Mr. Goldmann

Security & Safety

Financial Fraud and How to Reduce Your Risk

By Peter Goldmann, President, FraudAware Hospitality

For companies that don't believe they have a serious fraud problem...or simply choose to ignore the subject altogether, consider this: According to the Association of Certified Fraud Examiners in Austin, TX, the average American company loses 6% of its annual revenue to internal fraud. In other words, a hotel or resort company with, for instance, $1 billion in annual revenues, loses $60 million to employee embezzlement...expense account fraud...theft of inventory, etc.

FINANCIAL CRIME: OPPORTUNITIES GALORE

Among the leading reasons that hospitality companies are exposed to high levels of fraud is that the industry's culture tends to focus much more on providing great customer service than on the internal financial controls that go into running a hotel, resort or restaurant.

No problem with that, right? Better customer service equals more repeat business, means bigger profits and so on.

All well and good, except that this approach comes with a hefty price.

According to Robert W. Rudloff, Jr., vice president of internal audit at MGM Mirage in Las Vegas, when line employees, supervisors, managers and senior executives are focused so narrowly on getting customers to come back, internal financial controls inevitably get short-changed.

A good hotel manager, says Rudloff, naturally wants to spend most of his or her time meeting and greeting guests than authorizing guest refund requests... monitoring check-in procedure... or verifying employee time card accuracy.

The result, unfortunately, is that dishonest employees, guests, vendors and passers-through often have numerous opportunities to exploit missing or flawed anti-fraud controls. Losses to fraud are the inevitable result.

For example, many hotels are vulnerable to a scheme whereby "guests" make reservations for same-day check-in, using a stolen credit card and expecting that the fraud won't be discovered until after they've checked out. This is a form of identity fraud where thieves steal or create counterfeit identification or credit cards and use them to pay for goods and services that get charged to the legitimate individual's account.

The problem is that the front desk clerks are the first line of defense, so if they aren't trained to ask for and scrutinize all same-day guests' driver's licenses or other acceptable ID, chances are the fraudsters will get away with the crime.

The good news is that when it comes to identity theft, no matter how wonderful the technology and how real a bogus ID may look, there is almost always a red flag to spot when the crime is being committed. It may be the misspelling of the victim's name...suspiciously vague photos... not-quite-perfect lamination of a driver's license, etc.

The important point is that only trained eyes and constant attention to detail will catch the tell-tale signs of identity fraud by dishonest guests . To reduce losses from identity and credit card fraud, hotel management must train all employees who have regular direct contact with customers in how to recognize the signs of potential identity fraud (and, of course, to take action when an incident is detected.)

Fortunately, such training is neither complex nor costly. Getting employees to familiarize themselves with a list of the most common signs of fake identification...counterfeit credit cards and bogus checks, for example, can be done in a fairly short classroom training session.

MORE SECURITY VULNERABILITIES...

Other major fraud threats that cut into hospitality company profits include...

• Bogus travel agencies. Reservation agents at large hotels or in centralized reservation centers process a huge volume of reservations each day. Some of those reservations originate from legitimate travel agents who have done business with the company for a while and are on the list of pre-approved agents that the hotel will accept reservations from...and pay commissions to.
  
  When a dishonest reservations agent has been around long enough to know the ropes, he or she can easily set up a phony travel agency with their home address or PO Box for receiving commission checks.
  
  If management authorization of new additions to the list of approved travel agents isn't required, the dishonest reservations is unhindered in bypassing the approved list, or can even add his or her own bogus travel agency to the list without a hitch.

• "Comp" fraud. MGM Mirage's Rudloff says these schemes are endemic in the casino-hotel environment. There are countless ways, he explains, for employees to steal by abusing their privileges for giving out complimentary goods or services to high rollers and other special guests.
  
  Examples:
  
  In one actual case, multiple servers in a casino coffee shop stole cash by switching underused comp slips with separate high-dollar guest checks that had been paid in cash when settling the guest checks. They then applied the cash payments to the smaller (comp) check and pocketed the difference.
  
  The best way to prevent this type of fraud, suggests Rudloff, is to pre-number comp slips and require restaurant hostesses to write the comp slip number on the guest check and the check number on the comp slip and then staple the two together. Unless the hostess is also dishonest, it will be hard for servers to get away with this form of comp fraud.
  
  Casino hostesses, restaurant managers or others with comp privileges simply "over-comp"... giving away more than they're supposed to and receiving cash payments from the guests in return.

• Refund fraud. In one instance, a hotel accounts receivable clerk who had been passed over for a promotion, was found to have been fraudulently processing guest refund requests by forging the hotel manager's signature, and having the refund money credited to her own credit card account. She would then use the ATM machine in the hotel's lobby to withdraw the misappropriated funds.
  
  This scam was allowed to continue to the tune of $45,000 because the hotel manager failed to comply with the rule requiring him to review the listing of guest refunds paid... the controller neglected to review the refund requests prior to payment... and the refund process allowed refunds to be credited to credit card accounts that didn't belong to the legitimate guests.

• Inventory theft. High-priced items such as steaks and seafood are favorite targets for theft by dishonest food and beverage staff. Controls for reducing the disappearance of food and beverage inventory must of course include tighter physical security. However, other measures must also be implemented, such as requiring honest employees who spot co-workers stealing to report the theft...as well as strict policies calling for immediate termination of anyone caught misappropriating inventory.

• Procurement fraud. Bid-rigging is a favorite scam among procurement agents seeking to pad their salaries.
  
  Howard Silverstone, a principal at Kroll Zolfo Cooper, the financial services arm of corporate security consultants, Kroll Inc. cites one case where fraud was discovered after an employee in the accounts payable department noticed that one vendor seemed to be winning the majority of bids.
  
  A careful analysis of the bidding process revealed collusion between the procurement agent and the vendor. Each time a third-party bid was received by the agent, he would E-mail the amount to his "preferred" vendor. Hours before the deadline, the preferred vendor would submit the winning bid, under-cutting the lowest bidder by pennies.

These, and a host of other procurement frauds, says Silverstone, can also be substantially reduced through tighter internal controls and thorough employee fraud awareness training...as well as a strict policy of conducting thorough background checks on all new vendors prior to placing the first order.

ANTI-FRAUD CONTROLS: NEVER TIGHT ENOUGH

The important lesson in all of this is that properly designed internal controls can never be tight enough in a hospitality property. Dishonest hotel, restaurant and bar employees and guests seem to always find new ways to steal. The company's audit and accounting departments, in cooperation with management, corporate counsel and external auditors, must continuously review existing controls... improve on them and carefully screen for new tricks that employees and outsiders are inventing to steal their money.

Equally important, of course, is formulation and enforcement of new controls...as well as consistent dispensing of punishment when violators are caught.

Training all employees in how to comply with all anti-fraud controls is the other critical component of any hospitality company's efforts to reduce financial crime. Department managers must be responsible for ensuring that everyone who works for them knows how to prevent fraud...how to spot suspicious behavior among co-workers...and how to report such incidents when they occur.

THE BOTTOM LINE

While customer service is indeed the ultimate factor determining if a hospitality property sinks or swims, neglecting anti-fraud controls is bound to shrink the bottom line...no matter how wonderful guests think their visits are.

The challenge is to achieve balance. Balance between the quest for premium customer service and the unavoidable necessity to keep hard-earned revenues from flowing out through exploitation of inadequate internal controls.

Peter Goldmann is the Developer of FraudAware/Hospitality, the first on-line fraud awareness training course for hospitality managers, supervisors and line employees. He is is the publisher of the monthly newsletters, White-Collar Crime Fighter and Cyber-Crime Fighter. His company, White-Collar Crime 101 LLC also is the developer of FraudAware/Hospitality, a customizable Web-based fraud awareness training course for managers, supervisors and line employees. He is a member of the Association of Certified Fraud Examiners, and The International Association of Financial Crimes Investigators. Mr. Goldmann can be contacted at 203-431-7657 or pgoldmann@wccfighter.com Extended Bio...

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