Cannabis Dispensary Theft & Diversion

The Dispensary Fraudster Down the Hall

Employees are stealing from their own companies, and they are taking much more than just paper clips and Post-it notes…especially in the cannabis industry. Theft, diversion and occupational fraud – sometimes called internal fraud – is globally costing businesses the equivalent of billions of dollars annually.

The methods used by the culprits vary. Some skim cash from the reserves or walk away with the cannabis inventory. Some alter numbers on payroll checks. And some pull off various embezzlement schemes, such as reporting false expenses or changing financial statements. The one commonality is that it is the organization’s own employees who are perpetuating the misdeeds.

 

ACFE Study

Sometimes they act in collusion with each other, and sometimes they act alone. The findings come from Report to the Nations, an extensive study issued in April by the Association of Certified Fraud Examiners (ACFE). The study looked at 2,690 cases of fraud spanning 23 industries in 125 countries between January 2016 and October 2017.

All told, the 2,690 cases of fraud resulted in losses that exceeded $7.1 billion. But the true global cost of fraud is likely magnitudes higher, ACFE estimates that 5 percent of worldwide business revenue is lost to fraud, which would come out to roughly $4 trillion annually. It’s safe to say the problem remains huge.

Occupational fraud, experts say, is an egalitarian crime; the culprit is just as likely to be a top executive as an obscure low-level employee. A fraudster doesn’t look like a fraudster, they look like everybody else. It legitimately could be anyone. It’s not the person who looks sketchy. It could be the person who comes over to your house for dinner on the weekend.

When a fraudster is caught, coworkers are frequently shocked. Historically, occupational fraud has been looked at as an accounting problem – numbers that don’t add up tip-off company leaders that something is wrong. But ACFE’s report shows otherwise. Part of the message is that it’s not really an accounting problem, it’s a behavior problem.

In every edition of the report, ACFE has surveyed 17 differentred flag” behavioral indicators that tend to be associated with fraudsters. Those six red flag behavioral indicators are:

  1. Living beyond one’s means
  2. Financial difficulties
  3. Unusually close association with a vendor or customer
  4. Control issues and an unwillingness to share duties
  5. Divorce or other family problems
  6. A “wheeler-dealer” attitude or cultivated self-image

In at least 85 percent of the cases examined in the report, the fraudster displayed at least one of these red flags; in 50 percent of cases, he or she displayed multiple red flags. Both male and female fraudsters exhibit these behavioral indicators, but often in different proportions, experts say.

Studies in the past have shown that male perpetrators were more likely to be the wheeler-dealer-living-beyond-their-means type, whereas the women found themselves in some sort of financial distress and decided this was their easiest path for relief. For female fraudsters, the most common red flag by far is financial difficulties; it occurs in 40 percent of cases, compared with only 24 percent of cases for males.

And for males, the wheeler-dealer red flag was present in 16 percent of cases, compared with only 6 percent of cases for females. It does look like there are differences in the reasons why women steal, as opposed to men. In addition, on average women commit smaller frauds than men do; losses tend to be 80 to 100 percent greater with men.

Experts also say that security efforts to prevent occupational fraud can benefit from an understanding of the motivations and conditions underlying the crimes. Very few wake up in the morning and decide to rob their organization, many have pressures to perform at work, pressures at home, or are suffering from various addictions that inform their decision-making processes.

 

Fraud Triangle

The “fraud triangle” model explains the three (3) conditions that are often present in occupational fraud incidents.

  1. The employee is under financial pressure.
  2. He or she is given an opportunity to commit fraud, such as access to company resources.
  3. Employee rationalizes the theft to him or herself.

They may think, ‘I was borrowing it, I was going to pay it back,’ or, employees may feel the company owes them because they deserved a promotion and never received it. And if employees are on the verge of stealing, poor internal controls can help push them over the edge.

Certainly, lack of controls or oversight contributes to the opportunity for those at risk to take that first step and steal. Once that wedge has been crossed, it becomes much easier for the fraudster to escalate. In fact, the ACFE study found that nearly half of frauds examined in the report occurred because of internal control weaknesses.

For organizations that want to strengthen internal controls, it is recommended to maintain a consistent employee background checks before hiring; ensuring that sensitive duties are entrusted to more than one employee; implementing spot audit programs and conducting random audits on particularly vulnerable areas and training employees about fraud prevention and the red flags they should be aware of.

The other key to occupational fraud prevention lies in organizational culture, experts say. Here, the tone is set at the top, organizational managers who always act ethically and treat all employees respectfully are leading by example; employees will often follow suit. But if leadership is pushing the boundaries, and wading into that ethical grey area, people will take cues from that.

Some organizational leaders are taking steps to preempt bad situations by openly supporting a company code of conduct and ethics. Complacency and lack of a strong tone from the top are two of the most key indicators as to whether you are at risk. When management is seen as unengaged, unappreciative or apathetic, it creates an opportunity for a fraudster or potential fraudster to strike.

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