When crooked employee hid scams by booking in profits for company

A manufacturing company sued its marketing manager for creating hundreds of fake orders to line her pockets, but its $800,000 lawsuit failed because it could not prove that it suffered losses despite being a victim of fraud.

This was because the funds from over 200 fake orders came from its customers and the culprit made sure “profits” were booked for her company before she shared the balance with rogue buyers of the customers and a supplier who were all in cahoots with her.

The case provides a valuable lesson for companies to review their checks, especially in departments that are controlled by a small number of senior employees.

In this case, the scam went undetected for a long time because three groups of rogue employees from different companies were involved.

First, the buyers of the customers would issue fake purchasing orders for goods such as machine parts, and the marketing manager would refer the “orders” for the supplier to fulfil.

In reality, no goods were made or delivered, but the buyers would confirm the delivery so their companies would pay for the orders.

After booking in the income for her company, the manager would then pay the bill from the supplier, which in turn would return 90 per cent of it to her. Presumably, part of these funds would be shared with the buyers.

There were another 27 cases of double billing that resulted in the manufacturer overpaying for genuine jobs. In these cases, the manager raised two orders – one for the genuine supplier, which produced the actual goods, and another for her accomplice, which did nothing except to return 90 per cent of the ill-gotten gains to her.

After the fraud was exposed, the dishonest supplier admitted to participating in the fake scheme and paid $60,000 as compensation for 27 cases of double billing.

The manager was not taken to task because she died a few days after she was sued, but the company continued with its suit against her estate even though it did not suffer any loss.

Senior High Court Judge Chan Seng Onn found the unusual case to be “odd” because the company did not suffer any loss for over 200 fake deals, but yet continued to sue for “essentially ill-gotten profits”.

He noted that the manufacturer appeared to assume that income from the fake orders rightfully belonged to it.

“This premise cannot be correct in law. By analogy, when stolen money flows through the bank account of an innocent third party, that third party surely has no right to then sue a further downstream recipient of the stolen money on the basis that it is his money or his property,” Justice Chan said.

Indeed, the judge noted that the manufacturer, the late manager’s estate and the supplier should not retain any funds from the customers that had been obtained through the fraudulent scheme.

But to date, none of the customers had started any action to recover their payments for fake orders, presumably because it was hard to keep track of spare parts that had a high disposable rate.

This case provides three important lessons that we should take note of if we want to prevent fraud from happening at our workplaces.

When managers become too territorial

The manager’s estate tried to cast doubt on her employers by alleging that they could be complicit in the fraud as it would be impossible for her to pull “wool over everyone’s eyes for a period of seven years” by committing the fraud alone.

But Justice Chan disagreed, adding that if her boss were also part of the act, they alone could have created all the fake paperwork and there was no need to involve the supplier.

“Furthermore, any unnecessary increase in the number of persons involved in the illegal transactions would have created a greater risk of discovery by the authorities,” he added.

The truth was that the manager alone masterminded the whole scam because the supplier confessed that they were brought in by the manager to issue the fake delivery orders and invoices so that the whole deal would appear to be genuine on paper.

To prevent the fraud from being exposed, she made sure she was the only person handling the deals and prevented her colleagues from being involved.

For instance, she told her subordinate to channel all requests for quotations from customers to her and she gave instructions on how these purchasing orders should be prepared.

She then decided the pricing for the orders and which supplier would do the job.

In many of these cases, the staff recounted that when the customers wanted to have their orders delivered urgently, the manager actually collected the goods from the supplier and made the delivery herself.

Justice Chan noted that there was no reason for the marketing manager to deliver the goods herself when she could have requested the assistance of junior staff to do such a menial task.

It was obvious that she did everything so that no one could discover that there was nothing to be delivered in the first place. She merely pretended to run that errand so that she could issue official statements that the customers had received the goods.

She also made sure to book in a small profit for these fake transactions so that her bosses would not question her on why they did not make any money even though she processed a high number of such orders.

This scenario highlights the importance of having more than one person handling crucial business activities to avoid any tampering of important data as well as to safeguard business continuity.

After all, it does not make sense to rely on just one person to keep the business going because operations will be affected if the employee is sick or decides to leave.

Corporate system cannot track everything

In this case, the manufacturer has a system that records all business transactions, but that alone could not reveal any wrongdoing without further probes.

For instance, all the fake transactions were properly recorded because the customers’ orders, the supplier’s work invoices and subsequent payments were all accounted for. But such data alone could not expose the scam run by the manager who had provided such inputs.

It was not revealed how she was caught but during the trial, the company had relied on the admission of the supplier to prove its case.

What this means is that a company’s system can function properly only if it is managed by good and honest staff, because it cannot on its own expose wrongdoings if someone has already tampered with the data.

The devil is in the details

If a customer orders a machine that is necessary for its work, it would be hard to create a fake order and then avoid delivering anything as the customer would surely complain.

So the manager “cleverly” limited her fake orders to only expendables or spare parts because most companies do not keep a proper inventory of low-cost items that are frequently used and replaced.

This probably explained why the customers did not complain about the non-delivery of goods that they had paid for.

Even Justice Chan commented that the fraud was “very well concealed” from both the manufacturer and its customers by the manager.

As many companies move to increase their dependence on technology and artificial intelligence, this case shows that it is paramount for employers to invest in building a team of talented, loyal and honest employees.

After all, the best system cannot prevent real-world transactions from being tampered with by human employees if they channel their creativity to exploit loopholes for their selfish gains.

Source: The Straits Times © SPH Media Limited. Permission required for reproduction.

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