(With apologies to the Five Man Electrical Band)

This article in the Journal of Accountancy explores why people commit fraud. According to the article, a 1980’s-era study found that “an astonishing one-third of employees actually had stolen money or merchandise on the job.” The article asserts that the “fraud triangle” is composed of three factors: Pressure, Rationalization, and Opportunity. One theory is that the more dissatisfied the employee, the more likely he or she is to engage in criminal behavior. Another theory is that when personal financial pressure meets an opportunity to commit and conceal a crime, and the offense(s) can be rationalized as something other than criminal activity—then fraud, corruption, and other criminal activity occurs.

According to the article—

The lesson in these stories is that fraud does not occur in isolation. All crime is a combination of motive and opportunity. The opportunity to commit fraud is typically addressed through internal controls—if the proper checks and balances exist, it is more difficult (though still not impossible) to defraud an organization. …

The body of research into why “good” employees turn to fraud can be distilled into at least two important concepts. Employees and executives who feel unfairly treated sometimes believe they can right the scales by committing occupational fraud and abuse. Workplace conditions are therefore a major risk factor in predicting fraud. Also, employees faced with embarrassing financial difficulties pose a significant problem. The simple moral to the auditor is to pay attention to what goes on outside the books, too. So while you’re looking at the numbers, keep one eye and both ears open for disgruntled or financially strapped employees. It may mean all the difference in detecting fraud.

Frequent readers of this site may have noticed a penchant to report on stories of fraud, bribery, false statements, theft of government property, and other corrupt actions within the public procurement process. Although it is “conventional wisdom” that many government contractors are crooks, a perusal of articles on this site shows that there are as many corrupt government employees as there are corrupt government contractors. If one believes the now thirty year-old study referenced in the above article, then perhaps as many as one-third of government employees might be corruptible—especially when opportunity and rationalization meets personal financial pressure.

The foregoing is simply prologue to yet more stories of corruption. ** Sigh. ** Here are three stories that recently came our way.

First, here’s a Washington Post story about John Alfy Salama Markus, also known as John Salama. Markus, who was allegedly “a soldier in Iraq” where he was awarded a Purple Heart and Bronze Star, before becoming a project engineer for the U.S. Army Corps. of Engineers (USACE). According to the article—

Markus faces charges of conspiracy to defraud the United States and money laundering. The money laundering count carries a 20-year maximum prison sentence. … The complaint alleges Markus took bribes from Nouri in exchange for providing confidential information to [Ahmed] Nouri's company, Iraqi Consultants & Construction Bureau, about bidding negotiations on certain projects.

Markus also allegedly steered Army Corps of Engineers projects to Nouri, including a $6.25 million project to enhance security at the Bayji Oil Refinery in central Iraq for which Markus allegedly received at least $200,000 in bribes.

Citing Army Corps of Engineers records, the complaint alleges four more contracts were awarded to ICCB in the summer of 2007 totaling approximately $6.3 million. For those projects, Markus allegedly sought $550,000 in bribes.

The [complaint] alleges Markus deposited the bribes in bank accounts in the Middle East and in the U.S. and used the money to build a $1.1 million house for himself and his wife in Nazareth, Pa. They had previously lived in Belle Mead, N.J.

Second, let’s talk about property control. Control of Government Property is important, and so is control of company-owned inventory and material. Theft of Government property is a fairly serious issue and we’ve reported before on people who thought they were merely stealing company-owned inventory—only to realize that the stuff they took actually belonged to Uncle Sam. Sadly, we have another similar story to share today. Here’s a Department of Justice press release that announces a guilty plea by Annapolis resident Levon Smith, an employee of AAI Corporation (a Government contractor). Mr. Smith pleaded guilty to “theft of government property in connection with a scheme to steal and sell over $340,000 worth of copper cables and other government property used in foreign military operations.” According to the press release—

… from March 2008 to November 2009, Smith was a Senior Material Control Analyst at AAI Corporation, located in Hunt Valley, Maryland. AAI provides innovative aerospace and defense technologies, including unmanned aircraft to the U.S. government and other entities. …

The U.S. government purchased remote vehicle terminal cables and copper cables for AAI to install in U.S. property, including unmanned aerial vehicles (drones) used in foreign military operations. The United States government stored these drone cables at AAI buildings in Hunt Valley. On more than 40 occasions from June 2008 to October 2009, Smith removed cables and other U.S. property from the AAI buildings, including replacement parts for the drones operated by the U.S. military.

Smith took the stolen cables and property to a recycling company located in Rosedale, Maryland, presented an expired Arizona driver’s license and sold the stolen materials at scrap metal prices. Smith stole approximately $340,000 worth of government materials and received approximately $22,000 from the recycling company.

Think that’s a petty issue? Well, if you’re expecting to build a UAV but you don’t have the materials you need, that’s a problem—not only for the company but also for the warfighters who need their UAVs in the field.

For our finale, though, we have an even more mundane issue. Here’s a Department of Justice press release that discusses false claims associated with postage. You might think that it would be tough to rack up of any serious dollar issues about postage, but you’d be wrong. According to the DOJ—

California-based companies Quicksort Inc., Quicksort LA Inc. and Quicksort Sacramento Inc. have agreed to pay the United States $4.2 million to settle allegations that Quicksort violated the False Claims Act by falsely representing the level to which it had pre-sorted mailings in order to obtain discounted postage rates from the U.S. Postal Service. … The U.S. Postal Service offers lower postage rates to mailers who automate and sort their mail by zip code because these steps save the Postal Service time and money. Mailers use the services of businesses such as Quicksort that combine the mail of many customers and pre-sort it in order to qualify for the pre-sort discounts. After processing customers' mail, these pre-sort businesses present the mail to the Postal Service for mailing.

We started off by inquiring why people commit fraud and other corrupt actions. We reported that opportunity to commit and the ability to rationalize the action(s) need to be present. We noted job dissatisfaction and difficult working conditions as red flags—as was personal financial pressure. As you read over the three stories above—discussing common bribery, theft of property, and misreporting of data to obtain a financial advantage—we recommend you think about what conditions might have been present and whether there were any red flags (or other signs) that might have alerted leadership to the wrongdoing. Naturally, we don’t have all the facts and can only speculate, but we believe the thought experiment to be worth performing.

Next, consider your own business or working environment. What red flags do you see around you? What signs point toward a possible confluence of motive and opportunity?  And, more importantly, what are you going to do about them?

 

 

 

 

 

 

 

 

 

 

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