swindlers and cons in state government a case study of payment card fraud
Post on 24-Dec-2015
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STATE PAYMENT CARD PROGRAM
State Payment Card Program
In June 2007, Policy 29 went into effect
Made the State Payment Card the preferred method of payment
Small-value purchases under $2,000 For Business Purposes Only
Meant to improve vendor relations by accelerating payment process
Does not require bid solicitation
Does not require state issued purchase orders
THE FRAUD
Payment cards were improperly used by state employees in management positions to buy items for personal use
Fraudsters were allowed to:
Determine needed items to purchase
Place orders for the items
Personally obtain items
Pay for items with a state payment card
Disguise personal items as legitimate work related
HOW WE GOT INVOLVED
New Business Owner
Life savings to buy business
Did not know much about running the business
Depended on current management in day-to-day operations
After learning the business and determining that fraud was occurring the new owner
Obtained attorney
Attorney was former Assistant DA
Contacted Special Investigations
THE STATE PLAYERS
State Department “A”
Maintenance Manager
30 Year Employee
No Oversight
Made All the Decisions
No One Questioned
State Department “B”
Facilities Manager
10 Year Employee
No Oversight
Made All the Decisions
No One Questioned
THE SCHEME
State employees colluded with former business owner and other store employees to obtain tax free items for personal use and charged items to their state issued payment card
Business owner charged up to 150 percent mark up on purchases made by the state employees
State taxpayers paid for fraudsters to operate their side businesses and complete personal home improvement projects
WHAT WE DID
Time sensitive (former management found out)
Obtained records from current business owner
Review of relevant documents
Surveillance of homes, private businesses, state properties
Interviews
OTHER ITEMS DISGUISED
Pressure washer motor (that he wanted back)
Fog lights for his personal off-road vehicle
CB radio and antenna
Gallons and gallons of paint used for his side business
Painting supplies
Non-commercial refrigerators
Received cash for returned items bought with payment card
INTERVIEW WITH SUBJECT
Two investigators and department management
Obtained confession
Subject “A” admitted to theft and collusion with former business owner
ITEMS DISGUISED AS LEGITIMATE
Tools
Tree cutting equipment
Flooring material
Lumber
Pressure washer
Garage doors
INTERVIEW WITH SUBJECT
Two investigators and Director of Internal Audit
Appearance
Obtained confession
Subject “B” admitted to theft and collusion with former business owner
Undertone of blackmail
SIGNS OF FRAUDULENT ACTIVITY
Vague item descriptions on invoices
Items that don’t seem like logical purchases
Unusual items purchased
Use of a middle man to purchase items that could be bought directly with the payment card
Split invoices
Items that should have been purchased through another department
Internal control issues
REAL RISKS OF NO OVERSIGHT
Split invoices
Personal purchases disguised as legitimate work related purchases
Personal items returned for cash Use of middleman to inflate costs (huge
markups)
Guaranteed business from state government
DEPARTMENT ACTION
Department was terminating with or without confession
Two letters – one if he confessed – one if he didn’t confess
Confiscated accrued annual leave
Coded fraudster “not for rehire within the state”
Prosecuted
Moved the fraudster to another building
Assigned a new supervisor
Procurement privileges revoked
Fraudster harassed former building facilities staff
State Department “A” State Department “B”
DISTRICT ATTORNEY ACTION
Prosecuted Plead guilty Two years plus
supervised probation
Ordered restitution “We appreciate the
opportunity to have represented the Department”
Since the department declined to terminate employment with the subject we have decided not to prosecute
State Department “A” State Department “B”
KEYS TO PREVENTING FRAUD
Upper management should be responsible and check for appropriate purchases on the front-end
Provide training for the employee
Ensure the integrity of the employee
Ensure segregation of duties
Back-end monitoring of purchases
Zero tolerance
COMPTROLLER’S ACTION
Sent an immediate action notice to all state departments to review vendor purchases
Required state departments to report the results of their review back to our office
State contacted all vendors and reminded each that it was inappropriate to present gifts to state employees
QUESTIONS?
Melinda S. Crutchfield, CFEDivision of State Audit
Comptroller of the TreasuryMelinda.Crutchfield@cot.tn.gov
(615) 747-5308
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