Prevent Fraud, Increase Profits

Lawyers represent countless clients in cases of fraud. Last week, however, in a bizarre reversal, it was a group of lawyers who found themselves defrauded by their clients.

Thursday, August 12, Emmanuel Ekhator was extradited to the U.S. from Nigeria after being accused of defrauding dozens of American lawyers and firms of more than $31 million dollars, reports the Associated Press.

Ekhator and others are accused of executing a complex financial scam defrauding American lawyers via wire transfers to bank accounts in South Korea, Singapore, China, and Japan.

The scheme begins with a scammer calling a U.S. or Canadian law firm posing as an Asian client who needed to collect a debt from a person or organization based in North America. A second scam artist poses as the debtor. He then agrees to pay off the debt, but sends a fake check to the law firm’s representative.

A third fraudster poses as a bank employee and validates the fraudulent check for the law firm, which proceeds to use its own funds to transfer to the original Asian client the fake settlement amount.

At Above the Law, the lesson learned for attorneys is, “when you get a check for a large sum of money, make sure it’s not a fake before cashing in on it.”

Here, for law firm administrators, the lesson learned is, more importantly, be sure you have security measures and secondary checks in place to prevent the mishandling of settlements and fees.

Turns out, the typical organization loses 5 percent of its annual revenue to fraud, according to the Association of Fraud Examiners (AFE) in its 2010 Report to the Nations on Occupational Fraud and Abuse.

In 2010, the 100 biggest law firms, or AmLaw 100, grossed $67.42 million, which means as much as $3.37 million in legal fees may have been lost to fraud last year alone.

Small firms are particularly vulnerable to occupational fraud risk, according to the AFE’s 2010 Report to the Nations, as these organizations tend to lack adequate anti-fraud controls compared to their larger counterparts. Small firms tend to run operations on trust and mom-and-pop shop-type cultures, which overlooks typical suspicious employee behavior, like the ability to live beyond their means (43 percent of cases) or other red flags, like employees experiencing financial difficulties (36 percent of cases).

More than 80 percent of the frauds identified in this study were committed by individuals in one of the following six departments: accounting, operations, sales, executive/upper management, customer service or purchasing.   And, more than 85 percent of these individuals had never been previously charged or convicted of fraud-related offenses.

This means, background checks on employees or checks clients are not sufficient to catch perpetrators.

To avoid fraud, try implementing these three steps:

  1. Establish a Culture of Ethical Behavior. Peer pressure is not simply a schoolyard tactic. Managers should set the tone of ethical behavior through both personal example as well as written instruction (i.e., the Employee Handbook). Make sure your employees understand that fraud or other illicit behavior will not be tolerated.
  2. Educate Your Employees. The AFE concludes, “Our data show not only that most frauds are detected by tips, but also that organizations that have anti-fraud training for employees and managers experience lower fraud losses.”
  3. Initiate a Tips Hotline. A Tips Hotline is the number one fraud reporting mechanism, according to the AFE. A Tips Hotline allows and even encourages associates to report suspicious activity anonymously and thus without fear of reprisal. Although audits ranked fairly poor on anti-fraud mechanisms, surprise audits or even the threat of a surprise audit remains effective.

Emmanuel Ekhator defrauded more than 80 lawyers and firms of $31 million dollars. Ekhator and his fellow scammers planned to extort an additional $100 million from 300 others.

Don’t let your firm be a victim.

-WB

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