SWINDLERS AND CONS IN

STATE GOVERNMENT

A Case Study of Payment Card Fraud

STATE PAYMENT CARD PROGRAM

State Payment Card Program

In June 2007, Policy 29 went into effect

Made the State Payment Card the preferred method of payment

Small-value purchases under $2,000 For Business Purposes Only

Meant to improve vendor relations by accelerating payment process

Does not require bid solicitation

Does not require state issued purchase orders

THE FRAUD

Payment cards were improperly used by state employees in management positions to buy items for personal use

Fraudsters were allowed to:

Determine needed items to purchase

Place orders for the items

Personally obtain items

Pay for items with a state payment card

Disguise personal items as legitimate work related

HOW WE GOT INVOLVED

New Business Owner

Life savings to buy business

Did not know much about running the business

Depended on current management in day-to-day operations

After learning the business and determining that fraud was occurring the new owner

Obtained attorney

Attorney was former Assistant DA

Contacted Special Investigations

THE STATE PLAYERS

State Department “A”

Maintenance Manager

30 Year Employee

No Oversight

Made All the Decisions

No One Questioned

State Department “B”

Facilities Manager

10 Year Employee

No Oversight

Made All the Decisions

No One Questioned

THE BUSINESS PLAYERS

Former Business Owner

Current Business Owner

Store Management

Store Employees

THE SCHEME

State employees colluded with former business owner and other store employees to obtain tax free items for personal use and charged items to their state issued payment card

Business owner charged up to 150 percent mark up on purchases made by the state employees

State taxpayers paid for fraudsters to operate their side businesses and complete personal home improvement projects

WHAT WE DID

Time sensitive (former management found out)

Obtained records from current business owner

Review of relevant documents

Surveillance of homes, private businesses, state properties

Interviews

STATE DEPARTMENT “A”

The Swindler

INVOICE REFLECTS “BOXES”

RECEIPT FOR SPEAKERS

SPEAKERS FOR HOME USE

SPEAKER BOXES FOR NEW HOME

INVOICE FOR “ICE MAKER”

CHANGED TO “120 VOLT”

NONCOMMERCIAL ICEMAKER

OTHER ITEMS DISGUISED

Pressure washer motor (that he wanted back)

Fog lights for his personal off-road vehicle

CB radio and antenna

Gallons and gallons of paint used for his side business

Painting supplies

Non-commercial refrigerators

Received cash for returned items bought with payment card

SURVEILLANCE/INTERVIEWS

Work areas

Interviews with staff

Physical review of various work facilities

INTERVIEW WITH SUBJECT

Two investigators and department management

Obtained confession

Subject “A” admitted to theft and collusion with former business owner

STATE DEPARTMENT “B”

The Con

INVOICE FOR LIGHT BULBS

PERSONAL VEHICLE TIRES

ALUMINUM GUTTERS VOIDED

GUTTERS VOIDED AGAIN

GUTTERS CHANGED TO “FLUSH VALVE KITS”

LOWES RECEIPT FOR GUTTERS

SURVEILLANCE

Car

House/Home Improvements

Work

Interviews with staff

ITEMS DISGUISED AS LEGITIMATE

Tools

Tree cutting equipment

Flooring material

Lumber

Pressure washer

Garage doors

INTERVIEW WITH SUBJECT

Two investigators and Director of Internal Audit

Appearance

Obtained confession

Subject “B” admitted to theft and collusion with former business owner

Undertone of blackmail

SIGNS OF FRAUDULENT ACTIVITY

Vague item descriptions on invoices

Items that don’t seem like logical purchases

Unusual items purchased

Use of a middle man to purchase items that could be bought directly with the payment card

Split invoices

Items that should have been purchased through another department

Internal control issues

REAL RISKS OF NO OVERSIGHT

Split invoices

Personal purchases disguised as legitimate work related purchases

Personal items returned for cash Use of middleman to inflate costs (huge

markups)

Guaranteed business from state government

WHERE THE TWO CASES DIFFER

By Department and District Attorney’s Office

DEPARTMENT ACTION

Department was terminating with or without confession

Two letters – one if he confessed – one if he didn’t confess

Confiscated accrued annual leave

Coded fraudster “not for rehire within the state”

Prosecuted

Moved the fraudster to another building

Assigned a new supervisor

Procurement privileges revoked

Fraudster harassed former building facilities staff

State Department “A” State Department “B”

DISTRICT ATTORNEY ACTION

Prosecuted Plead guilty Two years plus

supervised probation

Ordered restitution “We appreciate the

opportunity to have represented the Department”

Since the department declined to terminate employment with the subject we have decided not to prosecute

State Department “A” State Department “B”

KEYS TO PREVENTING FRAUD

Upper management should be responsible and check for appropriate purchases on the front-end

Provide training for the employee

Ensure the integrity of the employee

Ensure segregation of duties

Back-end monitoring of purchases

Zero tolerance

COMPTROLLER’S ACTION

Sent an immediate action notice to all state departments to review vendor purchases

Required state departments to report the results of their review back to our office

State contacted all vendors and reminded each that it was inappropriate to present gifts to state employees

QUESTIONS?

Melinda S. Crutchfield, CFEDivision of State Audit

Comptroller of the TreasuryMelinda.Crutchfield@cot.tn.gov

(615) 747-5308