Connecting the Dots: Fraud in a Networked World
November 2012
IN THIS ISSUE
— Who You Know: The Importance of Relationships in Fraud Investigations
— Digging Through The Past: Finding Lower-Profile Relationships
GREETINGS!
Welcome to the November 2012 edition of our newsletter! In this issue, we’ll examine how various networks and interconnections between parties can be an important component of investigating fraud.
WHO YOU KNOW: THE IMPORTANCE OF RELATIONSHIPS IN FRAUD INVESTIGATIONS
Every fraud investigation – from a gas station’s employee embezzlement to a multi-billion dollar revenue recognition scheme — shares one key component: people are behind each and every case. To paraphrase Barbara Streisand, these are people who know people, and often who they know can have a direct correlation to their activities — both benign and fraudulent.
Whether high school classmates, fellow United Way volunteers, yacht club members or former co-workers, relationships between parties can help identify avenues for fraud, and sometimes help explain such behavior. Government regulators have taken notice; the U.S. Securities and Exchange Commission recently charged four individuals in an insider trading ring originating in New Jersey; one of the people trading on the alleged inside information was a social acquaintance of the purported tipster employee, and another trader was a former high school friend of the first trader. these kinds of connections are not often identified via public company filings, and fleshing them out often takes a different method of inquiry.
DIGGING THROUGH THE PAST: FINDING LOWER-PROFILE RELATIONSHIPS
Relationships like high school classmates tend to be somewhat under the radar, especially as time passes from when two people graduated together. But that doesn’t mean they’re impossible to discern. Alumni networking web sites have made it easier, if still somewhat time consuming, to identify high school or college classmate lists (on-site visits to browse yearbooks may never go out of fashion, unless yearbooks do), which can then be cross-checked with disclosed transactions such as trading records, vendor receivables, or whatever fraud the particular case entails. Other avenues for networking include social welfare organizations — while only top leadership are listed on a group’s Form 990, donors and volunteers are often identifiable in local or national organization newsletters or media articles highlighting a group’s efforts. In one past instance, we learned that several company executives suspected of colluding had each been named to the board of a large non-profit within a year or each other — with one subject’s company becoming one of the charity’s top five vendors shortly thereafter. These kinds of connections not only provide a patina of service and community involvement to the subjects, but also are a convenient avenue for discussing potential fraudulent schemes away from the subject of the possible fraud.
Social networking sites, corporate records and news articles can also help identify relationships that may serve as an important subtext to a fraud investigation, and can also create predication for requesting certain records, such as a group’s meeting minutes, once an inquiry is underway. These steps can help reveal connections that the parties would have otherwise preferred to keep from view – superficially positive relationships that can be abused as a back channel for committing fraud.