Tips for Identifying and Preventing Transaction Fraud – ACG Breakfast Series with Jeremy Pawelkiewicz

On May 10th 2016, LCG Advisors Senior Vice President, Jeremy Pawelkiewicz, was on the panel for the Association for Corporate Growth (ACG) Interactive Breakfast Series, “Tips for Identifying and Preventing Transaction Fraud.”

The subject matter-experts leading the discussion included James McArthur, Executive Vice President, Aegis Business Credit; Robert O’Neil, former US Attorney for the Middle District of Florida; and Jeremy Pawelkiewicz, Vice President, LCG Advisors. Mr. Pawelkiewicz has been with LCG Advisors for over 10 years and is currently an SVP – Field Exam Team Manager and is responsible for managing nine field examiners spread across the U.S.. Mr. Pawelkiewicz has performed field examinations in several countries on transactions up to $600MM.

Below is a brief Q&A with Mr. Pawelkiewicz on the topic of Fraud:

Q: Is there anything specific you look out for in regards to identifying and preventing transaction fraud?

A: The first thing I look for is cash leaving the bank accounts for non-business related or suspicious reasons. Large ownership draws, transfers to non-company related accounts with no description, wires to non-vendors or non-business related entities, etc.

Q: How do you identify/detect fraud?

A: Not usually that easy. Review of cash work, things being a “little to perfect,” lack of supporting documents for shipments, services rendered, lack of items reconciling to balance sheet or borrowing base. Cash diversion. Sales increasing right before submission of BBC.

Q: What types of fraud do you see most often?

A: Typically I see two types of fraud:

1) Desperation – An owner, CFO, CEO, etc. just wants to keep the lights on, payroll paid one more week, vendor shipments paid, etc. This usually leads to manipulation of the borrowing base. Original intent is a short term fix until the cash starts flowing again. This type of fraud is usually “easier” to catch as less thought and intent goes into this and inflation of collateral, which is the most common result, is normally easier for a Field Examiner to find.

2) Intent to Harm the Bank – In this case the owner, CFO, CEO, etc. is intentionally defrauding the bank for personal gain. This usually involves a much deeper, covert operation and is normally more difficult to uncover as an examiner.

Q: How can you prevent fraud or at least catch fraud earlier rather than later?

Using 3rd parties to assess various aspects of the company to pinpoint weaknesses. However, using 3rd parties also can make you susceptible to fraud.
Making sure there are clear segregation of duties. Fraud often happens at smaller companies where the person handling the AR receipts is also the one cutting AP checks, which can tempt people into thinking they are owed a little extra and can lead to embezzling.
CFO’s or Owners who are ultimately responsible for checks or wires being sent out should take the time to periodically match up what is being disbursed with the vendor invoice to ensure the amounts match and make sense.
Create a work environment of trust with accountability.
Instituting and enforcing a no tolerance threshold for any level of fraud. This sets the tone for the whole company. “Top down approach”.
Routine field exams are an excellent way to prevent fraud in the ABL world.
Correctly detailing parameters of loan in the loan agreement and in the BBC package the Company will submit weekly, monthly, etc.
Proper in-house monitoring of BBC submission and supporting files to ensure accuracy of BBC reporting.
Periodic verification of A/R invoices by Bank / 3rd Party.

Q: How can you protect your company from internet fraud, hacking, etc.?

A: At LCG, we stay ahead of the curve in making sure we were instituting cutting edge safeguards and using 3rd party IT audits to ensure we are safe guarded.