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Six tips for spotting corporate fraud

31st Aug 2010
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Criminal lawyer and fraud investigation expert Martin Cunningham offers advice for employers on how to spot possible dishonesty in the workplace.

Many smaller businesses are being ‘milked’ by unscrupulous employees without a hint of wrongdoing coming to light. It pays to take a closer look - even at people you think you can trust - from time to time. Below are a few signs to watch out for.

Check on early risers
If one of your staff invariably arrives earlier than anyone else (with the exception, perhaps, of the cleaners) it’s a good idea to ask yourself why they should be so dedicated and keen.

Could it be that they need to be first to reach the postbag? Fraudsters can escape discovery for six months or longer after ordering supplies or making purchases - like car hire, hotels, meals, electrical goods, office and computer equipment - charged to the company’s account. You won’t know, as long as the crook intercepts the invoices, reminders and threatening letters in the post. The unpaid bills could have passed through the courts before you know anything is amiss. The fraudster may even prolong matters further by intercepting court communications, too. In a matter of months they could run up debts in tens of thousands and blacken you company’s reputation.

Answer: Change the incoming post routine from time to time or arrange to collect your post direct from local Royal Mail office periodically. Always separate the habitual ‘early risers’ from the postbag.

Short holidays
Most people like to take a couple of long breaks a year, holiday allowance permitting. If a seemingly over-conscientious administrative employee insists on taking lots of short breaks of two or three days scattered through the year, again, ask yourself why.

Could it be because bank cheques take roughly four days to clear and someone is ‘cross-firing’ your money? This old trick involves meeting outstanding balances on a bank account with dud cheques drawn on an account propped up with more dud cheques. As long as there is a sufficiently large amount in ‘uncleared effects’ in circulation the bank will often pay out. Revolving three or more accounts means that there are always ‘funds’ to meet the next cheque to be presented.

The last big cheque gets turned into cash, usually just before Easter or Christmas.

To work this scam, the fraudster has to keep on top of all the cheque movements. An absence of more than four working days brings the whole thing tumbling down.

Check for phoney qualifications
If someone works for you with little or no supervision, make sure they’re doing their work. The trusted new employee could be an unqualified fraudster who knows just enough about your business to get the work outsourced to freelancers, suppliers or subcontractors. You could be paying someone’s salary or wages for months without realising that they’ve struck a verbal deal with a third party who’ll want paying eventually, perhaps after the fraudster has moved on.

Always take up references, check qualifications and undertake unexpected spot checks on unsupervised employees with management buying responsibility. A recent case that came before the courts involved outsourced labour valued at over £1.3 million.

Revolve the bank mandate
It takes five minutes to change the name of the authorised signatories and counter-signatories on company cheques. Just wake up one morning and do it. If anyone wants to know why, tell them you’re acting on professional advice.

Even partners, co-directors, fellow shareholders and employees with years of loyal service can be tempted to stray from the path of honesty when they are habitually handling large financial transactions.

It doesn’t take a genius to cover the administrative tracks of a missing cheque for a significant amount. A periodic, unexpected change of the bank mandate has been known to throw up quite a few surprises. Try it. You’ve got nothing to lose.

Run credit checks
Almost every business worth its salt runs credit and credentials checks on new customer accounts. Quite right, too. But what if one of the people responsible for doing the checks sets up a bogus customer account, approves it, then starts supplying the non-existent customer (at, say, a friend’s or relative’s address) with your goods or stock at no charge or notional prices?

Your accounting system would probably be fooled. Throw in a few regular refunds for non-existent supplies and someone has a damaging systematic fraud in progress. If one bogus customer account works, they’ll probably try a few more – 10, 20, or however many the system will take before it starts to creak.

Answer: Make independent verification and credit checks on new account customers through a third party. One of your professional advisors would probably be able to arrange it. That way there’s less chance of the ‘bogus account fraud’ taking root.

Keep it separate
I always advise business people to draw a clear management line between their purchasing and accounting functions. There have always been ‘dodgy’ (not to say corrupt) suppliers who are prepared to make it their business to get too close to buyers for everyone’s comfort.

If the question of ‘a backhander’ (not to say a bribe) arises, the seeds of a fiddle (not to say theft) can be sown.  Obviously, any dodgy purchase must to be overpriced to offset the ‘kickback’ and every overpriced purchase is causing damage to the health, viability or competitiveness of your business.

It’s much harder for this kind of petty dishonesty to flourish if the accounts department is entirely separate from the buying function because there then has to be collusion to cheat the employer. Collusion multiplies the risk and divides the proceeds.

Getting competing suppliers to quote and rotating your list of usual suppliers regularly helps to iron out cosy (not to say fraudulent) arrangements. Overpriced supplies spell either greedy suppliers or ‘bent’ buyers; you can do without both.

Stay alert
The great majority of people who work in business and administration are honest, conscientious and truthful.

Experience has taught me that there are a few who are not. They can do enormous damage to an otherwise healthy businesses. Employers should stay alert to the possibility that a black sheep may stray into the fold. It is often the most amiable, agreeable and well-liked individuals who con their way into legitimate businesses with criminal intent. Their victims are often well-seasoned business people.

You don’t have to become a distrustful cynic in your dealings with your staff - just be aware that there are times when people who are not everything they would have you believe them to be try to get too close to your business and stay one step ahead.

Martin Cunningham is a leading criminal lawyer and member of numerous recognised bodies and panels associated with fraud and fraud investigation.


Replies (6)

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David Winch
By David Winch
31st Aug 2010 18:19

Easy to spot - with hindsight!

In my experience of many 'theft by employee' cases the misconduct (which might technically be fraud, false accounting or forgery rather than simple theft) is extraordinarily easy to spot with hindsight - but was not spotted at the time (often because one tends to trust the people with whom one works).

One of the most blatant cases was of a shop manager who was required to bank takings at least twice each week.  One week he made no banking - and nobody noticed!  He did it again - and again - finally he went for nearly 3 months without banking a penny, and still nobody noticed.  It was only when a trainee accountant was tasked with an exercise of comparing takings in different outlets that the thefts case to light.

Another case involved an employee who cashed two payroll cheques each week - but there was only one payroll.  The cash from the second cheque was simply stolen, but because payroll details were confidential within the company the thefts were not detected until the untimely death of the usual cheque signatory.  When a new signatory took responsibility he asked why there were two cheques for the payroll for him to sign.  The rest, as they say, is history!

Simple basic precautions would avert a great many thefts.


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By jonbryce
01st Sep 2010 10:46


I would be surprised if this one still works, given that the post generally arrives just before lunch time these days.

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By KB99399
01st Sep 2010 10:51

Fraud in business

Think of anything that a person can do to make money & someone is probably doing it!

The problem is that in many small business they are constrained by being small, ie segregation of duties is difficult & many people start work early & don't take holidays because they genuinely do not have time.

With fraud there is no "one thing" to look for. If it were that simple everyone would be a suspect. You need to be looking for a series of signs which may warrant further investigation. Then when you rub below the surface a nasty odour becomes apparent.

Taking as many precautions as possible is the best idea. Then publicising your company policy on fraud & encouraging staff to tip you off if they suspect something is a good plan.

Many business owners rely on external audit to uncover fraud - but very few frauds are uncovered this way. 

Martin D Pope FCMA CFE

[email protected]

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By Irene
02nd Sep 2010 15:43

Phoney Qualifications / Credit Checks

Being cautious, vigilant, having and implementing company's procedures takes just that. Apart from an employee outsourcing the job he/she is paid for and putting your business in debt, your business can be ruined if an employee is not qualified to do the job.  Martin Cunningham puts it right being vigilant and checking on unsupervised employees does pay. I know of  a case where an employee who claimed to have worked in accounts completely messed up the accounts even after she was trained. And there is another situation where the employee took his bedroom to be where cheques meant to be deposited at the bank ended up in a pile under his bed.

Where credit checks are not done and with no procedure in place as to how purchases are made, you might just be working hard for another to rip the benefits.  It is true small companies are constrained by their very own size however; this should not be a deterrent towards taking steps to stamp out frauds. Above everything that business will need to succeed and grow big!




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By tomriv801
06th Sep 2010 14:18

everyday experience

from own experience, never start to loose control of one's business. the complications if one does so are enormous. believe me, i made that mistake. 

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By sluglet
13th Sep 2010 13:03

Just how useful are credit checks anyway?

Given the cost of getting a degree, passing professional exams and the way credit card companies threw themselves at us prior to the credit crunch it wouldn't surprise me in the least to find that a huge percentage of accountants and professional staff secretly have substantial levels of debt that they're covering up. All of which begs the question just how much assurance is it to do credit checks? Sure it might make you more cautious about how much trust and responsibility you give someone but given the current levels of personal debt in all sectors of society I'm dubious about how useful it is - Not to mention how ethical is it anyway to be snooping into your employees personal finances!!

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