My last series of blogs discussed strategies for detecting shell companies. I know they work because I have refined the strategies throughout my career. Now we will discuss what causes those strategies to fail.
What are the inhibitors to the successful use of artificial intelligence in fraud detection? Humans.
Answers to last month's questions
What day of the year is National Human Trafficking Awareness Day? January 11
Which US state dedicated January as Human Trafficking Awareness Month? Governor Kathy Hochul in January 2022 issued a proclamation designating January as Human Trafficking Awareness Month in New York State and directed landmarks across the state be illuminated blue tonight, January 11, to honor victims and survivors. FYI, that is my governor.
What color clothing should you wear on January 11? Blue
In what year did the US Congress enact Human Trafficking Crime? May 29, 2015
True or false? Most trafficking is carried out by people whose nationality is the same as that of their victim? True!
What is the maximum penalty at the federal level for committing a human trafficking violation? The penalty varies based on the circumstances, but as a guideline 10 years to life. State penalties vary by the state.
What Causes Fraud Detection Strategies to Fail?
Humans are the greatest inherent weakness of any strategy. I realize these are harsh words. But this has been my experience. Over the next couple of months, we will discuss why I have made this statement and what to do about it. FYI, my common theme is to make you think!
Fraud detection software simply flags a transaction and says hey, look at this! It takes a person to look at the transaction and formulate a conclusion. Is the transaction, okay? Is it a false positive? Or is it an indicator of a fraud scheme? Of course, the first step for most people is to look at the documents. The human has to look behind the curtain – much like Toto in the Wizard of Oz.
.But once you look behind the curtain, do you know what you’re looking for?
The right answer is not necessarily:
- compliance with company policy.
- approved by an authorized manager.
- evidence of internal control.
Not only must you be able to look behind the curtain but you also must be able to put the puzzle together in order to see the entire picture. Documents are simply one piece of the puzzle.
Remeber, documents are also used by perpetrators to conceal the truth. So, understanding concealment strategies is really important at the initial phase of your looking process. Remember the goal of an internal fraudster compared to an external fraudster is to create the illusion that everything is, okay. Once again, looking behind the curtain.
Once you’ve seen what’s behind the curtain, you must tell the fraud story in a clear, convincing, and interesting manner in order to cause management to react to the story. Do you have enough conviction in your opinions to cause management to react and cause change?
Let’s assume your company is in the construction industry. Your software has flagged an invoice for equipment rental. The vendor is an approved vendor on the vendor master file. Now equipment rental is a normal transaction in your company. There is an invoice that has an approval signature by an authorized project manager. So, what curtain should we look behind? Maybe, more importantly, what are we looking for? What will your story sound like?
In reading a book, I suggest you read the last chapter, so you know how the story ends. Now as you read the entire book, you know what is relevant and what is extraneous. I am sure my avid book readers would disagree with me. That is okay. In the fraud detection world, the story ends with two outcomes. The transaction either has the red flags of a fraud risk statement or it has red flags that were false positives. Sorry if I ruined the story, but it is that simple.
Going back to our example, let’s assume that the story ends with the vendor invoice being part of a fraud scheme. But what fraud scheme? Is this a shell company scheme using the pass-through scheme? Is this an over-billing scheme, in which we are paying for equipment that was not delivered? What is your story?
Let’s assume your story is a real vendor in collusion with the project manager to pay for equipment that was not used on the project. So, what elements will you need in your story, so the reader of the story says, you tell a great story? Based on watching Law & Order, Jack McCoy always wants to know the motive. Or, assuming I am Lenny Briscoe, I want to gather evidence that the equipment was not delivered for use. What evidence is available? Is the evidence direct evidence of the crime or will the evidence be circumstantial? Think about how to piece the story together and deliver the report to Jack McCoy. Sometimes Jack McCoy says we need more evidence or better evidence. That is simply how it works in the real world.
Now let’s do what Glinda the Good Witch of the North, told Dorothy in The Wizard of Oz, go back to the beginning. In this case, the beginning of the blog. So, why did I say, humans are the inherent weakness in identifying fraud? Is it because ending the story that the vendor invoice is valid is less controversial? Is it because humans are not good storytellers? That they do not know the theme of the story? Or that they do not know the required elements of a good story. Please remember, that this blog was intended to make you think about how to tell your story.
In our next blog, we will discuss which comes first, the chicken or the egg?
Plagiarism Trivia
- The word “plagiarism” comes from the Latin word for_________?
- Which Beatle got in hot water for one of his songs.
- What was the Beatles song?
- Which Pulitzer Prize winner was accused of plagiarism?
- True or false: Author Rudyard Kipling freely admitted he had plagiarized parts of his 1894 work?
- The first recorded instance of plagiarism goes back to the year______?
