​The Spy and the Construction Scam​

Regulatory, financial, and corporate control failures contribute to an elaborate fraud.

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​A Canadian Superior Court judge has sentenced a former construction company executive and informant for the country's intelligence service to seven years in prison for perpetrating Ottawa's "biggest commercial fraud" through his now-bankrupt company, the Ottawa Citizen reports. According to prosecutors, Roland Eid hid payables from outside accountants that made ICI Construction appear to be profitable when it was actually losing money. Moreover, Eid shifted CAN$1.7 million in funds from ICI to a personal account in Lebanon, which had been held in trust to pay tradesmen and construction material suppliers. Soon after, Eid fled to Lebanon. In court testimony, Eid claimed his handlers at the Canadian Security and Intelligence Service (CSIS) had directed him to start ICI and encouraged him to use the proceeds from its construction contracts to gather intelligence against Hezbollah, which is linked to terrorism. ICI's 2011 bankruptcy had a cascading effect on Ottawa's construction industry and resulted in the company's financial backer filing for bankruptcy, itself.

Lessons Learned

This is a complex case in terms of the circumstances of the fraud, its perpetrator, and the various twists and turns of the court proceedings. However, from a fraud and audit perspective, the main lesson learned can be summarized with a venerable piece of advice: Follow the money trail. In that path, there were numerous regulatory, financial, and corporate control failures.

Fundamentally, Eid abused his CEO position at ICI Construction to deceive his co-workers and employees, suppliers, other contractors, and the Canadian government in order to move CAN$1.7 million from ICI's bank account to his personal account in Lebanon. Here, the list of missing or underused controls that might have detected or even prevented fraud include:

  • Strong financial controls within ICI, such as requiring board of directors approval or chief financial officer sign-off for such a significant money transfer. Controls include specific documentation of where the money would go, to whom, the related contractual arrangements, and evidence of any legal/regulatory approvals needed at the receiving end — in this case from the government of Lebanon. Auditors and accountants should have been vigilant and recommended measures to keep funds intact, or even frozen, that should have been held in trust to pay for wages and materials of ICI's ongoing projects (regulatory rules need to do this, too). A lack of transparency around the activities of a primary financier of ICI also was a factor. And fundamentally, a demand of proof from Eid's claim to have secured a housing project contract in Lebanon could have revealed much about his plot at an early stage. Also revealing would be proof of his claim to have sold ICI to the company's controller in order to justify keeping the CAN$1.7 million.

  • Clear contracting industry rules and monitoring — even if self-imposed — of potentially unusual international transactions. This includes the same kinds of documentation requirements mentioned above as well as requirements for regular, transparent financial reporting.

  • A regular review by financial lenders, insurance institutions, and their regulators of their controls over and risk assessments of potential loans to small construction companies. This would exercise a higher degree of caution and scrutiny in their decision-making.

  • Tighter government rules for the movement of money outside the country. In Canada, a federal financial-tracking organization, FINTRAC, scrutinizes international monetary transactions. However, FINTRAC focuses on money laundering and terrorist financing, along with cash transactions coming into Canada valued at more than CAN$10,000. There is a process for filing a suspicious transaction report, but it is voluntary and no one did so in this case. Lebanon does not have equivalent rules, and it does not have an extradition treaty with Canada.

 

In closing, while Eid's history as a CSIS informant played next to no role during the proceedings before the judge, there may be lessons for national security agencies and large departments that enter into a myriad of construction contracts. Although we may never know what exact role these organizations may have played in aiding Eid and ICI Construction in the pursuance of gathering intelligence on Hezbollah, this objective could have played a part in the awarding of construction contracts. In that sense, they unknowingly may have assisted Eid in his fraudulent aims. Those organizations should be vigilant in balancing national security interests with crime and fraud prevention interests, including through robust vetting of planned intelligence operations and those to be involved.

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Art Stewart
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About the Author

 

 

Art StewartArt Stewart<p>​Art Stewart is an independent management consultant with more than 35 years of experience in internal audit, financial management, performance measurement, governance, and strategic policy planning.​​​</p>https://iaonline.theiia.org/authors/Pages/Art-Stewart.aspx

 

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