Friend or Foe? Due Diligence Can Help Expose Criminal Intent

By Lowers & Associates,

Businesses don't often dig deep into their employees. They trust and assume that people are doing what they're supposed to.

Benjamin Franklin once said, “Diligence is the mother of good luck.”  It’s a fascinating quote with a rabbit hole worth discussing, but taken at face value, it feels somewhat like the truth. Therein lies a conundrum, though, that most businesses are all-too willing to overlook when it comes to their bottom-line: feeling like the truth and actually being the truth are two very different things.

Diligence literally means persistent work or effort; luck implies success simply by chance. Maybe you’re familiar with another quote about luck, this one courtesy of philosopher Lucius Seneca: “Luck is what happens when preparedness meets opportunity.” For every overnight success or business that appeared to catch lightning in a bottle, history (and science!) has shown that diligent groundwork was laid, dues were paid, and sacrifices were made to enable that moment.

When a business neglects due diligence around its people, products, brand, or reputation and views its security posture without a critical lens, it’s depending on luck, pure and simple. And while every business is always hoping for good luck, what is luck in reverse? It’s opportunity waiting to implode.

We’ve talked at length in #OurStory series about The Fraud Triangle, and “Opportunity” has been a big part of that. Due diligence, as we’ll learn in our conversation with Tom Dolan, Manager of Claims & Research for Lowers & Associates, can actively be a businesses first line of defense against risk. It can provide a business the opportunity to build a strong culture.

And it can be something dependable to lean on if and when the day comes that luck runs out.

You wrote an article about due diligence for the #OurWork series, and the rhetorical question you posed was “Your Lucky Day?” Can you explain what due diligence is and why it’s important?

Tom Dolan: Due diligence is essentially fact checking. It’s a more in-depth background investigation with the same intent – to make sure that what you’re being told is true. It can require a bit of time and resource investment to do it right, but more often than not, it’s worth it. As for why it’s important, it helps identify red flags before entering into a business relationship. Businesses often need to perform due diligence on a candidate for a hiring or partnership opportunity; if you know what you’re looking for, due diligence can really help save the day.

How is this information actually acquired?

Tom Dolan:  There are tools and methods that require certain access or training, but honestly, there are quite a few open sources that allow you to look into someone’s background – public records and social media, for example. You can learn a great deal about someone if you know what to look for and how to analyze that information, especially when looking for red flags.

With our clients, many of the questions we typically explore are related to a subject’s criminal history, financial history, or any civil actions of note. These records can provide a great deal of information about whether or not the person that you’re dealing with is trustworthy, responsible, and reliable. It’s not too onerous a task to run down this info, and the rewards can be immense.

If, for example, you find out that you’ve hired someone for a senior position and it turns out that they’ve got a history of felony convictions, a violent past, or maybe unpaid child support, this association could tarnish your brand or even get you into legal trouble down the road. Depending on the proclivities and acceptance of risk in your industry, due diligence allows you to gauge a potential hire or partner’s background before you enter into a business relationship.

For a client, what is the thought process that goes into weighing your findings?  What offenses merit disqualification versus offenses that might go overlooked?

Tom Dolan: It varies from client to client and position to position, but it’s best to let the client make that decision. When we put together a due diligence report, we start out trying to find as much information as possible. We may or may not end up tailoring the focus depending on the client’s needs; but we are going to report on the facts as they stand so that the client can make a fully informed decision.

We might, for example, perform due diligence on an individual and come to find he’s got 20 unpaid parking tickets. That may not impact job performance in the prospective role, the client may not think it necessarily says anything about him personally, and so, they make the hire. At the same time, though, this individual has 20 unpaid parking tickets. What does that say about his personality, or his level of responsibility? Would he do the same thing with invoices?

So, for the client, it depends on why you were trying to obtain the due diligence in the first place. And that’s why, as an investigator, when you’re putting a report together, it has to be thorough. We don’t want to dictate that something is or isn’t important, because the client might think otherwise – it’s best to be thorough and objective, lay the facts out, avoid inserting your own opinion into the material.

One of your first due diligence investigations with L&A was a memorable one, it helped uncover a fraud scheme that had been going on for almost a decade. Tell us about that.

Tom Dolan: The employee was a 20+ year veteran employee, and while the investment scheme they’d been running did not go back as far as their initial employment, it dated back at least 10 years. It was a situation where this person worked their way up in the company, they’d done a good job, but once in a position where this individual was able to exploit the company, they did and took the company for over $4 million before it was all said and done.

How did the company find out? Did they suspect it for a while?

Tom Dolan: By the time they came to us, yes, but they only began to look into it because they started receiving notices from all sorts of clients indicating that their payments were late. The notices began stacking on top of each other as you’d expect to see when a Ponzi scheme starts to collapse.

From a morale standpoint, what did that do to the company?

Tom Dolan: I think it was devastating. They were not that big a company and this person’s actions collapsed the regional franchise they were working with. It resulted in some major structural changes across the company. A multimillion-dollar loss is huge for anyone, and this company felt it for sure. But mostly, I think it was the shock of having this occur and having gone on, unnoticed, for so long.

Thankfully for the company, they were able to start looking a little more into their other managers and making some changes so that people didn’t have quite the level of autonomy to get away with something like this again. The company assumed that they could trust this person and clearly they could not.

You mentioned before about how, when you see an individual’s lifestyle on Facebook that doesn’t match up with their job description, can be a red flag. This particular fraud case didn’t have that, but is there one that does come to mind?

Tom Dolan: We do a lot of work with the insurance market and we’ve built a number of programs off of due diligence assignments where we’ve identified one major issue in a book and they’ve asked us to take a closer look at other parts of the business to make sure the problem isn’t systemic. We had a similar franchise situation as the one above, this particular one was a refinery for precious metals. One of their branches had begun purchasing precious metals from illegal mines in South America. Without getting into specifics, in purchasing these illegal metals, they were supporting organized crime and would launder money through the operation. Human trafficking was also involved. These mines were basically run off slave labor, it was really a horrific situation when you dug into it, and it’s the reason why a lot of countries take illegal mining very seriously.

The franchise in question was making millions of dollars off of this scheme. And when you looked at their social media, which we were able to track down, it became pretty obvious that they were up to no good. The principals were living way above their means and boasting about it openly. Pictures on private planes, flashy jewelry, quoting gangster movies. They literally documented their illegal activity. If anyone had done some basic research on these guys, just on social media, their activity would have been very suspicious, it was that obvious.

And due diligence helps uncover things like this pretty succinctly…

Tom Dolan:  Yes! In the previous example with the Ponzi scheme, the signs were there – liens against the subject going back over 20 years, felony unpaid child support charges, misdemeanor assault resulting from a drunken brawl, they were even sued on two separate occasions by casinos in Las Vegas for unpaid debts. A lot of it was in the public record. But businesses don’t often dig deep into their employees. They trust and assume that people are doing what they’re supposed to. Which is good if you can trust your employees, and generally you can, but it’s still important to run these kinds of active background checks and court records monitoring. Because if the Fraud Triangle teaches us anything, eventually, some people will go off the rails. Due diligence can generally find and fix that kind of issue before it starts, or at least before it gets out of control, before federal charges are pressed and before your company is out $4 million.

What was the fallout with the mine?

Tom Dolan: Well, the parent company’s name was attached to that particular franchise, and they took a big hit to their brand and reputation. But they got to work and made some fixes, as clearly they didn’t want to sit back and let it happen again.

  Category: Due Diligence
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