US. As pointed out in this recent World Trade article on “avoiding the pitfalls of trade sanctions”, a company has to deal with:

  • (broad) country sanctions,
  • import or export specific country sanctions, and
  • Specially Designated National (SDN) sanctions against
    front companies, non-state entities, or individuals

maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury and:

  • denied persons list and
  • entity list

maintained by the Bureau of Industry and Security of the U.S. Department of Commerce.

There are dozens of country sanctions, hundreds of import/export (commodity) specific sanctions (and more could be on the way, including, of all places, a new sanction against the UK which could appear as early as 2013 as a result of allegations that they gave Airbus illegal subsidies (as per this recent Daily Mail article). And then there are thousands of denied persons and entities and this list also changes regularly.

So, what can you do? You can start by monitoring the sanction programs on the Treasury web site, country information, and the SDN list.

Then you can monitor the denied persons list and the denied entities list on the Bureau of Industry and Security site, which summarizes a multitude of export administration regulations. But considering that these are only summaries, and the full details can only be found in the Federal Register on the Department of State web site, including the pages on non-proliferation sanctions and chemical and biological weapons sanction laws as well as the pages of the counter narcotics group, you would also need to monitor the pages of the office of terrorism finance and economic sanctions policy, and the energy, sanctions, and commodities group of the bureau of economic and business affairs.

But that’s a lot of work … and it may not be enough! So what’s next?

Are You Ready for the New 1099 Tax Laws?

As of January 1, 2012, as per reporting requirements set forth by the Patient Protection & Affordable Care Act that passed in March 2010, which provides an Amendment to Section 6041 of the Internal Revenue Code, 1099-MISC reporting will now be required for all payees that receive payments that total $600 or more in a calendar year.

No longer will service providers that were incorporated be exempted, and no longer will companies that provide you with physical goods be exempted. A 1099-MISC must be filed for any payee that receives more than $600 worth of payments in a single calendar year.

For many organizations, this will increase the 1099 filing requirement from about 10% of the supply base to 90% of the supply base, a nine-fold increase in 1099-MISC reporting!

Furthermore, the IRS intends to make sure that everyone complies through the establishment of 16,000 new auditor positions. Right now, the Joint Committee on Taxation is estimated this is going to result in 17 Billion in additional revenues from 2012 to 2019 (which will likely cover the cost of the auditors 3 times over). And this amount does not include the revenue from fines that will be collected from each company not in compliance, which are increasing to $250 for each supplier that is not properly reported (from a current fine amount of $50), to a maximum liability of $1,500,000 in a calendar year (from the current liability of 250,000).

Right now, chances are that your organization doesn’t even have a TIN for most of the suppliers that need to be reported under the new legislation. So what do you do?

As per a recent white paper from Lavante that describes the impending challenge that your organization is about to face as well as a series of steps to become compliant, you could start with good Supplier Information Management (SIM). Not only will this solve your immediate 1099 reporting requirements (when integrated with your ERP / Accounting System), but it will enable a slew of other benefits (as described in previous posts here on Sourcing Innovation).

Lavante is the first to offer a SIM solution that will solve this challenge, which will be the subject of our next post.