by
Jim Marasco , CPA,CIA, CFE
Director, Corporate Services
StoneBridge Business Partners
From Fraud Matters, Winter 2010 - published by CPAmerica
Most organizations in this country operate their day-to-day operations without a passing thought to the "underground economy."
To most, it sounds like a television drama involving organized crime or narcotic dealers. But unsuspecting businesses may become victims.
There are many aspects of the underground economy. Three of the primary ones are money laundering, bid rigging and bribery. These frauds are labeled as "corruption" by the Association of Certified Fraud Examiners.
These crimes may not be as uncommon as one would think. How insulated is your organization?
Money Laundering
Money laundering controls took front and center in early 2008 in the Northeast.
New York Gov. Elliott Spitzer resigned after his participation in a prostitution ring was discovered. What captured investigators’ attention wasn’t so much the company he was keeping as the movement of funds between straw companies and various bank accounts with the intent to finance his indiscretions and avoid scrutiny.
Money laundering describes the process by which illicit money is "washed" through legitimate businesses so it can be used without attracting attention. It can be operated in a three-step process.
The first step involves placing funds into a legitimate financial institution.
The second step is layering. Once the funds are deposited, perpetrators move the funds around in layers of complex transactions designed to conceal the source and destination of the funds.
Integration of the money back into the economy is the last step. Businesses dealing in cash are typically used in these schemes. Restaurants, nightclubs, vendors serving these industries, and even parking garages make excellent candidates.
In 1996, the Suspicious Activity Report (SAR) was instituted by law. It now requires banks to report any known or suspected criminal activity. Since 9/11, banks have become more diligent in reporting this activity, as dollar thresholds do not apply.
Unfortunately, perpetrators have found a way to circumvent these controls. Today, they’ve turned to using open-system gift cards. These cards are reloadable and can be used at most retailers and ATMs.
But since they are not linked to a personal bank account, they avoid the scrutiny described above. It’s no surprise these prepaid cards have become a $63 billion business.
Bid Rigging
Strong internal controls suggest that capital projects or services expected to exceed a certain dollar threshold be subject to a bid/proposal process.
But if all the parties invited act in collusion, the independent bid process is compromised. This occurs more often when the services are specialized, the qualified or potential bidders are limited and/or the purchasing manager is corrupt.
Bid rigging is more prevalent in the construction industry. Collusion between general contractors or subcontractors can add substantial costs to a project. In most instances, it can be very difficult to detect.
Bribery
Illegal gratuities or bribery is a general business practice in many countries, but it is illegal in the United States. Louisiana Congressman William Jefferson was recently sentenced to 13 years in prison for accepting bribes for influencing business dealings with Africa.
Perpetrators may rationalize their behavior by believing that they are actually facilitating the process. However, accepting or paying bribes can have serious legal consequences. Many large organizations and governmental agencies specifically prohibit the receipt of any type of gift by vendors, consultants, etc.
Safeguarding Against these Influences
If you own a business that deals primarily in cash, you need to build strong controls, especially if you’re an absentee owner. The federal government is also watching. A heightened sense of awareness by the banks and federal agents has this activity closely monitored.
Purchasing managers should be routinely rotated in larger organizations. Capital projects should have a "clerk-of-the-works" assigned to independently oversee the project from start to finish. All aspects of the bid process, subcontractors used, change orders, etc., should be closely monitored by the organization independent from the construction manager and architect. All requests should be advertised to seek the most widespread coverage possible.
All organizations should prohibit their employees from receiving gifts and notify their vendors of their policy. Employees working in influential positions should be watched for suspicious behavior. Ethics hotlines should be established to offer other employees or vendors the opportunity to assist in monitoring for this activity.
The "underground economy" may seem far removed from your own organization, but it could be a lot closer than you think. As with most fraud, safeguarding against these influences starts with a general awareness and ends with a strong system of internal controls.
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