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Current Hot Topics in Bribery and Corruption Investigations
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Current Hot Topics in Bribery and
Corruption Investigations
Gerry Zack, CFE, CPA, CIA
Severina Ostrovsky
BDO USA, LLP, a Delaware limited liability partnership, is the U.S.
member of BDO International Limited, a UK company limited by
guarantee, and forms part of the international BDO network of
independent member firms. BDO is the brand name for the BDO
network and for each of the BDO Member Firms.
Current Hot Topics in
Bribery and Corruption Investigations
Presented for the ACFE’s Law Enforcement and Government Anti-Fraud Summit
Gerry Zack
Managing Director – Global Forensics
Severina Ostrovsky
Senior Manager – Global Forensics
BDO USA, LLP
Washington, DC
Current Hot Topics in Bribery and Corruption Investigations
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Agenda
1. Recent Developments and Trends
2. The Evolving Nature of Bribery and Corruption Schemes
3. Asset Tracing – A Key to Investigation
4. Forensic Data Analytics to Detect and Investigate Bribery and
Corruption
Recent Developments and Trends
Legislative
Enforcement
Investigative
Current Hot Topics in Bribery and Corruption Investigations
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Bribery and Corruption
According to the ACFE 2016 Report to the Nations on
Occupational Fraud and Abuse:
• Globally, 35.4% of the cases investigated involved corruption,
with a median loss of $200,000.
• But just 9% of cases involved only corruption.
• The remaining 26% involved corruption and asset
misappropriation.
The red flags of bribery in the accounting records may be
identical to other types of frauds – an important key to
detection; For example:
• What appears to be a shell company established by an employee
as a method of stealing funds from the company might actually
be with management’s consent as a conduit for paying bribes.
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Current Hot Topics in Bribery and Corruption Investigations
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Key Recent Developments
Countries enacting new B&C legislation
• Brazil, Mexico, France, New Zealand, Colombia, India, etc.
Use of DPAs and NPAs
International nature of schemes
• Cross-border investigations
• Increased cooperation among government agencies
Focus on individual accountability in addition to
organizational liability
• Yates memo
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Yates Memo
September 9, 2015 memo from Deputy Attorney General Yates
Establishes as written policy a practice that has been emerging in recent
years
Requires a focus on “individual accountability” in connection with
corporate wrongdoing
Outlines six steps to be taken by DoJ:
1) In order to qualify for any cooperation credit, corporations must provide to the
Department all relevant facts relating to the individuals responsible for the
misconduct.
2) Criminal and civil corporate investigations should focus on individuals from
the inception of the investigation.
3) Criminal and civil attorneys handling corporate investigations should be in
routine communication with one another.
Current Hot Topics in Bribery and Corruption Investigations
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Yates Memo – cont’d
Six steps to be taken by DoJ – cont’d:
4) Absent extraordinary circumstances or approved departmental policy, the
Department will not release culpable individuals from civil or criminal liability
when resolving a matter with a corporation.
5) Department attorneys should not resolve matters with a corporation without a
clear plan to resolve related individual cases, and should memorialize any
declinations as to individuals in such cases.
6) Civil attorneys should consistently focus on individuals as well as the
company and evaluate whether to bring suit against an individual based on
considerations beyond that individual's ability to pay.
Client name - Event - Presentation title
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Click to edit Master title styleThe Evolving Nature of
Bribery & Corruption Schemes
VimpelCom Case Study
Single vs. Multiple Transaction Schemes
On-book vs. Off-book Schemes
Current Hot Topics in Bribery and Corruption Investigations
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Complexity of Bribery and Corruption Schemes
Single transaction schemes
• The corrupt transaction is on the books
Multiple transaction schemes
• The initial step is usually on the books
• There can be many layers
• Often involve multiple entities
Consider the VimpelCom case
Current Hot Topics in Bribery and Corruption Investigations
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VimpelCom - The Objective
Company to pay bribes to the daughter of the president of
Uzbekistan, who has influence over certain government actions
involving the telecom industry
In order to obtain mobile licenses for Unitel LLC, VimpelCom’s
subsidiary in Uzbekistan
But how best to disguise the bribes?
VimpelCom ?Daughter of Uzbekistan
Official
Current Hot Topics in Bribery and Corruption Investigations
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The Structure
Unitel would be the holder of the licenses.
VimpelCom owns Unitel via two holding companies, neither of
which have any operations other than holding Unitel.
VimpelCom ?Daughter of Uzbekistan
Official
Freevale Silkway
Unitel LLC
Daughter uses her
influence to obtain
licenses for Unitel
Current Hot Topics in Bribery and Corruption Investigations
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Create a Slush Fund
Takilant Ltd. is created in Gibraltar – company is controlled by
Gulnara Karimova, the daughter of the president of Uzbekistan.
Takilant is basically a shell company, a front for the receipt of
bribes from VimpelCom intended for the benefit of Karimova.
Dutch prosecutors allege more than $385 million in bribes were
paid to Karimova in this manner from 2007 to 2015.
But there’s much more to this slush fund.
• How best to move funds from VimpelCom to Takilant without raising
suspicions? This is where it gets interesting!
VimpelCom Takilant Ltd. Karimova
Current Hot Topics in Bribery and Corruption Investigations
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Payments to Takilant
Passed through accounts in more than a dozen countries
Charged in VimpelCom’s accounting records to a variety of
accounts, including:
• Equity transactions
• Charitable contributions and sponsorships
• Consulting fees
• Property
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Current Hot Topics in Bribery and Corruption Investigations
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Slush Fund Accounted for as Equity
June 2007 – VimpelCom sells a 33% interest in one of the two holding
companies through which Unitel is held (Freevale Enterprises) to
Takilant for $20 million.
• Freevale is a British Virgin Islands company and a wholly-owned
subsidiary of VimpelCom (until the June 2007 agreement).
• Freevale is one of two holding companies of Unitel.
But the agreement includes a put option allowing Takilant to sell the
interest in Freevale back to VimpelCom in 2009 for a minimum price of
$57.5 million.
Option exercised in September 2009, resulting in $37.5 million of
profits to Takilant (bribes for Karimova).
• And VimpelCom’s ownership interest in Freevale is inflated in its financial
statements.
Current Hot Topics in Bribery and Corruption Investigations
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Fake/Inflated Construction Costs
VimpelCom and Unitel also used a multi-layered
construction vendor scheme to funnel $10 million in bribes
to Karimova.
This involved inflated billings for real services and some
billings that were entirely fake.
• i.e. The bribes ultimately are reported as property and equipment in
the financial statements of VimpelCom under this scheme.
Current Hot Topics in Bribery and Corruption Investigations
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Fake/Inflated Construction Costs
Unitel LLC
Vendors
Affiliates of Vendors
Takilant
Karimova
Vendors subcontract with
their own affiliates
Unitel pays vendors in
Uzbek currency
Subcontracts to Takilant
and paid in U.S. currency
Karimova draws funds out
from Takilant
Current Hot Topics in Bribery and Corruption Investigations
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Bribes Can Be:
On Book
Partially On Book
Off Book
No evidence of
the fund or
bribe remains
on the books.
A fund for bribes
is off the books,
but evidence of its
ongoing funding
exists.
The bribe or a
fund for bribes
remains on the
organization’s
books.
The Role of Asset Tracing
Asset Tracing Applications in the Modern Investigative World
Asset Tracing Categories of Research
Resources
Best Practices
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Asset Tracing: Different Applications
Different scenarios that could prompt an asset trace
Things to know before starting
• Domestic vs. international
• Business vs. individual
• Purpose
Private sector vs. public sector
• Common private sector cases
• Common public sector cases
• Examples
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Current Hot Topics in Bribery and Corruption Investigations
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Asset Tracing: Categories of Research
Categories of Research
• Stocks and bonds
• Real estate
• Boats
• Airplanes
• Vehicles
• Corporate directorships
• Intellectual property rights
• Other possessions
• Related party transactions
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Current Hot Topics in Bribery and Corruption Investigations
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Asset Tracing: Where to Look
Differing resources
• Online
• Open source
• On-the-ground
Location-specific differences
• Domestic vs. international
• State vs. county
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Current Hot Topics in Bribery and Corruption Investigations
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Asset Tracing: Where to Look Example
Broward County, FL
• Real estate information
o Broward County Appraiser Property Search
o Broward County Records, Taxes and Treasury Division Tax Search
o Broward County Official Records Search
o Broward County Certificates of Title Search
• Official records search
o Broward County Official Records – other information:
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Current Hot Topics in Bribery and Corruption Investigations
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Asset Tracing: Where to Look Example
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(AFF) Affidavit
(AGD) Agreement for Deed
(AGR) Agreement
(AST) Assignment
(ASTX) Assignment
(CDO) Condominium Documents
(CER) Certificate
(CET) Certificate of Title
(CFJ) Certified Final Judgment
(CJF) Certified Judgment -
Foreign(CJFX) Certified Judgment
- Foreign Hide from Web
(CMV) Certificate of Compliance
Sale Motor Vehicle
(COP) Certificate of Payment to
Contractor
(CP) Court Paper
(CPALIE) Cancel Property
Appraiser Lien
(CPX) Court Papers Hidden from
Web
(D) Deed Transfers of Real
Property
(DC) Death Certificate
(DPR) Domestic Partnership
(EAS) Easement Related
(EXP) Expunged Record
(FJ) Final Judgment
(FJX) Family Court Hidden from Web
(FS UCC) Financing Statement Related
(GOV) Gov Orders Ordinances Petitions &
Resolutions
(LIE) Lien
(LIEN CORP) Corporate Lien Warrant
Exempt
(LIEX) See FJX Hidden from Web
(LNP) Land Patent
(LP) Lis Pendens
(M) Mortgage/Modifications &
Assumptions
(M EXEMPT) Mortgage Tax Exempt
(M INTG EXEMPT) Mortgage Tax Exempt
(MAP) Miscellaneous Maps
(MIL) Military Discharge
(MOD) Modification
(MODX) Modification Hidden from Web
(NCL) Notice of Contest of Lien
(NCP) Notice of Contest of Payment
(NIP) Notice of Interest in Property
(NOB) Notice of Bond
(NOC) Notice of Commencement
(NOH) Notice of Homestead/Homestead
Affidavit
(NOP) Notice of Permit
(NOT) Notice
(NPD) Notice of Preservation of
Declaration
(OAMD) Order to Amend
(OEXP) Order to Expunge
(ORT) Order of Taking
(OSEAL) Order to Seal
(PALIE) Property Tax Lien
(PCS) Public Construction Security
(PLAT) Plat
(PLAT REL) Plat Related
(PR) Partial Release
(PRO) Probate
(REL CORP) Release Corp Lien
Warrant Exempt
(RES) Restrictions & Related Docs
(RST) Release/Revoke/Satisfy or
Terminate
(RSTX) Release/Revoke/Satisfy or
Terminate Hidden from Web
(RW MAP) Right of Way Maps
(SPALIE) Satisfaction/Release of
Property Appraiser Lien
(TBLIE) Transfer Lien to Bond
(TCLIE) Transfer Lien to Cash Deposit
(TSD) Time Share/Interval Deed
Current Hot Topics in Bribery and Corruption Investigations
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Asset Tracing: Real Estate Abroad
Country-specific information
UK Land Registry
• Title Register
o Full address of the property (to search you only need the
house number and postal code), the price paid, the
registered owners, and the lender name:
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Client name - Event - Presentation title
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Click to edit Master title styleUsing Data Analytics to Detect and Investigate
Bribery and Corruption
Methods of Concealment
Direct and Indirect Evidence of Bribery
Examples of On-Book and Off-Book Bribery
Methods of Establishing Funds for Paying Bribes
Framework for Data Analytics
Red Flags of Bribery and Corruption
Sources of Data That May Be Useful in Detecting Bribery
Current Hot Topics in Bribery and Corruption Investigations
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Concealment Methods in Corruption Cases
1. Creating fraudulent physical documents – 60.7% of cases
2. Altering physical documents – 52.9%
3. Creating fraudulent transactions in the accounting system – 42.9%
4. Altered transactions in the accounting system – 36.4%
5. Destruction of physical documents – 35.0%
6. Creating fraudulent electronic documents or files – 30.7%
7. Altered account balances in accounting system – 30.7%
8. Altering electronic documents or files – 30.0%
9. Creating fraudulent journal entries – 27.9%
10.Altered account reconciliations – 25.7%
11.Deleting electronic documents or files – 24.3%
Source: ACFE 2016 Report to the Nations on Occupational Fraud and Abuse
Current Hot Topics in Bribery and Corruption Investigations
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Focus Data Mining on Discovering:
Direct evidence of the payment of bribes
Direct evidence of payments made to an intermediary
through which bribes are paid
Direct evidence of the creation (funding) of a fund out of
which bribes are paid
Indirect evidence of the existence of the scheme
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Current Hot Topics in Bribery and Corruption Investigations
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Direct Evidence of Bribery
Common Accounts to Mine
Entertainment
Travel
Gifts
Charitable contributions
Training
Business development
Promotional items
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Current Hot Topics in Bribery and Corruption Investigations
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Bribes Can Be:
On Book
Partially On Book
Off Book
No evidence of
the fund
remains on the
books.
A fund for bribes
is off the books,
but evidence of its
ongoing funding
exists.
The bribe or a
fund for bribes
remains on the
organization’s
books.
Current Hot Topics in Bribery and Corruption Investigations
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Anatomy of an “On-Book” Slush Fund
BK Medical – Danish subsidiary of Analogic Corporation (a U.S.
company)
Sells ultrasound products:
1. Directly to end users
2. Indirectly to end users through distributors
One of the distributors is a Russian company.
This Russian distributor wanted to pay bribes to Russian officials
associated with government-owned hospitals in exchange for ordering
products from the distributor.
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Current Hot Topics in Bribery and Corruption Investigations
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Anatomy of an “On-Book” Fund
Russian Distributor pays BK Medical inflated amounts
for products
• BK and Distributor agree on a price for equipment.
• Distributor then requests a specific, inflated amount, on a second invoice and provides invoice template to BK.
BK Medical retains proper sale
amount, holds difference as slush fund for distributor
• Excess funds received by BK were also credited to accounts receivable, often resulting in a negative (credit) balance in A/R from the Russian distributor.
BK Transfers funds in accordance with
Distributor’s instructions
• Distributor directs BK to make payment from excess funds to unknown third parties.
Current Hot Topics in Bribery and Corruption Investigations
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BK Medical
Although BK Medical itself did not initiate the bribery scheme with
officials of the end users (the Russian distributor did), it clearly also
benefited from the scheme.
In this case, the slush fund remained on BK’s accounting records.
• Evidence of the slush fund’s existence was the negative balance in accounts
receivable from the Russian distributor.
BK only recorded the proper, agreed-upon amount as revenue.
• As a result, when the bribe payments were made, there was no trail left on
the income statement, as the payment was debited to accounts receivable,
relieving the negative balance due from the Russian distributor.
A total of 180 payments were made to unknown third parties from 2001 to
2011 at the direction of the Russian Distributor – total amount was $16.1
million.
• Total revenue BK earned from the distributor during this time = $21.6 million.
BK engaged in similar arrangements with distributors in Ghana, Israel,
Kazakhstan, Ukraine, and Vietnam.
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Current Hot Topics in Bribery and Corruption Investigations
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Methods of Funding Bribes
Through Payroll:
Creation of a ghost employee
Inflated wages to a real employee
Bonuses and other extra payments to a real employee
Through Sales People (employee or third parties)
Inflated commissions
Fraudulent bonuses
Special awards for exceptional performance
Inflated expense reimbursements
Allowances for training
Current Hot Topics in Bribery and Corruption Investigations
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Methods of Funding Bribery
Through Accounts Payable:
Creation of a shell company
Inflated invoices of real vendors (inflated prices, goods or services
not delivered)
Fraudulent additional charges on vendor invoices (delivery charges,
etc.)
Fake subcontractors to real vendors
Fraudulent change orders on contracts with vendors
Through Customers:
Above-normal discounts provided to customers/distributors
Fraudulent rebates to customers
Payments to customers for purported “marketing,” “training,” or other
programs
Falsified returns (resulting in credits to the customer’s account)
Current Hot Topics in Bribery and Corruption Investigations
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Methods of Funding Bribery
Through Other Third-Party Intermediaries:
Payments fraudulently characterized as investments
Inflated amounts paid in connection with acquisitions of other
businesses
Transfers purportedly “held in trust” for the company
Other Off-Book Methods:
Failing to record funds received from non-recurring or unusual
transactions (e.g., insurance proceeds, sales of property and
equipment or other assets, etc.)
Current Hot Topics in Bribery and Corruption Investigations
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Goal – Pay bribes to Panamanian government officials in
connection with sales to the Panamanian social security
agency.
The sale by SAP Mexico went through a local partner in
Panama.
Slush fund for the bribes was funded via a deep discount
on the price SAP Mexico charged its local partner.
• In effect, “netting” what would have been the proper revenue
with the payment of bribes, and pushing the bribe payment
responsibilities down to the local partner
Example of Inflated Discounts (1)
Current Hot Topics in Bribery and Corruption Investigations
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Individual who orchestrated the scheme hides it from
others at SAP by misstating the reasons for the larger
than normal discounts.
Local partner sells to government agency at significantly
higher prices.
Excess profits earned by local partner used to pay the
bribes.
Lessons learned:
• The bribes may be accounted for by netting with another
transaction.
• Red flag was the large discount.
Inflated Discounts (2)
Current Hot Topics in Bribery and Corruption Investigations
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Bribes paid to customers in Angola were funded by
inflating costs of its tires.
Phony freight and customs clearing costs were added
to its invoice price.
As tires were sold, the phony costs were reclassified to
a liability on the balance sheet account.
As bribes were paid, the liability was reduced, falsely
characterizing the amounts transferred as payments to
vendors for freight or clearing customs clearing costs.
During the entire time the scheme was created and
operated, evidence of the slush fund remained on the
books.
Goodyear (on book)
Current Hot Topics in Bribery and Corruption Investigations
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Bribes paid to customers in Kenya using cash.
Payments approved for purported promotional
products.
Manager would direct staff to make the check payable
to “cash.”
Manager directed staff to cash the checks.
Off-book slush fund of cash then used to pay bribes.
Once the slush fund was funded, no further evidence
of its operation existed on the books.
Goodyear (off book)
Current Hot Topics in Bribery and Corruption Investigations
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A Framework for Detection
Using Data Analytics (1)
1. Perform a risk assessment to identify the corruption risks your
organization faces, considering:
• Structural risk factors (e.g., do we work through subsidiaries,
distributors, consultants, agents, other third parties etc.)
• Geographic/political risk factors (e.g., regions and industries in which
we operate)
• Scheme-specific risk factors (i.e., based on the preceding, what specific
slush fund schemes are we at risk for?)
2. Identify what the red flags are for each type of scheme (perhaps
using the list of 20+ methods of creating slush funds provided earlier).
3. Determine which data would be affected by each (i.e., is data outside
of financial and accounting data affected, such as inventory, delivery,
etc.).
Current Hot Topics in Bribery and Corruption Investigations
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A Framework for Detection
Using Data Analytics (2)
4. Determine what anomaly in that data might exist if a slush fund was
involved (what affect on the data would a slush fund have?).
5. Consider multi-factor data analytics:
• Performing tests that only focus on a single data anomaly often results
in a large quantity of false positives, since most anomalies associated
with fraud or corruption also have honest explanations.
• Multi-factor testing assesses more than one risk factor, perhaps
assigning weights or scores to each.
• Only flag transactions for follow-up that achieve a certain score or that
possess multiple risk factors.
6. Investigate all flagged transactions/activities further to determine
whether corruption exists vs. a “false positive” (a non-corrupt
transaction that has some of the hallmark characteristics of
corruption).
Current Hot Topics in Bribery and Corruption Investigations
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Red Flags to Identify Through Data Analytics
• Customer name or address equals vendor name or address
• Vendor address equals employee address (or bank
information)
• Vendor payment to address in country of customer
• Vendor Address = PO Box
• Incomplete vendor master file (i.e., missing information
normally on file for a legitimate vendor, like telephone number)
• Unusually large one-time payment
• Payments in round monetary amounts
• Several round monetary payments to a vendor within a short
time frame
• Payments slightly under authorization protocols
• Several payments for identical amounts
Current Hot Topics in Bribery and Corruption Investigations
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Red Flags to Identify Through Data Analytics
• Authorizing party inconsistent with classification of expenditure
• Excessive payments to intermediaries
• Payments in excess of budget
• Payee inconsistent with GL classification
• Excessive charitable contributions, T&E, and gifts
• Vendor address in different country than location of services
• Vague, non-specific description for payments made in entries
• Payment descriptions that do not correspond to accounting
classification
• General purpose or miscellaneous accounts with significant
activity
• Missing invoices or other documentation
• Travel and expense requests with incomplete information
Current Hot Topics in Bribery and Corruption Investigations
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Red Flags to Identify Through Data Analytics
• Sales transactions with customers with discounts in excess of
other customers
• Unexplained rebates or other credits posted to customer
accounts
• Credit balances in customer accounts receivable accounts
• Bank accounts in tax havens (Luxembourg, Switzerland, British
Virgin Islands)
• Transactions routed through unconsolidated or nominee
companies
• Violation or avoidance of internal controls (payment amounts
slightly below authorization limits, manual checks, missing or
incorrect approvals)
Current Hot Topics in Bribery and Corruption Investigations
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What Data Is Typically Considered?
Accounting and other financial:
• Accounting system (general ledger, etc.)
• Billing data
• Time management
• Vendor management
• Payroll
• Inventory
Customer:
• Customer relationship management software
• Customer service logs/messages
• Delivery information
Communications:
• Email, text, IM
• Social media
Current Hot Topics in Bribery and Corruption Investigations
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Challenges with Data Analytics
Can be technically challenging to properly extract and analyse
data
Tools to be used can become expensive
Diverse locations and types of data
Access to data is often limited
Legal considerations – possible liability
False positives
Volume of anomalies to research
Current Hot Topics in Bribery and Corruption Investigations
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Addressing the Risk of False Positives
For our purposes, “false positive” means that the transaction or activity
flagged is NOT corrupt.
Keys to minimizing false positives:
• Careful design in the planning stages
• Consider using multifactor analysis, assigning weights or scores to each,
so that no single factor would trigger investigation
In addition, not corrupt does not mean it is not valuable to identify; it
could identify some other operational problem.
Accordingly, pushing elements of data analytics out to operational
personnel and having them consider it adds tremendous value to the
organization.
Consider using visual analytics when pushing data out to operational
personnel.
Finally, once a strong data analytics procedure has been established,
it should be performed on a recurring or continuous basis to monitor
for corruption.
Current Hot Topics in Bribery and Corruption Investigations
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Current Hot Topics in Bribery and
Corruption Investigations
Gerry Zack, CFE, CPA, CIA
Severina Ostrovsky