The Successful Frauditor's Casebook E-Book

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 682

Veröffentlichungsjahr: 2012

Beschreibung

Learn what works well and avoid the pitfalls in the real world of fraud detection and fraud investigation This casebook reveals how frauds and fraudsters were discovered--and delves into the investigations that followed. Each chapter covers a particular case, analyzing the factors that allowed fraud to develop and assessing the effectiveness of the detection process and the resulting fraud investigation. Importantly, the casebook examines the steps taken by organizations to recover from the cost of fraud and the damage that fraud has caused. * High-profile author, Peter Tickner, is well known in auditing and investigative circles * Cases of fraud, drawn from the author's direct experience as well as world-wide, are supplemented with checklists and practical guidance on fraud detection

Leseprobe

Contents

Foreword by Brian Paddick

Preface

Acknowledgements

Part I: Setting the Scene

Chapter 1: The Lessons Worth Learning From Past Mistakes

The Casebook Approach to Fraud—Lessons Worth Learning From Past Mistakes

Why Do We Need to Learn Lessons From Others’ Past Cases?

What Are the Lessons to Learn?

Getting to Grips With the Successful Frauditor’s Casebook

Part II: The NHS

Chapter 2: Cooking the Books in NHS Catering

Introduction

The Catering Case Where I Didn’t Bring Home the Bacon

The Chickens Finally Come Home to Roost

Conclusion

Chapter 3: NHS professionals—a better class of fraudster?

Cases From the NHS

Dental Fraud

Endnote—NHS Counter Fraud Activity

Part III: Charities and Schools

Chapter 4: The ‘nun on the run’

Case Background

That Fateful Local Authority ‘First Audit’

Case Outcomes and Concluding Thoughts

Chapter 5: Charity begins at home

Case Background

The Frauditor Finally Starts Work on the Case

Case Conclusion and Outcomes

Part IV: UK Banking Fraud

Chapter 6: Robin Hood or Robbing Hood?

Joyti De Laurey and Goldman Sachs

Case Closure and Outcomes

The Successful Frauditor’s View

Chapter 7: Bringing down the bank at Barings

Case Background

The Tale of the Fraudulent Trader

Case Outcomes and Conclusions

Part V: UK Police Internal Fraud

Chapter 8: The ‘Laird of Tomintoul’— and how to get the right to graze sheep at Scotland Yard

Case Background

A Sad and Sorry Tale of Crossed Wires and Missed Opportunities

Case Conclusions

Chapter 9: Corporate credit cards for cops—Part II

Introduction

Case Background

Part I—From An Internal Fraud Hotline to the Joint Police and Audit Investigation

Part II—Sounding the Alarm As the Corporate Ship Starts to Sink

Part III—Internal Audit Shows its Teeth, with Unexpected Consequences

Part IV—Internal Audit, Professional Standards and Met Finance Join Forces

The Final Reckoning on Corporate Credit Cards

The Last Word on Corporate Credit Cards For Cops?

Part VI: Internal UK Fraud

Chapter 10: Curiouser and curiouser

1. The Live Parrot Sketch

2. Sex + Drugs = Greed + Need

3. Mr Walsby-Tickle’s Little ‘Tickle’

Part VII: Government

Chapter 11: The men from the Ministry

The Outrageous Case of Gordon Foxley—and How He Out-Foxed the Pursuing Hounds

The Curious Case of Michael Allcock—Revenue Saint Turned Sinner

The Men at the Ministry—Conclusions

Chapter 12: The ghost, the guardian and the Galleria—internal fraud in local authorities

Case 1—A Ghost in the Machine

Case 2—The Guardian Who Wasn’t An Angel

Case 3—The Pig Farmer With His Snout in the Trough

Case 4—The Galleria: A Housing Scandal That All But Bankrupted A Local Council

Chapter 13: The heating contractor who was just a load of hot air

Case Background

The Fraud

Case Conclusions

Part VIII: UK Police and Military Outsourcing and Procurement

Chapter 14: An outsourcing nightmare

Case Context and Background

The Met’s Internal Audit Directorate Starts to Take An Interest

Case Conclusions

Chapter 15: Alarm bells should have been ringing out, loud and clear

Case Background

Round One—The First Audit Investigation

Round Two—The Joint Internal Audit and Police Investigation

Round Three—Internal Differences—At the Met and the Contractor—Get in the Way of Our Inquiries

Round Four—A Case Revisited and Internal Audit to the Rescue

Chapter 16: Fun with works and maintenance in the police and the Ministry of Defence

Background

When the Mod Came Calling Far Too Late

The Armed Robber, the Money Launderer and the Police Officer

Smile, Please! You’ve Just Been Framed!

Part IX: US Company Fraud

Chapter 17: Crazy Eddie wasn’t so crazy after all

1987—The Year of Great Unravelling

The Final Curtain For Crazy Eddie

Endgame—The Criminal and Civil Cases and Their Conclusions

Chapter 18: ZZZZ Best and Barrie Minkow—saint or sinner?

Introduction

Phase I—The Rise and Rise of Barry Minkow and ZZZZ Best

Phase II—What Goes Up Must Come Down—and With A Bump

Phase III—The Phoenix Rises From the Ashes

Phase IV—The Phoenix Turns Out to Be A Phoney

Part X: Multi-National Fraudsters

Chapter 19: Firepower: a bitter pill to swallow

Firepower, A Little Blue Pill and Tim Johnston

Chapter 20: Recent scandals in the subcontinent

1. The Great Indian Telecoms Fraud

2. Satyam Computer Services—Riding the Tiger For A Billion Pounds

Part XI: Concluding Thoughts

Chapter 21: Can significant frauds be nipped in the bud?

Getting the Best Possible Chance to Nip First Time Frauds in the Bud

The Value of Effective Vetting of New Employees and Those in A Position of Trust

Minimising the Risk of A Repeat Occurrence of A Large Fraud

Endnote

Index

This edition first published 2012

Copyright © 2012 Peter Tickner Associates, Ltd

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Library of Congress Cataloging-in-Publication Data

Tickner, Peter, 1952-

The successful frauditor’s casebook / Peter Tickner.

p. cm.

Includes bibliographical references and index.

ISBN 978-0-470-97776-7 (pbk) ISBN 978-1-119-96059-1 (ebk)

ISBN 978-1-119-96060-7 (ebk) ISBN 978-1-118-33084-5 (ebk)

1. Fraud—Prevention. 2. Forensic accounting. 3. Auditing, Internal. I. Title.

HV8079.F7T534 2012

658.4'73—dc23

2012001792

A catalogue record for this book is available from the British Library

Foreword

This book is set out as a collection of fascinating case studies and is Peter Tickner’s second book about tackling fraud and corruption in the workplace. It is an area where Peter has a particular expertise and lifelong interest, for which anyone who has ever met Peter or worked with him can vouch. If you enjoyed and learnt from Peter’s first book on fraud, you’ll certainly gain from this, his second book. If you haven’t yet read Peter’s first fraud book, then this one will give a good idea of just what you’ve missed out on so far, even though this is self-contained and doesn’t need to be read in conjunction with the first fraud book, which concentrated on how to be a successful fraud investigator. This book is much more about what actually happened in a number of significant frauds and the investigations that followed, with Peter’s frank analysis and views on the outcomes of each case.

I have known Peter for a number of years, since we first met when I was the Borough Commander at Lambeth and Peter was the Met’s civilian Director of Internal Audit. Police senior management recruited Peter from central government to stop the rot after the Met suffered an embarrassing £5 million internal fraud, one of the cases that Peter has now covered in depth in this book.

Peter was the one member of the civil staff who seemed to strike fear into some of my senior police colleagues, through his impartiality and indifference to their rank or status. If they had anything to hide, either wasting public money on major projects, abusing expenses or becoming too cosy with contractors, he seemed to sense it and home in on them relentlessly. Extraordinary though it might now seem, such was Peter’s reputation that at one point some of my police colleagues were regularly reporting on Peter’s activities to the ‘Diamond Group’ of senior officers set up to monitor the Met’s reputational issues. Their main concern, rather than dealing with the issues that Peter raised, was often how they could best mitigate his findings.

For my own part I have always been concerned about the need for integrity and truthfulness, especially within policing and I knew that whenever I had worries about the activities of staff or contractors a quiet word with Peter and he’d find out whether there was any cause for concern or not. Later, both when I was in the Serious Crime Directorate and towards the end of my career at the Met when dealing with major IT projects, I found I could turn to Peter for help when matters that were potentially fraudulent or corrupt came to light, especially where colleagues were somewhat less concerned than the public might expect. Peter had an expert fraud investigative team that worked alongside his audit staff and reported directly to him, that he had built up from scratch and that consisted of retired fraud squad detectives, ex-customs investigators and specialist analysts.

I know that Peter has poured much of himself into this book, which is a mixture of cases that he dealt with at the Met and earlier in his career, alongside some iconic frauds in the UK and elsewhere that were investigated by others. His style, both in person and in the book, is lively, enthusiastic, informative and entertaining. Peter doesn’t hold his punches and tells the tale of what really happened as much as he can. Even though Peter retired early from his job in 2009, he remains as passionate to this day about rooting out fraud and corruption in the Met and other organisations both public and private, as he ever was when based just across the road from my colleagues and me at Scotland Yard.

Enjoy the experience and read on, where you’ll soon pick up on Peter’s enthusiastic no-holds style. He’ll tell it how it is, right down to the details that went wrong as well as right both in his own fraud investigations as well as those of others.

Brian Paddick

Former Deputy Assistant Commissioner, Metropolitan Police, London

Preface

FINDING AND FRUSTRATING FRAUDS AND FRAUDSTERS

The theme of this book is an in-depth look behind the headlines at what actually happened to organisations that had fallen victim to significant frauds. I’ll be looking at how the frauds eventually came to light, how they pursued the fraudsters and, what the outcomes, good or bad, were for the organisations and individuals involved.

You can read this book as a freestanding work in its own right or see it as the next step on from my first book about fraud, published in 2010. In my first book I concentrated on showing those new to fraud investigation—and those who needed a refresher—how to go about a successful investigation and keep senior management, the lawyers and the police onside and in their rightful places during the investigation. In this book about fraud cases that caused significant damage, I’m looking at what happened in practice to a variety of organisations where fraud struck. I’m not just drawing on my own experiences but also that of others who’ve had to manage high-profile or difficult investigations.

The people who I have contacted have either been involved in pursuing or been the victims of significant frauds. This has included fraud investigators, internal auditors, managers and detectives. Just to add some spice and hear from the other side of the counter, I’ve also been out with my long spoon and ‘supped with the devil’, talking to the fraudsters and their accomplices about how they were able to fool colleagues, internal and external auditors as well as external reviewers.

One of the most frequently asked questions by the press and the public when a major fraud does finally see the light of day is ‘why didn’t the auditors know?’ Close behind that question comes ‘what were the non-execs doing?’ followed by ‘why didn’t senior management spot the fraud before?’ In this book, I have tried wherever possible to find the answers to those questions. Far too often experience shows that either the original messenger gets ‘shot’ (e.g. sacked or disciplined) or the internal auditors get the blame for the frauds that managers failed to spot.

I have always held the view that there is no such animal as an archetypal fraudster as most employees, owners of businesses and contractors are capable of fraud in the right circumstances. Notwithstanding my general view, within certain types of frauds, there are some recognisable types of behaviour that sounds the alarm bells to an experienced ‘frauditor’. This is particularly so with some of the iconic fraudsters whose names are well known in fraud finding circles.

With most of the big name fraudsters and con men and women that I’ve put in this book, including ‘Crazy Eddie’ and Barrie Minkow from the US, Tim Johnston from Australia, as well as UK fraudsters such as Anthony Williams, Colleen McCabe, Joyti De Laurey and Nick Leeson, common traits stand out. They all wanted to be bigger players than they really were and they all wanted the adulation of others. Nearly all are likeable individuals who are expert at turning on the charm (with the notable exception of Colleen McCabe) and all (except Nick Leeson) tried to buy the friendship and loyalty of others with monies that they had stolen. The ex-CEOs among them are all highly charismatic and plausible individuals.

The one common denominator however, of fraudsters and fraudulent and corrupt businesses, is greed. Greed drives them to bite off more than they can chew, greed drives them to lie and cheat and defraud; greed drives them to steal. They want something that isn’t theirs and either vicariously through others or directly themselves want to use their fraudulent gains to cure their envy of those that have the things that they want. Some of them are borderline fantasists too, almost conning themselves as well as others into believing the web of lies and deceit that they have spun around themselves.

The one practical skill that all these fraudsters possess is a remarkable talent for creative accounting and creative storytelling. Without it, none of them would have ever got past their first serious attempt to defraud and would not have entered the fraudster hall of fame.

I haven’t written this book to glory in their place in the hall of fame, or in the case of the lesser known fraudsters in the book, bemoan the fact that they didn’t make it there. This book sets out as clearly as I can the practicalities of finding and catching the most damaging fraudsters and fraudulent companies that might attack your own organisations. By setting out what others had to do, the means by which they unearthed frauds and dealt with their consequences, I hope to pass on useful hints and tips to those whose job it is to protect their organisations from fraud.

These separate case studies of actual fraud and corruption will help anyone reading this to hone their skills and pick up on the things that seem to work best when conducting a fraud investigation. Apart from the first two chapters in the first section and the last chapter, each chapter is self-contained. So if you don’t feel that a particular case has got anything to offer you, I won’t be offended if you skip that chapter and pick on one that you feel is more relevant!

Enjoy the book and I hope it helps you in your work.

July 2011

Acknowledgements

I am indebted to all those who have helped me along the way with this book, a journey that proved harder than I had expected. I was lulled into a false sense of security with the smooth production of my first book on fraud in 2010 and foolishly thought that I’d have no trouble meeting my publisher’s deadlines with this one! I’m very grateful to have finally got there and there are a host of people who I must thank for their help and assistance along the way. If I’ve missed anyone out, I apologise now for the unintended oversight.

First of all, a grateful thank you to my former head of investigations at the Metropolitan Police Authority, Ken Gort, and to retired Detective Chief Superintendant Phil Flower, who between them have acted as my sounding boards and given up their time to edit and comment on some of my more contentious chapters from my past life at the Met. Next, a very grateful and heartfelt thanks to Barrie Cull, who kindly gave up a considerable amount of time, both on the last book and this one, to draw the excellent cartoons that you will find in my books.

I’ve had some excellent feedback and help along the way on specific chapters in this book. Those I must thank for their efforts here include Steve McKenzie, ex-NHS Counter Fraud Service (now with the National Fraud Authority) for advice on NHS dental cases and Luis Remedios and Mark Gibson, Bromley Council Internal Audit, for help with the ‘Nun on the run’ case. Also Mohammed Khan, Chief Internal Auditor at Lambeth Council, for help and editing the chapter on their heating contractor case. And fellow anti-fraud lecturer Detective Constable Malcolm Driscoll, now with British Transport Police, for editorial assistance and friendly forbearance on the Joyti De Laurey chapter, as well as Neil Martin of NMP for editorial comment and permission to use material from Nick Leeson’s official website. And I must especially thank Kim Quarterman, as one chapter in this book would not have been possible without her bravery and subsequent actions.

I am particularly grateful to John Crutchlow, former Director of Finance at the Metropolitan Police, for editorial commentary, time, patience and much forbearance over the chapter on the Laird of Tomintoul, a story that I know carries some painful memories of times past at the Met. I am also grateful to Gerard Ryle, award winning journalist and author of Firepower—The most spectacular fraud in Australian history for permission to use material from his articles and for his editorial comments on my chapter on the Firepower story. Here I must also thank reformed convicted felon Sam E Antar for permission to use material from his website and for editorial comment on my ‘Crazy Eddie’ chapter.

I must also mention the help and advice I’ve received along the way from Greg Marks at CIPFA and Jim May at the Institute of Counter Fraud Specialists. Thank you as well to Catherine Crawford, Chief Executive at the Metropolitan Police Authority, for vetting some chapters and permission to use material drawn from my experiences when Director of Internal Audit for the Met. I’m grateful also for encouragement from fellow fraud author Nigel Iyer, whose enthusiasm always spurs me on, and auditing author Spencer Pickett, who started me on the writing trail and was kind enough to point me in the direction of his publishers. Not forgetting my former professor and fellow fraud author Alan Doig, whose typically blunt advice: ‘Forget the PhD—write the books!’ while we were having coffee together in a cafe one cold day in early spring, inspired me to continue writing rather than researching about fraud.

Finally I have to thank the two who’ve most been affected by the time I’ve spent researching and writing this book. First, thank you to my wife Elaine, who as well as putting up with my obsessive writing in the study has been my transport to the station on research days and, second, our 14-year-old cat Minnie, who has frequently sat at my side by the computer, offering appropriate comment and worried looks about what I might be writing next!

Part I

Setting the scene

Chapter 1

The lessons worth learning from past mistakes

By three methods, we may learn wisdom: First, by reflection, which is noblest; second, by imitation, which is easiest; and third by experience, which is the bitterest.

Confucius 559–471 BC

THE CASEBOOK APPROACH TO FRAUD—LESSONS WORTH LEARNING FROM PAST MISTAKES

Any wisdom that I have around fraud investigation has come from a combination of reflection and experience. I’m hoping to spare you some of the more painful and bitter parts of experience by setting out case studies where reflection and imitation will be sufficient to digest the lessons to be learned.

I could almost have entitled this book ‘The successful fraudster’s casebook’, except that nearly every fraudster covered here was eventually unearthed. However, many of them got away with it for years and enjoyed a successful career until their eventual exposure. In the two major bribery cases I’ve covered, one corrupt individual did successfully get away with it throughout his employment. He was only brought to justice some five years after his retirement and even then, although he served a term in Ford Open Prison, he never did reveal where he had salted away most of his ill-gotten gains and has continued to live off the fruits of his corruption to this day.

For my own investigations covered in this book, I have deliberately picked several cases where matters were not as clear or as straightforward as I would have wished during the investigation. They are all cases that helped hone my experience and knowledge. In one instance from my early days, my report about the initial case led to the opposite of its intended effect and in another later case the fraudulent individuals were only exposed through the civil courts some six years after we had concluded our investigative work and had moved on to other cases. But don’t worry, I have included some successful cases as well!

Successful fraud auditors (‘frauditors’) are successful for three key reasons:

1. They have learnt their craft through good practical experience.

2. When they made a mistake in the past, they analysed what went wrong and have made sure since that they haven’t made the same mistake again.

3. They know and understand themselves—their own strengths and their limitations—and they know and understand the fraudster’s mindset and modus operandi.

WHY DO WE NEED TO LEARN LESSONS FROM OTHERS’ PAST CASES?

There are days when I have cynically wondered if organisations really can ever learn any lessons from past mistakes, particularly in the world where I spent most of my career, central and local public services. But I know that the only way that you truly can get better at my line of work has been the ability to know when, how and why you got it wrong and to make sure that you do not repeat that the next time the same situation arises. The problem with organisations is that while individuals may have learnt from their past mistakes, organisational learning can get lost between one generation of management and the next. This is particularly true in any organisation where politics or collective and individual over-ambition get in the way of logic and sense.

So, what are the critical questions to answer if we are to learn the lessons from other organisations that have been defrauded? And how can we benefit from those answers? Seeing others’ mistakes and investigative successes objectively can enable us to map them onto similar scenarios in our own organisations and help focus our investigative efforts where something has come to light. They can also help us to identify areas worthy of closer attention and analysis to see if we have the same symptoms in our organisations.

Perhaps the first critical question is to ask why is there a need to pursue the guilty if you are the victim of a fraud. Can’t you just leave that to the police? Well, firstly, the police may not consider your fraudster to be worth pursuing. Secondly, if they do decide to pursue them it could be years before the case comes to court, if at all, with no guarantee that your funds will be recovered. For smaller organisations, the fraud could easily take them under long before any police enquiries are complete. Finally, unless you are very lucky, the chances are that the fraudster will have stolen more than can easily be recovered. Generally, most frauds are not spotted until they are either well under way or it is some time after they have been committed. By that time, the fraudster will have made some effort to dispose of part if not all of their ill-gotten gains.

This leads on to the second question. If there is no in-house fraud team, why can’t the organisation call in a specialist? After all, they will almost certainly be able to do something immediately useful for the organisation, rather than wait for the police. Well, you can—and it may be your only option. But fraud specialists don’t come cheap, we like to think that our skills are highly specialised and that comes at a premium, particularly if the organisation calls in one of the forensic arms of the larger accounting firms.

If there is any kind of professional internal audit service or if they or others have previous experience of a fraud investigation, then I would always urge organisations to do as much as they can in-house, bringing in the experts where really needed. It is usually a far cheaper and often more effective option. You will know your organisation best and there is no steep learning curve required to get to grips with the organisation before getting to grips with the case. Any experienced and sensible individual, auditor or line manager, who follows the processes that I set out in ‘how to be a successful frauditor’ should be able to manage most of the internal investigation with the in-house professional assistance from HR and legal, using any professional fraud auditing advice where best needed.

I have worked with every variant of the options for using outside professionals to help with a fraud investigation, from letting them run the whole case to ‘cherry-picking’ specialists to help with one-off parts of the investigation or the civil court process. The only time that I ever felt I had no choice but to go with outside specialists running the case was when I had a very small team many years ago and, apart from me, no one with any fraud investigation experience. The case needed the undivided attention of a team and involved a number of locations scattered around the UK. I simply didn’t have the resource in-house to conduct the enquiries in a sensible time-frame so I felt that the only sensible option was to bring in an outside specialist team to help me. Even then, I got together with the organisation’s procurement specialist and between us we drew up a specification and made sure that a good cross-section of specialist firms got invited to our briefing about the case. From that we invited expressions of interest and then asked for bids back in 24 hours (by and large you can’t afford to hang about with a fraud investigation) and got them.

So how would I sum up the options?

Scenario:

1. No in-house expertise in fraud, small team

a) If management believe that you have or are suffering a significant fraud, then call for help and pay the price of bringing in specialists to do the whole investigation. If not, get a specialist in short term to do a scoping study and try to do what you can.

b) Revert to specialist help for the entire investigation if you don’t have enough bodies to spare.

2. No in-house expertise in fraud, larger team

a) Get a specialist in to scope and possibly run the investigation but if possible get your staff to work alongside so that they can both learn the ropes and keep the specialist in the picture about your organisation.

b) See 1 b) above.

3. Some in-house expertise in fraud, small team

a) If management believe that this is a complex or significant fraud look for specialist advice but do the investigation yourselves if you can.

b) If you haven’t enough expert knowledge in-house, try co-sourcing with forensic specialists.

4. Some in-house expertise in fraud, larger team

a) In all except the most complex circumstances try to do the investigation in-house.

b) If the investigation starts to eat too much of your available sources, consider co-sourcing with a forensic partner.

5. In-house expertise, but taking civil action, small team

a) You should be able to run the investigation yourselves, but for court purposes you will need to sign up a specialist forensic accountant.

b) Otherwise, only call in specialists to supplement staff shortfalls in the investigative team and make sure that you manage them, not they you.

c) When you pick a specialist for court, make sure that they have a track record of being on the winning side in a high proportion of their cases. Civil actions are balance of probabilities not reasonable doubt, so a 75% success rate isn’t good enough, you want nearer 90%.

6. In-house expertise, but taking civil action, larger team

As per a) and c) above. You won’t have the b) problem, will you!

Outside specialists with good knowledge of what happens in your type of business can be particularly helpful to support an investigation, as they may well know better than you where you are likely to find the bodies. I would still argue that you need to maintain control and manage the investigation, as, ultimately, their interest is in making a commercial profit but yours is in stopping the losses to your organisation and doing your best to recover stolen funds.

WHAT ARE THE LESSONS TO LEARN?

These will vary for each of us and I am sure that you will make your own mind up from reading the cases in this book. There are perhaps a few generic themes in certain cases worth picking out at this stage.

Lessons to learn—part one

This set of themes is largely about the reasons why frauds go undetected until it is too late.

Theme 1: Collective or group ‘three monkeys’ syndrome

(See no evil, hear no evil and speak no evil)

I’ve spent most of my working life being far too cynical for most of my bosses and then events have reinforced that I was right to feel that way all along. It is a natural trait in most organisations to emphasise the positive and I don’t have a problem with that. But there is also a natural tendency, particularly where there is strong-minded senior or top management, not to take bad news particularly well. In many corporate organisations and government bodies, this can manifest itself in an unwillingness on the part of those immediately below the top Board to bring ‘bad news’ to the table. That in turn transmits itself throughout the organisation. Eventually, even when everyone knows that a crisis is staring him or her in the face, no one speaks up about it.

‘Peter gets the usual reaction when he tells the Audit Committee he’s found a fraud.’

Management will try to ‘bury’ problems or manipulate performance data to hide something that is going wrong, rather than look for the cause. Equally, Boards of directors, particularly non-exec directors, can find it hard to do their fiduciary duty in organisations run by powerful, charismatic and wilful leaders. They too develop the syndrome and don’t want to fall out of favour with their peers. It is hard to challenge when you are a lone voice and many whistleblowers and chief auditors over the years have been the first to lose their jobs when they have dared to stick their heads over the parapet and challenge top management.

In this book, there are two variations on the ‘three monkeys’ syndrome. We have the powerful and wilful bosses, as in the cases of ‘Crazy’ Eddie Antar, Colleen McCabe and Barrie Minkow. We also have the blind senior management where they just couldn’t bring themselves to admit that they had made a mistake and got into bed with a fraudster, such as some of the cases I have included from my police experience and NHS days.

Theme 2: ‘Alice in Wonderland’—the ‘Magic Mushroom’ syndrome

There is an old saying that if it sounds too good to be true, then it probably is too good to be true. Fantasy has played a large part with some fraudsters and all con artists. The ability to lie convincingly and then get others to believe what they are hearing when it defies all logic. Barry Minkow, Sam E Antar, Ramalinga Raju and Tim Johnston are classic examples.

Theme 3: The ‘first over the cliff’ philosophy or ‘lemming syndrome’

This is a bit unfair to lemmings, as modern studies have shown that it is a myth that they follow each other blindly over cliffs into the sea. But time and time again human beings have demonstrated these very traits. The Firepower story is a classic of this type. So too is the Barry Minkow case study. It also applies to Crazy Eddie and to a lesser extent Satyam. Everyone wanted a piece of their companies when they thought that they would get massive returns on their investments and they were so desperate to invest that they were oblivious to many of the basic precautions that any rational person would have taken or considered.

Theme 4: ‘Greedy and needy’ people will steal money from their employers

Ultimately, they haven’t got what they want or perceive they need and they look for opportunities to get it. If you don’t check up on them or have adequate and effective supervisory controls over them, they will steal from you. Worse than that, when they get a taste for it, they can’t stop. Cases in this book include the ‘Laird’ of Tomintoul (Anthony Williams), the ‘Toys ’ Us’ sex and drugs man, Paul Hopes and Joyti De Laurey.

Theme 5: Prevention is always better than the cure

In many of the cases in this book the fraudsters could have been stopped in their tracks before they got going. In some instances, checks and proper vetting procedures would have given organisations the opportunity not to take these people or organisations into their fold. In other instances, financial lifestyle checks of employees with spending authority would have identified that they were a serious risk to their organisation.

Theme 6: When employees forget why rules are necessary the fraudster steps in to fill the gap

This isn’t a variant of three monkeys as this happens at the grass roots and middle management levels of the organisation. Senior management can be blissfully unaware until it is far too late. It is the prescribed, alleged and actual business. There are always three systems in any organisation, the one laid down (prescribed), the one management tell you that they apply (the ‘alleged’) and the one that employees adopt in practice. When there isn’t too much drift between the three there isn’t a problem. But once familiarity lends itself to short cuts being taken by employees to avoid unnecessary work or ‘improve the system’ on the ground then doors are opened for the alert internal fraudster.

The classic starting point is when someone is supposed to check the work of another but they have worked together for years and are social friends. Almost inevitably they don’t check their friend as thoroughly as they would a stranger. Where regular staff or contractors are repeating the same work routines with each other, this familiarity leads to controls getting dropped. Joyti De Laurey’s bosses trusted her. They didn’t check their own bank statements for months—or they would have spotted her frauds very early on. Sam E Antar got successive audit teams compromised and reliant on their trust of him not to look too closely at dodgy areas of Crazy Eddie’s business. Alex Watson-Jones persuaded a willing management to ease his way to a £2.8 million payout by getting them to relax controls so that they could spend their budget before the year-end.

Theme 7: The Law of Unintended Consequences

All investigators should embrace this principle, as it is often how a sequence of events exposes a fraud or corrupt act. The law (as first expounded by US sociologist Robert Merton in 1936) is that in any complex social activity three possible unexpected consequences can occur. A positive outcome that wasn’t intended, a negative outcome that wasn’t intended and an unforeseen outcome that hadn’t been considered.

It is the unforeseen outcome that often casts a light into the dark and murky world of the fraudster. It can also bite the investigator. In one of my earliest cases in my days at the NHS, I learnt a hard lesson when I wrote an investigative report that the recipients deliberately chose to misread. Their interpretation was possible because I had been unintentionally loose with the language that I had used to set out the details of what was going on. What I had written was factually accurate and I had wrongly assumed that they would draw the same conclusions that any auditor or investigator reading my report would have drawn. I had forgotten both to remember that a report has to be written for its intended audience and that for non-investigators you must hammer home that point that you are trying to make and not leave any ambiguity in the conclusions that you want your audience to draw from the facts.

The corporate credit card scandal at the Metropolitan Police happened because of the unforeseen consequences of changing the means by which police officers were required to account for their spending each month. Also at the Met, the contract changes to the vehicle recovery contract led to an exponential rise in the cost of one type of activity that eventually caused all of us to look very closely at what was going on. Barrie Minkow’s Ponzi fraud, Sam E Antar’s sales and accounting fraud and Ramalinga Raju’s accounting fraud all created unintended consequences that eventually derailed them and exposed their frauds despite the failure of external auditors to unearth the frauds through normal audit work.

Lessons to learn—part two

My second set of themes is about lessons to be learned from the investigation and the pursuit of the fraudster to get the organisation’s funds back and to stop the fraud.

Theme 8: Don’t forget to stop the fraud first!

The external auditors had a whistleblower with Barrie Minkow but by delaying their contact with the SEC until the maximum allowed by the legislation and by not clearly passing on their concerns to their successors or the rest of his Board they unintentionally allowed thousands more investors to get stung before the nonsense was stopped.

Theme 9: Bringing in the police at the beginning can lead to delays in any civil recovery action

Government ministries and agencies are particularly prone to this. Foxley is a classic here, where the investigation took years to bring to court. It is sometimes essential to bring in the police, particularly if the fraudster has done a runner or even in the charity case I cover, where the fraudster appeared to be suicidal and the police were called in because of concern for his welfare (they didn’t realise that he had defrauded them at that point!). More often than not, early formal involvement of the police can cause two difficulties. First, they are there to solve a crime and catch a criminal; they are not there to help the organisation recover its assets. But once they have seized evidence you may have some difficulty in working out exactly what the fraudster has taken until the police can give you access to the papers they have acquired. Second, from the moment that the police are involved you have to tread carefully in any further work by your own people or those that you have hired in to get to the bottom of matters. It will be difficult to interview any potential suspect or deal with disciplinary issues without running the risk of falling foul of rules of disclosure or PACE (Police and Criminal Evidence Act) requirements that will apply once the police have started their investigation.

Police investigations and subsequent criminal proceedings can be lengthy affairs, particularly in fraud cases unless they are very ‘open and shut’ and the fraudster confesses. That can leave the civil process of recovering stolen assets in limbo and, for medium-sized organisations, can place a financial burden on them that may even take them to the wall in hard economic times.

Theme 10: Alerting the fraudster that you are on to them can cost you dearly

If you can, you should avoid alerting the fraudster that you are on to them until you have no other option. With Alex Watson-Jones, he had carried on at work after committing a major fraud as if nothing had happened. But once he was alerted by management suspending him from the office, he had time to move assets around and hide monies before the police called at his door.

Theme 11: When you go after a fraudster, go hard!

History shows that even if they put their hands up and admit their fraud, you still need to keep the pressure on them if you are going to recover as much as possible of whatever cash and other assets they have stolen from your organisation. Where possible, I favour the multi-tracking approach often used by the NHS Counter Fraud Service. Multi-tracking is simply using all available likely methods to get at the fraudster and recover any losses suffered by the organisation. Single tracking by comparison would mean going for a criminal or civil action but not both.

I used the multi-tracking approach successfully against fraudulent linguists in the police until my early retirement in September 2009. We would go for civil recovery, criminal prosecution if possible and seek to have them removed from their professional panel that enabled them to get employment as a linguist.

Theme 12: Leopards and their spots

Do convicted fraudsters truly reform—or is it simply another variation on the theme that caused them to commit the fraud in the first place? Barrie Minkow and Sam E Antar are two famous, perhaps infamous, US examples. Joyti De Laurey and Nick Leeson are two well-known British examples. All of them will tell you that they have reformed from the characters that committed the frauds for which they all received substantial sentences.

In the two US examples, Minkow became a Doctor of Divinity while in prison and set up the Fraud Discovery Institute, dedicated to exposing other business fraudsters in the US. Sam E Antar runs a website that explains in detail how he was able to get away with his frauds. Both of them have supported training and investigative courses run by the police and major investigative organisations. Antar claims not to take a penny for anything connected with the frauds that he committed, Minkow,1 until his recent fall from grace, was a senior church pastor and for ten years repaid a third of his earnings from anti-fraud training and presentations about his frauds towards the losses incurred by his victims.

For the UK fraudsters, Joyti De Laurey is now heavily involved with a prisoner’s rehabilitation charity and Nick Leeson, who also ‘found God’ in prison, started a new life in Ireland, gives talks to this day about how he did what he did and its consequences. Nick Leeson is the only one of the four who has always charged a fee to talk about his fraudulent former life. Nick has supported cancer charities and the like but to the best of my knowledge has not repaid any money to investors or others who lost out in the collapse of Barings.

All four have at various times since their frauds came to light courted the media, whether the press, news channels or through websites setting out details of how they committed their frauds. Ego and their need to be on centre stage have played their part with all four. They can all turn on the charm and come across as likeable ex-rogues when in one-to-ones or at group gatherings.

The leopard and spot theme is one about which you can make up your own mind. I’ll just sit quietly by with my cup of scented Earl Grey tea (or nice glass of claret!), cynical smile and deeply suspicious mind.

GETTING TO GRIPS WITH THE SUCCESSFUL FRAUDITOR’S CASEBOOK

I’ve written Chapter 2 as a lead in from this chapter to the rest of the book and the last chapter as very much a pulling together of my thoughts and experiences. In between, each chapter is complete and stands entirely on its own merit—and you can read any chapter in any order, depending on the type of case that takes your interest.

To give a reference point and a structure to the casebook, I have divided groups of chapters into sections, to reflect the dominant themes of those chapters and help signpost any chapter that might be of particular significance at the point when you are reading this book.

Notes

1. At the time of writing (November 2011) Minkow has been sent back to prison for a further five years for a fraud committed while running the Fraud Discovery Institute.

Part II

The NHS

Chapter 2

Cooking the books in NHS catering

Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened.

Winston S Churchill (1874–1965)

INTRODUCTION

It may seem an odd place to start a book about fraud cases that were largely successfully investigated to one degree or another, but fraud auditors and investigators don’t get delivered by the stork fully formed and professionally at the top of their game. We all learn our trade by a mixture of other colleagues’ experiences, learning what can or cannot be done and, ultimately, we learn from our own earlier mistakes.

When I started my career, only detectives and Customs officers had professional training to become investigators, everyone else learned as they went along or from experienced colleagues. Professional training nowadays can give a whole range of investigators and auditors the tools, but you still need to learn when and where they are appropriate during a live investigation. The art of becoming a better investigator is to know when you have made a mistake and never, ever, do it again.

For the first twelve years of my working life, from 1971 to 1983, I was an external auditor and then an audit trainer in the NHS. We were very much fraud audit oriented in those days, although systems based auditing had already replaced some of the ‘voucher bashing’ tick and turn work that had been an auditor’s bread and butter in the 1960s.

After seven years as a field auditor, I found myself on temporary promotion in our HQ, training the next generation of would-be NHS auditors. As part of the job, I would be invited every now and again to give talks to management training establishments in the NHS about what we did when we audited their hospitals and practitioner services.

I gave one regular talk to each generation of trainee catering managers as part of a much longer programme about the financial aspects of their business. On one particular occasion, I was the speaker immediately before lunch and a catering manager with a reputation for balancing his budgets to the penny was speaking immediately after lunch.

The catering manager and I sat down together in the lunch break with the course organiser. In my usual way, I was waxing lyrical to them both about some of the frauds and fiddles we had picked up in NHS catering since my last visit to the training establishment some six months earlier. What I failed to notice, although it wasn’t missed by the course organiser, was that the catering manager went paler and paler as I went on about one particular recent fraud.

When I came back to the next course a few months later, I couldn’t help noticing that this catering manager was no longer on the programme of speakers. I asked the organiser what had happened to him. She reminded me how pale he had gone when we sat down together and I had been talking about fraud on the previous visit. I had accidentally been spot-on in describing the very fraud that he had been committing.

Shortly after the catering manager’s return from speaking at the course, the police had arrested him and charged him under the Theft Acts. He had been stealing hospital supplies to run his own separate catering business. It was one of the reasons why his budget had balanced so well. To conceal his thefts he had to keep a tight control over catering spending in each hospital. He would also ferry supplies between hospitals to ensure that any surplus supplies at one went to another. That had given him ample time and opportunity to siphon off supplies between one hospital and the next in the group. No wonder he had gone so pale when he met me the previous time!

One of my favourite anecdotes when I used to help with the training of future NHS catering officers, by showing them how we knew when the catering managers were on the fiddle, was the true tale of the unqualified treasurer and the qualified head cook. In case you are wondering, I wasn’t showing the trainee catering officers how to avoid us catching them on the fiddle, I was just impressing upon those at the start of their careers that if they were tempted to go bad, we had many different ways of catching them—and probably would.

When I started my professional career in the NHS audit service we still had a few senior finance people who had been in post before CIPFA’s predecessor, the IMTA, became a chartered professional body requiring its members to be professionally qualified. Originally, there was no obligation to take the professional exams of the IMTA and many had just paid their subscriptions without taking the qualification. One of the last of these left in a senior post was the treasurer at a London hospital group when I first met him. George was a larger than life character, a local amateur opera singer and a Brian Blessed lookalike and soundalike and, as I discovered years later when our paths crossed at another hospital group, quite a Don Juan too. The head cook was a constant thorn in his (and my) side, earning colossal amounts of overtime and seen as untouchable as he was the local union rep.

George was having lunch in the hospital canteen with the chief engineer. George looked up from his lunch and noticed that the self-same head cook was lounging up by the main staff tills, flashing his considerable gold jewellery and apparently chatting up a young female catering assistant. George wasn’t impressed. He turned to the chief engineer. ‘See that bloody man, he earns more than I do!’ The chief engineer paused for a second and a wry smile touched his lips. ‘Ah yes, George, but he IS qualified!’ The rest of us ducked out and left them to it. We could still hear the volcano erupting as we left the canteen.

THE CATERING CASE WHERE I DIDN’T BRING HOME THE BACON

The head cook who had wound up George reminds me of a tale of mistakes made in my early days, when I was still cutting my teeth. As George well knew, the head cook’s take home pay was phenomenal. Ancillary workers in the NHS had different ‘industrial’ pay scales in those days, right up to the rank of head cook. Only the kitchen superintendent (a rank in the largest catering establishments) and the catering manager were classed as non-industrial ‘management’.

I had been carrying out a routine audit review of the catering operation at this hospital group. With a colleague, I had interviewed the catering manager and we knew that the kitchen superintendent had been off sick for long spells, leaving the two head cooks to take it in turn to be in charge. When we tried to find out why this catering operation looked costly and inefficient, we were given a long tale of woe from the catering manager about how they couldn’t recruit the right calibre of staff and had to rely heavily on certain senior members of the catering department.

We did all the usual operational auditing things that we did in those days—random checks of their deliveries didn’t suggest that any main suppliers were doing anything suspicious, although we did pick up one supplier who’d been slipping some mutton into the lamb deliveries. Otherwise, the stores and the kitchens were very much as we had seen at many other catering units. We noticed that the till controls were not of the best and identified some possible loss of income in the staff canteen, but as the bulk of the catering operation was elsewhere it didn’t really look like there were any issues about the general business. Certainly none that would account for their slight but not insignificant—and continuing—overspend.

My colleague was inclined to move on but I persuaded my management to let me have a longer look around the department. It just didn’t feel right but I couldn’t find anything major that screamed out at me. So I turned my attention to the staff and their pay. I had been looking at the payslips and had then called for their clocking on and off cards. I quickly realised that one head cook hardly ever earned any overtime, whereas the other one earned so much that with the 1.5 and 2× enhancements for weekend work, plus a London weighting allowance, his take-home pay made him the highest paid ancillary worker in the NHS, around three times his basic salary. He was the ‘bloody man’ who’d aroused George’s ire, although I didn’t find that out until I was having lunch in the canteen weeks later.

In those days, the clocking on and off records were literally cards and as I was carrying a tray of them back to the audit room up a staircase I slipped, scattering hundreds of them over the stairwell and entrance lobby to the building. It wasn’t an auspicious start. The chief salaries and wages officer was furious with me and I ended up with half his staff helping me to stack them back in the right order.

When I finally analysed the cards, it was apparent that a small group of the senior catering staff, except one of the two head cooks, worked more overtime than anyone else did. When I looked at their card entries, they often hadn’t punched to ‘clock off’, having the head cook initial their cards to confirm their finish times.

In the long-term absence of the kitchen superintendent, the head cook earning all the allowances and excessive overtime initialled his own clock card on the frequent occasions that he had not managed to be ‘clocked off’ properly. It didn’t take a genius to be suspicious of their patterns of working and cavalier use of the clocking machines. I noticed that the head cook started work at 6am most days and wasn’t clocked or initialled off until 9pm at night. Yet the other head cook was doing a bare minimum 8-hour shift each day. I spoke to the catering manager about it and they told me that one head cook liked to work the overtime but the other one, for personal reasons, didn’t want to.

I still wasn’t happy. Why would this head cook and the three assistant head cooks all need to be on duty longer than anyone else? When I started mapping out when they were on duty, it was obvious that they were always on together whenever there was an opportunity for enhanced overtime rates, especially at the weekend. And, curiously, they were often on duty at the weekend without any cooks with them. I could understand the need for sufficient staff to be on duty at the weekend—after all a hospital is a 24-hour 7-day-a-week service, but I expected the same ratio of senior cooks to junior staff, not a top-heavy loading of the management.

In those days, the NHS used to publish management guides working out the ratios of different numbers of catering grades needed to run operations of particular sizes. It wasn’t an exact science and there was room for a margin of error on interpretation of jobs. With large hospitals—and this was a massive one—there were always separate kitchens and supplies, one for patient catering and a slightly smaller one for staff catering. Generally, this made things a lot easier for the auditor/investigator.

Patient catering was always by far the larger operation and in smaller units where there weren’t two separate kitchens it was often very easy for the mendacious catering manager to misallocate the inputs, food and other consumables, even staff time. That way they could keep the costs and income from staff meals in the required proportions to meet their financial targets and thereby hide waste, inefficiency or fraud within the greater margins for error in patient feeding costs.

The one thing that was—and still is—useful about auditing or investigating anything in the NHS is that since the days of Florence Nightingale’s first attempts to work out where the money went in hospitals, they had an excellent costing system running alongside the financial accounts. For support departments such as catering you could tell how much they were spending each month, right down to the cost of items supplied to individual wards and the ingredient costs of meals on the menu. Patient costs were fully analysed and for the staff canteens, there were monthly trading accounts and stock ledger information to see how they were performing and pick out areas of concern.

Back at the large London hospital, I had a problem. Whichever way I worked through the normal expectations of an operation this size, they appeared to be overstaffed—and yet they had a group of the highest overtime earners in the country, let alone the rest of the hospital group. The catering manager was becoming less and less friendly on return visits and wasn’t giving me any believable explanations for what was going on. The budgets were overspent, but not to the degree that you would expect in the circumstances, suggesting that the budgets were too fat in the first place.

I had one breakthrough on the intelligence front—an old school-friend of mine briefly worked there as a hospital porter, between leaving university and getting a job in IT. We were having a drink one night and I mentioned the fun and games I was having trying to work out how this head cook and his team were getting away with it. He immediately knew who I was talking about and he grimaced. ‘He’s a nasty piece of work, Peter—I’d watch your back with him.’

He told me how, one night when he’d arrived at the hospital to clock on for porter duty, he’d accidentally run his old wreck of a car in to the back of the head cook’s personalised number plate and top of the range four-litre saloon car. The head cook’s car boot had flown open revealing that it was packed to the gunwales with what were very obviously hospital catering goods and equipment. Understandably, the head cook had been furious about the incident. He had immediately assaulted my friend, beating him up and threatening further violence if he ever told anyone what he had seen or dared complain about getting a good thumping.