Solarstar is a solar panel company with annual revenue of $4 billion and a rapidly growing promoter program. Its commissioned sales representatives were encouraged to sign up small businesses and sole practitioners as promoters. Promoters distributed company designed and authorized literature (a one-page description of Solarstar's products and services) to potential customers and clients, who would call a dedicated phone number on the flyer and use a unique code associated with the promoter to obtain a quote. If a purchase was made, the promoter got a referral fee and the sales representative received a commission.
The promoter program was growing fast, and field management was ecstatic as it was thought to be opening a new sales channel. One afternoon, one of the more successful promotors contacted a Solarstar online moderator with a request to be assigned to a new sales representative. The promoter alleged to be a 17-year-old girl, which caught the moderator's attention. Suspicions were raised and the transcript of the chat was sent to Solarstar's forensic audit manager, Robert Schull. After reviewing the transcript, Schull was determined to find out how a 17-year-old girl could have signed up as a promoter, let alone become one of the more successful promoters.
Schull first wanted to understand how the promoter program worked. He learned that it was outsourced to King Enterprises (KE), a small business run out of a strip mall in New Jersey. KE maintained a website that advertised the program and recruited potential promoters. The website had an online chat capability (that the alleged 17-year-old engaged) where current and potential promoters could ask questions or get help resolving concerns. Every week, Solarstar bulk paid KE for all closed promoter sales. KE then facilitated payment to the promoters. KE also was responsible for submitting 1099s to the U.S. Internal Revenue Service (IRS) and transferring funds to state agencies in the event a promoter did not cash the referral check timely.
Initially, Schull focused on the promoter registration process. He went to KE's website and signed up as a promoter by entering his name, address, phone number, and email address. Schull waited a few hours and received notification that he was now a registered promoter. Upon inquiry, he discovered there was no validation process to confirm the identity of the individuals registering as promoters. A review of the promoter database revealed names that were, in fact, companies. For example, multiple promoters alleged to be Comcast, Disney, Dominos, or Time Warner Cable. KE only required a Social Security number if the promoter exceeded $600 in referral commissions, which is the minimum requirement established by the IRS for submitting Form 1099.
Schull interviewed Mary St. Croix, the sales representative associated with the 17-year-old girl. She admitted that the promoter was her ex-boyfriend and not a 17-year-old girl. Allegedly, the ex-boyfriend was a married undocumented immigrant (purportedly with a criminal background) who used an alias and his son's Social Security number. He cashed his promoter referral checks at the local gas station. St. Croix provided a copy of a police report attesting to his violent nature, as well as the relationship. Her employment was soon terminated and the promoter was removed from the program.
- Promoter program terms and conditions should be reviewed to determine the criteria for becoming a promoter and how the employee and promoter earn a referral fee. Determine how the organization validates the authenticity of the promoter and the sale.
- Contracts with vendors should be reviewed to verify that they have a right-to-audit clause. From time to time, the right-to-audit clause should be executed. An effective audit technique is to compare an employee database to the vendor database by name, address, and phone number. Phone numbers are particularly effective in finding duplicates.
- Require all employees with the potential to interact with vendors to complete a conflict of interest form. Prompt employees to update their conflict of interest form annually. But remember, conflict of interest forms are useless unless someone reviews the disclosure of conflicts and follows up with the employees.
- Pay promoters with gift cards instead of cash. This should help deter individuals from trying to turn your promoter program into a small business.
As the contract between Solarstar and KE was about to expire, Schull next examined the program, itself. In interviews with employees who worked closely with KE, one employee alleged KE was keeping the funds from uncashed checks for promoters rather than transferring the checks to the appropriate state authorities. Schull's request to audit KE's books was rejected on the grounds that there was no right-to-audit clause in the existing contract, which was confirmed after review.
Schull next turned his attention to the promoter network. Based on the initial investigation, he believed that if sales representatives could work with a fabricated promoter, then they must be able to sign up a spouse, relative, or co-worker. He used data analytics to compare employee names, addresses, and phone numbers to the promoter database. Much to his surprise, dozens of employee names were in the database. Some employees set up their spouses, fiancés, brothers, and sisters.
One entrepreneurial employee maximized the program's potential by signing up his not-for-profit company and his church, and then signed up subpromoters (his relatives) under the church. A promoter could sign up a subpromoter and generate a sales commission for the sales representative and a referral fee for the promoter and the subpromoter, who in this case were all the same person. Essentially, the sales representative created a Ponzi scheme generating commissions and referral fees for himself, his company, his church, and his family.
Joe Smith, Solarstar's finance director, requested a meeting with Schull when he learned that revenue from customers signing up through the promoter program had slowed considerably. At the rate it was going, Smith calculated that the program would lose approximately $7 million each year. Smith's analysis of sales and Schull's field investigations revealed that dozens of sales were being made to customers living in low-income apartment complexes and trailer parks by unscrupulous sales representatives and their promoter friends. In some cases, sales representatives signed up promoters who were unemployed and had them knocking on doors or placing flyers on cars in mall parking lots.
Schull and Smith took their findings to management. Ted Spicoli, the vice president of sales and in charge of the loyalty program, refused to believe that the fraud in the program was as prevalent or widespread as Schull and Smith stated. He challenged Schull's findings and Smith's analysis. During one contentious meeting, he even challenged Smith's ability to perform basic math. Months passed, and more money was lost until finally the program was shut down. KE's contract was not renewed, and Spicoli was fired.
The promoter program was redesigned and launched as a friends and family program encouraging existing customers in good standing to refer a sale. Compensation was changed so sales representatives received a commission and the existing and new customer would split the referral fee, which was no longer paid in cash, but in gift cards. After six months, the new program was generating good customer sales without a single incident of fraud detected.