Fraud at Work: Occupational Fraud: A case study

A true case. A sole-trader (let’s call him ‘Bob’), trades on the Internet, selling outdoor goods. Business is good, and his business expands. No longer can Bob keep his stock of outdoor goods in his garage, and so he rents another garage. Business continues to grow, and once more he expands his stock and purchases

Home » David Rosen » Fraud at Work: Occupational Fraud: A case study

A true case.

A sole-trader (let’s call him ‘Bob’), trades on the Internet, selling outdoor goods.

Business is good, and his business expands. No longer can Bob keep his stock of outdoor goods in his garage, and so he rents another garage. Business continues to grow, and once more he expands his stock and purchases a warehouse.

He understands his business. He understands his market. He watches daily, and at specific hours, his market. He watches Ebay. He watches Amazon. He sees what is, and is not popular at certain times of the year. He understands prices.

He goes overseas to speak to manufacturers, and becomes an exclusive seller of outdoor goods. (Not fully exclusive, but certainly an authorised dealer).

His particular best-selling product is a wind-up torch: No batteries. He buys the torches in bulk, and secures a reduced price, even taking into account import duties, and the cost of freight and delivery.

Bob’s best-selling torches cost him (after taking into account the above costs), £1.50. He sells them for £5.00. Happy days! He makes a healthy profit, even taking into account the cost of storage.

One day, he realises he can no longer run the business on his own, and he employs a warehouseman, (let’s call him John).

Whilst continuing to make money, one day Bob sees a new trader, ‘Outdoor Jo’. He sells the very same torches being sold at £1.00.

Bob, dismayed by this potential threat to his business, calls the manufacturer who assures Bob that they have not authorised sale of torches at any lesser price, and knows nothing about it.

Bob does some more digging around, and speaks to some of his friendly competition who are equally baffled as to how Outdoor Jo is making any profit at all.

Neither Ebay, or Amazon will disclose the real name or address of Outdoor Jo, so Bob asks his girlfriend to purchase a torch. The transaction goes through smoothly, and sure enough the torch is swiftly sent to Bob’s girlfriend.

The seller’s address appears, and sure enough, it is none other than the address of….John.

Bob is gob-smacked by this revelation, and seeks advice.

What if it is nothing to do with John?

What if someone else lives with John, and has stolen goods?

What if John is working with one of Bob’s competitors to under-cut Bob and force him out of business, because if he competes, he will be selling torches at a loss?

…so many questions…

Legal advice

Bob comes to Darlingtons and he says: I don’t want you to charge me for any legal advice. I want a deal like what the adverts say, ‘No Win, No Fee’.

I say, we will give you a deal on a conditional basis as you have asked…’No money, no work’…Bob does not see the funny side. Provision of legal services and advice costs money, just like when you go into a newsagents and you ask to buy a piece of chocolate, you don’t then argue, you should pay on another day, or argue why you should pay at all, do you?

Rationale understood, Bob says that money is tight, but understands that advice will cost.

The thing is, I say, how do you really know it is John? Bob scratches his head, concerned and baffled as to how he can show John is behind all of this.

I give Bob a list of things to do, and then to come back to me.

Before doing so, I establish that John has a drugs habit. John drives an expensive car. John goes on expensive holidays and has an expensive watch…and John…can not possibly afford all of that on the wage he earns as a warehouseman being paid part-time, £12,000 per year.

Why didn’t Bob see the signs? Why was he not concerned? He trusted John. John seemed happy enough, and Bob was too busy buying up goods and handling the internet sales.

I also establish that John, has a key-fob alarm in and out of the warehouse. Only one other person has such a pass, which is Bob.

I also establish that there is a log of access in and out of the warehouse. There is also CCTV recording activity on the warehouse, and access in and out of the warehouse…but no one is monitoring any activity, and John knows this.

I ask Bob, when did you last do an inventory of what stock you have? Blank expression in response.

I ask Bob, when the last stock-take was done, and he says…by John 3 months ago, and all was in order. Was it Bob? Was it really?

Bob is then asked to call his Accountants, and to undertake a full inventory and to marry them up against what had been purchased and imported from the manufacturer together with serial numbers. etc…

Sure enough, some several weeks later, the exercise is concluded:

There is £150,000 of stock missing from the warehouse.

Having set up some more purchases through friends of Bob, once the goods were received, serial numbers were compared, and low and behold, it was Bob’s stock.

Bob used to enter the warehouse late at night, or in the early hours of the morning, to collect stock which had been purchased over the internet.

How did he make his profit? Well, the costs of the goods were nothing, and so any money received by John was profit to him. He could have sold a torch for 0.25p and he would still have made 0.25pence.

What to do?

Faced with an internal fraud issue, Bob had a number of options to consider.

Option 1: Sack John for gross misconduct, and be rid of him.

Option 2: Do nothing. Bad option, but nevertheless, an option.

Option 3: Confront John informally, and present him with evidence showing it was him, and ask him to re-pay. Not a bad option, but if you were taking this to the Police, you would likely be interfering with their investigation, and the possibility of a confession.

Option 4: Notify the Police and let them investigate;

Option 5: Write a letter of claim to John, seeking a civil remedy and request for repayment of profit.

Could this all have been avoided?

Yes. Bob should never have unconditionally trusted John. Bob should have been aware of John’s sudden and apparent change in lifestyle. Bob should have regularly either on a daily, weekly, or monthly basis, undertaken a stock-take of everything in his warehouse, either independently, or through his accountants, or by himself. This should not have been left to John to do. Bob should have monitored his log-ins, and log-outs more regularly, as well as CCTV footage, and let John know he was doing this. That exercise in itself, may have deterred John from considering he could get away with stealing stock so easily. Bob could have sought a Criminal Records Bureau check to see if John had any criminal record.

He did not know John at all, and yet left him in charge of hundreds of thousands of pounds of stock without any checks or monitoring policies in place. No systems in place, left Bob open to become a victim of fraud and theft.

What actually happened next?

The Police were notified, and at the time that they visited his house, armed with a Warrant, arrested him for theft and handling stolen goods, a letter of claim was also sent to him to bring a civil case. John lived in rented accommodation. The car was on finance. Most of the profit went to feed his drugs habit.

It was discovered that John had a criminal record for theft and fraud, only a few years ago, which he never disclosed to Bob.

John died of a drugs overdose. No money was recovered. Bob lost in a big way…

Professor Rosen is a Solicitor-Advocate, Partner and head of Litigation at Darlingtons Solicitors. He is a working member of the Fraud Advisory Panel, a Certified Fraud Examiner, and an associate Professor of Law at Brunel University.

David Rosen • Fraud

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