Chapter 7: Billing Schemes

1. Chapter 7: Billing Schemes

3. What Are Billing Schemes? • Schemes attacking purchasing function • Cause organization to buy goods/services that are nonexistent, overpriced, or not needed • Perp submits bogus invoice or other support • Victim organization issues a check • Perp collects payment

4. Billing Schemes • 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.

5. Common Billing Schemes • Shell company schemes • Non-accomplice vendor schemes • Personal purchases with company funds

6. Billing Schemes – Breakdown of Cases • 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.

7. Billing Schemes -Median Losses

8. Shell 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)

9. Shell 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

10. Shell 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

11. Shell Company Schemes – Countermeasures • 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 tax • Sort payments by vendor, look for: • Consecutive invoice numbers • Consistent payment amounts, round numbers

12. Shell Company Schemes –Countermeasures • 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

13. Identifying the Perpetrator of a Shell Company Scheme • Check articles of incorporation, dba • Conduct surveillance on mail drop • Review support: who requests, authorizes purchases? • Review cancelled checks for bank acct info • Don’t pay invoice, see who follows up • Search workstation of suspect for evidence

14. Billing via Non-accomplice Vendors • Perp overbills company on behalf of existing vendor • Vendor not involved in the scheme • Two common techniques: • Pay-and-return • Counterfeit invoices

15. Billing via Non-accomplice Vendors Pay-and-return scheme: • Controls over returned checks may be more lax than outgoing checks • Perp double-pays invoice, sends check to wrong address, etc. • Tells recipient a mistake was made • Asks for check back • Steals the returned payment

16. Billing via Non-accomplice Vendors Counterfeit invoices: • Perp generates bogus invoices, similar to existing vendor’s • Easy to do with desktop publishing • Company cuts check • Perp steals check or has it delivered to mail drop

17. Non-Accomplice Vendors – Countermeasures • Sort invoices by vendor, look for unusual invoice numbers, change in address or style • Mail checks immediately after signing • Restrict access to accounts payable records and addresses • Investigate excessive purchases from particular vendor

18. Non-Accomplice Vendors – Countermeasures • Independently spot-check purchases with vendors • Install system to prevent duplicate payments • Require 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

19. Personal Purchases with Company 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

20. Personal Purchases with Company Funds Methods of payment: • Perp has approval authority for invoices • Altered or bogus support documentation • Initiate fraudulent purchase requisitions • Buy on running accounts/purchase orders • Use company credit card

21. Personal Purchases – Countermeasures • 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

22. General Billing Scheme Red Flags • Invoices cannot be traced to shipments • Multiple payments to single vendor on same date • Pattern of purchases just below review level • Unusually quick turnaround on invoices • Departments/employees consistently over budget • Payments to multiple vendors for same product

23. General Billing Scheme 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

24. Billing Schemes Controls • Invoices, purchase orders and receiving reports must be matched before payment issued • Purchasing department should be independent of: • Receiving • Shipping • Accounting

25. Billing Schemes Controls • Purchases must have management approval • Maintain a current approved vendor list • Use competitive bids for major purchases • Vendor purchases should be reviewed for abnormal levels • Control methods should be implemented for duplicate invoices/purchase orders