1. “Finding Fraud and What To Do With It.” New York State Department of Transportation February 5, 2010 Edward T. Dominelli, CFE, MPA BST Forensic Accounting and Litigation Services Offices: New York - Albany

2. 2 Goals and Objectives Organizations involved in transportation-related construction, both public and private, can take proactive steps to mitigate the risk of fraudulent activity on their projects. This session will discuss suggested steps such organizations can consider to better deter and detect fraudulent activity, and what they need to do when fraud is detected or suspected to ensure appropriate follow-up and investigation.

3. 3 What is fraud? Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain. Managing the Business Risk of Fraud: A Practical Guide, prepared by IIA, AICPA, and ACFE

4. 4 Why do people commit fraud?

5. 5 Who commits construction fraud? Project Manager Superintendent “Clerk of the Works” Construction Manager Contracting Officer Architects Engineers Controlled Inspectors Estimators Contractors Subcontractors Materials Suppliers Corrupt Union Officials Organized Crime Labor Coalitions Other?

6. 6 “Fraud prevention and detection is like a mortal’s need for air. When it’s present, it’s never noticed. When it’s missing, it’s all that’s noticed” Author: Unknown

7. 7 Why must we address fraud?  Requirement of ARRA Program  Fraud happens in all organizations  Public Safety  Fiduciary duty to protect public assets

8. 8 Why must we address fraud?  Mitigate risk  Limit liability  Protect organizational reputation  Promote transparency in operations

9. 9 Fraud Mitigation Process  Finding Fraud – Prevention and Detection  Responding to Fraudulent Activity

10. 10 Finding Fraud – Key Steps  Management Commitment  Recognize Relevant Fraud Schemes  Identify High Risk Areas  Establish Prevention/Detection Measures

11. 11 Management Commitment  Acceptance That Fraud Exists  Set as Management Priority  Develop/Revise Code of Conduct agency level - conflicts of interest, gifts business partners embody in documents, i.e. contracts

12. 12 Recognize Relevant Schemes  Review agency history  Review professional literature  Consult with “experts”  Identify “Red Flags”

13. 13

14. 14 Conduct Risk Assessment  Where are we most vulnerable?  Focus on high risk areas

15. 15 Establish Prevention/Detection Measures  Design/Implement Internal Controls Examples: employee/vendor ethics policyemployee/vendor ethics policy contractor/vendor due diligencecontractor/vendor due diligence separation of dutiesseparation of duties change order review processchange order review process random contract auditsrandom contract audits independent project estimatesindependent project estimates original supporting documentsoriginal supporting documents worker identification systemworker identification system analyze bidding patternsanalyze bidding patterns

16. 16 Due Diligence Steps Check References Visit Projects Completed Speak with Peers Similar Scope, Size and Complexity Check Debarment Lists Public Database Search Review Subcontractors Enforce Subcontracting Limits Review Bid Pricing Verify Licenses

17. 17 Establish Prevention/Detection Measures  Set Fraud Reporting Requirements mandated reportingmandated reporting anonymous reporting - Hotlineanonymous reporting - Hotline whistleblower protectionwhistleblower protection internal and external resourcesinternal and external resources “When in doubt, report it.”“When in doubt, report it.”

18. 18 REPORT FRAUD, WASTE & ABUSE REPORT FRAUD, WASTE & ABUSE One of the core missions of the Recovery Board is to prevent fraud, waste, and mismanagement of Recovery funds. Recovery.gov gives you the ability to find Recovery projects in your own neighborhood and if you suspect fraudulent actions related to the project you can report those concerns in several ways: Submit a Complaint FormSubmit a Complaint Form electronically Call the Recovery Board Fraud Hotline: 1-877-392-3375 (1-877-FWA-DESK) Fax the Recovery Board: 1-877-329-3922 (1-877-FAX-FWA2) Write the Recovery Board: Recovery Accountability and Transparency Board Attention: Hotline Operators P.O. Box 27545 Washington, D.C. 20038-7958 The Recovery Board is committed to helping ensure these funds are spent properly, but we cannot do it without your help. Additionally, the Recovery Act provides protections for certain individuals (whistleblowers) who make specific disclosures about uses of Recovery Act funds. protections for certain individuals Source: Recovery.gov

19. 19 Establish Prevention/Detection Measures  Education employee training - fraud schemes, red flags, altered documents, reporting requirementsemployee training - fraud schemes, red flags, altered documents, reporting requirements contractor/vendor awarenesscontractor/vendor awareness contractor/vendor code of conduct contractor/vendor code of conduct “zero tolerance” “zero tolerance” incorporate into contract language incorporate into contract language discuss in bidders meetings/vendor interviews discuss in bidders meetings/vendor interviews reinforce in routine communications reinforce in routine communications posters posters

20. 20 Fraud Response Plan  Prepare Plan in Advance – Don’t wait until it happens!!!  Investigative Process consistentconsistent timelytimely impartialimpartial professionalprofessional  Identify Investigative Resources internal - IG, SIU, Counsel’s Office, Internal Auditorinternal - IG, SIU, Counsel’s Office, Internal Auditor external – USDOTIG, NYSDOT, NYSOIG, State Police, FBI, District Attorneyexternal – USDOTIG, NYSDOT, NYSOIG, State Police, FBI, District Attorney

21. 21 Evidentiary Considerations  Evidence collected will be disputed for three reasons: Legality of the acquisition of the evidence Integrity of the evidence Interpretation of the evidence

22. 22 Evidentiary Considerations  Preserving and Protecting Evidence documents – paper and electronic physical – i.e., core sample chain of custody/illegal search issues  Interviewing Witnesses false imprisonment issues self-incrimination issues union contract issues  Maintain Confidentiality – “Need to know.”  Let the “Pros” Handle It

23. 23 - Sudden change in work habits – tardiness, productivity, reliability - Sudden change in lifestyle – living beyond means, clothing, cars, jewelry, vacations, cash - Sense of entitlement, complaints of being underpaid - Sudden change in personality/appearance - Prior history of misconduct/criminal history - Excessive unscheduled absences/tardiness - Evidence of mounting financial difficulties – collection agency calls, wage garnishments, borrowing money from co-workers Employee Fraud Indicators

24. 24 - Complaints from vendors (contactors, consultants, suppliers) - Difficulty contacting during workday, unavailability - Unreported outside employment/business activities - Unwillingness to be away from job for extended periods, no vacations - Non-acceptance of promotions - Failure to share important information with supervisor or subordinates - Resistance to supervision/oversight - Reluctance to delegate to subordinates Employee Fraud Indicators

25. 25 - Excessive non-work related phone calls or emails during the workday - Consistent failure to follow established procedures/overrides established internal controls - Poor record-keeping/inadequate documentation to support decisions or transactions - Non-cooperation with auditors/inspectors - By-pass chain of command - High turnover of subordinates - No/limited segregation of key functions within work unit, weak controls Employee Fraud Indicators

26. 26 - Untimely bank deposits/bank reconciliations - Consistent math errors in computations - Alteration/falsification/destruction of official records - Socialization with vendors - Soliciting/accepting gifts and gratuities from vendors - Frequent, unexplained meetings with vendors behind closed doors or off- site - Meeting with “unfamiliar” people in office - Failure to enforce contract provisions with vendors Employee Fraud Indicators

27. 27 - Consistent use of same vendors - Vendor’s insistence to deal with a specific representative - Personal intervention to get certain vendors paid - Referral of certain vendors to perform work - Referral of subcontractors to primes - Limited/restricted competition for procurement of goods and services DON’T IGNORE RED FLAGS. THEY MIGHT MEAN NOTHING, BUT THEN AGAIN ….. Employee Fraud Indicators

28. 28 Questions

29. 29 Thank you Edward T. Dominelli, CFE, MPA BST Valuation and Litigation Advisors Forensic Accounting and Financial Investigations 26 Computer Drive West Albany, NY 12205 1-800-724-6700, ext 133 edominelli@bstco.com