False billing frauds currently represent the largest dollar losses in small businesses. Unlike larceny, these are not spur of the minute, minor amount crimes. These are premeditated and substantial.
The Fraud
Billing frauds are too numerous to count. Fake payee (shell) companies, crooked vendors in cahoots with employees, or even freelance (non-accomplice) suppliers can be involved. Consider these:
- Shell companies (or even a fictitious "shell" person) can be created as phony vendors. The fraudster-employee creates an identity for a fake vendor, perhaps rents a mailbox at a UPS Store, and opens a bank account using the fake identity and maybe his wife's maiden name as agent for the vendor. An invoice is created billing his employer for goods or, more commonly, services, and the bill is run though the payables system.
When the check is generated it goes to the phony vendor mail drop box and is picked up promptly and deposited to the fake vendor bank account. Most likely an ATM card is used to clear the money out of the account. If inadequate purchasing and payment controls exist at the company, this scam can go on regularly for months or even years.
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Did You Know?
Be aware that "shell companies" are almost always involved in money laundering frauds, discussed elsewhere. Shells are still legal, but they constitute a huge threat to national security since they offer terrorists as well as common swindlers a way to form legal entities to facilitate their crimes.
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- A fraudster-employee can work in cahoots with an accomplice vendor, allowing the vendor to inflate invoices or short deliveries. The take is then split among the participants.
- A non-accomplice vendor is one who is completely unaware that a customer's employee is using him to steal.
- Freelance fraudster vendors can over-bill you, short your orders, double-bill you, etc.
- Employees in a position to make personal purchases with company funds through false billing schemes or even corporate credit cards scams bear watching.
- Multiple payments to the same payee is another method -- often called pay and return. The employee pays Vendor A and Vendor B, but sends A's check to B and B's check to A. He then calls the vendors to apologize for this error, asks them to return the checks and he'll reissue correct ones. The employee intercepts the checks when they are returned and uses them for check washing or other fake payee scams. The employee issues a second payment to each vendor, mailed to the correct address and marked as replacing lost checks.
The Flaw
Again, the lack of division of responsibilities in handling payments, purchase orders, checks, bank reconciliations will come back to bite you every time!
The Fix
Prevention, as always, is the best defense. Phony payments involve a plethora of transactions, and prevention will require some targeted methods depending upon whether payment is to a vendor, a benefit claimant, a customer, or employee.
In the case of shell company fraud, one good way to determine if it exists is to regularly review your Approved Vendor List. How many use post office box addresses? For employee-vendor fraud, check vendor addresses against the payroll addresses. Do any match? Look up unfamiliar vendor names in your phone book. Do they really exist?
The permutations of billing fraud go on forever. Just use your imagination. Pretend you're a crooked employee and try to figure out how you'd get money out of your business by using your payables system.