Fraud_in_Airlines

FRAUDULENT ACTIVITIES IN AIRLINES Osman A. ÖZERTAŞ Inspector/Turkish Airlines oaozertas@thy.com ABSTARCT: Fraud is defined as “any action, which deprives a carrier of the reveneu to which it is entitled, undertaken without the carrier’s knowledge or consent.” by IATA (International Air Trasportation Association) and the cost of fraud to the commercial aviation industry is estimated around 1,5 billion USD every year. This estimation comes from IATA Fraud Prevention Group’s (FPSG) The Annual Fraud Loss Survey among airlines. Airline industry is a labor intensive service sector as much as capital intensive and mainly white collor workers are employed. In the industry computerized electronic systems are highly used. In order to produce an aviable seat for sales, there are many interconnected services gathered such as resevation, ticketing, operations, passenger traffic, handling of passenger, baggage and cargo, catering, maintenence (MRO), training, fuelling etc. While airlines render many of those services on their own, some of the services are outsourced. Besides some of those services are sold to other airlines. Such a complicated working enviroment and computerized electronic systems which are highly used in the industry attract fraudsters. Eventually fraud activities affect airlines’ financial statements directly or indirectly. Frauds may take place in revenue generating activities, expense accounts, ticketing, reservation activities, frequent flyer activities, cargo and baggage activities, E-ticketing, Maintenence, Repair and Overhaul (MRO) activities etc. In this study, at first main fraudulent activities in airlines will be explained briefly, then fraud activites in the airline industry will be examined briefly considering The Results of the Airlines Fraud Survey 2000 made by IATA and IAAIA (International Association of Airline Internal Auditors) I-INTRODUCTION It has been over a century since the first flight of Wright Brothers in Kitty Hawk. Since then commercial aviation has developed rapidly especially after World War II. Today 4 billion passengers, 1,6 billion of them international, and 78,7 million tons of cargo, (mail included) 42,7 million of them international, transported by air. It has become a business which sells nearly 400 million international scheduled tickets in a year, generating more than USD 100 billion in revenue. Airline industry operates in an enviroment in which states and international organisations such as IATA, ICAO (International Civil Aviation Organisation), FAA (Federal aviation authority), JAA (Joint Aviation Authority) and their laws, rules and regulations and service providers, many of them commercial, such as airport administrations, air traffic control managements, ground handling, MRO (Maintenance/Repair/Overhaul), catering, training, insurance companies, aircraft manufacturers and lessors etc. co-operate in harmony. Airline industry requires high investments (investment intensiove) and returns (profits) are low. The industry has a cyclical, / capital and labor intensive (highly unionized), / seasonal and complex sturcture. Because of the high competetion in the industry, airlines sturggle to cut costs. Therefore, the estimated value of 1,5 billion USD annualy arising from fraud is vital for the airline industry. II-FRAUD ACTIVITIES THAT MAY OCCUR IN AIRLINES: Airline staff, appointed agents, IATA sales agents, third parties such as passengers and purveyors may be involved in fraud activities in airlines. Below, fraud activities will be explained regardless of the fraudsters identity. A- Frauds In Reveneu Generating Activities: Airlines generate daily cash flows especially from passenger ticket and cargo sales through their own sales offices or appointed sales agents. The generated income should be deposited in to the bank account of the airline in a certain period of time. Main airline reveneu frauds are summarized below: 1- Embbezzlement: is the fraudulent appropritation by a person to his own use of property or money entrusted to that person’s care but owned by someone else. In this context, fraudulent airline staff may embezzle airline’s reveneu entrusted to himself. 2- Delayed acccount settlements or reveneu deposits (Late Banking): Reveneu or income, which should be in airline’s bank account in a ceratin period of time, may be kept undeposited in due date and that income or reveneu may be used by airline staff or agent’s own benefit. 3- Fare and commission irregularities: Airline staff or agents may apply lower fares which are invalid for intended itinerary. Incorrect commissions may be applied conciously by agents or airline staff. 4- Credit card abuses:  Chargebacks: Rejections of credit card holders because of fraud (stolen or cloned credit card usage) or lack of voucher and signature  Credit cards that belong to airline staff or agent: Airline staff or agent may collect ticket fee in cash from passengers but use his own credit card for the transaction and takes advantage of the cash amount until credit card’s settlement date. 5- Reducing the income: Airline staff or agent may reduce the reveneu by refunding fictitious tickets or voiding tickets which were actually sold. 6- Uncollected excess baggage fee: Some airline passengers may not desire to pay the amount for their excess baggage and fraudsters airline staff may not collect the amount partly or fully from passenger in exchange for something. 7- Sale not reported: Flown tickets may not be reported by agent or airline staff B- Frauds In Expense Accounts: Main fraud activities in expense accounts can be summarized: 1-Mischaracterized expenses: It is about introducing a non-business expense as a business expense such as taking friends or family to dinner and reporting it as business development, 2-Overstated expenses: It is about swelling up the amount of actual expenses and pocketing the difference, 3-Fictitious expenses: Submitting false documentation for reimbursement, 4-Multiple reimbursement: Copying invoices and submitting them for payment more than once, 5-Non-documented expenses: In some cases document con not be received for some expenses such as tips in the restaurants and that kind of personal expenses can be introduced as business development. C- Ticket and Ticketing Related Frauds 1- Ticket theft: Blank airline ticket stocks may be stolen from airlines or their agents and can be prepared aginst airline’s will 2- Utilization of counterfeit tickets: The fraudsters sell the counterfeit (or stolen) travel documents to unwitting air travellers in a low price and if the airline is able to detect the countfeit ticket, passenger is not accepted for the flight and the unwitting passenger is defrauded, if the airline is not able to detect the counterfeit ticket, the passenger could fly and the airline is defrauded. Consequently the usage of counterfeit (or stolen) airline ticket stock fraud is big business for criminals, whose success comes at the loss of the airlines. 3- Ticket tariff abuse: Is about that tickets are to evade some restrictive rules such as minimum stay or Sunday rules.  Back-to-back ticketing (cross ticketing): is a good example for ticket tariff abuse. Back-to-back ticketing is when a passenger purchases two discount fare round-trip tickets and uses them concurrently to avoid fare and ticketing restrictions associated with the discounted fare. This practice is considered illegal by airlines.  Eligibilty: Airlines issue some special and lower fares for youth/CHD/INF, seamen, ethnic, student.. some passengers, who are not eligible, try to take advantage of this lower fares. 4- Altering the coupons: TAT (Traditional Paper Ticket) are prepared manually and each airline ticket has “flight coupons”, “audit coupon” and “agent coupon” and the amount on the ticket should be same on each coupons, however the amount is altered on the coupons and higher amount is collected from passenger but paid lower amount to airline and the difference is pocketed by fraudsters. ( otherwise known as cardbarding) 5- Out of sequence coupon usage: According to IATA rules, tickets should be used according to its sequence, In same cases passengers is condoned using 2nd flight coupon before 1st coupon by airline staff. 6-Revalidation sticker usage abuse: In routine, stickers can be used for revalidating tickets, but in some cases airline staff or agent can revalidate an invalid ticket in order to get benefits. 7- Fraudulent use of tickets: Void, lost, exchanged or refunded tickets can be used and passenger may travel with that kind of documets. D- Cargo And Baggage Abuses: 1- Airway Bill (AWB) theft and forgery: In order to secure the cargo relases or to present to a bank to obtain letter of credit funds, airway bills can be stolen or created forged employing various methods. 2-Cargo theft: Cargoes can be stolen from airline’s warehouse 3-Stealing goods from baggages: Especially valuable goods can be stolen from baggages and airline indemnifies the passenger’s loss. 4-False baggage claims: The compensation system can be abused. Real claims should be distinguished from false claims. Some passengers make money by filing false claims E-Reservation and booking abuses: Airline staff or agent may benefit by making non-productive bookings that are shown below. Non-productive bookings are the expense of the airline: 1-Speculative and fictitious bookings: Speculative Bookings are made in an anticipation of sale where no definite passenger exist. Fictitious bookings are made for productivity purposes where no definite passenger exists.  Post departure bookings,  Questionable cancellations prior to the scheduled flight,  Bookings made with fake names,  Confirmed ticket issued for a not-confirmed booking.... Are considered speculative and fictitious bookings 4-Passive segments: non-active booking entered in the CRS that is originally hosted in the airline system 5-Duplicate bookings: Booking more than one reservation for the same passenger within one or more GDS 6-Ticketing time limits (TTL): Reservations for unticketed passengers can only be held for a limited time and if the ticket is not purchased within the agreed time limit, the reservation will be cancelled....... F-Frequent Flyer Program Abuses 1- Unauthorized mile usage: Miles earned from frequent flier program may be used against program member’s will 2- Award ticket abuse: Award tickets may be prepared against insufficent miles of program member by airline staff. G- E-Ticket Frauds: Usage of E-ticket brings advantages to the airlines and all frauds related to paper tickets (that is,. forgery, counterfeiting or reuse) will be eliminated. But fraudsters also adopt to new E-ticket enviroment. Number of E-ticket frauds have been identified such as travelling on cancelled E-ticket, refund of aged E-ticket... H- MRO (Maintenance, Repair and Overhaul) abuses: False and misleading statements regarding aircraft products, parts, and materials or theft of aircraft parts are main fraudulent activities. III-AIRLINE FRAUD SURVEY 2000 In order to asses the fraud risk and losses faced by airline industry around the world, surveys were initiated and conducted by the International Association of Airline Internal Auditors (IAAIA) in 1996 and 2000 For the purpose of the surveys, fraud is defined as “An intentional unlawful act falsehood, omission or deceit, which results in a loss, or risk of loss of any property, money or right.” In this section the fraud risk and losses faced by airline industry will be evaluated acording to the “Airline Fraud 2000 Survey”s results. Respondents of the survey are airlines from 5 continents and responding airlines differ in size, turnover and operating capabilities. About 1/3 of the respondent airlines confirmed that fraud is a serious problem, 21% consider fraud as a major problem. In 1996 62% of the interviewed airlines considered fraud as a major problem. ARINC, database in corporation with ARINC or in-house detecting systems are used by respondent airlines for detecting fraudulent tickets Internal Audit has major responsibilty in detecting, preventing and investigating fraud in airlines. The other responsible departments are security, accounting and revenue billing. About 1/3 of the airlines did experience management fraud in the last 12 months and about 50 % had other employee’s fraud. The average fraud loss is between 72 000 USD for manager and 416 000 USD for other employee’s fraud. The most frequent internal fraud incidents, which were experienced by the respondent airlines, are inventory theft on board stock, cargo theft, payroll fraud, expense account fraud, ticket theft, and inventory theft from group stock. The most frequent external fraud incidents are credit card fraud, counterfeit tickets, altering tickets after sale, tariff abuse, theft of cargo, ticket theft, fraudulent baggage claim The most common frequent flyer abuses, experienced by the respondent airlines are sale or transfer of frequent flyer points, travel agent abuse, allowing other people to use frequent flyer numbers, sale of free tickets, like employees add points to friends’ accounts. The most common cargo and aircraft item abuses are indicated as consignments from outside the properties, onboard aircraft theft ( duty free etc), cargo thefts, theft of aircraft parts from warehouse and other thefts and break-ins. Collusion between employees and third parties, poor internal controls at own airline, collusion between employees, inadequate computer systems, nature of business, poor internal control at travel agents, overriding of controls by management, poor firewall and IT controls, poor internal controls at other airlines are cited by airlines as fraud reasons. Immediate dismissal of employee, legal action for damage, confiscating tickets and stolen items, reporting to police agency, review by internal audit department, reporting stolen tickets to ARINC, equivalent database, insurance claims, review by security department, seeking restitution, confiscating all accumulated frequent fly er points, disallowing baggage claims, reporting to audit committee, keeping it quiet, reporting to IATA are indicated responses to fraud by airlines. Indicated review and improve internal control, increased focus of senior management on the problem, training airport personnel in fraud detection, reference checks on new employees, training agents in improved fraud prevention, training courses to employees in fraud prevention, use of automation to discern fraud, increased budget for internal audit department, increased budget for security department, whistle–blower program are indicated as steps to reduce fraud by respondent airlines. IV- CONCLUSION: The fraud cases in airline industry is not limited with the above explained. There may be more cases. Even though airlines has some tools for struggling fraud. It can be reduced but not totally eliminated, because of the size and complex structure of the industry. Fighting against fraud, which is estimated as 1,5 billion USD annualy, is vital for airlines which are struggling cost cutting in a highly competitive market. It is necessary that actors in the industry should combine their experiences, efforts, in fighting against fraud. In that context, IATA FPSG Fraud Prevention Steering Group) and IAAIA (International Association of Airline Internal Auditors) has an important role in making airline industry conscious of losses arising from fraud and constituting methods of detecting and eliminating froud risks. For these purposes, IATA FPSG and IAAIA orginise conferences annually. Airlines should join and be part of these kinds of activities. At the end of 2007, no airlines will be using standart airline tickets (TAT and ABT) and E ticket will substitute the standart airline ticket. E-tickets will bring some advantages to airlines such as reducing costs and improving customer services . Besides, since an E-ticket can not be lost, misplaced or stolen, fraud arising from paper ticket usage will be eliminated. Unfortunately, fraudsters are willing to benefit from weakness of E- ticket system. Inspection and Internal Audit departmets have important role in airlines in detecting, investigating and preveting fraud. Internal Audit’s function is not limited with fraud activities, auditors have also responsibility in detecting and disclosing corporate irregularities. Therefore these Inspection or internal audit deparments’ efforts should be supported by airline management. REFERENCES: http://www.airports.org/aci/aci/file/Press%20Releases/PR140306_2005_Prelim_Results.pdf http:/www.iata.org/workgroups/rpsg.htm Ahipaşaoğlu, H. Suavi; Arıkan, İrfan: Seyahat İşletmeleri Yönetimi ve Ulaştırma Sistemleri, Detay Yayıncılık, 2003 http://www.seiler.com/pdf/FiancialExpertFall2005.pdf IATA Fraud Prevention Steering Group (FPSG) Minutes 13rd, 14th, 15th, 16th Meetings International Association of Airline Internal Auditors (IAAIA) Fraud Survey 2000