How to scour your organization for pandemic fraud risks
05 Jun 2020

The coronavirus pandemic is placing unbelievable strain on all facets of the world economy, with stay-at-home and shutdown orders shuttering some industries and disrupting most others. The abrupt shift to working from home has created new and varied opportunities for fraudsters and criminals to ply their trades.

But there are also opportunities to identify illicit behavior that started before the pandemic hit. Compliance professionals have a crucial role to play in ferreting out new fraud schemes while also exposing previously undetected activity.

“If someone has been diverting funds, now is the time to find them,” said Daniel Wager, vice president of global financial crime & compliance with LexisNexis Risk Solutions.

One thing to remember is activity that was considered normal before the pandemic is not normal now, compliance professionals say. Monitoring of employee activity and financial transactions since March must be viewed through this new lens. Vendor payments that continue unabated to pay for nonessential goods and services—despite deep corporate cost cutting or a spending freeze—deserve a hard look.

Salespeople who continue to submit expense reports similar in size to their pre-pandemic spending should raise eyebrows because they likely aren’t traveling at the moment, says Andy Miller, chief analytics officer at compliance software company Lextegrity.

“So many companies are not continuously monitoring their spending right now. It’s hard to do this detective work in normal times, and it’s even harder to do in a pandemic,” Miller said.

Traditional compliance controls have been weakened by work-from-home scenarios, because it is harder to monitor all potential means of communication, like second personal cell phones, social media, and chat apps like WhatsApp and Weibo.

“People aren’t working in that physically monitored environment, and so it’s harder to track who they’re talking to and what they’re saying,” said Lee Garf, general manager of NICE Actimize, a financial crime and compliance vendor. “There are also new trading patterns emerging, so you have to fine-tune your alerts quickly and easily to respond to them.”

Here are some pandemic-related frauds that are likely already occurring that financial institutions and corporations should be watching for, as well as pre-pandemic frauds that could be exposed, with advice on how to spot and report them.

Fraud in the ‘barnacles’

Tesla Chief Executive Elon Musk said in a 2018 conference call that his company would start “scrubbing the barnacles off” with what was described as a new, brutal regime with regards to contractors, according to a story in the Mercury News of San Jose, Calif.

Corporate cost cutting and frozen budgets should be viewed as an opportunity to examine expenditures with vendors and contractors, said Miller.

“Some employees may have an emotional attachment to a vendor, and that might provide the pressure and rationalization to keep that spending going,” he said.

If a company has cut spending, non-critical spending should be slashed across the board. Look closely at non-critical line items whose funding isn’t affected, he said.

Another way fraudulent transactions might appear is through a change in middle management. Say three managers regularly review vendor spending or monthly reimbursements, but due to changes in staffing or priorities, those responsibilities are reassigned. The new set of eyes might lead to hard questions being asked on specific spending items.

Pre-pandemic fraud schemes may come to light during the pandemic, as changes in patterns and behaviors uncover bad behavior. Fictitious vendors could be exposed when one person who had been approving them is laid off or reassigned, Miller said.

One way to red flag expenditures for fraud is to set up alerts that look for similarities between employee addresses, phone numbers, and tax identification numbers with those listed for the potentially fraudulent vendor. Pore over non-critical expenditures, and keep going past the biggest ones.

“You have the opportunity to look up and down the ledger and ask, ‘Why are we spending money on this?’” Miller said. “People mostly do the right thing, but you have to be vigilant.”

The fraud tends to be buried in the barnacles; the small expenditures, not the whale.

Pandemic financial crime red flags

Monitoring employees who are working from home is harder than ever, says Garf. This is especially true of traders and brokers who could take advantage of the weaker oversight to pursue any manner of stock and insider trading schemes.

By Aaron Nicodemus, Compliance Week, 4 June 2020

Read more at Compliance Week

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