Paul Van Der Aa - Dealing With Fraud And Corruption In A Pragmatic Manner

Jakarta Business Networkers

Fraud and Corruption in Indonesia

Consulting

Strictly private

and confidential

12 October 2017

PwC



PwC

Strictly private and confidential 12 October 2017

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Indonesia probes corruption related to Rolls-Royce and AirbusFormer chief of state airline Garuda placed under investigation


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Agenda 1

Agenda Executive Summary Executive Summary

Fraud is everywhere

Executive Summary

9

2 Fraud triangle 11

3 Anti-corruption efforts and their effectiveness / KPK-'statistics' 18

4 Real life fraud cases 23

5 Suspicious Transaction Analysis 36

6 What can you do? 45



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Fraud is everywhere



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There are many kinds of financial crime

• Financial statement fraud

• Procurement fraud

• Bank card and cheque fraud

• Cyber fraud

• Counterfeit goods fraud

• Employee fraud

• Money laundering

• Tax fraud

• Insurance fraud

• Expense claim fraud

• Misappropriation of assets

• Insider trading

• EtcJakarta Business Networkers


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Fraud triangle



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Rationalisation

• I’m doing the Company a favour.

This will definitely enhance

shareholder value

• I’ll help expose my Company’s

internal control weaknesses

• I’ll just borrow the money and return

it later

• I deserve it since I’ve sacrificed so

much for the company…

Incentive – fraud is often committed

because perpetrators are in some

form of financial difficulty or need

(e.g. gambling, drugs, living beyond

means, etc.)

• Pressure to meet loan covenants or

forecast numbers

• Pressure to meet market expectations

Opportunity

• Fraudsters are in the right position at the right time

• They recognise and seize the opportunity to commit fraud

• They understand operations, policies and procedures, and have access to

records/funds

It is generally accepted that the following three conditions must be present for fraud to occur:

Opportunity



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RationalisationIncentive

!Fraud

Introduction to the Fraud Triangle

What is corruption?



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Corruption Fraud

vsOffering or receiving something

to Influence improperly the action

of another party

Action of misrepresentation that

knowingly is misleading

to gain financial benefit or avoid

obligation

Reported bribery and Corruption, by region

27%

12%

14%

25%

30%

35%

39%

39%

24%

12%

7%

19%

32%

43%

36%

34%

10% 50%

Global

Western Europe

North America

Latin America

Asia Pacific

Middle East*

Eastern Europe

Africa

20% 30% 40%

% of all respondents who experienced economic crime over the survey period

2011 Global 2014 GlobalJakarta Business Networkers


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0%

*Indonesia and Middle East included in

the “Asia Pacific” region in 2011

Source: PwC GECS

Source: Transparency International

2 Fraud triangle

90 Indonesia 37

Top 5 most/least corrupt countries

Corruption Perception Index 2016

Rank Country Score Rank Country Score

1 Denmark 90 1 Denmark 91

New Zealand 90 New Zealand 91

2 Finland 89 2 Finland 90

3 Sweden 88 3 Sweden 89

4 Switzerland 86 4 Norway 88

5 Norway 85 5 Switzerland 86

88 Indonesia 36

174 North Korea 12 174 North Korea 8

175 South Sudan 11 175 South Sudan 15

176 Somalia 10 176 Somalia 8

Corruption Perception Index 2015

Executive SummaryExecutive SummaryExecutive SummaryAgenda

Note: 1 is perceived to be least corrupt, 176 is perceived to be most corrupt



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24%

24%

72%

22%

24%

23%

27%

29%

69%

Cybercrime

Bribery and Corruption

Procurement fraud

Asset Misappropriation

2014

2011

Jakarta Business Networkers 0% 20% 40% 60% 80%


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Bribery and

Corruption is identified as

one of the five most prevalent

forms of fraud, after Asset

Misappropriat

ion

PwC’s Global Economic Crime Survey indicates only slight changes year on year

Accounting fraud

Source: PwC GECS

Sector % of respondents reporting

Financial services 19%

Professional services 18%

Entertainment and media 14%

Sector % of respondents reporting

Engineering and construction 50%

Energy, utilities, and mining 42%

Government/state-owned enterprises 35%

Sectors reporting the least bribery and corruption:

Source: PwC GECS

Executive SummaryExecutive Summary2 Fraud triangle Agenda Executive Summary

Industries most at risk of bribery and corruption

Sectors reporting the most bribery and corruption:



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Anti-corruption efforts and their effectiveness / KPK-'statistics'



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Anti-corruption efforts and their effectiveness / KPK-'statistics‘



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Anti-corruption efforts and their effectiveness / KPK-'statistics‘ (continued)

Total Cases in 2012: 49

Total Cases in 2016: 99

Source : http://nasional.kompas.com/read/2013/12/30/2149106/2013.KPK.Tangani.70.Kasus

Total Money Saved :

IDR 500 Billion



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http://nasional.kompas.com/read/2013/12/30/2149106/2013.KPK.Tangani.70.Kasus

Anti-corruption efforts and their effectiveness / KPK-'statistics‘ (continued)

Source : KPK



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Positions of convicted:

• Judges

• Prosecutors

• Parliamentary Members

• Ministers

• Government Officials

• Ambassadors

• Commissioners

Bribery and corruption in high risk markets

10%

14%

26%

29%

40%

Lost opportunity to

competitor believe paid

bribe

Asked to pay bribe

0% 10% 20% 30%

Org with operations in high risk markets

Org with no operations in high risk markets

Respondents

with operations

in high risk

markets are twice

as likely to be

asked to pay a

bribe and believe

they lost an

opportunity to a

competitor bribe

3 Anti-corruption efforts and their effectiveness / KPK-

'statistics'

Source: PwC GECS


Executive SummaryExecutive SummaryExecutive SummaryAgenda


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22 22

Real life fraud cases



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A Business in a business

Customer Company Company Company Customer

Own transport

Fraudulent companyCustomer

Customer

√

√

X

Pick up goods from customer Bring goods to port Pick up goods from port Deliver goods to customer Result



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Middleman

• During our image analysis and document vouching, we noted the following pattern from a number of transactions to end customers:

o A number of quotations from Company ABC to end customers

o A number of quotations from Fraud company to end customers

o POs received from Fraud company with lower product prices compared to identified quotations

o Sales to Fraud company with product deliveries directly to end customers

• The chart below summarises the above findings



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Cyber fraud



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There are many fraud schemes when it comes to procurement…..



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Below we have listed some of the fraud schemes we have come across during our engagements:

1. Supplier = Company X employee

2. All suppliers are owned by same person so tender is not "real“

3. Split POs to stay under approval threshold for Direct award when should have gone out for tender

4. Kick backs to Company X employees/procurement staff to get contracts

5. Overpayment for goods of lower quality

6. Company X pays for services that were never provided

7. Supplier is middleman and is owned by employee or his family member and provides goods to Company X with a mark up

8. Inappropriate and ineffective internal controls

1. Supplier = Company X employee

Issue

• The supplier is actually an employee of Company X,

but has not declared its business interest in the

supplying entity

• Undeclared conflict of interest

Approach

• Identify common addresses, bank accounts and phone

numbers through Suspicious Transaction Analysis,

Corporate Intelligence and forensic investigation

• Conduct Due Diligence before accepting/during

relationship with vendor

• Pre and post employment screening of employees

Outcome

• Identify undeclared conflicts of interest

Company X

4 Real life fraud cases Executive SummaryExecutiveASguemndmaaryExecutive Summary



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2. All suppliers are owned by same person so tender is not "real“

Issue

• Company X invites 3 companies to provide a proposal, but they are actually owned by the same person

Approach

• Identify common shareholders, directors, etc, common addresses,and phone numbers through Suspicious Transaction Analysis andforensic investigation

Outcome

• Establish whether entities are related

Proposal Proposal Proposal

Company X




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3. Split POs to stay under approval threshold for Direct award when should have gone out for tender

Issue

• Company X procurement people arrange with

supplier to split POs into smaller POs to stay

under the threshold so that they can “direct

award” a contract and not have to go out for

tender

Approach

• Identify common shareholders, directors, etc,

common addresses, and phone numbers through

Suspicious Transaction Analysis and forensic

investigation

• Review G/L for unusual transactions, volume

and amounts

Outcome

• Identify POs that are connected and relate to the

same contract

Note: Approval threshold for direct appoint is US$ 750k




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4. Kick backs to Company X employees/procurement staff to get contracts

Issue

• Company X employees/procurement staff ask

vendors for kick backs before/in order for them

to get awarded contracts by vendor

Approach

• Identify correspondence (e.g. e-mail, SMS,

WhatsApp messages) between Company X staff

and vendors (use Forensic Technology Services)

• Pre and post employment screening of

employees

• Conduct data analytics between customers/staff

to identify inconsistencies in procurement

Outcome

• Identify employees who are requesting kick

backs from vendors

VendorProcurement staff/

employeeKick back

Contract

Company X




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5. Overpayment for goods of lower quality

Issue

• Suppliers deliver lower quality goods, but charge

for higher quality goods and share the difference

in price with Company X staff

Approach

• Identify correspondence (e.g. e-mail, SMS,

WhatsApp messages) between Company X staff

and vendors (use Forensic Technology Services)

• Conduct price comparison/data analytics

Outcome

• Identify employees who are in collusion with

vendors

• Identify potential quality issues

Good worth US$100,

but invoiced US$ 150

50Company X pays US$ 1

to vendor

Vendor pays US$ 25

to employee

Company X

Company X

employee




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6. Company X pays for services that were never provided

Issue

• Supplier charges Company X for services that were

never provided and share the proceeds with Company

X staff

Approach

• Identify correspondence (e.g. e-mail, SMS, WhatsApp

messages) between Company X staff and vendors (use

Forensic Technology Services)

• Conduct walk through of procurement cycle to identify

weaknesses in internal controls and “points of leakage”

• Check sample of “services” transactions

Outcome

• Identify employees who are in collusion with vendors

• Identify “fake” transactions

Invoice for S$ 150

for services

Company X pays US$ 150

to vendor

Vendor pays US$ 25

to employee

Employee acknowledges

receipt of services

Company X

Company X

employee




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7. Supplier is middleman and is owned by employee or his family member and provides goods to Company X with a mark up

Issue

• Entity owned by Company X staff acts as

middleman and on-sells goods to Company X

with a mark-up

Approach

• Identify common addresses, bank accounts and

phone numbers through Suspicious Transaction

Analysis/data analytics and forensic

investigation

• Conduct Due Diligence before accepting new

vendors/during relationship

• Pre and post employment screening of

employees

• Conduct price survey

Outcome

• Identify undeclared conflicts of interest

Profit sharing

Marked up goodsGoods

Company X

Company X

employee




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9. Inappropriate and ineffective internal controls

Issue

• Employee had a conflict of interest, he/she did

not declare as claimed was not aware that he

should declare

Approach

• Conduct fraud risk Diagnostic (Company self

assessment initially) and Fraud “Risk Storm”

Workshops to “challenge” the initial assessment

• Update fraud risk assessment

• Review fraud risk policies and procedures

• Conduct fraud awareness training

Outcome

• Identify weaknesses in internal controls

Examples:

• No Code of Conduct

• No “conflict of interest” policy

• No whistleblower facility

• No proper segregation of duties

• No independence / declaration policy

• No SOPs




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Suspicious Transaction Analysis



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What is “Suspicious Transaction Analysis”?



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Suspicious Transaction Analysis (STA) is an automated fraud detection and data analysis process which can search through millions of transactions and master file data to identify those that require further investigation. STA complements an organisation’s existing schedule of audit and control tests, making best use of valuable resources. It is a tool which quickly identifies problem areas, particularly in those high risk functions such as payroll, accounts payable and expense claims.

STA utilises sophisticated software programs to data match and interrogate an organisation’s supplier and employee databases to quickly identify, for example:

• Duplicate payments (made either fraudulently or in error)

• Collusion between suppliers and employees

• Suppliers fitting known fraud profiles

• Unusual, anomalous or otherwise questionable transactions.

A proactive approach to fraud detection



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Benefits of Suspicious Transaction Analysis



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Benefits of Suspicious Transaction Analysis



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Some Case studies

Case Study One: Duplicate payments to suppliers

Our role: To undertake an STA over accounts payable and payroll for a large

organisation. There were no prior suspicions of fraud orerror.

Outcome: In addition to data quality issues, we identified a large number of duplicate

payments to suppliers amounting to over $1,700,000 which was recoverable from

suppliers.

Case Study Two: Overpaid Overtime

Our role: We were asked by a government agency to use STA to analyse staff salaries

and overtime payments over a three year period.

Outcome: We identified nine employees who were paid overtime rates in excess of$1,000 per hour, the highest being $4,989 per hour. These results allowed the agency

to investigate the payments and recover theover-payments.

Case Study Three: Duplicate payment of invoices and cleaning of supplier master

files

Our Role: We undertook an STA of master supplier and purchasing transaction files

for a large organisation. We identified approximately $600,000 of duplicate invoice

payments over a two year period. The STA also revealed that a number of suppliers

had been entered in the master file more thanonce.

Outcome: The organisation cleaned the master file of duplicated suppliers, thereby

reducing the risk of inadvertent duplicate payments and commenced to recover the

overpayments.

Case Study Four: Vehicle over-servicing

Our Role: Unsatisfied with the operating costs of its vehicle fleet, particularly relating

to vehicle maintenance, this organisation approached us to undertake an STA

specifically over vehicle maintenance payments.

Outcome: We analysed all electronic maintenance data for the entire vehicle fleet over

a three year period. Several anomalies were detected, including apparent over-

servicing of vehicles and vehicles serviced with either no labour costs or no parts costs.

Our client was able to revisit the service provider agreements with the intention of

terminating the relationship with the vehicle maintenance provider.

There are literally thousands of possible STA tests that can be run. The decision as to

which tests to run depends on a number of factors such as type of business, quality of

data, the number of records, internal control weaknesses, past fraud incidents and so

on.

Some of the more useful routine Accounts Payable and Payroll tests we run are listed

below. However, it should be noted that we can also tailor these tests or design

additional tests which will address your specific needs andconcerns.

5 Suspicious Transaction Analysis Executive SummaryExecutive SummaryExecutive SummaryAgenda



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Some examples of STA tests for Procurement

1.

2.

3.

4.

5.

6.

•

•

Collusion between employees and suppliers: Identify details shared between

employees and suppliers (either address, telephone or bank details). Identify

whether payroll and accounts payable transactions exist.

NB: In the event employee related suppliers reside on the Supplier Master File

for the purposes of the reimbursement of work related expenses, these will be

eliminated from the test results where the supplier name is the same as the

employee name.

Identify suppliers sharing address, telephone, with the PwC profile database

(prisons, document exchanges, serviced offices, postal services and adult

entertainment). Identify payments to these suppliers.

NB: In the event employee related suppliers reside on the Supplier Master File

for the purposes of the reimbursement of work related expenses, these will be

eliminated from the test results where the supplier name is the same as the

employee name.

Payments to suppliers which do not appear on the Supplier Master File (by

supplier number or bank details).

NB: In the event the Supplier Master File is maintained real time such that

only the latest bank details are captured, a historical listing of bank accounts

is required to eliminate false positives from theresults.

Duplicate supplier payment transactions to the same supplier based on:

Identical invoice amount and identical or similar invoice number

Identical invoice amount and description.

8. Duplicate supplier payment transactions based on identical invoice number

and amount to different supplier numbers.

9. One off payments to suppliers.

10. Invoices dated (i.e. suppliers invoices date) onweekends.

11. Active suppliers sharing information (address, telephone, bank details) with

one or more other suppliers within the same branch (i.e. different supplier

numbers within the same branch). Identify whether duplicate supplier

payments have occurred to these suppliers per Test No. 8.

12. Identify favourable payment of invoices (i.e. invoices paid within 10 days of

the suppliers invoice date).

13. Compare suppliers invoice date to the purchase order creation date to identify

purchase orders created on the same date or subsequent to the suppliers

invoice date.

14. Identify multiple invoices from the same supplier on the same date.

15. Identify active suppliers in the Supplier Master File which have no accounts

payable transactions (i.e. active on the Supplier Master File but they are not

really active because they have no transactions). Such suppliers should be

disabled on the Supplier MasterFile.

16. Split purchasing by employees: Identify multiple purchase orders created on

the same day or within three days of each other to the same supplier and

authoriser where the total value exceeds the acceptable tolerable level for the

authoriser.




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Some examples of STA tests for Procurement (Cont’d)

18. Identify invoices paid before the suppliers invoice date.

19. Identify accounts payable transactions processed by employees while they are

on annual leave or sick leave.

20. Benford analysis on invoice amount.

21. Identify large invoices without purchase orders or which have not been

receipted.

22. Excessive purchasing from suppliers.

23. Identify duplicate cheques issued to different suppliers.

24. Identify quantity mismatches between the quantity ordered and the quantity

receipted.

25. Compare purchase order amount to the amount invoiced.

26. Analyse round invoice amounts from suppliers.




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Some examples of STA tests for Payroll

1. Compare payroll dates with employee start and termination dates to identify

payments to employees:

• Prior to hire date

• More than 60 days after termination date.

2. Identify employees sharing address and/or telephone with the PwC Australian

profile database (prisons, document exchanges, serviced offices, postal services

and adult entertainment). Identify payroll transactions to these employees.

3. Employees sharing information (either bank details, DOB and same name, name

and address, or name and phone number) with one or more other employees (i.e.

different employee numbers). Identify payroll transactions to theseemployees.

4. Employees receiving excessive overtime as a proportion of gross pay (40% or

more of gross pay is overtime).

5. Employees receiving excessive allowances as a proportion of gross pay (40% or

more of gross pay is allowances).

6. Payroll payments with no tax deducted.

7. Payments to employees which do not appear in the Employee Master File (by

employee number and bank details information).

NB: In the event the Employee Master File is maintained real time such that only

the latest bank details are captured, a historical listing of bank accounts is

required to eliminate false positives from theresults.

8. Identify round payroll payments to employees.

9. Identify payments to employees with unusual dates of birth:

• Aged 17 years or less

• Aged 65 and over.

10. Identify duplicate payroll payments based on employee number and pay run

number.

11. Identify payments to employees where the bank account name differs to the

employees’ name.

12.Payroll transactions dated on weekend dates.

13.Identify payments made to employees employed for 10 days or less.

14.Excessive number of payments per period.

15. Identify employees with high amounts of gross pay (e.g. over $80,000).

16. Identify incorrect payroll payments by comparing the gross amount in the

Employee Master File to the actual amount paid to theemployee.

17. Identify annual leave and long service leave taken prior to approval.

18. Employees sharing information (either bank details, address or telephone) but

not name with different employees. Identify payroll payments to these

employees.

19. Identify payroll payments to employees where the bank account name differs

from the employee’s name.




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What can you do?



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There are many ways to avoid or mitigate fraud



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Action Comment

Code of Conduct Tone at the top is key!

Back ground due diligence Know who you’re dealing with

Segregation of duties Don’t give people the opportunity to commit fraud

Delegation of Authority The CFO does not need to approve everything

Data Analytics/Suspicious Transaction Analysis

To be performed periodically

Fraud Risk Analysis Know where your risks lie, and make sure you mitigate exposures

Whistle blower hotline Follow up on reports

Forensic investigation Follow up on indications of fraud

PwC Forensics Service Offerings

Without an effective fraud risk

management strategy, a company

is exposed to fraud for which the

Board and management may be

legally and financially liable for

failure to establish a pro-active

fraud risk framework.

PwC’s Forensic Services practice

specialises in establishing fraud

risk and control frameworks

which help to identify relevant

fraud risks and the associated

controls.

We assist clients to understand

and meet their obligations in

fraud control in accordance with

both private and public sector

Standards such as AS 8001-2008

Fraud and Corruption Control,

various Fraud Control Guidelines

and other requirements. We

divide our fraud risk frameworks

into three headings: Prevent,

Detect and Investigate.

• Fraud risk policies and procedures• Fraud control plans• Annual declarations• Pre and post employment screening of employees• Fraud awareness training• “Whistle blower” hotline procedures

• Investigative Intelligence & Analysis • Procurement Fraud ManagementJakarta Business Networkers


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• Fraud risk assessments• Facilitated workshops

to identify fraud risk

• Proactive internal and

external audit

procedures

• Data analytics

(“suspicious

transactions analysis”)

• Fraud investigations• Forensic Accounting• Electronic Discovery Services

• Anti-Money Laundering (AML) & Sanctions• Anti-Bribery & Corruption• Licensing Management Services