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CORRUPTION

FRAUD

Corruption

Corruption is a term used to describe


various types of wrongful acts designed
to cause an unfair advantage.

It involves the wrongful use of influence to


procure a benefit for the actor or another
person, contrary to the duty or the rights of
others.

Source: 2015 International Fraud Examiners

Corruption

Forms of corruption

Bribery
Kickbacks
Illegal gratuities
Economic extortion
Collusion

The most common area for corruption in


an organization is in the purchasing
environment/function, and most corruption schemes
involve employees acting alone or in collusion with
vendors/contractors.
Source: 2015 International Fraud Examiners

Bribery
Bribery may be defined as the offering, giving,
receiving, or soliciting of corrupt payments (i.e.,
items of value paid to procure a benefit contrary to
the rights of others) to influence an official act or
business decision.

It involves collusion between at least two parties.

Classifications
Official bribery - refers to the corruption of a
public official to influence an official act of government.
Commercial bribery - refers to the
corruption of a private individual to gain a
commercial or business advantage

Source: 2015 International Fraud Examiners

Kickback
Kickback is form of negotiated bribery in
which a commission is paid to the bribe-taker in
exchange for the services rendered.

Kickbacks are improper, undisclosed


payments made to obtain favourable treatment.

In the government setting, kickbacks


refer to the giving or receiving of anything of
value to obtain or reward favourable treatment
in relation to a government contract.

In the commercial sense, kickbacks refer


to the giving or receiving of anything of value to
influence a business decision without the
employers knowledge and consent.

Source: 2015 International Fraud Examiners

Illegal Gratuities

Illegal gratuities are items of value given to reward a


decision, often after the recipient has made the
decision.

Illegal gratuity schemes do not necessarily


involve an intent to influence a particular decision
before the fact.That is, an illegal gratuity occurs
when an item of value is given for, or because of,
some act.

It can (and do) evolve into bribery schemes

Source: 2015 International Fraud Examiners

Economic Extortion
Extortion is defined as the obtaining of
property from another, with the other partys
consent induced by wrongful use of actual or
threatened force or fear.

Economic extortion is present when an


employee or official, through the wrongful use of
actual or threatened force or fear, demands
money or some other consideration to make a
particular business decision.

That is, economic extortion cases are


the Pay up or else ... corruption schemes.

Source: 2015 International Fraud Examiners

Economic Extortion
To constitute extortion, the threat must be the
controlling reason that the victim gives up a right or
property.The following types of
threats
can
constitute extortion:

Physical harm

Property damage

Accusing a person of a crime

Disgracing a person

Public exposure

Source: 2015 International Fraud Examiners

Collusion
Collusion refers to an agreement between two
or more individuals to commit an act designed to
deceive or gain an unfair advantage.

It is an agreement, usually secretive, which


occurs between two or more persons to limit open
competition by deceiving, misleading, or defrauding
others of their legal rights, or to obtain an objective
forbidden by law typically by defrauding or gaining
an unfair advantage.

It can involve an agreement among


companies to divide the market, set prices, or
limit production. It can involve wage fixing,
kickbacks, or misrepresenting the independence
Sources: 2015 International Fraud Examiners Manual,
of the relationship between the colluding
http://www.business-anti-corruption.com/about/about-corruption/vocabulary.aspx#Patronage

Methods of Making Corrupt Payments


Gifts, travel, and entertainment wine
and liquor, clothes and jewelry, lavish
entertainment, paid holidays, free luxury
transportation, free use of resort facilities

Cash payments when involving minimal


amount

Checks and other financial instruments


business checks, cashiers/managers
checks, wire transfer

Hidden interest in a joint venture or


other profit-making enterprise.

Transfer of properties for a value other than


fair market

Source: 2015 International Fraud Examiners

Internal Control Red Flags of Corruption


Poor internal controls over key areas, such as
purchasing, inventory receiving, and warehousing

Poor recordkeeping

Poorly defined roles and responsibilities

Insufficient capacity to monitor high-risk employees


or units

Inadequate anti-corruption control plan

Poor separation of duties in purchasing

Lack of transparency in expenses and accounting


records

Poor enforcement of existing policies on


conflicts of interest or acceptance of gratuities

Poor documentation supportingSource:


award
of Fraud Examiners
2015 International

Conflict of Interest
A conflict of interest occurs when an employee or
agent (someone who is authorized to act on behalf
of a principal) has an undisclosed personal or
economic interest in a matter that could
influence his professional role.

These schemes involve self-dealing by an


employee or agent and can occur in various
ways.

Conflict of interest schemes generally constitute


violations of the legal principle that an agent or
employee must act in good faith, with full
disclosure, and in the best interest of the principal or
employer.
2015 International
Fraud Examiners

her/his
A conflict ofSources:
interest
exists
whenManual,http://www.business-antisomeone,

corruption.com/about/about-corruption/vocabulary.aspx#Patronage

Conflict of Interest
An agent is any person who, under the law, owes
a duty of loyalty to a principal or employer.
Agents include officers, directors, and employees of
a corporation; public officials; trustees; brokers;
independent contractors; attorneys; and
accountants.

A principal is an entity that authorizes an


agent to act on its behalf.

In a principal-agent relationship, the agent acts on


behalf of the principal, and the agent should not
have a conflict of interest in carrying out the act
on behalf of the principal.

Conflicts of interest do not necessarily


Source: 2015 International Fraud Examiners
constitute legal violations, as long
as they

Common Types of Conflict Schemes

Purchase schemes

Sales schemes

Delayed billings

Business diversions

Resource diversions

Financial interest in companies under perpetrators

supervisions

Financial disclosures

Source: 2015 International Fraud Examiners

Conflicts in Purchasing Schemes


If the employee:

Has an undisclosed financial interest in a supplier


or contractor

Sets up a bogus contractor or vendor, or buys


through a broker or middleman that the
employee controls

Is involved in other business ventures


with a supplier or contractor

Has an interest in a business that


competes with his employer

Accepts inappropriate gifts, travel,


entertainment, or fees (kickbacks) from
a vendor

Source: 2015 International Fraud Examiners

Conflicts in Sales Schemes


Underselling - causing the employer to
undersell goods, services, or properties to a
company in which the employee maintains a
hidden interest
Writing off sales - tampering with the victim
companys books to decrease or write off the amount
owed by the company in which the employee has a
hidden interest.

Source: 2015 International Fraud Examiners

Conflicts Influencing Delayed Billings

In other cases, the perpetrator might not write


off the scheme, but simply delay billing.

This is sometimes done as a favor to a


friendly client and is not an outright avoidance of
the bill but rather a dilatory tactic.

The victim organization eventually gets


paid, but loses time value on the payment,
which arrives later than it should.

Source: 2015 International Fraud Examiners

Conflicts in Business Diversion


A number of employees end up starting
their own businesses that compete directly with
their employers, and when this occurs, such
employees might begin siphoning off clients for their
own business.

This activity clearly violates the employees


duty of loyalty to the employer, and frequently
violates the companys internal policies.

There is nothing unscrupulous about free


competition, but while a person acts as a
representative of his employer, it is improper for him
to try to take his employers clients.

Normal standards of business ethics require


Source: 2015 International Fraud Examiners
employees to act in the best interests
of their

Conflicts in Resource Diversions


Some employees divert the funds and
other resources of their employers to the
development of their own businesses.

This kind of scheme involves elements


of both conflicts of interest and fraudulent
disbursements.

Source: 2015 International Fraud Examiners

Conflicting Financial Interest in Companies


Under Perpetrators Supervision
Sometimes an employee will have a direct
or indirect financial interest in a company under
his supervision.

For example, accountants sometimes hold


stock in a company they audit.These problems
often occur in government.

Source: 2015 International Fraud Examiners

Conflicts in Financial Disclosures

Management has an obligation to disclose to


the shareholders significant fraud committed by
officers, executives, and others in positions of
trust, but misplaced loyalties might prevent
management from making such disclosures.

The inadequate disclosure of conflicts of


interest is among the most serious of frauds.

Inadequate disclosure of related-party


transactions is not limited to any specific industry;
it transcends all business types and relationships.
Source: 2015 International Fraud Examiners

Disguised Purchases
The need or use of the item is falsely
described.The intent of the expenditure is to
enrich the employees lifestyle

Primary variations of the scheme


The employee purchases goods or services
that are personal in nature and provide no useful
business purpose; the employee subsequently
diverts the item to personally benefit from it
The quantity exceeds the companys needs,
and the employee enjoys the excess items
The employee intentionally procures items in
excess of company needs and then diverts the
items for eventual resale

Source: Fraud Risk Assessment: Building a Fraud Audit Program-Leonard W. Vona Google Books

Bid Rigging
Bid rigging is a form of fraud in which a
commercial contract is promised to one party
even though for the sake of appearance several
other parties also present a bid.

It is a form of price fixing and market allocation,

often practiced where contracts are determined by a


call for bids, for example in the case of
government construction contracts
Bid rigging almost always results in economic
harm to the agency which is seeking the bids, and
to the public, who ultimately bear the costs as

Source: 2015 International Fraud Examiners

Types of Bid Rigging

Bid suppression occurs where some of the

conspirators agree not to submit a bid so that


another conspirator can win the contract.

Complementary bidding, also known as cover


bidding or courtesy bidding, occurs where
some of the bidders agree to submit bids that are
intended not to be successful, so that another
conspirator can win the contract.

Bid rotation occurs where the bidders take turns


being the designated successful bidder, for
example, each conspirator is designated to be the
successful bidder on certain contracts, with
conspirators designated to win other contracts.
Source: 2015 International Fraud Examiners

Bid Pooling

Bid pooling a type of fraud that occurs


in a competitive bidding environment with
a limited number of bidders.
Bidders coordinate bids on different contracts so
that each gets a contract.
For example, if a company is soliciting bids
for raw materials, the vendors can each agree to
be the low bidder on one type of raw material,
thereby guaranteeing that each gets part of the
sales.
Source: http://www.accountingtuition.com/bid-pooling.html

Patronage
Patronage - the use of state resources to
reward individuals for their electoral support.

It is a system in which political supporters


are rewarded for their support, such as by being
appointed to public office or receiving contracts,
subsidies or other benefits.

Sources: http://www.business-anti-corruption.com, wikipedia

Identity Fraud
Identity theft

Identity theft happens when fraudsters access


enough information about someones identity (such
as their name, date of birth, current or previous
addresses) to commit identity fraud. Identity theft
can take place whether the fraud victim is alive or
deceased.
Identity fraud

Identity fraud can be described as the use of


that stolen identity in criminal activity to obtain
goods or services by deception.
Source: 2015 International Fraud Examiners

Identity Fraud

Fraudsters can use your identity details to:

Open bank accounts.

Obtain credit cards, loans and state benefits.

Order goods in your name.

Take over your existing accounts.

Take out mobile phone contracts.

Obtain genuine documents such as passports and


driving licenses in your name.

Stealing an individuals identity details does not, on its


own, constitute identity fraud. But using that identity for
any of the above activities does.

Source: http://www.actionfraud.police.uk/fraud_protection/identity_fraud

Charity Fraud
Charity fraud is the act of using deception to get
money from people who believe they are making
donations to charities. Often a person or a group of
people will make material representations that they are
a charity or part of a charity and ask prospective donors
for contributions to the non-existent charity. Charity
fraud not only includes fictitious charities but also
deceitful business acts. Deceitful
business acts include businesses accepting donations
and not using the money for its intended purposes

Source: en.wikipedia.org/wiki/Charity_fraud

Disaster Relief Fund Fraud


Disaster fraud is a deliberate act to deceive
people, government organizations or private
industries after devastating events for personal
financial gain.

Can be categorized as:

Charitable solicitation fraud is the act of


soliciting funds by posing as a legitimate
charitable organization.
Contractor and vendor fraud is the act of
posing as a legitimate vendor, worker or
repairman to collect payment but never
complete the tasks in question.

Source: http//securityintelligence.com/disaster-fraud-criminals-capitalizing-oncatastrophes/

Price gouging is the act of increasing the

Health Care
Fraud

Health care fraud involves a deception or


misrepresentation that an individual or entity
makes, knowing that the misrepresentation could
result in some unauthorized benefit to the
individual or to the entity or some other party.

The most common fraud involves a false


statement or a misrepresentation or deliberate
omission that is critical to the determination of
benefits.

Due to the highly technical nature of the


health care industry and the broad diversity in
payment systems throughout the world, health care
fraud schemes can be among the most complex.

Source: 2015 International Fraud Examiners

Health Care Fraud


Provider fraud consists of practices by health care
providers (including practitioners, medical suppliers,
and medical institutions) that cause unnecessary
costs to health care programs or patients through
reimbursement for unnecessary or excessive
services, or services that do not meet the recogniszd
standards for health care.

Source: 2015 International Fraud Examiners

Medical Equipment and Supplies Scheme


While it is typical to think of provider
fraud as schemes committed by physicians,
nurses, and other direct service providers, fraud
schemes by organizations and individuals
providing medical equipment and supplies are
also common.

Medical services generally require many


types of supplies and equipment, ranging from
simple gauze to high-cost MRI machines.

The following are several types of


Source: 2015 International Fraud Examiners
schemes committed by equipment

Medical Equipment and Supplies Scheme


Ambulance Transportation

Fraudulent billing for ambulance transportation can


include bills for more mileage than incurred, for trips
never taken, or for trips not covered by the health
programe.
Infusion Care
Fraud schemes involving infusion care treatment
include:

Services billed at abnormally high rates in


comparison to cost

Bills for patients who are not beneficiaries


of the health care programe
Kickbacks given to the prescribing physician

Bills in excess of the physicians prescription


Source: 2015 International Fraud Examiners

Medical Equipment and Supplies Scheme


Reusable Medical Equipment

Reusable medical equipment includes items


such as crutches, wheelchairs, specialized patient
beds, and so on. Fraud schemes by reusable
medical equipment suppliers frequently involve:

Falsified prescriptions for equipment or


supplies

Intentionally providing excessive supplies

Equipment not delivered or billed before


delivery
Billing for equipment rental beyond when
the equipment was checked out

Noncovered supplies (varies by health


model billed
Source: 2015 International Fraud Examiners
care program)

Medical Equipment and Supplies Scheme

Pharmaceuticals

Pharmaceutical fraud is the largest single


source of provider fraud in the health care industry,
and can involve pharmaceutical manufacturers,
pharmacies, and providers who prescribe such
products. Fraud schemes stemming from pharmacy
transactions include:
Merchandisingsubstituting something
of value for a prescription drug

Billing for brand name drugs but


dispensing generic drugs

Billing beyond amount prescribed

Billing for drugs not prescribed

Billing for a high-priced generic drug but


dispensing a lower-priced generic drug

Medical Equipment and Supplies Scheme

Impostor Provider

An impostor provider is a provider who does not exist but


bills fraudulent claims. A variation on this scam
involves assuming the identity of a deceased provider
and practiceor putting together a group of licensed
providersand fraudulently billing under the groups
provider identification code.

False Diagnoses

When a provider knows that a service is not covered by


a health care program, he might use false diagnoses or
procedure code manipulation. Examples of common
services not covered are investigational or experimental
procedures and cosmetic surgerySource:
(although
covere
2015 International Fraud Examiners
Manual

Medical Equipment and Supplies Scheme

Double Billing

Double billing occurs when the health care


beneficiary or the provider seeks to be paid twice for
the same service.The fraud might be perpetrated by
the beneficiary, with the complicity of the provider,
or it might be done by the provider alone.The bill
might be submitted to two (or more) different health
care programs, or it might be submitted twice to the
same health care program with documentation
intended to show that two separate expenses have
been incurred.
Source: 2015 International Fraud Examiners
Manual