Corporate Fraud Discovery: Will You Please be Quiet, Please?

Dr. Michael-A. Leuthner
Dr. Michael-A. Leuthner

What’s about the communication with the public if you identified fraudulent activities within your company?

Following the first article of this series, which described the human factor in fraud, the second article described the different kinds of fraud that can be found in a business context. In the third article it was explained how to deal with a freshly discovered fraud in an organization and what specific steps should be taken next. The fourth article showed which simple but highly effective measures can be taken to deter occupational fraud. The fifth article described the reasons for the reduced motivation of a company to inform customers, creditors and shareholders when fraud was discovered within the company. But a concealment of fraud against the stakeholders could have negative consequences.

Three current negative examples for very poor or even non-existent communication are analyzed in the present sixth part.

Lately known cases of employees carried-out activities that were not aimed at the genuine „business purpose“ were as follows:

  • the Catholic Church,
  • Volkswagen AG, and
  • the FIFA.

Explicitly, it should be emphasized that here is no moral or any other evaluation done. It should be focused solely on the right of information needs of the members, customers and the general public.

It is easy to understand that an organization has no interest in produce negative messages. Moreover, neither members, nor users, customers and suppliers should receive this negative information nor shareholders or creditors. Why is that so? One is afraid to produce a negative (and possibly longer-lasting) image in the appreciation of those who are connected with the organization and ultimately provide monetary means to lose.

Fraudulent and unlawful actions are coming in most cases to public attention, sooner or later. Concealing and delaying fraudulent behavior by misleading communication can have extremely negative consequences for the organization, no matter what kind of organization.

Catholic Church

Unfortunately, usually the classic „salami tactic“ is indicated, or even worse, as happened in the case of the Catholic Church. Just the facts were admitted which were already proven under the crushing burden of proof. Otherwise, a veil of silence is wrapped over everything else. We do not regard this as an open communication and it does not support credibility that non-compliant activities will be punished.

Volkswagen

picture_Poetsch_Hans_Dieter_c_Scania_Foto_-150x150[1]
Hans-Dieter Poetsch
Volkswagen AG is another well-known example how fast the market responds to incomplete or uncertain information and potential customers drift to competitors. This is already indicated by reduced sales in the United States. One ends with the impression that Volkswagen AG’s communication reminds us more of a total helplessness to the public. This is confirmed in an interview with the newspaper ‚The world‘. It may surprise that Supervisory Board Chairman, former chief financial officer in the same company, Hans Dieter Pötsch, states:

„”What happened will be investigated, clear, complete and open-ended.”“ „”Even if, at the end, we do not like the outcome.”[1]

During the interview, the Supervisory Board Chairman responds to the question why he does his job as head of Supervisory Board at all, he answered that he did not apply to this function. You can you that, but you don’t have to.

John German Foto: German/ICCT
John German Foto: German/ICCT

John German, U.S. co-director of the International Council on Clean Transportation, reports in the German periodical ‚Stern‘[2] that a department of the University of West Virginia had received an order to test three VW vehicles in the operation of an environmental test. The University was supported by the California Air Resources Board (CARB). The test result was, that under normal conditions on the road, the vehicles NOx emissions were five to 35 times higher as has been indicated by the manufacturer. When the vehicles were back in the test facilities, the values corresponded again[3] with the numbers specified by Volkswagen AG. In May 2014, John German sent the documented test results to the U.S. environmental protection agency (EPA) and also to CARB. VW had received also a copy, thanked, but not responded in any way at all. Today, we know that the internal audit department, which reported in accordance with the guidelines directly to the Board, knew of these procedures. One can assume that the Board must have had the knowledge what was happening inside the corporation. Communication in such critical cases must be clear and unique. Here, it is definitely not.

picture_Betrug_Ahnengalerie[1]
Ancestor Gallery of Fraud: Free Seats still avalable

FIFA

Another interesting case in communication hurdles to the public is shown by FIFA with their former dominant chairman Sepp Blatter. Blatter still denies everything. Either he is completely deluded or he is no longer a member of this world. If you briefly reminisce about this operation, following highlights will be:

Chuck Blazer
Chuck Blazer

Chuck Blazer, ex-official of FIFA, as well as 21 years Secretary of the American football Confederation CONCACAF, plays an important role within this case. CONCACF also plays a highly important central role in the FIFA corruption scandal. It was already in the year 2011, that Blazer was according to the German periodical ’spiegel‘ faced with the choice being either arrested or to act as a clandestine informant for the states attorney’s office. “Blazers chose the latter, repaid $1.9 million and worked since 2013 as a covert agent for the states attorney that coldhearted FIFA colleagues with a mini microphone in the key fob“ [6] .

Now, with accessible insider knowledge, the U.S. judiciary has now brought charges against 14 FIFA officials. The method of using a plea is nowadays the standard repertoire of American prosecutors, especially in the fight against organized crime. The former U.S. Attorney and New York’s late Mayor Rudolph Giuliani smashed the structure of all of the city’s five Mafia families too.

Due to greater experience in complex corruption offences the United States opened the prosecution. Probably no judiciary will be tougher, even beyond the country’s own borders. This is one of many reasons the U.S: have created the Foreign Corrupt Practices Act (FCPA). The suspects don’t have to be U.S. citizens: America’s investigators can prosecute as long as there is only a single connection to the United States.

Although the present case offers several points of incidents, but the US authorities took advantage of the so-called work-horse in fraud cases, the so-called „wire fraud“ [7] to start the official investigations. To proceed, phone calls, E-mails etc. are sufficient prove. It is assumed that the soccer officials laundered their money through American banks.

Loretta Lynch
Loretta Lynch

US Minister of Justice Loretta Lynch had already as former U.S. Attorney for the District of East New York built her reputation with prominent corruption cases and since 2010 she also dealt with their team with FIFA. US Justice was still cautious with the access and would have rather waited until all suspects would be gathered in one place before covering them. The FIFA Congress in Zurich, then, was the perfect chance. Therefore, the communication was rendered to the public in a non-desired way.

The task of communication if errors or fraud be detected or uncovered in the company is neither perceived by the compliance department, nor by the marketing department alone. The corporate bar will also not take over the communication also without being consulted. A clear communication strategy is to design by professionals and then stringently implement by top management. In this respect, the above mentioned examples make us wondering. Stay tuned!

Dr. Michael A. Leuthner

Dr. Michael-A. Leuthner studied mechanical engineering and economics, writing his doctorate with a professor for financial auditing. In addition, he holds the following qualifications:

  • Certified Public Accountant (State of Washington)
  • Certified Internal Auditor
  • Certified Fraud Examiner
  • Certified Financial Services Auditor

Focus of Dr. Leuthner’s work is restructuring and fraud discovery and prevention in international firms around the world.

E-mail: leuthner@cpa-leuthner.com

[1] https://www.xing.com/profile/MichaelA_Leuthner

[2] https://de.linkedin.com/pub/dr-michael-a-leuthner-cpa-cfe-cia-cfsa/4/37/b38

Links

[1] http://www.welt.de/Wirtschaft/article150183331/Kernwerte-der-marke-Volkswagen-beschaedigt.html; translated by the author

[2] http://www.theicct.org/John-German

[3] Hale, Norbert: this man caused the VW scandal, in: Star vol. 2015, no. 53, pp. 50-54

[4] http://www.Spiegel.de/Wirtschaft/Unternehmen/VW-abgasskandal-die-Schnelle-loesung-weckt-misstrauen-Kommentar-a-1064593.html

[5] http://www.sueddeutsche.de/sport/fifa-blatter-droht-ein-viel-tieferer-sturz-1.2792191

[6] http://www.Spiegel.de/sport/Fussball/FIFA-skandal-deshalb-sind-die-us-ermittler-so-hartnaeckig-a-1036130.html, translated by the author

[7] https://www.washingtonpost.com/news/the-fix/WP/2015/05/27/how-the-us-can-arrest-FIFA-officials-in-Switzerland-explained/

Published Articles on Fraud

Teil I: Faktor Mensch: Risikofaktor #1 bei Betrug

Teil II: Manager schmieren, manipulieren, betrügen: Die Betrugsarten im betrieblichen Umfeld

Teil III: Auch bei Managern kann die Devise gelten: Nicht hören, nichts sehen, nichts sagen

Teil IV: Compliance-Kultur Wegducken: Verhindern von Betrug

Teil V: Über unternehmerische Betrugsfälle wird der Mantel des Schweigens gelegt

 

 

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