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Construction fraud in Canada—understand it, prevent it, detect it

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Construction fraud is pervasive From government projects to corporate developments to individual home builds, cases of fraudulent activity in the construction industry are abundant. In many cases, rather than the stereotype of construction companies defrauding individuals or the public, it is the companies themselves losing money to fraud perpetrated by employees, contractors, subcontractors and venture partners. These frauds include diverted funds, materials misuse, padded bills, charging for unperformed work, hidden cost overruns and more. In a recent global study, the Association of Certified Fraud Examiners (ACFE) ranked real estate and construction fraud as the second and third most costly frauds in terms of median loss, with billing fraud the number one scheme.1 In a similar study focused on Canada, the average loss for all fraud cases was higher than the global average, and this held true in construction, where it was $628,500.2 1 The Association of Certified Fraud Examiners. Report to the Nations on Occupational Fraud and Abuse: 2012 Global Fraud Study, p. 29-30. Accessed at http://www.acfe.com/ uploadedFiles/ACFE_Website/Content/rttn/2012-report-tonations.pdf on October 24, 2012. 2 The Association of Certified Fraud Examiners. Detecting Occupational Fraud in Canada: A Study of its Victims and Perpetrators, p.17. Accessed at http://www.acfe.com/ uploadedFiles/ACFE_Website/Content/documents/rttncanadian.pdf on October 24, 2012. 3 Construction numbers remain strong in Canada, particularly in Toronto where ���there are about 148 skyscrapers and highrises under construction, far more than any other city in North America,��� with ���400 planned developments marketing their condos across the Greater Toronto Area.���3 Given the investment dollars involved and the potential for loss on multiple fronts���from money to reputation to legal action���the industry needs to stand up and take action. For any businesses or individuals involved in residential or commercial construction���including construction firms, construction lawyers, real estate companies, property development companies, property management companies and real estate investors��� understanding the severity of the issue, the most common types of fraud schemes out there and what you can do to prevent and detect them within your business is critical. 3 Nicholas Johnson, the Globe and Mail. ���Toronto���s moving on up . . . and up.��� February 19, 2012. Accessed at http:// www.canada.com/news/Slain+mobster+exported+constru ction+fraud/5762200/story.html on October 24, 2012. This paper examines construction fraud in Canada and the factors that facilitate it. We also look at 10 common fraud schemes and provide practical advice on fighting them. The many faces of fraud: The family business Two sons purchase their father���s construction business without reviewing the current staff and suppliers, relying on their father���s previous decisions. Taking advantage of their inexperience, an individual in the procurement department sets up a fictitious supplier. Then he purchases raw materials through an approved supplier, only to sell those materials back to the construction company���through his fictitious supply company���at a significantly inflated cost.

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