Billing SchemesBilling Schemes

O C C U P A T I O N A L F R A U D a n d A B U S E

C L A S S I F I C A T I O N S Y S T E M

Asset Misappropriations

Cash (90%)Inventory and Other Assets

Skimming (28.9%)

Larceny (4.1%)

Fraudulent Disbursements

(67.0%)

Fraudulent Disbursements

Billing Schemes

Payroll Schemes

Check Tampering

Expense Reimb.

Register Disbursmts.

Finally, most fraudulent disbursements fall into one of the above five categories.

What Are Billing Schemes?What Are Billing Schemes?

Schemes attacking purchasing functionCause organization to buy goods/services

that are nonexistent, overpriced, or not needed

Perp submits bogus invoice or other supportVictim organization issues a check Perp collects payment

Billing SchemesBilling Schemes

Fraudulent Disbursements

Other8.1%

Register2.7%

Payroll16.5%

Check Tamp24.5%

Expense14.9%

Billing33.3%

244 billing schemes were reported, with a median loss of $250,000.

Billing schemes are the most common and most costly form of fraudulent disbursement.

Common Billing SchemesCommon Billing Schemes

Shell company schemesNon-accomplice vendor schemesPersonal purchases with company funds

Billing Schemes – Billing Schemes – Breakdown of CasesBreakdown of Cases

Purch.50.8% Non-

accomp6.1%

Other2.5% Shell Co.

40.6%

Of 244 billing schemes reported, over 90% were either personal purchases or shell company schemes.

Billing schemes are the most common form of fraudulent disbursement.

Billing Schemes -Billing Schemes -Median LossesMedian Losses

$375,000

$100,000

$100,000

$590,000

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000

Other

PersonalPurchases

Non-AccompliceVendor

Shell Company

Shell Company SchemesShell Company Schemes

What is a shell company? Fictitious entity Created for purpose of committing fraud Only exist on paper Usually consist of bank account and mail drop Generally registered with state or county (perp

needs registration to open bank account)

Shell Company SchemesShell Company Schemes

Usually invoice for services, not goods– Services not tangible, harder to verify

How shell company invoices get paid: – Perp has authority to approve payment– Supervisor “rubber stamps” purchases– Perp prepares bogus support documents– Collusion among several employees

Shell Company SchemesShell Company Schemes

Pass-through schemes: Variation of standard shell company scheme Perp assigned to purchase goods/services for

company Uses shell company to buy the items on credit Shell company sells items to employer at inflated

price Pays off shell’s credit, excess is profit

Shell Company Schemes – Shell Company Schemes – CountermeasuresCountermeasures

Question invoices that have residential address or mail drop for mailing address

Look for invoices with lack of detail– Missing phone #, fax #, invoice #, tax id, etc.

Investigate invoices with no sales taxSort payments by vendor, look for:

– Consecutive invoice numbers– Consistent payment amounts, round numbers

Shell Company Schemes – Shell Company Schemes – CountermeasuresCountermeasures

If suspicions about vendor arise: – Look up vendor in phone book– Contact others in industry– Visit address to verify existence– Independently verify delivery before paying

Periodically run comparison reports between vendor/employee addresses

Maintain up-to-date vendor list

Identifying the Perpetrator of a Identifying the Perpetrator of a Shell Company SchemeShell Company Scheme

Check articles of incorporation, dbaConduct surveillance on mail dropReview support: who requests, authorizes

purchases?Review cancelled checks for bank acct infoDon’t pay invoice, see who follows upSearch workstation of suspect for evidence

Billing via Non-accomplice Billing via Non-accomplice VendorsVendors

Perp overbills company on behalf of existing vendor

Vendor not involved in the schemeTwo common techniques:

– Pay-and-return– Counterfeit invoices

Billing via Non-accomplice Billing via Non-accomplice VendorsVendors

Pay-and-return scheme: Controls over returned checks may be more

lax than outgoing checksPerp double-pays invoice, sends check to

wrong address, etc.Tells recipient a mistake was madeAsks for check backSteals the returned payment

Billing via Non-accomplice Billing via Non-accomplice VendorsVendors

Counterfeit invoices: Perp generates bogus invoices, similar to

existing vendor’sEasy to do with desktop publishingCompany cuts checkPerp steals check or has it delivered to mail

drop

Non-Accomplice Vendors – Non-Accomplice Vendors – CountermeasuresCountermeasures

Sort invoices by vendor, look for unusual invoice numbers, change in address or style

Mail checks immediately after signingRestrict access to accounts payable records

and addressesInvestigate excessive purchases from

particular vendor

Non-Accomplice Vendors – Non-Accomplice Vendors – CountermeasuresCountermeasures

Independently spot-check purchases with vendors

Install system to prevent duplicate paymentsRequire all incoming mail to be opened by

mailroom; all incoming checks logged (to prevent pay-and-return)

Instruct bank not to cash checks payable to organization

Personal Purchases with Personal Purchases with Company FundsCompany Funds

Perp uses company checks to buy personal items. Common examples:– Home supplies/construction– Side business– Pay medical, utility, credit card bills, etc.

Merchandise may be returned for cash

Personal Purchases with Personal Purchases with Company FundsCompany Funds

Methods of payment:Perp has approval authority for invoicesAltered or bogus support documentationInitiate fraudulent purchase requisitionsBuy on running accounts/purchase ordersUse company credit card

Personal Purchases – Personal Purchases – CountermeasuresCountermeasures

Require all purchases to be delivered to centralized receiving department

Separate purchasing and receiving functions Investigate any purchases that are ordered drop-

shipped to unusual location Question purchases that do not appear to have a

business purpose Review any purchases made without management

approval

General Billing SchemeGeneral Billing Scheme Red Flags Red Flags

Invoices cannot be traced to shipmentsMultiple payments to single vendor on same datePattern of purchases just below review levelUnusually quick turnaround on invoicesDepartments/employees consistently over budgetPayments to multiple vendors for same product

General Billing SchemeGeneral Billing Scheme Red Flags Red Flags

Extreme inventory shortages Expenses increase dramatically Unexplained rise in cost of goods sold Unexplained decrease in gross/net profits Excessive materials orders Goods not purchased at optimal point High level approval of a low level transaction

Billing Schemes ControlsBilling Schemes Controls

Invoices, purchase orders and receiving reports must be matched before payment issued

Purchasing department should be independent of:– Receiving – Shipping– Accounting

Billing Schemes ControlsBilling Schemes Controls

Purchases must have management approvalMaintain a current approved vendor listUse competitive bids for major purchasesVendor purchases should be reviewed for

abnormal levelsControl methods should be implemented for

duplicate invoices/purchase orders