Billing Fraud - Is Anyone Immune?

When it comes to billing fraud schemes, not even the United States Government is immune from playing the victim. A fraud survey conducted by the Association of Certified Fraud Examiners (ACFE), in 2006, states,

“Among the fraudulent disbursement categories, billing schemes were most commonly reported... Of 675 reported fraudulent disbursement cases, 44 percent involved billing fraud.” (Wells, 2008)

The ACFE Report also stated a median loss of $130,000 per incident. In a recent case that involved the U.S. Government, the United States Government was over charged on a multi-billion dollar contract to supply food for soldiers in Iraq, Kuwait, and Jordan. The Department of Justice submitted a press release on 16 November 2009 stating,

“PUBLIC WAREHOUSING COMPANY, K.S.C., (“PWC”) a logistics company organized under the laws of the Nation of Kuwait has been indicted by a federal grand jury on multiple charges of conspiracy to defraud the United States, committing major fraud against the United States, making false statements, submitting false claims and wire fraud.” (UNITED STATES ATTORNEY’S OFFICE, 2009)

The indictment charges PWC with six counts. Count two in particular alleged a conspiracy based on PWC’s fraudulent over-billing the United States through multiple means. In brief the alleged means are as followed:

1. Intentionally failed to purchase less expensive food items based upon a vendor’s failure to provide PWC with a discount.

2. Fraudulent over billing of the United States by having vendors use a consolidation facility and placing the consolidation costs plus a PWC profit into the Delivered Price paid by the United States contrary to the prime vendor contracts.

3. PWC’s knowingly manipulation and inflation of Delivered Prices.

The indictment goes into further detail about how some of the alleged billing fraud occurred. PWC would call vendors insisting they provide a discount and label the discount to something that would not facilitate PWC from passing the discount on to the U.S.

PWC on other occasions would ask vendors for a “prompt payment discount” in exchange for providing the vendor with “preferred customer” status, thus issuing that vendor with an increase in business.

When a vendor refused to label discounts as “prompt payment discount” PWC would ask the vendor to label the discount “damage allowance.” PWC at times would ask vendors to increase its “prompt payment discount” upon the vendor’s acceptance to do so; more business would then be shuffled to the vendor.

PWC fraudulently inflated the distribution fees that it billed to the United States by soliciting vendors to manipulate the way products were packed, thus allowing PWC to bill the U.S. twice as much as it should have.

The United States Government was made aware of the fraud by a lawsuit filed under the Qui Tam provisions. According to Jim Higgins,

Potential purposeful government misbillings came to light in 2005 thanks to a qui tam relator, one Kamal Mustafa Al-Sultan whose company partnered with the company that would become Agility. Justice Department officials have decided to join the civil whistleblower action, providing credence to Al-Sultan’s claims. Al-Sultan stands to share in 15% and 25% of the government’s recovery if it is decided that misbilling fraud has occurred against the military.” (Higgins, 2009)

The U.S. Government's move to pay whistleblowers is paying off in this case and may be something to think about implementing within cooperations.

As this case unfolds the extent at which the United States Government was defrauded is extremely high. My initial thought was that the only victim in this case is the U.S. Government. However upon further thought, I find myself thinking that PWC is also the victim.

PWC stands to lose a multi-billion dollar contract. A loss of revenue this big could quite easily spell disaster for PWC and all of their employees.

How can a company protect itself from the few rogue employees that can plague the cooperation?

The ACFE’s 2008 report to the Nation on Occupational Fraud and Abuse had a question that asked, “How important are the following controls for preventing fraud?” A list was given that included Internal Audit Department, Surprise Audits, Management Review of Internal Controls, Fraud Hotlines, Mandatory Job Rotation/Vacations, and Rewards for Whistleblowers. (Slater, 2008)

An Internal Audit Department rang in at number one and having a CFE can go a long way to prevent ongoing fraud from happening. Another way to prevent billing fraud is through Internal Controls. Internal Controls is simply policies and procedures created to insure business is conducted properly. One of the policies that should be address within your Internal Controls is separation of duties. Creating a separation of duties policy makes it much harder for employees to conduct fraud without collusion. (Rogers)

As you can see anyone can become a victim to billing fraud, even the U.S. Government. Companies stand to lose everything when fraud runs rampant from within. There are some procedures that can be conducted to help deter or detect ongoing fraud.

With procedures in place like whistle blowing rewards, internal controls, and CFE certified Internal Audit Departments fraud will become more difficult to conduct. Only by continually re-analyzing our company’s policies and procedures can we continue to grow our knowledge in helping to fight all types of fraud.


By: Joseph Dustin

References

Wells, J. T. (2008). Principles of Fraud Examination 2nd edition. In J. T. Wells, Principles of Fraud Examination 2nd edition (p. 96). Hoboken, New Jersey: John Wiley & Sons, Inc.

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