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Construction fraud can be hard to nail down

Shannon Moneo
Construction fraud can be hard to nail down
Rosanne Walters - BDO Canada

Within Canada’s construction industry, the median loss to fraud is $259,000 of annual revenues, almost 70 per cent more than the $154,000 that Canadian companies in other sectors lose each year, according to the Association of Certified Fraud Examiners.

The frauds include stealing property, expense account abuse and kickback schemes. Online scams such as ransomware are also appearing with greater regularity.

"There’s a lot of corruption in the construction industry," said Rosanne Walters, a partner and chartered accountant at BDO Canada’s Vancouver office. Forensic investigations are one of her several specialties.

Fraud and theft run rampant, she said, because there are many opportunities in the industry.

"You really have to know who your supervisors are," Walters said. "And you have to understand the relationship your supervisor has with suppliers."

Onsite supervisors have a lot of latitude and can make a lot of decisions. Ideally, a solution is to have an office person whose main role is to be on top of projects. It may cost $60,000 to $80,000 for such an employee, but it’s worth it, Walters said.

"If there’s collusion, fraud can last forever," she explained.

In almost 60 per cent of cases, losses aren’t recovered.

With more than 20 years experience in investigative accounting, Walters points to "wheeler-dealer" project managers and bosses who work in construction. On the lookout for bargains, they broker deals with suppliers. In some cases, the arrangements lead to personal gain at the expense of the company.

Common in the construction industry are off-the-book deals where site supervisors make deals with subtrades, who will bill for a certain amount and direct some of the payment back to supervisors.

Another scam is that suppliers or trades will offer supervisors gifts like holidays or tickets to events. Walters recommended that companies have a policy addressing gifts where employees agree not to accept goodies worth over a certain amount, such as $50.

There is also another scam where the site supervisor will record an employee as having worked eight hours per day when they worked six. The missing two hours worth of wages can be split between the employee and supervisor.

"People walk away from the site with product, wood, steel, door knobs, doors," Walters added.

Having a quality control watchdog is crucial.

"You need that guy who’s on top of everything," she said, adding the site supervisor can be in charge of work at the project and a trusted, office-based person should be handling purchasing, time sheets and other big-ticket expenses. "Do your due diligence. You need office support for projects."

Walters outlined other procedures to curb fraud.

"Really know what the costs of services are."

When an owner knows the prices, discrepancies stand out immediately.

She also advised to use the bid process and to switch suppliers as often as possible.

"Budget projects really well. When costs seem higher than normal, look into it right away," Walters said.

In Canada, 65 per cent of fraudsters are male, the median age is 40, 55 per cent have university degrees and usually no criminal history.

There’s also the 10-10-80 rule where 10 per cent of employees never steal; 10 per cent will steal at any opportunity; and 80 per cent will go either way, depending on how they rationalize the opportunity.

Walters notes the fraud triangle: When a need or pressure is overwhelming, the fraudster takes advantage of an opportunity, in the form of weak internal controls or the ability to override the controls. In turn, the employee rationalizes their theft for reasons such as they didn’t get the raise they deserved or the boss won’t miss the money.

Signs that an employee could be committing fraud include living beyond means (46 per cent), financial problems (30 per cent), unusually close relationship with vendor or customer (20 per cent), wheeler-dealer attitude (15 per cent), control or an unwillingness to share duties for fear of discovery (15 per cent), divorce or family problems (13 per cent) and addiction (10 per cent).

Specific to the construction industry, 36 per cent of fraud involved overpaying a supplier and then taking a kickback; fraudulent billing was 28 per cent, where a fake supplier was paid; 22 per cent involved stealing non-cash assets; expense account abuse was 21 per cent; payroll schemes (overpaying co-workers or paying non-existent staff) was 16 per cent; and skimming (selling products or services for cash or off the books) occurred in 15 per cent of cases.

Preventative measures include close review and pre-approval of all suppliers and expense reports, spot checks, constant attention to financial and bank statements.

"And video surveillance," Walters said. "People change their behaviour when they’re being watched."

When it comes to cybercrime, either disgruntled or negligent employees, or subcontractors can pose risks. A fired employee can remove confidential information such as bid documents via email or USB flash drive or wire funds to an accomplice. A subcontractor with a criminal record can get access to the company computer system. A careless employee may click on an email that downloads malware onto the system, allowing financial assets to be stolen, confidential data to be accessed and operations to be disrupted, said Walters.

Hard-to-guess passwords that are changed regularly and stored securely are paramount. Employees or contractors who leave the company should immediately lose access to company computer systems. Important data should be encrypted and backups should be done daily. Staff should get regular training so they’re aware of the growing number of online risks. Cyber fraud insurance and a disaster recovery plan can bring some peace of mind, Walters noted.

In Victoria, Det. Sgt. Derek Tolmie has been dealing with "man-in-the-middle" scams where a fraudster somehow infiltrates an email dialogue and convinces the correspondents that they (the fraudster) are both the service provider and the contractor. Typically the crooks will change email addresses in slight ways such as flipping two characters.

In one case, $1 million was sent by a Victoria lawyer who believed he was corresponding with an overseas client when in fact the money was directed somewhere in Asia and then Europe.

Another recent case involved criminals who infiltrated email correspondence between the purchasing manager, who was ordering a large piece of equipment, and supplier, asking the manager to send $25,000 to Florida instead of the expected address in a Canadian province.

What was interesting in this case, Tolmie said, is that the Canadian supplier had earlier been scammed by a woman, apparently in Russia.

"What we’re seeing are victims dragged into two different frauds, man-in-the-middle and romance scams," Tolmie said. "Slow right down. Do your due diligence."

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