TIMBER SECURITY 101
In October I was part of a timber security webinar sponsored by the Forest Resources Association. I summarized the history of the Forest Products Security Group and the fraud cases the forest industry has dealt with in that time. I also shared some prevention measures that could help curb theft and fraud. I thought I would review some of that same information here as a foundation for the work we in timber security live and breathe every day. Think of this as Timber Security 101, an introduction for those new to the industry and an update for those who have been in this business a long time.
Brief History of the Forest Products Security Group
In the 1970’s and 1980’s, most large forest industry corporations employed full-time Security Managers. Many were ex-FBI agents or law enforcement. They were tasked with addressing issues such as loss prevention, asset protection, intruder prevention, staff and client safety, access control, property damage prevention and more recently cybersecurity/data security . Their responsibilities included theft but also included people, property and data safety and security as well.
Then, in the early 1980’s Security Managers from six companies formed an ad-hoc security group to join forces to combat their common security challenges. Gene Mertz, Weyerhaeuser’s Security Manager was the driver in bringing together Boise Cascade, Champion Paper, Mead Paper, International Paper, Georgia Pacific, and Weyerhaeuser to spearhead this joint effort. Their premise – it’s quicker, cheaper, and more effective to learn from someone’s else’s experience. So, they met with the goal of comparing notes and best practices in combating theft and fraud.
By 1989, the ad-hoc group joined the American Pulpwood Association (now the Forest Resource Association, FRA). Both groups had essentially the same goals. During the 1990’s the Forest Products Security Group expanded into the FRA’s 6 regions in the US.
However, as the 2000’s began companies began downsizing security personnel, to the point that now there are only a few forest industry companies that have full-time internal security staff. Today, the Southern Forest Products Security Group comprising the South-Central and Southeastern Regions of the FRA still meets with the same goals of reviewing cases, sharing best practices, and networking. The group currently meets once a year and all are welcome. Please contact the FRA to make sure you’re on their mailing list!
The Magnitude of Timber Fraud
Timber security has come to mean the practice of preventing and detecting fraud within the forest industry. This includes issues in outright theft as well as theft schemes, but also abusive contracts, cybersecurity, trespass issues, stolen equipment and fuel, billing and accounting schemes and wire transfer fraud.
Not only are there a wide variety of issues to consider, but also, the number of players in the supply chain contributes to the complexity of preventing, detecting, and stopping criminal fraud. In general, the challenges are in the hand-offs.
That is where fraudsters see an opportunity to take advantage of the processes in place to find a crack where they can profit. By colluding with a colleague on the other side of the supply chain (for instance a trucker and a scale house worker), efforts can temporarily support personal gain.
The issues are exacerbated when staffing is low, economic conditions are tightening and organizations are too busy to spot red flags in their processes and systems. Compounding these issues prosecution and recovery of financial losses can be disappointing.
Depending on your role in the industry, the issues may change. For instance, landowners who own the land and the timber are concerned with trespass on the land, stolen timber, fake invoices, fraudulent contracts, timber merchandizing, and straw bids.
Mill owners are concerned with fake scale tickets, wood inventory schemes, wire transfer fraud, collusion, zone jumping schemes and scale manipulation.
And procurement staff are concerned with fake purchase documents, kiting timber, collusion, kickback schemes, bribery, zone jumping schemes, influence peddling and straw bids.
Is Timber Fraud a Problem?
We cannot answer the question about the extent of the problem exactly since many fraud cases are not discovered, reported, or prosecuted. However, we can look at data that is available through the Association of Certified Fraud Examiners (ACFE). The ACFE is the world’s largest anti-fraud organization and premier provider of anti-fraud training and education. They have 90,000 members worldwide.
Each year the ACFE conducts and publishes their annual “Report to the Nations” which, in 2020, examined 2504 total fraud cases (895 in the US alone) reported by Certified Fraud Examiners and investigated between January 2018 and September 2019.
During that two-year time-period companies lost $3.6 billion dollars as represented in the report. Since 1996, based on actual cases, ACFE estimates average losses to be 5% of annual revenues. That means some had little or no losses and others had substantial losses. In either case, what kind of an impact would a loss of 5% of your annual revenue have on your business? To provide a sense of the scale of the US forest industries challenges, consider that the industry generates over $200 billion in annual revenues.
The ACFE reports a median loss per case of $125,000. To put that in perspective, the highest median loss in the report was the mining industry at $475,000, second highest was the energy industry at $275,000. Education had the least losses at $65,000. Organizations with less than 100 employees suffered a higher median loss than larger organizations.
Although 52% of companies run background checks to prevent hiring “bad” employees, in only 13% of the cases did a background check provide a clue to the fraudster. Internal control weaknesses are responsible for nearly 50% of all fraud cases and 33% are due to the lack of any internal controls whatsoever.
Some other interesting facts to consider:
→Typical fraud cases last 14 months.
→Corruption was the most common scheme and asset misappropriation is the least costly but represents the largest number of cases reported (86%).
→The top three departments where frauds are occurring are: operations, accounting, and executive management.
The Forest Products Security Group Cases
The Forest Products Security Group has been involved in cases for the past 32 years, covering all regions of the US. Here are a few samples:
- $10 Million (an analyst diverts company funds to his personal accounts, Embezzlement).
- $10 Million (Logger diverts company stumpage for his own benefit).
- $7.2 Million scale house fraud.
- $6.7 Million scale house fraud.
- $4.5 Million fake timber advances into an employee’s accounts
- $4 Million fake vendor/billing scheme into a husband’s company
- $2.5 Million illegal sale of timber
- $2.5 Million scale fraud (Log scaler out West)
- $2 Million scale house fraud
- $1.2 Million scale house fraud
- $1.6 Million “cut and cover case” Keadle Lumber case (THE CASE 1989)
- $1.2 Million scale house fraud
- $1 Million scale house fraud
- $1 Million logger diverts wood for his own benefit
- $750,000 scale house fraud
- $600,000 – wood dealer shorts landowner
- $400,000 scale house fraud
- $300,000 scale house fraud
- $300,000 – Landowner discovers 125 acres cut without his permission
- $100,000 – scale house fraud
- $50,000 – scale house fraud
It is worth noting that only 20% of cases are actual theft of wood. More noteworthy, 75% of cases are creating or altering documents, primarily scale house fraud but also including embezzlement, billing schemes, etc.
Response of the Industry? Mitigation Efforts are Increasing
The use of targeted anti-fraud controls has increased over the last decade. These controls include formal anti-fraud policies, fraud training for employees and managers/executives and hotlines. These anti-fraud controls have resulted in lower fraud losses and early detection.
Preventive efforts remain the best place to put efforts and dollars.
Once a case is identified, the investigation and prosecution become very expensive. This has led many companies to forgo pursuing prosecutions and settling for terminating employment or contracts to stop the losses without attempting to recover them. This may be a contributing factor in the failure of background checks picking up fraudsters. There simply is no record.