Cooking-the-Books: Recipes for the CFO - Robbing Our U.S. Disabled Vets takes the Cake!

Part I of a Series - "Robbing Our Disabled Veterans Took the Cake this week!" 

Pre-Heat oven @ 1,000 degrees

Knock Grandma or a U.S. Disabled Veteran over with a rolling pin

Hide fraud papers in a colander in the pantry and put a "DANGER - Toxic Materials" sign on door

Use a sieve and a sifter to siphon every last dollar your company or community fails to secure

Once you've skewered and burned everyone around you, tell them pot holders are definitely recommended

Before dinner:  Warn guests to chew slowly so they don't choke when they have to swallow the fact that those they trusted made burnt toast out of them while laughing all the way to the bank!

No one is surprised Bloomberg News often reports that one-third of the corporations surveyed worldwide reveal they are the victims of fraud and embezzlement executed by their own employees. 

Included in these surveys are some of the most successful and respected companies which have the means to purchase and apply every world-class vendor management tool, technology, risk management strategy and tactic known to man to protect themselves, so how could this be possible?  If you accept these statistics, then how can we ever really protect our corporations and communities from people determined to do us & your entire enterprise harm?  

Well - You can't. The Bloomberg surveys continually prove it.  Sadly, there are always human beings operating without values who are determined to beat any system of protection. These people live and work to profit off the hard work and backs of others.  

They need and rely on a lack of checks & balances inside your company, municipality, board of education, and non-profit organization to thrive.  Sometimes they choose to work specifically at your company or inside your community because word on 'the street' is that you and your lax oversight are a ripe target for the criminal activities they are determined to execute and repeat for personal profit.

The U.S. Attorney General's Office released the following press release on September 18th 2013:   "TRENTON, N.J. – A former Department of Veterans Affairs (VA) employee who worked as a supervisory engineer at the VA’s campus in East Orange, N.J., today admitted accepting more than $1.2 million in kickback payments in connection with $6 million in VA construction contracts awarded to companies with which he had relationships, and to engaging in a scheme to defraud the VA by claiming one of those companies was owned by a service-disabled veteran when it was not, New Jersey U.S. Attorney Paul J. Fishman announced."

It makes me sick that Jarod Machinga, 43, of Hopewell, N.J., thought nothing of robbing contract work from America's real disabled U.S. veterans while stealing tax payer money from the VA - an agency that offers services & support to heroes.  

He pleaded guilty before U.S. District Judge Mary L. Cooper in Trenton federal court.  Okay this is awful - but can someone tell us how Mr. Machinga was able to execute these crimes for five years in a row without anyone noticing?!

You see - it was as easy as using an Easy-Bake-Oven.  Jarod Machinga's recipe for success was to partner with another individual to set up three companies that could be used to obtain VA work and then used his position to steer some $6 million in VA construction projects to those firms.  Folks - Since this happens in every industry & business sector every week, today's focus has to be about figuring out how to slow these crimes and to mitigate the damage they leave behind.

In my 27-year career in global human resources and talent acquisition, I've come to the conclusion that hiring the very best full time talent and partnering with the right third-party vendors are key factors for success inside every company.  There is no strategy, innovation or market offerings without high caliber human resources creating solutions and executing the work that propels a corporate mission forward.  If these people do not operate with values and ethics - your company is toast!

As a result of this fact, this Blog Post is part of a short series to help educate others on how brilliant and highly credentialed professionals cook-the-books for personal profit. I think it's important to look at the massive damage these crooks leave behind after they rob their companies, clients, shareholders, fellow employees, fellow citizens and communities.  There is no chance for honest Profitable Growth & Success when the Competitive Advantage is wiped away by massive fraud. 

In simple terms, the VA crimes announced by the U.S. Attorney General's Office this week explains a simple but dirty secret practice tied to white collar conduct which has helped siphon more money from legitimate funding sources inside corporations, government agencies, municipalities and non-profit community organizations than any other tactic out there. 

It's called leveraging shell companies or becoming 'silent partners' for Personal Profit & Advantage at the expense of all others.  

I live by tenets that scream we cannot fix what we don't understand or admit is broke; and we'll never help right a wrong without understanding what went wrong...

For starters, I invite everyone to Google & research the largest Information Technology employment consulting fraud exposed to-date in New York City's history.  The CityTime Payroll System Scandal - TechnoDyne/SAIC Scam cost NYC taxpayers more than $450 million dollars between 2005 and 2011.  In this case, the finished product was never even delivered!  In a NY-minute you're going to understand why honesty and integrity are important qualifications for anyone seeking the position of NYC Comptroller or any position of authority for that matter.

With inside help from employees at SAIC & NYC government who enjoyed handsome pay-offs, the execs at TechnoDyne orchestrated a crime wave of fraud, embezzlement and money laundering that went on @ NY City Hall for 6 years, so we have to ask ourselves, "How was that possible under the watchful eye of the Bloomberg Administration?"

TechnoDyne founders Padma & Reddy Allen have been fugitives on the run from the U.S. Justice System since they were indicted for these alleged crimes in 2011.  

This slick husband & wife team once honored as rising stars in Information Technology consulting circles arrived in New Jersey with suitcases full of cash to continue their worldwide fraud scheme baring fake credentials, backgrounds and profiles (i.e. - LinkedIn, etc), with employees that did not exist and everyone including SAIC,  NY/NJ government officials and IT industry leaders fell for all of it.  

Who could believe that all of their TechnoDyne employees failed to use a last name on their LinkedIn profiles which I promise you means that some percentage of those consultants do not exist.  How many non-existent IT consultants did NYC pay for to fund fraudulent pay-outs and pay-offs between 2005 and 2011 will never be known.  When did LinkedIn Profiles & bogus business websites & listings become a substitute for legitimate investigative background checks before handing off giant government contracts?     

Before the Reddy's were indicted in NYC, Padma had also served on the Technology Board @ Monmouth University.  How could universities allow themselves to be duped and 'used' by cunning crooks who only sought association with their institutions, staff and students to camouflage their intention to cheat others and commit large scale crimes that they had already set up and launched from their homeland across oceans? 

The Reddy's stole a spot from legitimate U.S. vendors inside the minority and woman-owned business sub-contractor contract requirement.  How is that possible?  They had competed against others during the source selection process which begs the question, how many people were 'bought' before the contract was awarded? 

What the heck happened to the 'old fashioned' but reliable Dun & Bradstreet type business background checks or the use of investigative organizations like Kroll International Inc that used to be mandatory before handing off hundreds of millions in taxpayer-funded projects to some unknown sub-contractor? 

Ask yourself this question:  Did Padma & Reddy Allen come to the U.S. to steal the confidential payroll information on all NYC government employees?  Was that their mission?  

Since the Allen's are on the lamb, no one can answer that question but the question itself speaks not only to crimes in Corporate America, but it raises flags about homeland security and protecting the personal data of our citizens from criminals bent on doing us harm.     

By June 2011 - NYC prosecutors had only seized a mere $38 million of the $450 million NYC handed them.  The $38 Million was found in some 120 bank accounts for the scores of shell companies Padma & Reddy Allen had already used for years across three continents to mask their transactions, payoffs, etc.  If a small NJ-based woman-owned company claiming 200 U.S. employees could create such a complex network of deception with shell companies and inspire willing participants across the globe in corporate and government positions, just imagine what else is going on. 

Many experts believe the sheer size and complexity of the Allen's actions was thought to be unprecedented, but don't believe it for a minute. It's the largest scandal that was "uncovered." 

How many corporate finance departments and audit offices do you know actually have the investigative & forensic skills, capacity, manpower, time and resolve to track and capture so many crimes of this magnitude inside one vendor relationship?  What if a senior exec participating in such a scheme doesn't authorize an investigation?  Let's just say your company is toast until that exec retires or until you're lucky enough to get a Big 4 firm in to help you.  That brings us to the next incredible example…

Inside a revered U.S. company it became absolutely critical to introduce world class procurement & vendor procedures and to focus on managing the acquisition of all products and services through a single vendor management office using new state-of-the-art management tools, technologies and methodologies to mitigate and/or eliminate risks and fraud that had undermined the success of the company for years.  The firm was acquiring temporary human resources in many job categories (contract employment help) to deliver on large-scale management objectives.  

Following a two year Big 4 investigation, this company was forced to abandon outdated procurement practices that had allowed execs to execute these requirements without oversight, checks-and-balances, and audits for decades.  No outside audit entity had ever entered individual business/ functional silos to investigate or cross-check the financial transactions of execs tied to individual departments inside this firm because the company's vendor processes were built on a well-meaning but out-dated corporate tenet called "trust" thirty years ago.  

After a company executive reporting to the CEO and eight other senior business officers were terminated it became mandatory that all full time & part time employees and all on-shore, off-shore and U.S. contract personnel go through one Vendor Management Office managed by the Chief Financial Officer.

Procurement in this company is now monitored by corporate finance, audit & risk teams which includes forensic accountants & information technology experts.  The oversight committee also includes a third-party global investigative research team led by a world-renown vendor that employs former U.S. prosecutors, federal agents and attorney generals from across the nation.

Procurement changes were implemented and the senior employees were terminated because this is what a Big 4 consulting firm helped this company confirm:  Executives - who had been with the firm for decades - had set up anonymous consulting LLC firms (bogus Shell Companies) where it was not transparent that the same managers entrusted to make the contract personnel and other vital procurement decisions for the firm were actually partners, stakeholders and/or 'silent' benefactors in the vendor firms selected by them.  Let's be clear - this happens across all industries. 

If it sounds familiar, it should.  Think about this month's VA case, Enron & Andersen Consulting, WorldCom, NYC's CityTime/SAIC/TechnoDyne payroll system disaster, former Board of Education President Michael Ritacco and his friends and family plan in Ocean County NJ, many government pay-to-play schemes, private financial placements, land development  - this list is so long that it's supposed to make honest men and women cry.

While enjoying their executive pay packages, these senior employees profited off every hour of service performed by hundreds of consultants in their departments to the tune of tens of millions of dollars over many years, (11 years to be exact).  What?  How is this possible?

In a stunning revelation some of the profits were secured by billing for contractors who did not exist.  It was the worst week in this 100 year old company's history, but they learned the hard way where there are limited checks & balances corporate criminals who operate like this will always reach for the next level of deception to increase their profits at the expense of their company.

In "the olden days," (before the Year 2000 for the purpose of today's Blog Post) the methods many companies used as an approach to human resources consulting procurement - especially in the area of Information Technology - created a ripe environment for these illegal and unethical activities to play out.  Many execs enjoyed profitable windfalls using this approach during the trumped-up Y2K scare, (i.e. remember the elevators that would crash and the airplanes that were going to fall out of the sky?).  As Bloomberg News reminds us these practices are still alive and well and thriving across all industries today.

Some of the more creative executives stay way under the radar by making their shell company a sub-contractor once or twice removed from the officially vetted primary contractor and/or put their 'female-owned business' in their spouse's maiden name, so the public company (that is their full time employer that provides salary & benefits while handing them the fiduciary responsibility to do what is right and expected of them) has no clue or information that executives on their payroll are either actually married to those directly profiting inside these transactions or that they are benefiting indirectly in other financially creative and astonishing ways.

One approach works like this:  Vendor #1 is on the public company's 'Approved' Vendor List. Vendor #1 makes an arrangement with 'its special' Shell Company Sub-Contractor Vendor #2 which is either owned in part by executives inside the public company and/or those execs are clandestine benefactors inside the daisy-chain of transactions thanks to relatives, friends, business partners, funding agents, etc. who are willing to help them rip companies off as long as there is 'some kind of a reward' inside each transaction for them, (i.e. - rewards come in all forms - cash, construction of a house or built-in swimming pool, new car or boat, vacations, children's education, etc. paid out by one of the shell companies not on any employer's radar).   

Vendor #1 is contracted by Client A (your company) and awarded Primary Contractor status at a BILL RATE of $200 per hour for one managing consultant/contractor placed on assignment.  Execs in your public company who are the silent partners of the Shell Company Sub-Contractor Vendor #2 receive $50 per hour for every hour the contractor works. The consultant 'actually doing the work' and fulfilling the obligations and responsibilities of the project enjoys a PAY RATE of $80 per hour.

The silent partner is guaranteed his/her $50 per hour payout and Approved Vendor #1 walks away with its profit of $70 per hour.  This lucrative criminal collusion keeps all parties happy, but your company is toast.  Contract Employment Candidates seeking work are not always aware they have a role in these transactions, but I must say the issue becomes more of a systemic employee relations problem for your company when employment candidates do sign up to be involved.  

You are already hiring someone full time and/or putting a contractor on assignment in your facility who does not meet the standards set in the codes-of-conduct of your firm; and we already know the hiring manager hiring them doesn't meet those standards either.  

Your company is the major victim of this scheme because you are paying a minimum of $50 more per hour than you should be because your execs are taking "that $50.00 per hour cut" and everyone involved in the scheme is actually committing a crime that rises to the level of fraud & embezzlement that is undermining your entire operation which the Bloomberg News survey confirms plagues companies worldwide. 

Think about it: When you are being billed for an on-shore or off-shore human resource that does not actually exist that means Vendor #1 & Vendor #2 get to split the $200 per hour that is billed, ($200.00 per hour X 40 hours per week = $8,000 per week).

What's really disturbing is that the scams perfected inside corporations have moved inside our local communities.  I find it repulsive to report that school systems in NJ have been scammed out of millions of dollars in the past decade and here is an easy to understand example of how some school administrators use shell companies for personal profit @ the expense of kids:  An exec or senior school administrator orders hardware for his/her office that costs your company or taxpayers $300.  What you don't know is that they created a shell company in the form of an LLC in your state which comes remarkably close to (i.e. I mean it mirrors) "the name" of the real vendor in another state who provides the actual product or service.  Invoices are paid to a PO Box outside of the local community; the bank account is usually not in their name and there it is:  They're in business for themselves! 

They order the $100 item from the 'real' vendor and the hardware is actually delivered to your company or school - so no worries there. The problem is you have paid a marked-up cost of $300 and your exec uses his/her secret shell company to pay the real $100 invoice. The criminal's profit in this transaction is $200 but once again you are left holding a bag with $200 less inside it to spend on the students.  

Now apply this clever tactic and sad reality to school projects that cost millions of dollars.  As the Tom River's Ritacco Center Scandal taught us there is no end to the amount of money that can be siphoned at the expense of all.

If these execs are willing to repeat this behavior over a period of months and years, you must ask yourself what other legitimate corporate systems would they be willing to compromise inside your company for personal gain and profit (i.e. - Could all subordinates involved or aware of the scheme get rated the highest ranked performers by this department exec which qualifies them for the highest payouts when it comes to merit increases and quarterly or year-end performance bonuses?  Do people get promoted and demoted as a result of these situations? Were padded expense reports approved by that exec and paid out by your company? Did 100% of the money raised from volunteer efforts go to the cause?  Did you lose top performers because 'something' didn't feel right in that department where fraud had infested your corporate environment?  My experience is if employees are willing to take risks and rob you through shell companies, they are absolutely capable of anything.

The unethical people who willingly participate in these kind of activities do a massive amount of damage to our companies and our economy.  They purposely cause the pay-and-bill rates of temporary employment help/consultants and the cost of other legitimate goods and services to sky-rocket because these executives successfully create “clandestine systems” that allow them to hide behind the shell company and LLC header and manipulate the information and financing on both ends of the process.

The level of deception is just mind-boggling to comprehend…  It's sickening that the same colleagues who would attend their bosses mother's funeral or who the CEO respected enough to invite to a family wedding would do these terrible things right under the nose of all who trusted them.  

Let's be clear:  These people are laughing at all of us for the lack of oversight that presented these great opportunities to cheat in the first place.  Some of them will actually blame you and the company to your face for making it so easy for them.

We have to imagine these white collar criminals obviously don't have a value system you and I will ever understand, but that doesn't mean we shouldn't take steps to beat them at these terrible games or to make absolutely sure they can't execute such transactions again inside the companies and institutions we all share a fiduciary responsibility to protect. 

My own twenty-one years of research on these topics and my conversations with hundreds of high caliber professionals in my network caught in the crossfire of these terrible situations taught me a lot.  The crooks are robbing funds that could be dedicated to corporate research, launching new businesses and market offerings, innovation, marketing, expansion, etc. which all leads to a need for Job Creation, acquiring talent and HIRING! 

They know they are creating conditions that often force cost-containment initiatives that eliminate the jobs of colleagues, cancel projects, consolidate departments, and cause firms to fail and they don't care. 

There is no going back - all these people have taken their money and scattered, but we can certainly take steps moving forward to learn from what they did to make sure a new generation of professionals can never do this to our companies, neighborhoods, nation and global economy again.  If we don't understand this history, it will repeat itself.

Think about this: A closer look at Bernie Maldoff's decades of crimes and 'some' of the private high-financing arrangements out there left many of us out here wondering if there was anyone alive inside the Security and Exchange Commission.  Oh and don't forget Bernie is the former head of NASDAQ Exchange?  Can you imagine the damage he did there when so few of us understood the power of technology 40 years ago?

The AS400 computers which produced all of Madoff's fraudulent monthly statements in the Lipstick Building on 3rd Ave in NYC were in a closet with a sign that read, "Maintenance Closet."  Not one SEC investigator ever opened that door for over twenty years?  This would be the funniest corporate story ever told if investors had not been so deeply damaged.  The message - leave no stone unturned and open every door for gosh sakes! 

Talk about keeping investors and shareholders in the dark holding the bag.  How would you or your shareholders feel if your company's last equity finance deal didn't go to the best and most qualified private financing arrangement?  What? 

Yes - I'm asking how would you react if you found out your execs limited the deals that were presented so the financing could only go to a brother-in-law or neighbor of your CEO, Company President, or Equity Finance Director whose last name could never be traced to any of them?  If we didn't know - shame on us.  Shame on the entire company and the systems they adopted that failed all.

You see public companies pursue private placements everyday for lots of great & important reasons that help all of us & our economy. You can secure critical funding for internal growth, acquisitions, recapitalizations, reorganizations which often includes hiring, or buyouts of large shareholders. Your company might want to clean up its balance sheet by getting rid of expensive debt or expand its institutional ownership by monetizing large restricted stock position(s), in which case traditional underwriting might not be available or a viable alternative.

Depending on the current market conditions, a private financing arrangement is often a more attractive option to a company than public financing from a pricing standpoint, but there is a risk that must be mitigated across our industry.

When private financing becomes the more attractive option to a public company simply because executives inside the public company are literally and financially tied to the private funding source - that is they are silent partners or benefactors in 'some' way to the private financing arrangement (i.e. - you have no way of knowing that they, their former colleagues, or families & friends are profiting directly or indirectly from these selections) - that means the best interest of your company and clients is not at the forefront of these decisions and transactions.  People are willingly scamming you, your company, your clients, investors, and shareholders for personal profit.  These actions can literally put your entire enterprise at grave risk.  

There is simply no end to the harm that can be done once these channels of shame are systemically introduced into legitimate procurement and source selection processes.  

There is no getting out of it unless a crack in this kind of scheme is unearthed in an audit, a whistle-blower finds the management courage to come forward, a market tanks and third-party intervention finds out by accident, or the circumstances come to light and are addressed by some other means. 

To make things worse…

Too often these execs are not charged; they are released and free to REPEAT this behavior in other companies. My #1 complaint as a global recruiter is that these smart corporate-savvy criminal executives (who look good on paper) know full well that the COMPANY BRAND is often more important than the crimes they are caught committing. 

Big 4 Audit Execs can validate the fact that after they uncover many of these white collar crimes, too often these criminals are let off the hook so the company they are exiting can protect its BRAND.  

Liars, cheaters, fraud experts, money launderers and embezzlers are silently ushered out of companies and become in-eligible for Re-Hire at those firms, but they are too often set free to go repeat these behaviors & actions inside other companies.  Why is that?  Few companies wants front page headlines that scream lax oversight and poor management served as clueless partners in such crimes.  Such headlines are not good for THE BRAND they often conclude. 

Are all the source selection and budget decisions in your company made by a small group of 'trusted' execs in each department without the 'appropriate' level of enterprise-wide oversight?  The Bloomberg News Surveys tracking these issues should be reason enough to reassess and rethink all such methods and approaches.  

Maybe you rotate surveillance approaches so schemes cannot be planned around what is 'always' expected?  In 2008 - Trader Jerome Kerviel at France's Societe' Generale slept on a cot for weeks to beat his company's surveillance & compliance sweeps.  That revered global company of our time lost $4.9 billion in a single day.  Whatever. 

Finally another critical & important reason corporate vigilance across the board is important is to position your company to recognize the hard working and honest employees and vendors who play by the rules - which are YOUR rules!   

It's important to reward employees & reward vendors with your business who do not compromise the integrity of your operation.  These scams have kept high caliber and ethical vendors from executing business that could have given you and your company cost-effective best price - best values options you never had access to. 

This scenario also means you had executives who allowed honest vendors competing for your business waste time and their corporate resources through long but contrived 'Request for Proposal' processes vying for business they would never receive because your execs already knew the source selection was going to the firm or shell company he/she was tied to.  They 'used' all the other vendors for SHOW - to give it the appearance of a legitimate Request for Proposal process.

Many high caliber employees have walked away in silence from these terrible situations for fear of retribution, (i.e. - perhaps it was their perception that the collusion went too high up in the organization and/or they were afraid to jeopardize their career, personal life, standard of living, etc).    

Obviously none of us can stop repeat unethical behavior or illegal activity in all corners of our businesses, communities or organizations.  Understanding that people have been operating without ethics, values and transparency since the beginning of time is a reality, but we are accountable to the companies that employ us and the organizations that entrust us with their mission, so we must set up road blocks.  That is we must summon the courage and determination to introduce world-class approaches & methods to make undermining a company's success, mission and goals more difficult than it is today.

Introducing state-of-the-art standards into procurement/ purchasing procedures and finding ways to research ALL stakeholders who profit on the vendor-side of your business takes hard work, but it is the only way to protect your business, all industries, and our economy.   

If nothing else, let's make it harder for those determined to cook-the-books for personal profit.   Just maybe the 2014 Bloomberg News survey will report that only one fifth of the companies surveyed worldwide were the victims of fraud, embezzlement & money laundering.  We can dream, can't we?