Forensics, Investigation, Litigation

A fraud scheme that went undetected for several years and totaled millions of dollars recently rocked a small town in Nebraska and sent shockwaves through the agricultural cooperative industry in the Midwest. While this case may seem unique and isolated, agricultural cooperatives are a prime victim of theft by deception due to the trust they often put in employees, and the lack of controls and resources to deal with such issues. The case of Gavilon has a number of lessons.

What Happened at Gavilon

Here’s how the suspect perpetrated the fraud:  While a legitimate load of commodities sat on the facility’s scales, the suspect would create duplicate false tickets. The false tickets were allegedly made out in the name of family members, who would then receive the checks, sign them and turn them over to the suspect. The checks would be cashed at various bank locations. Court documents indicate he would pay part of the cash from these checks to people who knew about the activities, presumably to keep them quiet. By the time the scheme was caught, it had spanned from 2007 to 2013 and totaled near $2.5 million. A summary of the story can be found here.

The case caught the ordinarily quiet town of Fremont by surprise. As a native Nebraskan, I can attest to the value people in that state put on loyalty and trust in their friends and neighbors. The entire agricultural industry in Nebraska has taken note that the suspect systematically and egregiously violated the community’s trust. Nebraska law has a unique way of referring to embezzlement—they call it “theft by deception,” perhaps the best term ever coined for this type of activity.

What We Can Learn

The facility’s security director deserves kudos for taking notice and calling it to the attention of authorities. The fact that it went on so long before being caught may also present company management with some moments of introspection about their policies and procedures. For other co-ops, mitigating frauds like the one perpetrated at Gavilon may seem overwhelming at first, but taking some simple steps can go a long way. Here are some helpful tips:

  1. Look for the unusual – The checks sent from the suspect to his alleged co-conspirators were mailed. In many cases, the mailing address will match with that of the employee or a close family member. Member settlements and payments to vendors and suppliers should be scrutinized for matches to employee attributes such as name, address or phone number. Any member or supplier with a P.O. Box address should be verified as well.
  2. Duplication is always unusual – Settlements for same or similar quantities and dollar amounts occurring in sequence or on the same day are always unusual and relatively easy to catch. This also is true of payments to vendors and suppliers—another popular way of embezzling funds from a company.
  3. Data mining is a great place to start – Evidence of fraud is often unknowingly captured in a cooperative’s record keeping. The trick is to know where to look for the subtle signatures of fraud within the mass of data. This can be accomplished through the process of data mining electronic financial records. Forensic data mining searches for patterns and relationships in data that are indicators of fraud, even if no initial suspicions exist. Often data mining does not require the investigator to be on site—the data can be electronically exchanged and all work performed off site. This makes data mining a low-cost but massively effective option to consider. Data mining also is effective at highlighting system weaknesses that could lead to fraud, even if no fraud is actually occurring.
  4. Hotlines are the most effective way to detect fraud – It appears from court filings related to the case that multiple individuals were involved in or had knowledge of the scheme. If anyone with knowledge of a theft by deception scheme wishes to report it, but no mechanisms are in place to allow them to do so confidentially, the scheme could go on indefinitely. According to the Association of Certified Fraud Examiners, 42 percent of frauds were detected through tips, and hotlines are by far the most effective means of detection. Implementing an anonymous third-party ethics hotline like BKD’s IntegraReport for employees, customers and vendors to access provides a powerful, proactive tool for detecting theft by deception.

As with most fraud or forensic accounting cases, the unfortunate circumstances surrounding Gavilon can provide lessons for the agricultural cooperative community going forward—lessons in awareness, diligence and taking a proactive stance to detecting theft by deception.

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