FEATURES

Fraud Alert!

Is Your Aviation Operation at Risk?

BY MIKE BRODSKY & AMY EDWARDS Deloitte Financial Advisory Services LLP Y mbrodsky@deloitte.com / aaedwards@deloitte.com ou’ve invested anywhere from $3 million to $90 million in your business jet, to ensure your travel safety and security. Add to that the annual costs of your flight department or management company, both fixed as well as direct operating costs including fuel, maintenance and repairs, safety/inspections, and onboard expenses such as food, beverage, and labor, and you are spending hundreds of thousands additional dollars.

In a $77 billion industry, the potential for fraud is high.

According to the Association of Certified Fraud Examiners (ACFE) 2020 Report to the Nationswww.acfe.com/report-to-the-nations/2020, the median fraud loss for organizations in the transportation industry was $150,000. Since fraud is a risk that can be reduced with close attention paid to those areas which are inherently more susceptible to theft, mitigating these risks is an important, yet sometimes overlooked, part of business aircraft ownership and operation.

Black’s Law Dictionary defines fraud as “a knowing misrepresentation of the truth or concealment of material fact to induce another to act to his or her detriment.” According to the ACFE, three specific factors typically enable individuals to commit fraud: pressure/ motivation, opportunity, and rationalization. ■ Pressure/Motivation can arise from the financial pressure both individuals and companies feel when they confront financial challenges and distress. As the economy continues to weaken, the incentive and likelihood of fraud increases. The National Business Aviation Association (NBAA) and other industry groups wrote to congressional leaders asking that business aviation companies be included in an aviation/airline bailout as a result of the financial uncertainty for the industry. Current financial circumstances illustrate examples of the potential pressure that could push unscrupulous individuals to commit fraud. ■ Opportunity can arise as a result of lack of supervision or oversight or the overriding of controls and processes. Smaller vendors with few employees might lack the capacity for a proper segregation of duties, which also may present an opportunity to commit fraud. ■ Rationalization for an individual to commit fraud against an owner/operator of, or investor in, a business jet could be as simple as envy. Some employees consistently serving high-net-worth individuals could rationalize their fraudulent acts as justifiable if they perceive the impact to be small relative to the owners’ wealth. Some fraud risk factors include: ■ Outsourcing your day-to-day operations to a management company. Services sourced by management companies include maintenance, fuel sourcing, inflight labor, and safety inspections. Lack of transparency between you and your management company can increase the risk of fraud.

■ Vendor relationships and kickback schemes between your flight department or management company and their vendors. Bidding fraud often includes price fixing and noncompetitive bids for contracts. ■ Since the aviation industry is highly regulated, a variety of inspections are performed regularly and permits required. The risk of bribery for such items is inherently high for permitting, licensing, and inspection services – and can put your travel safety at risk, too. ■ When dealing with expensive, high-quality aircraft parts, there is a potential risk of asset misappropriation including theft of materials and goods by employees, and subsequent reselling on “gray markets” for a profit.

What are the most common fraud schemes, their associated risks, and what are the potential controls your organization can implement to mitigate these risks?

Fraud Risk: Bribery/Corruption Scheme: Many state and local laws prohibit bribery of government officials with the majority of states prohibiting bribery between commercial entities. There is potential risk that certain unscrupulous agents or officials could be bribed by aircraft operators or their representatives in order to pass aircraft inspections or obtain licenses and permits. And vendors could provide kickbacks to flight department personnel or management companies to win contracts. What You Can Do: Ensure that you and/or your aircraft management company have controls in place, including anti-bribery and anti-corruption training and policies. These policies and procedures can help you determine that appropriate behaviors and/or activities are followed when interacting with a third party. If you fly internationally, be conscious of global bribery and corruption laws like the US’s Foreign Corrupt Practices Act (FCPA). Fraud Risk: Vendor Fraud Scheme: Types of fraud involving third-party vendors include fictitious or duplicate invoice payments and check tampering. Fictitious vendors also could be created to misappropriate your money. What You Can Do: Implement mitigation techniques. These include accounts payable/billing controls such as a three-way match among an invoice, purchase order, and receiving report. Conduct regular vendor audits and background checks of vendors and employees. Fraud Risk: Bidding Fraud/“Bid Rigging” Scheme: While bid rigging may take many different forms, typically it involves an agreement among bidders that predetermines the winning bidder and limits competition among vendors. When contracts are up for bidding, competitors might agree in advance who will submit the winning bid, thus colluding to fix the price – an illegal act that undermines the bidding process. What You Can Do: You can and should obtain numerous independent quotes for contracts, have price lists of previous contracts, and add audit clauses in contracts. By understanding current market rates with the industry for certain contracts, you can feel more confident that you are getting a fair price.

Fraud Risk: Asset Misappropriation

Scheme: There is a risk of theft of spare and ancillary parts for your aircraft, as well as food and beverage and other sundries purchased for you and your passengers. Additionally, employees could order larger quantities than actually required and resell these for their own profit. What You Can Do: Use direct supervision of employees, conduct employee and vendor background checks, perform periodic counts of higher-value spare and ancillary parts, and maintain detailed repair records to track the use of spare and ancillary parts.

According to the latest statistics from ARGUS International, May 2020 flight activity among individual flight departments and charter operators increased 84% from April 2020. The industry has more than adequate capacity to accommodate growth, and flight activity is expected to continue to recover and grow over the near term, according to aviation market intelligence provider JETNET. As a result of the recent events with COVID-19, you may be less likely to be price sensitive and more focused on safety and security while flying. Given this potential loss due to fraud and the potential growth of the bizav industry, it’s even more important now for you to focus on reducing your risk for fraud.

While it’s impossible to eliminate all potential risk, it is possible to mitigate wrongdoing with appropriate controls. By identifying the higher risks of potential fraud in business jet ownership, you can develop relevant internal controls to monitor, detect, and deter fraud, resulting in lower losses, increased profits, and protection of reputational risks. BAA The authors would like to thank Deloitte Risk & Financial Advisory consultant Lauren Dinges, Deloitte Financial Advisory Services LLP, for her contributions to this piece.

MIKE BRODSKY is a Deloitte Risk & Financial Advisory managing director in the forensic practice, Deloitte Financial Advisory Services LLP.

AMY EDWARDS is a Deloitte Risk & Financial Advisory senior manager in the forensic practice, Deloitte Financial Advisory Services LLP.