PD Partnership with CPA Northwest Territories/Nunavut

May 31, 2021 – nagel + associates, a forensic and investigative accounting firm, is pleased to announce that it has entered into an Affiliate Agreement with the Chartered Professional Accountants of Northwest Territories/ Nunavut (“CPA NWT/NU”), as a Professional Development partner.

nagel + associates recognizes the importance and benefits of anti-fraud training, which are four-fold: first, to establish a common understanding and awareness of what constitutes fraud; second, to help educate participants on what motivates fraudsters to engage in illicit activity; third, to identify the methods by which frauds are perpetrated; and finally, to equip participants with the tools and skills necessary to recognize the potential indicators of fraud.

“CPA of NWT/ NU is pleased to have nagel + associates as a Professional Development partner.  The comprehensive training our members now have access to through nagel + associates ensures our members have the necessary tools to detect fraud or misappropriation, will build on our industry’s credibility and will provide members with the ability to continue to grow and flourish.” – Marlene Sutton, Executive Director, CPA NWT/NU.

“Our partnership with CPA NWT/NU aligns with our commitment to helping enhance the skill sets of CPAs to enable them to carry out their work and service their clients with a skeptical mindset, thereby increasing the likelihood of identifying ‘red flags’ or potential indicators of fraud.  Our courses help CPAs to meet their professional obligations vis-a-vis the Canadian Auditing Standards (CAS), which require auditors to acquire reasonable assurance that the financial statements taken as a whole are free of material misstatement–whether caused by fraud or error.” – Edward Nagel, Principal and Founder of nagel + associates.

About nagel + associates

nagel + associates is a Toronto-based boutique forensic accounting firm.  The firm’s exclusive focus on forensic and investigative accounting allows it to remain independent, focus on doing the work that aligns with its expertise, and most effectively and efficiently respond to urgent and sensitive matters facing its clients. nagel + associates works closely with organizations and individuals, as well as their legal counsel, to investigate allegations of fraud and other wrongdoing, and to support litigation and dispute resolution processes. The firm’s core practice of forensic accounting is complemented by its anti-fraud consulting, anti-fraud training, and crypto advisory services. For more information, please visit: https://nagel-forensics.com/

About CPA NWT/NU

The professional interests of CPAs are represented at the national, provincial and/or regional levels.  CPA NWT/NU is one of such Provincial institutes representing the interests of its members. For more information please visit: https://www.cpa-nwt-nu.ca

 

Fraud and White Collar Crime In Municipalities

Edward Nagel, Principal of nagel + associates is pleased to be delivering a virtual workshop on May 4, 2021 for the Association of Municipal Managers, Clerks and Treasurers of Ontario (AMCTO) on the the topic of:

“Fraud and White Collar Crime in Municipalities”

Fraud and white collar crime is undoubtedly one of the top ten “stay-awake” issues for municipalities. Schemes can be simple or elaborate but are only limited by the creativity of the fraudster.  Fraud schemes can range from fictitious vendors and invoices, to ghost employees on the payroll, to unauthorized expenses. These and other common fraud schemes can unleash havoc on a municipality, particularly financial harm. Given that prevention—rather than detection—is the best deterrent against fraud, this interactive workshop will provide municipalities, their employees and management with the tools and skills necessary to identify the “red flags” or potential indicators of fraud that commonly victimize municipalities, in order to mitigate this real and known risk.

The session will include addressing the impact on fraud risks emanating from the Covid-19 pandemic, as many people have shifted from physical to remote work environments—a trend that is likely to continue in some capacity, even once Canadians are fully vaccinated.

Click here for a full agenda of the session being delivered for AMCTO.

Fraud Trends Stemming from the COVID-19 Pandemic

In a memorable scene from the esteemed HBO crime drama The Sopranos, mob boss Tony Soprano is angry with his captains about their dwindling earnings, claiming that the recession is no excuse for poor financial results in their line of work.  He rhetorically asks his consigliere, Silvio Dante, “…what two businesses have traditionally been recession-proof since time immemorial?”.  Silvio responds, “Certain aspects of show business, and our thing[1]

While the developments of the last several months – a global pandemic, government-ordered closures, mass unemployment, civil unrest – have presented problems far more formidable than those of a typical recession for enterprises both criminal and legitimate, they have also provided fertile ground for fraud and other wrongdoing.  Despite some underworld revenue streams being disrupted or completely drying up[2], such as sports gambling (due to professional leagues suspending their seasons), protection rackets (due to mandated business closures), and the drug trade (due to border restrictions), other opportunities have presented themselves for those willing and able to exploit them, suggesting that Silvio’s argument holds true even in these extraordinary times.

This article addresses some of the recent fraud trends that have emerged over the past several months in Canada as well as in other parts of the world, because of COVID-19.

A Confluence of Circumstances

The coronavirus pandemic has created waves that have touched virtually all corners of the globe, giving rise to a convergence of many, often mutually exacerbating, developments, including:

    • Death and illness of loved ones;
    • Widespread layoffs;
    • Physical distancing requirements;
    • Remote work arrangements;
    • stock market volatility;
    • Mandated business and school closures;
    • Closed borders/ other travel restrictions; and
    • Critical shortages of certain goods.

Collectively, these circumstances have created widespread uncertainty, fear, anxiety, instability, isolation, and desperation – precisely the sorts of conditions that opportunistic ‘bad actors’ can readily exploit[3]

According to the Canadian Anti-Fraud Centre (CAFC), Canadians reported losing $1.8 million to frauds related to COVID-19 between March 6 and May 25, 2020[4].  Like many attempts to quantify the pervasiveness of fraud, this figure is almost certainly understated, as frauds often go undetected, and even those that are detected often go unreported.  Indeed, the CAFC acknowledges that what gets reported to them is “typically the tip of the iceberg”[5]. Notwithstanding, the extent and variety of frauds reported to date to the CAFC (and to other authorities) suggest a pervasive problem.  In general, many of these frauds fall into one of five categories: product scams, investment scams, cybercrime scams, impersonation scams, and government scams.

Product Scams

Product scams include the sale of test kits, medicines, medical supplies, and other goods/services that are fake, substandard, exorbitantly priced, and/or never delivered.  Organized crime groups are believed to be heavily involved in these types of scams[6].

According to the CAFC, reported frauds of this nature have included fraudsters posing as cleaning or heating companies selling decontamination services, duct cleaning, or air filters that purportedly protect against the coronavirus.  The CAFC has also received reports of questionable testing kits or remedies that in many cases are ineffective[7].

In British Columbia, an investigation by the RCMP and Health Canada resulted in over 1,500 illegal COVID-19 testing kits being seized[8], while Toronto Police made an arrest following an investigation conducted alongside American authorities, in connection with prohibited COVID-19 testing kits being shipped across the Canada-U.S. border[9].

Product scams appear to be a worldwide concern amid the pandemic.  For example, a Europol report on how COVID-19 will affect European crime trends cites “…the trade in counterfeit and substandard goods” as one of the most prominent developments that they have observed[10].  Moreover, it is a trend that they anticipate to continue in the medium term (with an expected proliferation of counterfeit vaccines) as well as the long term (with an expected recession-spurred increase in demand for cheaper products)[11].

Mitigating the Risk of Product Scams:

    • Purchase only from reliable sources
    • Assess price against the price of comparable goods or services
    • Be skeptical of claims about products that seem too good to be true
    • Perform online searches for customer reviews of companies and products before making purchases

Investment Scams

Investment fraud and other financial services schemes have also been a widespread problem during the current crisis.

In April, the Ontario Securities Commission (OSC) and the RCMP’s Integrated Market Enforcement Team (IMET) issued a joint warning about pandemic-related investment scams, including cases in which investors have been approached by companies claiming to offer methods of preventing, detecting, or curing COVID-19.  They also warned about aggressive stock promotions and ‘pump and dump’ schemes in which false or misleading information (including about potential cures, remedies, or tests) may be disseminated to artificially inflate stock prices[12].

Similarly, the CAFC has issued a warning about fraudsters posing as financial services companies or financial advisors and offering loans or debt consolidation or promoting certain investments[13].

According to Torys LLP, both Canadian and American securities regulators are actively pursuing companies that have made inaccurate disclosures relating to COVID-19-related goods/services such as therapeutics, vaccines, or personal protective equipment, as well as companies that have attempted to hide existing financial problems by falsely representing them to be related to the pandemic[14].

Mitigating the Risk of Investment Scams:

    • Perform due diligence before making investment decisions
    • Make sure the business you are dealing with is regulated and/or licensed
    • Be wary of businesses based overseas
    • Be skeptical of those who aggressively promote certain investments

Cybercrime Scams

Cybercrime is another area that has been – and is expected to continue to be – an area of focus for the criminal element looking to take advantage of the pandemic.Cybercrime can be carried out through various means, including emails, text messages, and illegitimate websites, usually for the purpose of obtaining money, personal information, or both[15].

Victims of such schemes have been induced to open email attachments, click on links in text messages, visit websites, or perform other similar actions by fraudulent communications relating to the pandemic.  These include ‘phishing’ emails and other messages indicating that recipients have been exposed to a person who tested positive or instructing them to click on a link or provide personal information in order to collect government benefits[16].

Mitigating the Risk of Cybercrime Scams:

    • Do not open attachments or click on links from texts or emails unless you are certain that they are from a trusted source
    • Check the sender’s email address
    • Check email content for spelling and grammar errors
    • Be leery of any requests for personal information – do not respond unless there is a legitimate reason why the information os required AND you trust the entity to which you are providing the information

Impersonation Scams

There have also been numerous reports of fraudsters pretending to be charities, government agencies, or other authorities, in order to obtain funds and/or personal information from unsuspecting victims.  Such impersonations may be part of the types of cybercrime-related schemes described above, or they may be a unique category of schemes altogether.

The CAFC has received reports[17] of fraudsters posing as:

    • public health authorities offering fake information relating to infections in a given neighbourhood or personal test results, and then soliciting personal information;
    • charities seeking donations under false pretenses;
    • utility companies threatening to disconnect services if payments are not made; and
    • government departments asking for personal information.

In addition to the above, there have been reports of ‘job scams’ in which criminals pose as employers offering work-from-home employment – an enticing proposition for many, given the prevalent unemployment and stay-at-home orders – and request money or personal information as part of the purported job application[18].

The OSC has also warned about similar types of impersonation schemes, including ones in which fraudsters are posing as banks, financial advisors, prospective employers, or government departments/agencies, in an attempt to obtain financial or personal details[19].

Mitigating the Risk of Impersonation Scams:

    • Verify the identity of parties representing themselves to be agents of the governments or other authorities, and corroborate claims that they make
    • Be skeptical of any requests for personal information or payments

Government Scams

In the wake of the pandemic, governments have been hurrying to provide financial support to people and businesses, as well as trying to procure the necessary testing kits, medical supplies, and personal protective equipment. While both measures are much-needed, they also create areas that crooks can abuse, including by claiming financial relief or other benefits to which they are not entitled, and by setting up companies to source and re-sell needed supplies and equipment at excessive mark-ups.  For example, a Virginia man was recently charged with submitting fraudulent loan applications to take advantage of emergency financial relief provided by the CARES Act[20].

In response to concerns about support programs being abused, the Canada Revenue Agency recently opened up a ‘snitch line’, which provides a mechanism for people to report information relating to individuals who are receiving the CERB or CESB despite not being eligible, or businesses that are misusing the wage subsidy program[21].

 Possible Future Trends

As governments continue to ease restrictions and businesses and institutions begin to open up again, many of the aforementioned problems will persist, and several others will likely present themselves.

Financial difficulties are likely to continue for many individuals and businesses, as continued mandatory closures, concerns about subsequent ‘waves’ of the coronavirus, strained financial resources, and other factors will cause some employers to be slow to rehire and reopen.  Many customers and tenants that have been able to defer or reduce credit card, loan or rent payments temporarily, or that have only been able to meet such obligations with funds from government support programs, will find it difficult to make ends meet when such concessions or support programs are phased out.  These problems will only be exacerbated when landlords begin to evict and lenders begin to call loans with greater frequency and zeal than they have in the last few months. All of which is to say that financially speaking, the worst of this crisis may not be behind us.

Such ongoing financial difficulties may give rise to a number of conditions that criminals and other unscrupulous opportunists can take advantage of.  For example, struggling companies may feel compelled to scale back or eliminate certain ‘non-revenue-generating’ activities, such as internal audit, control, and compliance functions, thereby leaving themselves vulnerable to fraud at a time when bad actors, both internal and external, may be looking to defraud them.

These types of cost-cutting measures can lead to shortcuts being taken, standard procedures being bypassed, and financial information being misrepresented[22], all of which create risks for the organization. The trend of working from home, which is expected to continue for many office workers, may also make some of these negative outcomes more likely.

Recent economic conditions may also lead to more risk aversion, both for individual investors as well as financial institutions[23].  This may make it more difficult for businesses to obtain financing through traditional avenues, which may lead them to turn to other financing sources, including those looking to exploit them.  Such sources include criminal groups, which may be looking to buy or lend money to struggling businesses[24], given that legitimate businesses offer organized crime groups a means of laundering proceeds of crime, demonstrating legitimate earnings, and carrying out further criminal activity.

In fact, Italian police recently arrested 91 suspected mobsters who were allegedly involved in laundering proceeds of their extortion and drug trafficking operations by purchasing failing businesses affected by the COVID-19 lockdown[25].

Desperation may also lead otherwise honest employees and businesses to carry out fraud against their employers, vendors, customers, or insurers, which could lead to increases in payroll fraud, procurement fraud, expense report fraud, benefits fraud, financial reporting fraud, and insurance fraud.

Another trend that is expected to continue in the near future is ongoing growth in online retail transactions, contactless purchases, and digital wallets.  Stores and restaurants that were a short time ago primarily or exclusively physical businesses are rapidly adapting to offer online ordering[26].  These changes in how consumers are making purchases are expected to give rise to upticks in chargeback fraud (in which customers claim goods were not received and request refunds through their credit card company) and account takeover (in which a customer’s online account is taken over by someone else)[27].

While nobody can be sure what the future holds, past experience and current trends would appear to suggest that crooks will continue to look for ways to use worldwide uncertainty and instability to their advantage.  

About Our Firm

nagel + associates is a Toronto-based boutique forensic accounting firm that focuses exclusively on Forensic Accounting, Investigations and Disputes, Anti-Fraud Training, Anti-Fraud Consulting and Crypto Advisory. For more information about our services, please click here.

Sources:
[1]  Source: “For All Debts Public and Private.”  The Sopranos. (Season 4, Episode 1).  HBO.  Television.
[2] Source: cbc.ca
[3] Source: cbc.ca 
[4] Source: antifraudcentre.ca 
[5] Source: www.cbc.ca
[6] Source: Ibid.
[7] Source: antifraudcentre.ca 
[8] Source: citynews1130.com 
[9] Source: torontosun.com 
[10] Source: europol.europa.eu 
[11] Source: Ibid.
[12] Source: osc.gov.on.ca 
[13] Source: antifraudcentre.ca 
[14]Source: torys.com
[15] Source: cbc.ca
[16] Source: cbc.ca
[17]Source:  antifraudcentre.ca
[18] Source: cbc.ca 
[19] Source: osc.gov.on.ca
[20] Source: justice.gov 
[21] Source: canada.ca
[22] Source: corporatecomplianceinsights.com 
[23] Source: cbc.ca 
[24] Source: cbc.ca
[25] Source: cbc.ca
[26] Source: oliverwyman.com
[27] Source: forbes.com

Hook, Line and Sinker: Watching for the Warning Signs of Phishing Scams

In this article originally published in the Canadian Payroll Association’s DIALOGUE Magazine, Edward Nagel, Principal & Founder of nagel + associates describes the most common types of phishing scams, how phishing scams are  commonly carried out and the red flags to watch out for in order to detect these schemes. The article also mentions how to protect your business from being victimized by these scams.

Mitigating the Risk of Fraud During a Financial Crisis

Unprecedented. Surreal. Nightmare.

This is some of the terminology emerging from the current situation that our planet is facing, as a result of the COVID-19 pandemic.

The ‘new normal’ remote work environment, social distancing and the like has forced us to change the way we communicate and conduct business—to the extent organizations are able to do so. In certain industries, particularly those that are customer-facing or dependent on human contact, companies are increasingly forced to confront the inevitable decision about employment continuity for their staff.

Regardless of where on the spectrum your organization – or your clients’ organizations – find themselves today, during economic downturns, companies seek ways to cut back overhead, just to stay afloat; this could impact the system of internal controls, designed to keep the company operating efficiently and free of fraudulent activity.

The Challenges Impacting Internal Controls During Economic Crises

One of the basic internal controls in any organization is segregation of duties, whereby a function is divided up between two or more individuals in order to add a level of control. This could include ‘signs-offs’ by multiple individuals, in order to carry out transactions.

In the current environment in which large numbers are operating remotely, organizations are invariably facing challenges to find the appropriate balance between staying operational and managing risks.

Moreover, during challenging economic times and/or periods when resources have been cut back, the formalized processes and procedures designed to mitigate fraud tend to become less formal, less consistent, and/or and less supervised.

Two of the areas that rely on strong processes and internal controls to function effectively are payroll and purchasing.

Payroll

The employee onboarding process for many organizations involves having human resources setting up the new employee, while payroll generates the payment to that new employee; ideally, neither HR nor payroll can perform both functions, thereby mitigating the risk that a ‘ghost’ or fictitious employee can be set up on the payroll–that is, before consideration of collusion.

Notwithstanding these and other controls in place, some of the ‘red flags’ that organizations should be looking out for in the current economic environment as potential signs of payroll fraud, include:

  • Changes in employee bank account information (when no known changes have occurred during a particular period)
  • Duplicate information in the payroll register (names, addresses, bank account details, etc.)
  • New employees added to the payroll (during a period when there are no known new hires)
  • Increases to the rate of pay (during a period when there are no new changes to rate of pay)
  • Excess hours booked (when it is known that no overtime is occurring)

Purchasing / Procurement of Goods & Services

Another area that tends to challenge organizations, whether during difficult economic times or otherwise, is the company’s purchasing function. Arguably, setting up a new (albeit fictitious) vendor and paying them is a common risk of fraud in any organization.

Most larger organizations require a formal, multi-step process to set up a new vendor, which can include preparation of forms, background due diligence and/or approvals. Therefore, it would follow that the risk of a fictitious vendor being created and paid, tends to increase during periods of economic crisis, particularly when companies reduce their resources.

In order to balance controls with efficiency, some organizations enable ‘one-time’ vendors and ‘sole-source’ vendors to address emergency situations that cannot follow the normal procurement rules, such as obtaining multiple quotes for the procurement of goods/services.

Some of the ‘red flags‘ that organizations should be looking out for in the current economic environment as potential signs of purchasing and procurement fraud include:

  • New vendors set up in the vendor master file (when there are existing ‘approved’ vendors with a history of providing those goods/services)
  • Exceptional number of ‘one-time’ purchases or payments (particularly to vendors who have previously not provided services to the organization)
  • New vendors who are set up in the vendor master file without documentation (particularly where there is no evidence of background due diligence performed)
  • Possible patterns of payments made to certain vendors (particularly those that are suspiciously at or below the signing authority of certain employees)
  • Disproportionate number of purchase transactions attributed to individuals who historically have not made many purchases (particularly around month-end, quarter-end, and/or year-end)

Mitigating Fraud – Some Practical Strategies

While resources are constrained and we continue to operate in a lean work environment, it is commonly viewed the prevention – rather than detection – is the best deterrent against fraud. Therefore, organizations should try to add, rather than reduce, internal control measures to mitigate the risk of fraud.

Some practical strategies that could help reduce the risk of fraud and/or increase fraud detection during periods of economic downturn include:

  • Clear and consistent communication – improving communication and awareness about fraud is a key element of any effective fraud management program. With many operating in ‘modified’ and/or remote work environments, reminding employees of existing or updated policies is crucial to keeping fraud risk top-of-mind.
  • Conducting ‘spot-audits’ – preferably performed by persons not responsible for carrying out those functions
  • Rotating duties within a department – ensuring that different people within a department perform different functions, which increases the likelihood of detecting potential illicit activity (while discouraging would-be fraudsters)
  • Putting in place additional – rather than reduced – measures, when adding employees or vendors
  • Modifying existing procedures to adapt to the new circumstances

Contact us to obtain more information about fraud risk mitigation in the current environment or to discuss any other matters with us.

Stay healthy.

Thank you to the frontline teams who are working tirelessly.

Edward, Avi, Cameron & Jonathan

About Our Firm

nagel + associates is a Toronto-based boutique forensic accounting firm that focuses exclusively on Forensic Accounting, Investigations and Disputes, Anti-Fraud Training, Anti-Fraud Consulting and Crypto Advisory. For more information about our services, please click here.

Payroll Fraud -A Global Problem – Finding a Potential Needle in the Pay Stack

In this article, originally published in the American Payroll Association’s PAYTECH Magazine, Edward Nagel, Principal & Founder of nagel + associates identifies the various payroll fraud schemes that commonly victimize organizations, including a case study that illustrates how ghost or fictitious employees can be added to the payroll.  The article highlights common red flags to watch out for as possible indicators of payroll fraud and common methods used by organizations to prevent and detect payroll fraud.