Fighting Fraud & Corruption in Uganda - Steven Powell 25 August 2021 - ENSafrica

Fighting Fraud &
Corruption in
Uganda

Steven Powell
25 August 2021

objectives?

 •   fraud facts and theory including the profile of the fraudster
 •   an explanation of corrupt practices, & procurement risks
 •   corruption overview - tender abuse & other corrupt schemes
 •   cyberfraud
 •   EFT Fraud – (diverted payments)
 •   fraud prevention and internal controls
 •   fraud risk indicators
 •   the tools to identify corruption
 •   case studies

the profile of the typical fraudster

 •   White collar crime statistics reveal that more
     than 80% of fraud involves internal employees,
     most of whom have more than 5 years of service
 •   Many companies who fall victim to fraud rely
     on trust rather than controls
 •   The fraudster could be your most capable, most
     reliable & most trusted employee
                                                                   Telegraph UK

 Generally the profile of the typical fraudster is:
     Older than 30, stable family situation, above average education, first
     offender and has been with the company for more than 5 years
     The fraudster is often the last person that anyone would suspect and
     the “red flags” (symptoms) that become known are often ignored due
     to high levels of trust

the fraud triangle - Psychology behind it
  fraud takes place when the 3 factors described below converge

                             the fraud recipe

                                                    The employee will justify
fraud takes place                                   committing acts of
when employees                                      dishonesty by
under pressure                                      rationalizing his or her
identify the                                        behaviour
opportunity to                                      Rationalization takes
commit fraud -                                      the form of finding
coupled to a                                        justification for the
perceived low risk                                  behaviour by re-labeling
of detection                                        to remove moral stigma
                               fraud

                         rationalization

fraud pressures
  •   Often, formally honest employees commit
      fraud as a result of pressure which presents
      itself in a variety of ways:
  •   living beyond means
  •   insecurity regarding tenure of position,
      retrenchments
  •   trigger events
         divorce
         extra marital affairs
       medical emergency
  •   peer pressure
  •   gambling alcohol or drug problems

opportunity
•    When employees experience the pressure, they often start looking for gaps or
     weaknesses in the control environment
•    Opportunity to commit fraud presents itself in a variety of forms:
     •   Weak control environment
     •   Shared passwords
     •   Limited segregation of duties
     •   Limited independent review
     •   Poor management oversight
     •   Remote location
     •   High trust

examples of “rationalizations”

   Rationalization takes place when employees try to justify or re-label
   their illicit activity in order to make it seem less morally
   reprehensible
   Examples of rationalisations that have been verbalized:
    “it was just a loan I am going to pay it back”
    “it was a spotters fee”
    “it was just a commission”
    “the company makes huge profits but does not pay us enough”
    “the company has retrenched a lot of staff”
    “I should have been promoted long ago”

the detection of fraud
most frauds are discovered by accident when fraudsters become careless or greedy

     60%

     50%

     40%                                                            management
                                                                    auditors
     30%                                                            tip-offs
                                                                    accident
     20%

     10%

      0%

    Many frauds are discovered as a result of tip-offs (Colour green because many
    tip-offs come from disgruntled mistresses or ex wives)
                                                            Michael J Comer

Procurement Fraud & Tender abuses in SA
•    Collusion with government officials in tender irregularities:
     •   creation of artificial / inflated need
     •   tender fixing & drafting tender specifications
     •   avoiding tender by irregular expansion or extension of contract after award
     •   avoiding tender by misuse of single-source procurement exception
     •   government insiders sharing confidential tender information and assisting
         bidders in tenders
•    Systemic use of middle-men to influence tenders and facilitate suspect payments
•    Enterprise development needs exploited - subcontractors as conduits to channel
     funds
•    Using vague agreements to contractually facilitate suspect payments – bland
     descriptions
•    Characterized by inappropriate gifting, sponsorships or donations

examples of fraudulent schemes
ghost suppliers
   this is a letterhead and a bank account
   the corrupt employee signs off or requisitions payments for a company which
   does not exist
   payments are made to this entity and usually find the way to the employee or
   his spouses accounts
   no services or supplies are rendered

key controls
   Someone other than the employee who ordered the goods should sign
   off confirmation of delivery/proof of service
   Close the gates – new vendors must be properly checked and
   verified when they are added to the vendor database (company and
   credits checks should be routine)

Procurement fraud case study
German motor manufacturer
• Head of procurement took
    kickbacks for appointment as a
    contractor
    • home renovations
    • Harley Davidson
    • several cars including expensive
       4x4
    • regular o/seas trips
Result
• prejudice R7 million
• 4 service providers terminated
• 6 year jail sentence for head of
    procurement

Maintenance depot procurement fraud case study

  •   Officials place orders for parts to repair the vehicle
  •   Part is not delivered but officials complete paper trail
      • Requisition
      • Purchase OrderR5m-a-year corruption scam uncovered
      • Delivery note
      • Job cards
  •   When parts are actually delivered - Part is re-routed back to
      supplier
  •   Illicit profit by supplier is shared with the syndicate
  •   Whistle blower reveals corruption running for more than a
      decade

          “R5million a year corruption scam uncovered”
                                              Cape Argus

conflict of interest
•   large portions of procurement spend is allocated to companies
    that employees and senior officials have undisclosed interests in
•   undeclared interests and secret profits inflate the cost of doing
    business exponentially -the solution is
    • a robust declaration of interest policy which obliges
       declaration of all interests
    • coupled to vendor screening – (know who owns your service
       providers)

tools to ID fraud and tender abuse
    lifestyle audit – also known as the means test
•   By accessing various public databases – gather intelligence on buyers
    managers and decision makers to ensure assets are commensurate to
    known income stream:
    • properties
    • motor vehicles
    • credit
    • company links
•   identify adverse information or negative data by using internet or
    company searches and screen employees for negative histories
    • credit and
    • criminal

digital fraud
• Identity theft: where criminals obtain information about you to
  convince a bank or a customer service representative that they're you.
• Phishing: where criminals attempt to trick unsuspecting individuals into
  clicking on a malicious URL or e-mail attachment to steal their login
  details which they can then use to gain unauthorized access to the
  victims' financial accounts.
• Pharming refers to redirecting website traffic through hacking, whereby
  the hacker implements tools that redirect a search to a fake website.
  Pharming may cause users to find themselves on an illegitimate website
  without realizing they have been redirected to an impostor site, which
  may look exactly like the real site.
• Ransomware: where a hacker encrypts files on your computer. The only
  way to get the files back is to pay the hijacker in crypto currency, like
  Bitcoin.
• Online deposit scams (puppy scams etc).

Recently, cyber security firm, Norton, said globally, 978 million consumers
were affected by cyber crime in 2017 stealing a total of $172 billion.

phishing & pharming

how to minimise the risk

       •   Be very selective with the type of information
           that you share on social media sites

18

how to minimize the risks cont’d
 •   Use strong passwords, with a variety of upper case and lower case
     letters, symbols, and numbers. Never write them down where
     other people can see them. You should also try to change them up
     every now and then.
 •   Only use reputable online shopping sites. One thing you can do is
     look at the URL of the website. If it begins with “https” instead of
     “http” it means the site is secure. Also check with friends if they’ve
     heard of it or used it before.
 •   Be extra cautious when using Wi-Fi hotspots. Some scammers
     falsify popular hotspots.
 •   Don’t click on random links.

are you sharing too much?

The use of social media
•   Names of children, places of employment, places you frequent
    (your Facebook “check-ins”, birthdate – all can be accessed via
    social media and can be used to perpetrate identify theft.
•   Don’t post pics of your holiday in the Seychelles
•   CFO case study
•   Make sure your privacy settings are updated!!

EFT fraud risk
EFT fraud is essentially the diversion of funds from the
organisation’s bank accounts to third parties, to whom
those funds are not due, usually involving manipulation
of the vendor payment system

electronic funds transfer fraud

 •   two methods
 •   creation of alternative
     vendor profile which is then
     selected to perform illicit
     transactions
 •   substitution of employee
     account and deletion
 •   in the 1st scenario the risk
     of being caught is higher as
     the employee info remains
     on the vendor profile and
     should be detected through
     proper checks

whose problem is EFT fraud
•   it is invariably an account holder problem,
•   and usually not a bank problem
•   it is usually facilitated by password abuse within
    the finance team
•   spyware and collusion with bank officials must be
    excluded

case study eft payment clerk

   •   shaken not stirred – 007 steals R740k from a large retailer
   •   position - eft payment clerk – earnings R10k

              divorce                        weak controls

                               fraud

                        rationalization

case study : EFT payment clerk
•   A junior employee in a finance team, whose role involved
    processing batches of vendor payments electronically, got
    divorced
•   He was already battling to manage financially and now needed
    to pay for a messy divorce, alternative accommodation &
    maintenance
•   Realised that he can authorise and release transactions with his
    supervisors password
•   Made small talk with his supervisor as he was logging in, -
    noted his password, and voila…. he could create, capture and
    release payments
•   He tested thresholds with small payments to himself then
    waited…
•   Suspect became very bold and loaded a duplicate vendor with
    his personal bank account on the vendor master database
•   Nobody noticed, and the volume and scale of his fraud
    escalated, within a year he had stolen just under a million

case study contd : the black hole

•   lost payment – software programmers
    showed our suspect how to manually
    override the system to ensure that payments
    reach the intended destination
•   every time our suspect made a legitimate
    payment he knew he could steal by changing
    a text file on his c drive:
    • “I could not resist the temptation; I had
       the devil on my shoulder tempting me to
       try process a fraudulent transaction, it
       was just too easy!”

case study – chief accountant

 •   R2 million in one year
 •   modus operandi – amendment of vendor banking
     account detail on vendor master file
 •   substituted account not own account (DRC)
 •   once illicit transaction concluded – amended vendor
     profile deleted and vendor banking info restored to
     original
 •    when routine audits are performed – all appears as it
     should
 •   where did the money go?
 •   the local casino received R1,95 million out of the R2
     million stolen

case study - FD at packaging company

•   R4.2 million misappropriated
                                                Bedside reading material
•   R1.7 million in one morning
    substitution and deletion
•   vehicles, houses, timeshare (house
    search), gambling, overseas travel,
    holidays, private schooling, heart
    operation,
•   Property & vehicles for family,
•   vehicle for close friend
•   safety deposit boxes?
•   R3 million recovery via full co-operation
    which translated into mitigation for an
    effective 5 year jail term

Case
case studystudy   4 manager
           – Financial

•   Stole R4,2 million in Western Cape over 8 years
•   Committed traditional EFT fraud via diverted payments
•   suspect placed personal stop orders (DSTV, Telkom cars and
    insurance on organisation account)
•   suspect paid for her house R1.3 million with EFT to lawyers
•   suspect overpaid suppliers and diverted reimbursement to
    her account

what should the company have picked up?
•    eft clerk
     • the payments to a particular supplier whose profile was
        exploited was far over budget
     • routine audits testing payroll against the vendor master
        files would have identified the illicit profile
•    chief accountant
     • password control was abused
     • cfo signed off batches of eft’s – if he just counted the
        transactions he would have noticed that there were more
        payments in the batch than the paperwork reflected
     • supplier payments were duplicate- a proper recon of each
        supplier against approved budget would have identified
        the overspend
     • There were multiple changes to vendor banking details
        which is abnormal

key controls to prevent EFT abuse
  •   vet vendors properly (address, history, bank
      account, expertise & infrastructure)
  •   enforce tight control over changes to suppliers
      bank accounts – add management authorisation
  •   audit changes to supplier banking info over the
      past year
  •   interrogate the changes
  •   verify with suppliers and banking institution

the symptoms of fraudulent behavior

     the red flags or warning signals in respect of the corrupt
     employee are always present - make sure that staff report
     suspicious activity

fraud red flags
  excessive lifestyle
  gambling alcohol or drug problems
  staff who constantly claim underpaid
  close relationships with suppliers
  sole suppliers - not shopping around
  poor credit rating
  poor communication and reports
  indulging in affairs
  not taking leave
  refusal of promotion
  excessive & unexplained overtime
  criminal record

divisional red flags
•   too much trust placed in key employees
•   limited segregation of duty
•   no independent checks on reconciliation and payments
•   no clear lines of authority or responsibility
•   proper authorization procedures not enforced
•   inadequate documentation & records
•   infrequent independent reviews
•   inadequate disclosure of interests & investments management
    override of the controls
•   operating on a crisis basis
•   inadequate attention to detail

conclusion
   fraud and corruption are significant risks
   prevention is better than cure
   people will try to tempt your staff
   promote a strong ethics culture
   review your anti-fraud controls annually
   perform control review regarding eft payments
   do not rely only on controls - only as effective as the people
   enforcing the controls
   train people to recognize the symptoms
   do not work in a vacuum - use the tools and technology &
   experts

                                                                    ©2009 S Powell

questions

Steven Powell
spowell@ENSafrica.com
+27 21 410 2553 or +27 82 820 1036