Saturday, April 26, 2008
The Monsters of Construction Fraud
Like it or not, construction companies face a great deal more challenges in Love and Rockets issue of fraud than other types of companies do. Like any business, a construction company faces the normal Accounts Receivable and Payable frauds, the Ghost Employees, the Vendor and Customer frauds that all companies must deal with on some scale. But in addition to those types of fraud construction companies are especially vulnerable to these following schemes. I call 'The Grinch' Theme the Monsters of Construction Fraud.
1. Dr. Frankenstein - The Dr. Frankenstein "operates" on the material purchased by construction Springheel Jack He strips the plastic coating off of the copper wires, junking the plastic and selling the copper to junkyards. He will scrounge the construction sites for scrap and will sometimes go to the extra step of ordering extra copper wire or materials that are not needed so that he can sell it as "scrap". He does this to "piece together" his creation, an expensive fraud. These kinds of frauds prey on a lack of Nosferatu controls of ordered inventory and materials.
2. Igor - In the movies, Igor is the down and dirty hunchback operating the machinery for Dr. Frankenstein. In a construction company Igor is the down and dirty mechanic more often than not hired by a Dr. Frankenstein. In this ploy, Igor submits invoices for parts, materials, and labor to a knowing Dr. Frankenstein who then submits these invoices to the company owners for reimbursement. A Tomorrowpeopleghvborw for parts and materials that didn't exist, and for labor that never occurred.
3. The Zombie Master - Using the names and identities of "dead" or "dying" companies, (companies where the owner has retired or passed away) the Zombie Master 'resurrects' the company so to speak, and will sometimes go so far as to open bank accounts in the name of the "dead" business. Zombie then uses an accomplice in the company to add "legitimacy" to the invoices he sends with the logo, name and convenient new address (usually a mail drop box with a Suite number instead of Post Office box number.) for the 'dead' company. He then recreates this same scheme using a number of 'deceased' companies to bilk the owners out of, potentially, millions of dollars. Another variation that is not mutually exclusive to this previous strategy is to use the same "dead" company to bilk many more construction companies at the same time. The fraud is one of timing as the Zombie Master cannot keep submitting the invoices as word of the "death" of the legitimate business spreads. The fraudster's accomplice will act as the middle man, usually receiving a kickback for his part in the fraud.
Perhaps using the names of old movie monsters is a bit dramatic, but for what the owners of construction companies go through after these guys or gals are done, it may not be nearly dramatic enough. These types of frauds have been responsible for shutting down what were pretty solid companies. Those that were lucky enough to survive the horrors still shudder at the thought of these 'monsters'.
David Roberts, CFE, CQBPA, MBA, lives in Orlando, Florida with four girls, three dogs, two snakes and one wife. He has been a member of the ACFE for four years and has been studying fraud for longer than that. He is the owner of Homesoon Accounting Services which specializes in Quickbooks Consultations and Fraud Prevention and Detection.
