AntiFraud Trends and Analytics Integrating antibribery corruption analytics

Anti-Fraud Trends and Analytics Integrating anti-bribery & corruption analytics into your compliance monitoring program Meeting with Verizon October 19, 2012

Components of an effective anti-fraud & corruption compliance program Setting the Proper Tone Elements of a successful corporate anti-fraud, bribery and corruption program Code of Ethics Fraud and Corruption Prevention Policies Communication and Training Proactive Risk Assessment Controls Monitoring and Analytics Reactive Incident Response Plan Management Ownership and Involvement Anti-fraud, bribery and corruption key activities may include Page 2 ►Review of fraud policies and controls ►Industry benchmark of anti -fraud programs ►Gap analysis ►Future state design session ►Who owns fraud? ►Assess roles and responsibilities ►Fraud and risk committee formulation ►Customized training ►Corporate governance ►Corporate anti-fraud road map ►FCPA / anti-bribery assessments ►Fraud risk assessment ►Targeted anti-fraud analytics ►Anti-bribery and corruption analytics ►M&A Due Diligence ► 3 rd Party Risk profiling ►Conduct background checks ►Investigations ►Fraud response planning ►Forensic data analytics ►Discovery and document review

How FCPA compliance & analytic overlaps with key business processes DOJ’s criteria for an FCPA violation: 1. Who 2. Corrupt Intent 3. Payment (or intent to pay) 4. Recipient 5. Business Purpose EY maintains a library of over 400 anti-fraud tests around each fraud risk area. Source: ACFE 2010 Report to the Nations On Occupational Fraud Page 3

Start with the Fraud Tree Different tools and methodologies are required to combat corruption Fraud tree Corruption Conflicts of interest Bribery and corruption/ FCPA Illegal gratuities Fraudulent statements Bid-rigging/ procurement Revenue recognition GAAP Reserves T&E fraud Theft of data Asset misappropriation Cash larceny Page 4 Theft of other assets – inventory/ AR/ fixed assets Fake vendor Payroll fraud Non financial

Corruption is a key risk area ACFE 2012 Report to the Nation Median loss was $135, 000 per incident. EY Global Fraud Survey • 39% of respondents say that bribery & corruption practices occur frequently in their countries • 15% of CFOs surveyed said they would be willing to make cash payments to win business • 20% of CFOs surveyed said that they are willing to make personal gifts to win business Source: ACFE 2010 Report to the Nations On Occupational Fraud Page 5

Top corruption risk areas Telcom company example 1. Vendor / employee conflicts of interest 2. FCPA 3. Travel & entertainment abuses 4. Overpaying local suppliers in other countries (kickback) 5. Kickback from a customer for free service (high frequency, low impact) Source: ACFE 2010 Report to the Nations On Occupational Fraud Page 6

2011 Corruption Perceptions Index Page 7

How is fraud detected? Source: ACFE 2010 Report to the Nations On Occupational Fraud 2012 ACFE Report to the Nation on Occupational Fraud Page 8 50% by tip or accident

Forensic analytics maturity model Beyond traditional “rules-based queries” – consider all four quadrants Structured Data Low Detection Rate High Anomaly Detection, Clustering Risk Ranking “Traditional” Rules-Based Queries & Analytics Statistical-Based Analysis Unstructured Data Matching, Grouping, Ordering, Joining, Filtering Traditional Keyword Searching High Page 9 Data visualization, Drill-down into data, Text Mining Keyword Search Data Visualization & Text Mining False Positive Rate Low

Beyond “rules-based” tests Beyond traditional matching, filtering and sorting algorithms, EY integrates statistical, visual and text mining techniques to identify patterns of high risk or rogue employee activities. Page 10

Common anti-fraud tests 1. Payment stream analysis ► 2. Vendor or subcontractor abuses ► 3. Over limits, unusual expenses, miscellaneous/sundry expenses Payroll ► 5. Fictitious vendors, employee / vendor conflicts of interests, Employee expenses and P-card expenditures ► 4. Altered invoices, goods not received, duplicate invoices, inflated prices, excess quantities purchased, requestor/approver conflicts Ghost employees, unusual payments, no deductions/evaluations, direct deposit account analysis Bribery and corruption ► Page 11 Bid rigging, conflicts of interest, contract compliance, kickbacks, payments to outside consultants

Fraud detection analytics Page 12

Focus on the payment text descriptions What if you saw these terms used as justification for payments to third parties? Nobody calls it “bribe expense” “<blank>” Government fee Pay on behalf of Special commission Friend fee Donation Goodwill payment One time payment Special payment Commission to the customer Incentive payment Consulting fee Team building expense Volume contract incentive Processing fee Page 13

Text Mining: “Disbursements Analysis” Page 14

Travel & entertainment – an FCPA risk example “Who entertained whom, where, what for and for how much? ” Page 15

Anti-Bribery & Corruption Analytics Who said what, where and how much? Page 16

Transaction Risk Scoring Review breaches on targeted analytics Page 17 Filter by selected analytics

Finding hidden money… Duplicative payments to fictitious vendors Different Vendor ID Similar names Page 18 Same Date Exact Same Amount Different Invoice # Some with same address Same Reference / Job Code

Finding hidden money… Salary & Payroll Abuse Overtime abuse. Test for billing more than a 40 hour work week Page 19

Vendor / employee conflicts of interest Vendor Master and Employee Master should not overlap. Analysis of phone numbers and fuzzy address matches. Page 20

New Research: Fraud Triangle & Behavioural Analytics Page 21

The Fraud Triangle¹ Applying theory to electronic communications 1. Donald R. Cressey's “Fraud Triangle” ; Incentive/Pressure, Opportunity and Rationalization are present when fraud exists. Page 22

EY / ACFE library of ‘keywords’ (Over 3, 000 terms in a over a dozen languages so far…) Rationalization Incentive/ Pressure Opportunity …I deserve it …make the number …special fees …nobody will find out …don’t let the auditor find out …client side storage …gray area …don’t leave a trail …off the books …they owe it to me …not comfortable …cash advance …everybody does it …why are we doing this …side commission …fix it later …pull out all the stops …backdate …the company can afford it …do not volunteer information …no inspection …not hurting anyone …want no part of this …no receipt …won’t miss it …only a timing difference …smooth earnings …don’t get paid enough …not ethical …pull earnings forward Page 23

Fraud Triangle analytics—calculation Joint EY and ACFE Research Project Page 24

Fraud Triangle Analytics – Research Bribery Case Keyword hits as a percentage of total emails Incentive/Pressure Terms Opportunity Terms Rationalization Terms Investigation timeframe, September 2006 to March 2007 Page 25

Interactive dashboard Fraud Triangle Analytics – Interactive Dashboard Page 26

Emotional Tone Analysis Indentify “Derogatory”, “Surprised”, “Secretive”, “Worried” communications Page 27

Emotional Tone Analysis Ken Lay’s emails were “derogatory”, “confused” and “angry” Page 28

Rogue employee analytics Risk Scoring Model – peer stratification dashboard review Peer Stratification Dots represent clusters of high risk communications that can be reviewed by clicking. Detail-Level View Page 29

Closing thoughts ► Consider a pilot program, taking a risk-based approach ► Consider developing an “anti-fraud” task force ► Maintain and build a library of robust anti-fraud tests ► Don’t overlook bribery and corruption—corruption is a hot topic for global companies, especially in telecommunications and global capital projects ► This is not SOX testing and the same tools don’t apply! Current global fraud landscape requires more proactive, targeted analytics, beyond traditional “rules-based” tests Page 30

Contacts Vincent Walden Ernst & Young LLP Partner, Assurance Services Fraud Investigation & Dispute Services New York, NY (212) 773 -3643 vincent. walden@ey. com Page 31 Bill Henderson Ernst & Young LLP Partner, Assurance Services Fraud Investigation & Dispute Services New York, NY (212) 773 -4389 william. henderson@ey. com