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Misappropriation Schemes – Using fraudulent invoices and shell companies to steal funds
Common indicators, resources and prevention tips for misappropriation schemes executed through fraudulent billing practices.
An employee submits fraudulent invoices to cause the organization to issue payment. The support for the check is fraudulent; however, the disbursement appears to be valid. The most common schemes include the perpetrator
(1) forming a shell company to submit fictitious invoices to the victim organization, and
(2) inflating or double-paying legitimate vendor invoices.
Billing schemes are a type of “on-the-books” fraud scheme whereby false accounting entries are made to create an audit trail to cover the theft of funds.
• Identification of alterations, white-outs or handwritten notes on legitimate vendor invoices
• Confirmation of invoices from legitimate vendors should be considered if alterations of vendor invoices are found
• Identification of falsified invoices submitted in the name of fictitious shell companies
• Shell companies are fictitious entities used by perpetrators to open bank accounts for receiving stolen funds
• Due diligence of vendors with invoices that lack physical addresses or use post office boxes, to determine whether they are legitimate businesses and approved vendors
Ensure that there is adequate segregation of duties between employees with responsibilities for procuring/ordering items, approving new vendors, approving vendor invoices, recording vendor invoices, paying vendor invoices and reconciling bank accounts.
Perform adequate due diligence on vendors, and maintain an up-to-date approved vendor list.
• Physically observe vendors’ place of business using the address indicated on their vendor invoices
• Conduct a public record search on new and existing vendors that include only a post office box on their vendor invoices
Perform periodic monitoring of vendor invoices and related information as part of pre-payment or post-payment reviews.
• Compare vendors’ addresses to employee home addresses
• Carefully inspect altered vendor invoices to determine appropriateness
• Determine bank(s) of deposit used by vendors (identify and investigate instances where the same vendor deposits checks at different banks – perpetrators will often open bank accounts to divert stolen funds, but use different banks to avoid suspicion)
• Determine if returned checks are physically missing from monthly bank statements
• Monitor and inspect voided checks and compare to accounting system check register
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