# Fraud Prevention and Deterrence

/ Published April 21, 2023
BATTLE CREEK, Mich., 
The Annette Greene article “Fraud: Trends to look for,” lays a good foundation for the detection and reporting of fraud. The article focuses primarily on the Association of Certified Fraud Examiners’ 2022 “Report to the Nations.” The report covered 2,110 cases from 133 countries resulting in more than $3.6 billion in total losses.

Let’s examine a couple key aspects of fraud prevention and deterrence. The ACFE defines fraud as any intentional or deliberate act to deprive another of property or money by cunningness, deception, or unfair means. Occupational fraud occurs when an employee, manager or executive of an organization deceives the organization itself. Fraud hurts organizations by decreasing salaries/bonuses, increasing public scrutiny, and diminishing trust within the organization.

It is much easier to prevent fraud than detect it. Increasing our identification and detection skills could be the most effective fraud prevention method. We should keep employees and management aware of potential fraud indicators within the workplace and how to report suspected fraud activities. This is accomplished by establishing proactive audit policies, providing employee fraud awareness training, enforcement of mandatory job rotations, strong management oversight, and effective reporting programs.

An effective fraud awareness program and training are key. Memorandums, leadership training, organization-wide emails, and formal training programs are highly effective methods for preventing fraud. All levels of the organization should participate in efforts to mitigate the likelihood of fraud. For example, Defense Logistics Agency Disposition Services incorporates fraud training into “Fraud Friday” emails sent by its director. The emails provide examples of fraud and help facilitate discussions across the organization. These emails increase awareness which, in turn, helps increase awareness and early detection.

**The Fraud Triangle**

To stop fraud, we must understand the reasons why some individuals commit fraud in the first place. The Fraud Triangle was developed by Dr. Donald Cressey in the early 1950s. He determined that three factors (financial pressure, rationalization, and opportunity) must be present for an individual to commit fraud.

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                Fraud Triangle                            Financial Pressure – Motive/Pressure, addiction, living beyond means/debt.Opportunity – Lack of internal controls, no management oversight, no accountability.Rationalization – “They don’t pay me enough,” “I deserved the promotion,” “I work hard, I deserve it.”            SHARE IMAGE:Download ImageImage DetailsPhoto By: Courtesy ImageVIRIN: 230407-D-D0441-100**Financial Pressure** – Motive/Pressure, addiction, living beyond means/debt.

**Opportunity**– Lack of internal controls, no management oversight, no accountability.

**Rationalization** – “They don’t pay me enough,” “I deserved the promotion,” “I work hard, I deserve it.”

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Financial pressure is the motive or reason a person engages in a fraudulent act. Financial pressure can be identified by “red flags.” AFCE’s 2020 Government Edition – Report to the Nations found that 90% of all fraudsters exhibited at least one behavioral red flag (i.e., living beyond their means or experiencing financial difficulties).

Opportunity arises from a lack of controls and oversight within a process. A person in a position of trust is given access to assets or granted decision making responsibilities. Without controls and oversight, the person has the perceived opportunity to commit fraud without being detected. DLA creates standard procedures and internal controls to help mitigate the opportunity to commit fraud. One mitigation method used is the separation of duties.

Rationalization happens when unhappy employees feel they are mistreated. The person needs to justify their misdeeds before they commit them. They convince themselves they are entitled to more and the organization owes them for all the work they have done. Once the fraud is committed, the perpetrator may find it easier to do it again.

**Power of Tips**

The AFCE’s 2020 Government Edition – Report to the Nations indicates that 43% of fraud cases were reported by tips. The tips came from a variety of places, but 54% of the tips came from employees – the same employees who work side by side the with the perpetrator. Fellow employees are the first line of defense against fraud. They should be able to recognize potential abnormalities and report them as soon as possible. The problem may be that they are not properly trained and not aware of the signs of fraud facing the organization.  

Remember – “If You See Something, Say Something.”

Report suspected fraud to the DLA OIG Hotline at (800) 411-9127.

**Examples of Fraud in the Government**

An F-16 pilot died when his ejection seat failed. Was it counterfeit? (airforcetimes.com)

Counterfeit parts are a real risk facing DLA. In this example, potential counterfeit/defective parts may have led to the death of a U.S. Air Force pilot when his ejection seat parachute failed to deploy. The electronics in question were inspected and found to be scratched and unevenly sanded. Additional laboratory testing was conducted showing several transistors and microchips to be fake. One of the companies involved has been accused of altering the defective parts prior to sending to the lab for analysis. The Air Force is still unclear on whether the counterfeit/defective parts caused the ejection seat to fail.

Chief loses anchors after pleading guilty to ‘wrongful appropriation’ of military property (navytimes.com)

A U.S. Navy chief plead guilty to “wrongful appropriation” of government property from DLA Disposition Services. His lawyer stated that “some of his orders involved excess [night vision goggle]s that were to be cannibalized and used in a chiefs’ initiation.” The case came to light after one of his co-conspirators was found to have military property in their personal possession. The military property was discovered by government-contracted movers when they became suspicious of a household goods shipment. The boxes were unpacked to be inventoried and repacked, but the boxes appeared to contain government property.

Cash, cars and guns: Former Army range director pleads guilty in bribery scheme (armytimes.com)

A former Army range director, Victor Garo, accepted more than $100,000 in bribes from REK Associates. The bribes included cash, automobiles, and firearms. In exchange for the bribes, Garo would recommend that the Army use specific vehicles that would make it more likely the contracts would be awarded in their favor. Garo and his associates also supplied the contractor with confidential procurement documents. In total, $19 million in contracts were awarded to REK Associates.

In summary, the prevention of fraud is directly tied to employee awareness, early detection of suspected fraudulent activity and timely reporting. Leader engagement, training at all levels and empowerment of employees are critical to a successful fraud prevention program.