I am confident that every investigator has, at one or more times in their career, arrived at an early-on assumption about the main details of a case. It’s human nature to do so and quite often, that assumption proves to be accurate. But not always. As Sherlock Holmes once observed: “It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.” The following (disguised) example of a suspected insurance fraud illustrates why it’s always critical to let the facts lead you to the truth.
An Inside Job?
The insurance claim looked suspicious. An electronics retailer had reported a break-in at its primary warehouse. According to the retailer, several hundred thousand dollars’ worth of stock had been stolen. Thieves had smashed a large hole in the building’s brick wall, likely with sledgehammers and pneumatic drills, and grabbed as much inventory as they could. The heist took less than three minutes, according to the time sequence caught on the building’s security tapes.
None of that was suspicious by itself. What could not be overlooked, however, was the incredible similarity to a claim made by the same retailer a year earlier. In that incident, thieves had cut a hole in the exact same spot, which at the time was constructed with wood and a thin covering of aluminum siding. The warehouse was old and easy to break into. And the security was no more than a token effort.
The product loss that time was also several hundred thousand dollars. Following an investigation, the insurer had paid the initial claim. A condition of the settlement required the retailer to reinforce the building, which it did by adding a thick layer of cement to the warehouse walls.
“Has lightning really struck twice? And in the exact same spot?” the insurer’s adjuster asked the retailer’s CFO as they discussed the latest claim. His tone was somewhat suspicious.
“I know how it looks,” the CFO said, “but I think it’s just a case of being targeted by the same people as before. That’s it. Nothing more.” The CFO added that his company had upgraded the physical building and enhanced the security systems, as set out in the previous settlement.
“Where was the security guard?” the adjuster asked. He had been hanging out at the far end of the warehouse, the CFO explained, having a cigarette just outside a back door. The guard didn’t hear the ruckus because he was listening to music on headphones. “He’s subsequently been fired,” the CFO added.
When the meeting ended, the adjuster said the claim was on hold until a thorough investigation could be completed. Part of the process, he said, would involve the insurer retaining a reputable forensic accountant, who would be tasked with determining the actual loss. “If you deny our claim, we won’t be able to get insurance, not after the previous theft,” the CFO said. The adjuster could see the genuine concern on the man’s face.
“That’s not my...” he was about to say “problem” but realized it would sound cold. “It’s not for me to decide. Let’s wait and see what emerges from the investigations.”
A Challenging Assessment
A forensic accountant, Elizabeth Renshaw, was retained, and she began work on the file a few days later. She met with the CFO, who went out of his way to be friendly and as seemingly helpful as possible. Several times he mentioned how hard it would be on the retailer if the claim were turned down for fraud. “We would be so terribly vulnerable,” he said. “Imagine if they came back a third time, and we couldn’t recover our loss. If you could possibly show them that no fraud took place…” he pleaded.
Renshaw put her hand up to stop him right there. Although she felt some sympathy for the CFO, she needed to explain her role.
“First of all, I’ve not been retained to conduct a fraud investigation,” she said. “The insurer can do that if it wants. My job is to assess what, if anything, has gone missing. You’re paying me, but I’m not an advocate for you. I’ll report my findings, no matter what they are.”
Determining her findings, she sensed, might not be an easy undertaking.
The retailer primarily dealt with small, expensive, fashionable items. The inventory moved in and out of the sprawling warehouse on a regular and quick basis.
“You estimated your loss to be about $250,000,” she said to the CFO. “Where did that number come from?”
To answer the question, the CFO suggested the two visit the warehouse and inspect the location of the break-in. It had been shored up extensively (and the number of security guards at the warehouse had subsequently been tripled, with one posted near the scene of the two crimes). Yellow police tape stretched along a large area that encompassed the break-in site.
The thieves, the CFO explained, had made a large enough hole for a small man to wriggle through. They had seen him, and another small man, do this on the retailer’s grainy security images. “Could be boys,” the CFO said. “Or girls,” Renshaw added.
Once inside, the thieves passed as many small items as they could through the hole to their accomplices. It was impressive just how much product could be removed this way in such a short time.
“How did they know where to make the hole?” the forensic accountant asked.
“I guess they remembered from the last time,” the CFO said, a slight tinge of sarcasm in his voice.
“How did they know where to make the hole the first time?”
The CFO admitted he didn’t know.
“The thieves must have known the warehouse,” she said. “This area has the most expensive equipment by far. There has to have been some inside knowledge. How many people would have access to this information?”
“Quite a lot,” the CFO said. The warehouse employed about 15 people. Apart from several supervisors and a warehouse manager, the rest worked for little more than minimum wage and no benefits. The warehouse manager, he said, was a good, loyal employee but a bit of a taskmaster. She would soon learn that the manager was an abrasive boss who belittled his crew and seemed to enjoy firing them or having them quit. Turnover was high. “Probably someone who was angry at us did this,” the CFO suggested.
She cautioned the CFO about jumping to conclusions. Her next question concerned the retailer’s management. How many of them knew the warehouse layout?
Everyone, the CFO said, but he took umbrage at the suggestion that one could possibly be involved in the theft. “I know these people personally. You’re wasting your time. None of them would do this.”
It was a reaction the forensic accountant had encountered many times before, an assumption by management, that the lowest-paid employees conducted fraud and theft, never the senior trusted personnel.
“Most major frauds are committed by people at the higher ranks of a company,” she said. “It’s good to keep a secure eye on warehouse employees, but the other should be trained on the people sitting around the boardroom tables.”
The question as to how the thieves knew where to hit was put aside for a while as the accountant concentrated on trying to determine how much had been stolen. The retailer’s inventory tracking system was, like its approach to security, barely adequate. She discovered not all orders were entered into the system. That came to light during a tour of the facility. She noticed orders were stuck onto a bulletin board near the warehouse manager’s office. Upon questioning, he admitted he was often so busy, usually because he was short-staffed, that he didn’t have time to make sure his entries were up to date. As a result, a significant portion of the missing inventory had not been entered into the retailer’s database. It was probably true, and he admitted that some orders were never registered.
The forensic investigator interviewed employees and analyzed existing documentation, especially purchase orders, for the past five years. From the results, she determined how much inventory went in and out of the warehouse every month. Some periods were more active — the months leading up to the end-of-year holidays, for example — but, in general, the sales figures showed a consistent pattern, including a small but steady increase in revenue over the years.
From her analysis, she was able to ascertain how much inventory was in the warehouse at the time of the robbery. She compared that figure to the inventory count conducted the day after the break-in. Based on her findings, she prepared a report that placed the loss at a low of $175,000 and a high of $210,000.
An Inside Investigation
After she had tabled her report, the adjuster asked if Renshaw would attend a meeting with several members of the insurer’s investigative team. “We would like to retain you to determine if you can, whether there is any evidence of fraud,” the insurer’s general counsel said. “You’ve been working on this for quite a while now, and it only makes sense to have you expand the scope of your assignment.” Before Renshaw could point out that she was conflicted because she’d been retained by the retailer, general counsel told her the retailer had agreed to the arrangement. He showed her a letter from the CFO confirming what counsel was saying. “We believe the forensic accountant is a fair, objective and highly competent professional,” the CFO had written. “Her appointment makes absolute sense to us.”
General counsel asked Renshaw if she had any gut feelings about the case. “Based on what I saw, there was no obvious reason for the company to stage a robbery,” she said. “Its books, which we know may not be telling the entire truth, indicate they’re making a small, steady profit. They’re paying their bills and are doing a reasonable job collecting their receivables. Some suppliers are slow to pay, but that’s happening in almost every business these days. I didn’t see any obvious signs of a company in crisis. And, if it was, why such a small, clumsy theft? Why not torch the place?”
Did she think it was an inside job?
To some degree, yes, she answered. It had to be. But the list of people who knew the warehouse layout was long. And many of them had a grudge against the retailer.
“Why is that?” counsel asked.
Renshaw told them about the warehouse manager. “He has a toxic personality,” she said. “From what I was told, he really seems to enjoy bullying the hourly employees, especially if they’re down on their luck.”
She had no reason to suspect him of any involvement in the robbery, however, as this had not been part of her original mandate. Intuitively, she didn’t think he had anything to do with it, as he treated the warehouse as if it was his personal property. It was probably the one place in his life where he felt like a king, she sensed. It was unlikely he would damage it by smashing in a wall. He was mean and incompetent (he had resisted improving the security as he considered any changes to be a criticism of his competency, and he did not take criticism well) but not a thief.
Renshaw was not convinced she could determine, by examining the books, whether the retailer or a group of opportunistic thieves had plotted the robbery. She thought there was another, less conventional way to solve the matter.
“I’d like to put a PI into the warehouse, as an hourly worker,” she said. “I know they need to hire people. We can take the CFO into our confidence to ensure our guy gets hired. It’s my experience that low-level criminals can’t help but brag about their scams. By the way, we’ll need someone who can drink and hold a lot of booze. It’s over beers after work that tongues start wagging.”
“Can we trust the CFO?” she was asked. Renshaw thought they could. The longer they had worked together on her report, the more she believed him to be an open and honest person.
The plan was approved and put in place. Within two weeks of the PI joining the team, a drunk coworker let it slip one night at a bar that a former staffer, who detested the warehouse manager, had “got the last laugh.” When pressed, he put a finger to his lips and would say nothing more.
Based on that remark, an investigation was launched against the former worker. It was soon discovered he was part of a small group that was fencing stolen goods. A sting operation resulted in his arrest and the subsequent apprehension of the rest of the break-in team. During a plea agreement, the accused said the retailer had no involvement in either robbery whatsoever.
The insurer settled fairly with the retailer, once again setting out conditions for the insurance to be renewed. One was a rewriting of the job description for the warehouse manager and a change in the required academic and other credentials that made it impossible for the incumbent to retain his position.
The CFO took Renshaw to lunch to thank her for her work. He said when the insurer had first implied that the retailer had stolen from itself, he thought there was no way to change its mind. “They seemed pretty convinced. But you convinced them otherwise.” That’s not what happened, Renshaw replied. “The facts changed their mind. My job was to have a mind open to the facts.” At that, they clinked glasses and enjoyed an excellent meal together.
From Uncovering Fraud: True Stories About Fraud, Fraudsters & How They Got Caught by David Malamed, edited by Paul McLaughlin. This column was first published in May 2012.