Tuesday, 26 March 2019

Assume Fraud Until Genius is Proven

My friend Michael Kuria CFE, recently  published an article on fraud in Kenya in the Daily Nation of 10 March 2019. He has allowed me to share the article here.

While going through the last several weeks’ news stories, my mind could not help but travel back in time over a decade, to a country house on the outskirts of a small market town in Eastern Europe where I and others selected from across the world spent one very hot summer perfecting our skills in service of our chosen craft. What craft, you ask. Well, the craft of financial forensics. Catching and otherwise disrupting the schemes of economic saboteurs and terrorists. And make no mistakes that is what corruption is; economic terrorism.  In addition to the heat (it hit 40°C that day), I still remember the instructor taking us through the paces that day repeating an operating heuristic that has become one of my commandments. I can still hear his Germanic accent with the exaggerated “s” bellowing the words “Always assume fraud until genius is proven”.

Indeed. These words came to my mind as I went through column after column in newspapers reporting numerous corruption cases involving people whose crimes should have been evident the moment they made ostentatious public displays of unexplained wealth.
Assuming fraud until genius is proven means that in every situation where you come across an individual, a corporation, any entity whether natural or corporate, public or private that repeatedly outperforms its peers day in day out, never having a bad day, always displaying incredible success without any clear indication of its competitive advantage you must assume that those involved are fraudsters and the results come from deception until you are presented with proof of their genius.
This heuristic has many implications. If you are dealing with one of the many preachers who promise guaranteed immense blessings if you “plant a seed” chances are, unless he can prove supernatural abilities, he is a smooth talking conman.  If a corporation that has left its peers in the dust for decades year-in year-out without any radically different products or strategy, it is likely cooking the books. If it is a rockstar stock-broker who always has his nose in all the right deals, chances are he is an inside trader not some genius possessed of unnatural intuition.  Or billionaire lawyers who have their fingers in the most lucrative government tenders and never lose cases but possess no discernible special abilities or talents. Nine times out of 10 you’d win if you bet that they are corrupt and greasing the wheels of justice with bribes.  It is hard to be that good. Genius is rare.
You wouldn’t think genius is rare in Kenya though if you read the news stories though. It appears to be very common. In each one of these cases you have fellows who just a few years ago were unknowns vegetating in utter penury and about as well fed as a barber’s cat becoming billionaires overnight without delivering any known value to anyone in the entire solar system.  All this without any special skills or abilities, without inventing, developing, producing or creating anything.  To be sarcastic, I am surprised that the Nobel Prize for Economics is not awarded to a Kenyan every year.   And when they are uncovered as having been nothing more than clinical mythomaniacs with the IQ of a mudfish and the truth telling abilities of a carnival mirror, we all pretend to be shocked and disappointed. It is all feigned outrage and we convince nobody. Least of all ourselves. Everyone Kenyan alive knows what’s going on in all of these cases.
To end the charade of feigned outrage, I propose that going forward we apply this heuristic in all circumstances. Until genius is proven, we must assume fraud and act accordingly. When a suave, smooth talking city-slicker flies out to your village in a convoy of helicopters to ask for your daughter’s hand in marriage, and you have no idea what he does for a living or how he made his wealth just assume he is up to no good, end the negotiations and throw him out of your house.  If not, let’s agree that you are an accomplice and the beneficiary of thievery not a helpless victim of unimaginable trickery.
As the ancient legal maxim goes, Non decipitur qui scit se decipi.  He is not deceived he who knows himself to have been deceived.

Michael Kuria is a risk consultant specializing in the detection, prevention and disruption of complex transnational financial crime. He can be reached on michael.kuria@consultant.com

Monday, 30 July 2018

Managing Fraud Risks Related to Cash for Small Enterprises 101

You have quit your job to start an entrepreneurial journey with trusted friend (s). You each contribute some funds as capital. Depending on your strengths, you share out various roles within the start up. Some take up marketing roles, others finance and accounts, others communication etc. The business picks up and within no time the office is buzzing with new clients, meetings and a few hi five moments as you bag clients and deliver to clients

Things seem to be working great – regular salary, bills being paid, a growing portfolio of clients etc. Come the end of the year and you are eager to see how much profit you have made and decide whether to take a bonus or reinvent the profits. To your surprise, the partner in charge of finance tells you that in fact the company has made minimal profit or a loss. In addition, you are operating on a bank overdraft and the company car may be repossessed because of the overdraft areas. You sit back and ask yourself, how?? In your mind, the organization must be making profit even with basic understanding of the transactions. You know the estimate of your costs and you know how much is coming in…..so why you in loss territory and a negative cash are flow position?

Then you remember a few things – you have always been signing cheques without asking too many questions, you have never seen your period accounts or a bank statement, only the partner who is an expert in finance has full information on the company finances etc.
Does this sound familiar? It may or not, but this is not a theoretical case. This is actually something that has happened to a number of business where partners trust each other and focus has been on growing the business and less effort on financial management and controls. The right conditions for fraud.

For people in such businesses here are a few things that you should do or never do in relation to cash flow:

  1. Cash flow is king in small businesses – never let your sight off on the cash flow position of the business. At end of every week, review the cash flow position and understand how every penny has been spent.
  2.  Never sign blank cheques – never ever. Where possible use online banking.
  3.  Let all payments require at least two signatories.
  4. Reduce cash payments to the bear minimum – ensure that you can tract all payments to an account or person. Cash has no audit trail. So if your partner sys he paid X you can never prove it.
  5. Insist on original documents - e.g. include your email in the banking transactions so that you receive bank statements form the bank. I have seen people editing soft copy bank statements in PDF to hide their fraud.
  6.  Have a third party audit your accounts every year – select such an auditor competitively.
  7. Have proper business registration and have transactions and assets in the name of the company and not individual partners.
  8. Hire a staff unrelated to any of the shareholders as the accountant – trust is not an internal control. Many capable accountants out there will not cost much.
  9. Deal with any case of theft ruthlessly.