Case Studies

Case Study 8 – Fraud Investigation on Logistics and Distribution Centre

Industry: Oil and Gas Refining and Distribution (Indian Ocean).

Client: Private limited company.

Objective: To identify the source of logistics losses ex- logistics centre.

Results:
The company had won the competitive bids during privatization of government assets on the island nation in the Indian Ocean in 2000. Their assets included a refinery on the coast and roughly 25% of the distribution network that was formerly owned by a government state owned company.

The directors and shareholders of the company suspected something was amiss with the annual losses on throughput/ transport of petroleum products from the logistics and storage facility to the distribution points. These were much higher than the industry average. The Internal Audit Director was asked to investigate.

During a major cyclone in the early 1990's much of the island's infrastructure had been damaged and was inoperative. This included the rail system which used to transport the petroleum products to the capital of the country. As a result transportation by road had commenced and grown rapidly, using old petroleum trucks imported from Europe, often of a sub standard nature and quality. The business was controlled mostly by a specific ethnic group whose family connections had assisted with the rapid development of road transport and logistics services.

The logistics centre from where trucks would collect the product for transportation was in a fairly bad state, due to effects from cyclones as well as continuous under investment over the years. As a result, there were no weigh bridges in operation to weigh the before and after loading weight of trucks. Similarly, no meters had been installed at the dispensing gantries to measure the quantity of product loaded. Instead, a system of calibration certificates was used, whereby each truck would be calibrated and a certificate officially issued by the state calibration authorities.

The process was that a truck would arrive at the Logistics center, a dip would be taken to ascertain whether the truck was fully empty, the truck would be filled and then a dip would be taken to ascertain the level of product in the compartments. Using the calibration certificates the volume of product in the truck would be calculated and noted on a delivery slip. At the other end of the trip in the capital, the calibration certificate would be produced for discharging and a similar calculation would be made to calculate the total off load, which would then be compared with a copy of the delivery note to work out the losses. These losses would then be apportioned to the four distribution companies on a pro rata basis.
In theory this sounded like the best option considering the absence of weigh stations and meters on load points and considering the calibration certificates were issued by a government calibration department and maintained on a two yearly basis when each truck had to be re calibrated independently.

The investigation was undertaken by observation, reviewing records including calibration certificates and interview with people involved with the transportation and logistics process. Fortunately, at a certain point in time both the logistics centre and the distribution facility had started to take copies of calibration certificates to put on file for each truck.
At the same time there were several reports of petroleum products being sold on the road from the logistics centre to distribution points in jerry cans at below market prices; A few police officers also visited me and reported on first hand observations of such practices.
As a result of on going investigations I finally found the cause of the losses. It became evident that many truck drivers had in fact two versions of calibration certificates with differences of up to 1,000 liters of product at the calibrated levels on the certificate. They would present one version with a higher level at the logistics centre and the second with a lower overall volume at the delivery point. They would siphon off the differences en route, by breaking the lead seals on the manhole covers on top of the truck, and then replace the seals themselves with counterfeit or original seals obtained on the black market. Another option often utilized was the use of an overflow pipe in one of the compartments which would be connected directly to the truck fuel compartment and would hence provide the trucks free fuel. Discussions with previous employees of the state owned company identified this practice had been going on since the early days when raid transport replaced rail transport after the damage caused by the cyclone.

I completed full calculations and obtained evidence going back years, including identifying the issuing agency for the fake calibration certificates and subsequently met with the truck company owners to recover losses going back up to 3 years. Most of these companies settled and some went into liquidation as a result. Other results of this investigation were:

Improved physical controls. The company commenced installing flow meters at loading bays at the Logistics centre and also invested in a weighbridge.

Improved site security. A new firm of security guards was engaged with specific scope of work to conduct gate checks on a random basis.

Introduction of new policies and procedures for logistics. I wrote and introduced a new set of policies and procedures to formally confirm requirements for the Logistics centre staff to observe loading and dispatch controls.

About USD 500,000 was recovered as a result of the 1 year long investigation and subsequent negotiations.

Lesson learnt:
Collusion can defeat even the best internal controls.

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