Case Studies

The Fraud:

A multinational courier firm. Local laws regarding business ownership meant the Lebanese operation was a joint venture. The business maintained separate accounting systems, with monthly reports to the regional head office of the multinational firm.

The perpetrator was a senior accountant. Among other tasks, he was responsible for maintaining and reconciling an internal account for customs duty – payable locally on couriered goods. He was not a signatory on the bank account but was responsible for preparing bank payment instructions for signature and accounting for payments made. Only one signature was required – that of the country manager who was also a joint venture shareholder.

Over 13 months the accountant arranged 55 fraudulent payments, some with genuine and some with forged signatures. All were accounted for as having been made to a customs broker and the reconciliation was falsified to conceal the escalating deficit. The payments had in fact been written in favour of a money-changer, and the employee used them to acquire foreign currency – several million dollars worth.

Discovery arose after the accountant simply disappeared, and West African fraudsters tried to track him down at his workplace. It became apparent that the perpetrator had himself been the victim of a fraud.

He was traced by Interpol to Holland but eventually located by private investigators in London. Investigations confirmed that over US$400,000 of the proceeds had been directed to West African fraudsters, who had promised to pay a substantial amount of money into his account but first needed funds themselves.

It seems that was the trigger for the fraud. He used his employers’ funds to pay the fraudsters and went as far as meeting them in Amsterdam in an attempt to collect the promised payment. On realising he had been duped, he continued the fraud and tried to get away with enough to set himself up with a new life in Europe.

Risk Features:

• The financial affairs of the joint venture were monitored from a regional office in Bahrain, but not through a fully-integrated accounting system.
• Internal audits were not carried out annually. Profitability meant the venture was perceived as low risk. Audits that were carried out focused on procedures rather than verification of balances of account.
• An ineffective segregation of duties at the particular joint venture.
• The tax regime and associated accounting for import duty were specific to Lebanon, and not fully understood by head office personnel or the regional management. Coupled with the sheer volume of transactions on the account, all of this meant the employee could conceal the cumulatively increasing deficit caused by the misappropriations.
• Discovery was inevitable, as the balance sheet rather than the profit and loss account was affected. But if the employee had not fled, when would it have happened?
• Problems experienced in tracing the proceeds through several countries.
• Difficulties in pursuing recovery from the bank, the payment beneficiaries, and the external auditors.

Solutions:

• Integrating accounting systems for joint ventures as well as subsidiaries.
• Understanding activities peculiar to a particular group business.
• Undertaking an effective balance sheet review, in particular of suspense and other internal accounts, rather than the previous focus on revenues and profitability.
• Ensuring an effective segregation of duties – something that was in force at all subsidiaries but not this particular joint venture.
• Discontinuing use of written instructions to the bank.
• Effective accounting review from head office and through regional management.