The Fight Against Fraud: Arm Yourself With Prevention

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Fraud is big business. Companies are at the greatest risk of fraud from their employees, since the employees have easy access to information and assets. Some experts estimate that companies lose 5% of their revenues to internal fraud. At a company with annual sales of $100 million, that means that $5 million is walking out the door each year.

Executives tell themselves that their company isn’t the norm. They do better than average. They certainly haven’t been a victim of internal fraud to the tune of 5% of revenues. The sad truth is that they don’t know exactly how much has been stolen from their companies because they aren’t aware of all the fraudulent activities committed. Five percent is an average level of fraud for a company, and it would be wise for executives to take this number seriously. Continue reading

In Law We Trust

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johnny-degirolamoJohnny G. DeGirolamo, founder of The Law Offices Of John DeGirolamo, Esq., uses the tagline “In Law We Trust.”  The firm’s website says:

Having spent two years at the firm, it became clear to John that he missed the criminal law that he spent his college and law school careers studying.

His affinity for criminal law during college and law school is well-documented. At the right are three mugshots of John G. DeGirolamo (click on any of them to see them full size). His arrests and/or cases include these in Hillsborough County, Florida: Continue reading

Roca Labs Lawsuit Theories

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roca-labs-lawsuitRoca Labs is no stranger to ridiculous litigation. Last year, Roca Labs filed lawsuits against a multitude of companies and individuals in an attempt to silence critics. Essentially, the company sells a sketchy product called Gastric Bypass No Surgery. Roca Labs claims it is an alternative to gastric bypass surgery, but it has questionable results, and some people have even said it is dangerous. There are plenty of people alleging that Roca Labs is making false claims about its product, thus the company seems to truly earn the label of scam or fraud.

Roca Labs wants to stop customers (and others) from discussing their negative opinions of the company and the products. The company says critics have damaged is reputation, but I submit to you that Roca Labs itself damages its reputation.

Roca Labs filed suit against me in Florida, using a couple of theories that they thought were novel. Unfortunately for them, those two litigation theories have already been tried against me and were shot down by federal courts at both the district court level and the appeals court level.  Back in 2010, Medifast Inc. filed a $270 million lawsuit against me (and others) in U.S. District Court in the Southern District of California. I was dismissed from that case by the district court. Medifast appealed, and the appeals court upheld my dismissal from the case. Counsel for Roca Labs could learn a thing or two from that case. Continue reading

The Eyes Have It: Seeing the Signs of Fraud

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Would you recognize the clues that your client has been ripped off by one of its employees? Or would management conduct business as usual, blindly trusting their employees? Companies make the mistake of not actively searching for fraud. They tend to trust their employees and trust the procedures in place to safeguard company assets.

It may be good business to trust employees and empower them to make real contributions to the growth of the company. However, it is not wise to turn a blind eye to signs that a trusted employee may be stealing. Continue reading

Food Babe Scam: Why Vani Hari Is a Fraud

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vani-hari-food-babe-fraudA few months ago, I wrote here about “Food Babe,” the persona invented by Vani Hari. She is a pretend expert on food, blogging about supposedly dangerous additives. Some call her a “food activist,” but the truth is that she is paid for bringing paranoia and hysteria to her cult-like following.

I believe Vani Hari is a complete fraud for a multitude of reasons. The most compelling include:

Suspended Marquette Professor Responds

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A month ago I wrote about Marquette Professor John McAdams and his criticism of teaching assistant (and graduate student) Cheryl Abbate. Essentially, Abbate told a student that discussion of opposition to gay marriage equaled homophobia, and would not be allowed in her classroom. That seemed to be an unfair restriction on speech to Professor McAdams, and to me.

Last week, following the end of the fall semester, Marquette University suspended Professor McAdams with pay.  The school doesn’t want this to be called a suspension, instead saying that he is relieved of all teaching and faculty duties. I initially thought this was a move by Marquette to make it look like they were taking some action, so the Abbate supporters would be appeased. It seemed unusual that he would be suspended during winter break, as no teaching goes on at that time. However, I understand that all of Professor McAdams’s classes for the winter semester have been canceled, so this appears more serious than I originally thought. Continue reading

College Rape Crisis Hoax

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We’ve all heard about this “college rape crisis” that has been manufactured and plastered all over the internet and media. The story line is that there is an incredibly high instance of rape on college campuses. The [false] story is promoted like this, and this, and this, and this. It’s all a hoax, and the situation becomes even more egregious when so-called journalists make statements like “virtually everyone agrees.” No, virtually everyone does NOT agree.

Occasionally, a brave soul will speak up and inform everyone that the “college rape crisis” story is a myth. The hoax has been perpetuated through fake statistics and fake narratives, like the story Jackie told to Rolling Stone about the rape that never happened. This whole college rape crisis hoax is insulting and belittling to real victims of rape.

So where is the proof that this crisis has been manufactured? Look no further than the Bureau of Justice Statistics and a study entitled Rape and Sexual Assault Among College-age Females, 1995-2013. A summary of the study is found here. Continue reading

Cheryl Abbate Wants Marquette to Censor?

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Marquette University teaching assistant Cheryl Abbate doesn’t like the fact that Professor John McAdams criticized her for not allowing students to discuss gay rights. His article got noticed by Inside Higher Ed, so instead of defending her possibly indefensible actions, Cheryl Abbate cried to the publication:

Abbate, however, said she hoped Marquette would “use this event as an opportunity to create and actively enforce a policy on cyberbullying and harassment.” She added: “It is astounding to me that the university has not created some sort of policy that would prohibit this behavior which undoubtedly leads to a toxic environment for both students and faculty. I would hope that Marquette would do everything in its power to cultivate a climate where Marquette employees, especially students, are not publicly demeaned by tenured faculty.”

Continue reading

Things I Have Learned About Fraud

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For more than 17 years, I have been conducting fraud investigations, and I have learned a lot about fraudsters, their methods, and the companies they work for.

Hotlines cut fraud losses in half.
Anonymous reporting mechanisms like fraud hotlines decrease the cost of internal fraud. Employees are excellent watchdogs, and are more likely to report wrongdoing if they have a confidential way to report the information they possess. Research shows that companies with hotlines discover fraud schemes sooner and therefore lose less to internal fraud.

Sarbanes-Oxley has mandated anonymous reporting mechanisms like hotlines for public companies. Private companies should follow suit, since the hotlines have been proven to be effective. However, companies should not get a false sense of security from a hotline. There are many other fraud-prevention measures that companies should also implement.

Employees are very receptive to anti-fraud training.
As I’ve mentioned, employees are typically very good watchdogs. They don’t like to see someone else on the take while they are putting in honest work. If they know what to look for, employees are likely to report misdeeds to management. Continue reading

Are Your Employees Committing Fraud?

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Fraud is big business. Companies are most at risk of fraud from their employees, since they have access to information and assets. On average, companies lose 5% to 6% of their revenues to internal fraud. This means that a company with sales of $50 million is likely losing $2.5 million to $3 million each year to employees with sticky fingers. In this age of amazing shrinking profit margins, 5% or 6% could mean the difference between being in the red or in the black.

You might be thinking that your company has never had that much stolen in one year. Correction: You don’t know if you’ve had that much stolen by employees. Companies can’t quantify exactly how much has been stolen from them, because they simply are not aware of all the frauds committed.

The average is 6 percent, and it’s based upon a consideration of the known and unknown frauds in companies. Don’t get caught in the trap of thinking that your company is much better than average. As managers of companies, you may like to believe that you’re doing better. But some companies are doing better, and some are doing worse. Assume that your company is losing 6 percent, and try to improve on that.

The Schemes
Fraud committed by employees comes in all shapes and sizes, but generally falls into three categories. Asset misappropriations are the ones we hear about most often. These include theft of inventory, theft of money and theft of anything employees can get their hands on.

The less commonly occurring frauds include corruption and financial statement frauds. Corruption includes participation in bribes and kickbacks, and it is common for vendors to bribe employees to help them get favorable contracts or terms. Financial statement fraud centers on the manipulation of financial statements in order to create a financial opportunity for an individual or entity. It is easily the most expensive type of fraud, with the average scheme creating fraud losses in the millions and tens of millions of dollars. In the case of legends like Enron and WorldCom, those losses can rise into the billions.

Hunting Down the Thieves
Companies these days are determined to go after fraudsters with an arsenal of trained investigators. Investigations serve two very important purposes. First, they send a message to other employees that the company is serious about finding fraud and doing something about it. Second, an investigation helps the company learn about the weaknesses exploited by dishonest employees.

While investigations are very useful, they are still not the best way to reduce fraud losses. Recovery from fraudsters is generally very low, so performing an investigation with the intent of recovering ill-gotten gains is misguided.

To cut fraud losses, I recommend that companies invest in a comprehensive fraud prevention program. This will cost money up front, but that investment is easily recovered by a reduction in the company’s fraud risk. Consider even a 10 percent reduction in the risk of internal fraud for the $50 million company. That’s $300,000 saved in one year alone.

Weapons Against Fraud
An effective fraud prevention program has three major components: education, investigation and proactive prevention. Studies have found that internal frauds are most often discovered through tips from employees, customers, or vendors. Since employees are inclined to report misdeeds, company-wide education of employees is an integral part of a fraud prevention program. I recommend broad-based fraud education for all employees. More specific anti-fraud training should be presented by department and by position within the company.

While fraud prevention efforts are aimed at stopping theft, the need for investigations will never be completely abated. Ongoing investigations are important deterrents to fraud, but should not be the main focus of a prevention effort.

The most extensive part of a comprehensive fraud prevention program is the creation and implementation of proactive preventive techniques. These policies and procedures should go above and beyond traditional internal controls and government regulations, and should have a specific purpose relative to the prevention of fraud.

Development of a good fraud prevention program is serious business. For maximum effectiveness, I recommend the involvement of an anti-fraud expert. Those who have investigated hundreds of frauds are in the best position to develop the most relevant controls.

An effective program can be implemented efficiently with the right people and the right expertise. It may be complex and time-consuming, but the cost and pain to implement effective anti-fraud controls is small in comparison to potential and actual fraud losses.

The Best Defense
We’ve all heard that the best defense is a good offense. If management sees the signs that something is out of order, you should follow up. Management should trust their instincts enough to look into any situation that makes you uncomfortable. Hopefully, with a shift toward more proactive fraud prevention, those situations will occur more infrequently.

The process of fraud prevention really never ends. Even with the successful implementation of a comprehensive fraud prevention program, the work is not done. A company committed to fraud prevention will continuously monitor and improve the control policies and procedures.