Year: 2009

Why Don’t Sanctions Deter Fraud?

Meric Craig Bloch theorizes that punishing people who are caught committing fraud is not an effective way to deter fraud. The reasons behind his theory:

  • Employees who commit fraud don’t anticipate getting caught. The threat of sanctions does not deter them because they don’t expect to face them. To deter them, you have to raise the “perception of detection” – people who believe they will be caught committing fraud are less likely to commit it.
  • Employees who commit fraud rationalize their conduct so that it seems legal or justified. They do not see their actions as wrong.
  • Because employees who commit fraud are primarily motivated by status, the greatest threat they face is that their crime will be detected.
  • Sanctions are reactive – you are punishing someone after the damage to the company has been done.

Is Your Organization Adequately Prepared to Fight Today’s Workplace Fraud?

EthicsPoint published this webinar focusing on proper and efficient investigations.

The presenter was Meric Craig Bloch, VP Compliance and Corporate Investigations of Adecco Group North America.

Meric predicted more fraud coming into the workplace as part of this down economy. Managers are focused on making their numbers and it is harder to do.

Profile of a fraudster:

  • Likely acts alone
  • Likely a male over 40
  • Has worked at the company for a number of years
  • Some college (and probably more) education
  • no criminal record
  • no history of job discipline

It is obvious from this that fraud risk is less on the person and more on the internal situation and pressures. The fraud triangle is a combination of:

  • opportunity – compliance programs are in place to remove opportunities
  • rationalization – when dissonance happens and gets justified as not stealing (for instance –  entitlement, revenge, minimal damage, everyone else is doing it)
  • pressure – how and when fraud happens when the pressure to commit fraud is greater than the pressure to not

In this down economy the pressure is increased. So we need to remove the opportunities.

What is the ideal opportunity for a fraudster:

  • weak internal controls or ability to override
  • Pressure to be dishonest
  • perceived reward is relatively high
  • perception of detection is low
  • potential penalty is low

What is the best way to respond

  • good internal controls
  • raise the perception of detection
  • manage pressures and incentives (this includes treated employees during layoffs and not setting difficult targets)
  • focus on identified risks
  • zero tolerance for fraud

Meric calls for doing a fraud risk assessment. Learn about the potential fraud risks inside your company and the impact on the external view of your company. You need to determine your own tolerance for fraud risk. You need assess both the likelihood and impact of the fraud. Then you can evaluate your internal controls to see if they are designed effectively and are they operating effectively. Then you need to address the residual risks that are not mitigated by existing controls or anti-fraud programs.

Meric points out that you need to take steps to detect fraud. One tool is a whistleblower hotline. But hotlines are passive. You need someone sufficiently motivated to pickup the phone and make the call. You should make fraud reporting a mandatory requirement.

Fraud generally continues until detected. Half of fraud schemes are discovered by accident.

Fraud allegations can come from many sources, so you should have a consistent protocol for investigating fraud. Your organization should have a best practice for investigations. You need to make sure the investigations are run consistently and are well-documented.

The investigator is not the police. As the investigator you need to think about the business needs. Your investigation should lead to process improvements and better internal controls.

One of the questions was how to prove ROI. Of course, compliance is all about preventing fraud and loss. So it is hard to show savings for events that did not happen.

California’s Pay-to-Play Laws

California requires disclosure of gifts to officials at public agencies. The disclosure is made using Form 801 (.pdf).

This form is for use by all state and local government agencies to disclose payments made to the agency when the payments provide a personal benefit to an official of the agency. Examples may include travel, meals or other benefits. Under certain circumstances, these payments will not result in a gift to the official, but will be considered a gift to the agency. The payments must be used for official agency business and must meet other requirements that are set out in FPPC Regulation 18944.2 (.pdf), which is available on the FPPC website www.fppc.ca.gov. This form must be filed within 30 days of the use of the payment.

California treats the giving of tickets to officials at state and local agencies slightly differently. FPPC Regulation 18944.1 (.pdf) regulates this practice, with disclosure made on Form 802 (.pdf)

There is a whole series form for reporting lobbying activity:

  • Form 601 — Lobbying Firm Registration Statement
  • Form 602 — Lobbying Firm Activity Authorization
  • Form 603 — Lobbyist Employer/Lobbying Coalition Registration Statement
  • Form 604 — Lobbyist Certification Statement
  • Form 605 — Amendment to Registration
  • Form 606 — Notice of Termination
  • Form 607 — Notice of Withdrawal
  • Form 615 — Lobbyist Report
  • Form 625 — Report of Lobbying Firm
  • Form 630 — Payments Made to Lobbying Coalitions
  • Form 635 — Report of Lobbyist Employer/Lobbying Coalition
  • Form 635-C — Payments Received by Lobbying Coalitions
  • Form 640 — Governmental Agencies Reporting
  • Form 645 — Report of $5,000 Filer
  • Form 690 — Amendment to Lobbying Disclosure Report

Fortunately the FPPC put together a Lobbying Disclosure Information Manual (.pdf)

There is an extensive collection of campaign disclosure forms for California.

The key form may be Form 461 — Independent Expenditure Committee and Major Donor Committee Campaign Statement. There is an associated manual: Campaign Disclosure Manual 5 – Information for Major Donor Candidates (.pdf).  Chapter 4 of the Manual (.pdf) details the reporting requirements.

The FPPC Regulations are very long and detailed.

Colorado’s Pay-to-Play Law

The Colorado voters passed Amendment 54 in the November, 2008 elections, which amends the Colorado Consitution to limit campaign contributions: Text of the Proposed Initiative (.pdf) and Text of the Constitutional Amendment (.pdf).

The consitutional amendment carries a presumption of impropriety between contributions to political campaigns and the award of sole source government contracts.

West Virginia’s Pay-to-Play Law

West Virgina addresses pay-to-play abuse by limiting campaign contributions during the negotiation and performance of the contract. West Viginia Code §3-8-12(d) provides:

(d) Except as provided in section eight of this article, no person entering into any contract with the State or its subdivisions, or any department or agency of the State, either for rendition of personal services or furnishing any material, supplies or equipment or selling any land or building to the State, or its subdivisions, or any department or agency of the State, if payment for the performance of the contract or payment for the material, supplies, equipment, land or building is to be made, in whole or in part, from public funds may, during the period of negotiation for or performance under the contract or furnishing of materials, supplies, equipment, land or buildings, directly or indirectly, make any contribution to any political party, committee or candidate for public office or to any person for political purposes or use; nor may any person or firm solicit any contributions for any purpose during any period.

Kentucky’s Pay-to-Play Law

Kentucky places limitation on campaign contributors who get no-bid contracts from the state.  K.R.S. §121.056(2) provides:

No person who has contributed more than the maximum legal contribution established by KRS 121.150 in any one (1) election to a slate of candidates for Governor and Lieutenant Governor that is elected to office or any entity in which such a person has a substantial interest shall have any contract with the Commonwealth of Kentucky during the term of office following the campaign in which the contributions shall be made unless the contract shall be attained by competitive bidding and the person or entity shall have the lowest and best bid.

(a) “Substantial interest” means the person making the contribution owns or controls ten percent (10%) or more of an entity or a member of the person’s immediate family owns or controls ten percent (10%) of the entity or the person and his immediate family together own or control ten percent (10%) or more of the entity.

(b) “Immediate family” means the spouse of the person, the parent of the person or spouse, or the child of the person or spouse.

South Carolina’s Pay-To-Play Law

South Carolina restricts campaign contributions by a contractor to a candidate who participated in awarding the contract. South Carolina Code  §8-13-1342 provides:

No person who has been awarded a contract with the State, a county, a municipality, or a political subdivision thereof, other than contracts awarded through competitive bidding practices, may make a contribution after the awarding of the contract or invest in a financial venture in which a public official has an interest if that official was in a position to act on the contract’s award. No public official or public employee may solicit campaign contributions or investments in exchange for the prior award of a contract or the promise of a contract with the State, a county, a municipality, or a political subdivision thereof.

Ohio’s Pay-To-Play Law

On January 2, 2007, then Ohio Governor Taft signed into law Substitute House Bill 694, enacting changes to Ohio’s pay-to-play laws. The new law places restrictions on many political contributors who currently hold, or are competing for, a contract with the state or local government. The new law also extends these prohibitions to many local political subdivisions that were not covered under previous versions of the law, including county commissioners, city council members, township trustees, school board members, and other local boards, commissions, task/ forces, and other authorities.

The law is currently subject to litigation.

Ohio’s pay-to-play laws are primarily in R.C. 3517.13, are triggered when

  1. a partner or owner of an LLC, LLP or partnership, or an individual who owns 20% or more of the shares of a corporation contributes over $1,000; or
  2. if those business owners, their spouses, children, and the company’s affiliated political action committee (“PAC”) cumulatively contribute over $2,000 over the course of two years.

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