“Finding Fraud and What To Do With It.” New York State Department of Transportation February 5, 2010

1. “Finding Fraud and What To Do With It.”New York State Department of Transportation February 5, 2010 Edward T. Dominelli, CFE, MPA BST Forensic Accounting and Litigation Services Offices: New York - Albany

2. Goals and Objectives • Organizations involved in transportation-related construction, both public and private, can take proactive steps to mitigate the risk of fraudulent activity on their projects. This session will discuss suggested steps such organizations can consider to better deter and detect fraudulent activity, and what they need to do when fraud is detected or suspected to ensure appropriate follow-up and investigation.

3. What is fraud? • Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain. • Managing the Business Risk of Fraud: A Practical Guide, prepared by IIA, AICPA, and ACFE

4. Why do people commit fraud?

5. Project Manager Superintendent “Clerk of the Works” Construction Manager Contracting Officer Architects Engineers Controlled Inspectors Estimators Contractors Subcontractors Materials Suppliers Corrupt Union Officials Organized Crime Labor Coalitions Other? Who commits construction fraud?

6. “Fraud prevention and detection is like a mortal’s need for air. When it’s present, it’s never noticed. When it’s missing, it’s all that’s noticed” • Author: Unknown

7. Why must we address fraud? • Requirement of ARRA Program • Fraud happens in all organizations • Public Safety • Fiduciary duty to protect public assets

8. Why must we address fraud? • Mitigate risk • Limit liability • Protect organizational reputation • Promote transparency in operations

9. Fraud Mitigation Process • Finding Fraud – Prevention and Detection • Responding to Fraudulent Activity

10. Finding Fraud – Key Steps • Management Commitment • Recognize Relevant Fraud Schemes • Identify High Risk Areas • Establish Prevention/Detection Measures

11. Management Commitment • Acceptance That Fraud Exists • Set as Management Priority • Develop/Revise Code of Conduct • agency level - conflicts of interest, gifts • business partners • embody in documents, i.e. contracts

12. Recognize Relevant Schemes • Review agency history • Review professional literature • Consult with “experts” • Identify “Red Flags”

14. Conduct Risk Assessment • Where are we most vulnerable? • Focus on high risk areas

15. Establish Prevention/Detection Measures • Design/Implement Internal Controls Examples: • employee/vendor ethics policy • contractor/vendor due diligence • separation of duties • change order review process • random contract audits • independent project estimates • original supporting documents • worker identification system • analyze bidding patterns

16. Check References Visit Projects Completed Speak with Peers Similar Scope, Size and Complexity Check Debarment Lists Public Database Search Review Subcontractors Enforce Subcontracting Limits Review Bid Pricing Verify Licenses Due Diligence Steps

17. Establish Prevention/Detection Measures • Set Fraud Reporting Requirements • mandated reporting • anonymous reporting - Hotline • whistleblower protection • internal and external resources • “When in doubt, report it.”

18. REPORT FRAUD, WASTE & ABUSE  One of the core missions of the Recovery Board is to prevent fraud, waste, and mismanagement of Recovery funds. Recovery.gov gives you the ability to find Recovery projects in your own neighborhood and if you suspect fraudulent actions related to the project you can report those concerns in several ways:              Submit a Complaint Form electronically Call the Recovery Board Fraud Hotline: 1-877-392-3375 (1-877-FWA-DESK) Fax the Recovery Board: 1-877-329-3922 (1-877-FAX-FWA2) Write the Recovery Board: Recovery Accountability and Transparency Board Attention: Hotline Operators P.O. Box 27545 Washington, D.C. 20038-7958 The Recovery Board is committed to helping ensure these funds are spent properly, but we cannot do it without your help. Additionally, the Recovery Act provides protections for certain individuals (whistleblowers) who make specific disclosures about uses of Recovery Act funds.  Source: Recovery.gov

19. Establish Prevention/Detection Measures • Education • employee training - fraud schemes, red flags, altered documents, reporting requirements • contractor/vendor awareness • contractor/vendor code of conduct • “zero tolerance” • incorporate into contract language • discuss in bidders meetings/vendor interviews • reinforce in routine communications • posters

20. Fraud Response Plan • Prepare Plan in Advance – Don’t wait until it happens!!! • Investigative Process • consistent • timely • impartial • professional • Identify Investigative Resources • internal - IG, SIU, Counsel’s Office, Internal Auditor • external – USDOTIG, NYSDOT, NYSOIG, State Police, FBI, District Attorney

21. Evidentiary Considerations • Evidence collected will be disputed for three reasons: • Legality of the acquisition of the evidence • Integrity of the evidence • Interpretation of the evidence

22. Evidentiary Considerations • Preserving and Protecting Evidence • documents – paper and electronic • physical – i.e., core sample • chain of custody/illegal search issues • Interviewing Witnesses • false imprisonment issues • self-incrimination issues • union contract issues • Maintain Confidentiality – “Need to know.” • Let the “Pros” Handle It

23. Employee Fraud Indicators - Sudden change in work habits – tardiness, productivity, reliability- Sudden change in lifestyle – living beyond means, clothing, cars, jewelry, vacations, cash- Sense of entitlement, complaints of being underpaid- Sudden change in personality/appearance- Prior history of misconduct/criminal history- Excessive unscheduled absences/tardiness- Evidence of mounting financial difficulties – collection agency calls, wage garnishments, borrowing money from co-workers

24. Employee Fraud Indicators - Complaints from vendors (contactors, consultants, suppliers)- Difficulty contacting during workday, unavailability- Unreported outside employment/business activities- Unwillingness to be away from job for extended periods, no vacations- Non-acceptance of promotions- Failure to share important information with supervisor or subordinates- Resistance to supervision/oversight- Reluctance to delegate to subordinates

25. Employee Fraud Indicators - Excessive non-work related phone calls or emails during the workday- Consistent failure to follow established procedures/overrides established internal controls- Poor record-keeping/inadequate documentation to support decisions or transactions- Non-cooperation with auditors/inspectors- By-pass chain of command- High turnover of subordinates- No/limited segregation of key functions within work unit, weak controls

26. Employee Fraud Indicators • Untimely bank deposits/bank reconciliations • Consistent math errors in computations- Alteration/falsification/destruction of official records- Socialization with vendors- Soliciting/accepting gifts and gratuities from vendors- Frequent, unexplained meetings with vendors behind closed doors or off- site- Meeting with “unfamiliar” people in office • - Failure to enforce contract provisions with vendors

27. Employee Fraud Indicators • - Consistent use of same vendors- Vendor’s insistence to deal with a specific representative- Personal intervention to get certain vendors paid- Referral of certain vendors to perform work • Referral of subcontractors to primes • Limited/restricted competition for procurement of goods and services • DON’T IGNORE RED FLAGS. THEY MIGHT MEAN NOTHING, BUT THEN AGAIN …..

28. Questions

29. Thank you • Edward T. Dominelli, CFE, MPA • BST Valuation and Litigation Advisors • Forensic Accounting and Financial Investigations • 26 Computer Drive West • Albany, NY 12205 • 1-800-724-6700, ext 133 • edominelli@bstco.com