Invoice Fraud

Posted on Friday, December 15, 2017

When a supervisor with Burlington Northern Santa Fe Railway stumbled upon a way to submit fraudulent invoices to his employer, he enlisted several others in the scheme. In the end, more than $2 million in bogus or inflated invoices (details of the case are in the right-hand box) were submitted.

How the Fraud Worked

    Two Kansas men pleaded guilty in 2010 to conspiracy to commit wire fraud against Burlington Northern Santa Fe Railway (BNSF).
    Matthew Wyrick, 35, and his father-in-law, Robert Steele, 64, were charged with various offenses related to BNSF, where Wyrick was employed as a supervisor in the Structures Division.
    Wyrick was stationed in Tennessee and was later moved to Kansas. As a supervisor, he had the authority to employ vendors to work for the railroad and authorize certain payments to them.
    According to court documents, in a 29-month period, Wyrick, Steele and others engaged in a scheme to over bill BNSF to obtain money and other goods.
    For example, Wyrick met a man who owned a hardware store in Mississippi. Wyrick and the owner agreed that the store would submit fraudulent invoices to BNSF for products and services that were never provided. After the invoices were submitted, Wyrick would approve them and he and the owner would split the proceeds. In all, more than 100 bogus hardware store invoices were submitted, totaling more than $350,000.
    When Wyrick moved to Kansas, his supervisors encouraged him to find additional vendors to ensure that BNSF was not being overcharged for services. Wyrick then recruited his father-in-law to become a vendor. At the time, Steele was an out-of-work long-haul trucker. With Wyrick's encouragement, Steele changed the name of his company to S&S Erectors. Wyrick failed to disclose his relationship to Steele, thereby indicating there was no conflict of interest.
    S&S submitted approximately $1.8 million in invoices to BNSF. Some of the invoices were legitimate. Others, however, were fraudulent because they billed BNSF for services never performed, misrepresented the nature of the work or grossly overcharged the company. Wyrick approved the vast majority of the S&S invoices.
    Steele paid Wyrick more than $600,000 of the proceeds he received from BNSF by writing a check to him, giving him cash, or paying Wyrick's personal bills. Wyrick admitted that he knew some of the invoices were fraudulent but approved them anyway.
    For example, S&S submitted nearly $400,000 in invoices to BNSF for hazardous waste disposal associated with one of its projects. Those invoices were fraudulent because the waste disposal was not "hazardous" and was disposed of by S&S for less than $10,000.

To prevent a similar scam from taking place at your organization, consider taking the following steps:

Communicate your company's ethical code. A well-written code of conduct plays an important role in setting an ethical tone in which employees are expected to transact business. It is important that this code include a section dedicated to vendor selection and management. In addition, in order to ensure that vendors are ultimately selected based on merit, some companies prohibit workers from partaking in vendor hospitality, including meals, gifts or travel.

Require vendors to sign a code, too. Consider asking all vendors, regardless of size or type, to sign a vendor code of conduct. The code can include not only what is expected of the vendor, but what the vendor can expect from your company. It should also include information about your company's fraud hotline or how to report unethical behavior from employees.

Formalize your company's vendor selection process. The railroad supervisor was able to commit fraud in large part because of the lack of structure around his company's vendor acceptance process. Your vendor management, or supply chain management organization, should be responsible for approving new vendors. You can dramatically reduce vendor fraud with a rigorous selection and evaluation process that includes documenting the business requirements and requests for proposals.

Take time to learn about your vendors. During the acceptance process, consider requiring each company to complete a detailed questionnaire that includes asking the vendor to provide ownership information, customer references, office addresses, financial records, and pending litigation. It's important to not only request this information, but also to verify it.

The Internet contains a number of free sources to authenticate phone numbers and addresses as well as conduct investigations of the vendor's owners or executives. Depending on the size and importance of vendors, you may consider engaging your accountant to conduct comprehensive background checks.

Monitor frequency and dollar amounts of vendor payments. Implement a random review of vendor payments based on dollar amount, frequency, and other factors. All of the documentation submitted to support the payment should be reviewed and you should investigate any anomalies or inconsistencies. Whenever possible, ensure that the products or services were actually provided in the manner invoiced and agreed upon.

Include a special clause in vendor agreements. Many companies include a "right to audit clause" in vendor contracts. This can be a powerful tool in the fight against fraud or abuse. It allows your business to audit the vendor's records for a specified period of time and it can also include the ability to audit subcontractors.

Consult your attorney before adding a "right to audit clause" to your contracts to ensure that it includes the appropriate language. If vendors refuse to comply with the requirement and deny access to their records, it does not necessarily mean that the vendor has committed fraud. However, at that point, consider engaging your attorney to discuss remedies available under the contract.

Vendor fraud schemes often remain undetected until the losses have reached epic proportions. Implementing the steps above creates a multi-pronged approach that can significantly reduce the risk of your company becoming a victim.

Posted in Fraud & Forensics Group

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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