THE FRAUD COLLUSION PATTERN
Diana Okado, MSc, CFE
Managing Director and Co-Founder Revolution Analytics Limited
Collusion is the collaboration of individuals or groups to help in achieving a particular goal, which cannot be reached by a single entity. Consider the two scenarios below;
An advance-fee scam is a type of fraud and one of the most common types of confidence trick. The scam typically involves promising the victim a significant share of a large sum of money, in return for a small up-front payment, which the fraudster requires in order to obtain the large sum. If a victim makes the payment, the fraudster either invents a series of further fees for the victim, or simply disappears.
There are many variations on this type of scam, including 419 scam, Fifo's fraud, Spanish Prisoner scam, the black money scam and the Detroit-Buffalo scam.[1] The scam has been used with fax and traditional mail, and is now prevalent in online communications like emails and now a variation of the same is seen with Mobile money.
Prisoners are locked up and idle, they decide to formulate a way to support their families whilst they serve their terms. They feel that they have been denied the opportunity to fend for their families, some rightfully so, others being victims of circumstances. Irrespective of the reason behind their being behind prison bars, they need to find something that will keep them busy.
Scenario 1
In the outside world, technology has caught up and everyone is in haste to own a mobile phone. The fact that you can now send funds to your relatives up country is very enticing. In this group of people, there is a mix of learned and illiterate individuals. This does not matter because with a little practice, one is able to navigate their phones.
In the meantime, the prisoners have managed to device a scheme that will enrich them. They decide to ride on the mobile money wave to support their families. Despite the rules and procedures, they manage to get hold of handsets. They opt to pick a number randomly and send a fake promo message. Since they don’t have a list of numbers they can call, they decide to add one to the last digit of the initial number e.g. 0700123456, the next number will, be 0700123457. A pattern for sending their hoax messages has been established. Now they sit and wait for the human greed to come into play. Some of the subs who receive the message, despite not participating in any promo will call the numbers provided in the text message. There will be an attempt to social engineer them into sending money to process their "winnings." The prisoners in an attempt to show off to other prisoners in the same or other correctional facilities will share the news of their newly found fortunes. This will in turn give rise to copy cats, who will help in propagating the fraud.
Mobile service providers will receive complaints from subscribers, who are angry that their numbers have been given to fraudsters. On checking the source of the fraudulent message, they will see the pattern involving an addition of one to the last digit of a number. It will then be possible to set an automated alert in the system that captures this pattern and the fraudster lines are barred and handsets blacklisted, hopefully before they defraud subscribers.
Subsequent attempts will be made by the prisoners to defraud the unsuspecting subscribers. However, chances of success are minimized due to the mobile service provider actively following the pattern and embarking on controls to minimize its exposure.
Scenario 2
The CEO has received accolades from both his Board and other peers. The CEO’s confidence is unmatched and he attributes the bank success to him being at the helm. His targets for the upcoming year are stretched and he needs to motivate his staff to perform. He has promised excellent bonuses if last year’s targets are surpassed.
It is Quarter 3 and time is fast running out for the CEO. He can see himself forfeiting on his huge bonus. A deal he was projecting from CYN organization is also dependent on him showing a good financial position. He calls the Chief Sales and Marketing Officer to his office and their conversation centers on the performance. The Sales and Marketing manager complains endlessly about the economy. Things are tough and no one can meet the stringent loan guidelines. A plan is hatched “what if we were to relax the lending rules” in just this quarter? He calls his friend Peter who is the Chief Credit Officer and the plan is executed. To manage information certain loans are only at the purview of the Chief Credit Officer. To manage his team the Chief Credit Officer does not take leave and doesn’t allow his team full view of certain reports.
Everyone on the executive committee is happy as this new turn of events including the Risk and Compliance chief whose bonus is also governed by the performance of the bank. Internal Compliance teams are provided with only the “good” reports. No questions are asked on what is driving this new performance.
As required by law an external audit is conducted by MNM Auditors. The Audit staff is diligent and raises a number of questions that point to the financial misstatements that are happening. However the audit partner is good friends with the CFO and wants to retain his business. He advises his juniors to change their audit findings.
Soon glaring holes begin to erupt. Loan default and provision for bad debts do not seem like they are in tandem. The CFO, CEO and Sales and Marketing Chiefs are always aggressive to anyone who questions them. They have formed a “big boys” club that is impenetrable.
Only through an independent audit by the governing body is the truth unmasked. A lot of questions are raised and answers sought.
From scenario one, we have established that fraudsters also want bragging rights from amongst their peers. It is therefore safe to assume that in scenario two, the bank CEO has shared his scheme with his peers in other financial institutions and it is therefore possible that there are copy cats.
Scenario 2 fraud type is not new. In the conclusion and investigation into the 2008 Global Financial crisis it was found that the crisis was the result of among other things "high risk, complex financial products;
Undisclosed conflicts of interest; dramatic failures of corporate governance and risk management, excessive borrowing, risky investments, and lack of transparency" by financial institutions.
When the governing body discovers the problem in the first bank, doesn’t it therefore follow that they should assume the same issue exists in other banks and proceed to check it out? Are the impacts from the two scenarios comparable? Is it necessary to wait for a second bank to be closed down to form a pattern that can then be used to check other banks?
Patterns are very helpful and important in prevention and detection of fraud as demonstrated in the first scenario. However, in some cases like in the second scenario, it is very costly to wait for a pattern to take action. In such cases, a suspicion is as good as a confirmation and should be followed immediately with swift action by the governing body.
I leave the notion of the domino effect of a second and/or third bank going down to your imagination.
The one thing that stands out in both scenarios is the collusion between different entities. The collusion chain should not be broken when dealing with these frauds. All entities should be held liable for the part they played.
The players change but the game stays the same.