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«National Science Foundation Office of Inspector General March 22, 2007 NSF OIG-07-1-008 PKF Witt Mares 10304 Eaton Place, Suite 440 Fairfax, Virginia ...»

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Agencias Universales S.A.

Embezzlement Report

For the Period January 1, 2002 to June 30, 2003

National Science Foundation

Office of Inspector General

March 22, 2007

NSF OIG-07-1-008

PKF Witt Mares

10304 Eaton Place, Suite 440

Fairfax, Virginia 22030

Tel: (703) 385-8809

Fax: (703) 385-8890

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TABLE OF CONTENTS

Page Executive Summary Background …………………………………………………………………………. 4 Objectives, Scope and Methodology ……………………………………………….. 5 Summary of Findings ……………………….……………………………………… 5 Exit Conference……………………………………………………………………... 7 Review Report and Findings Independent Accountant’s Review Report ……………………………….………… 8 Findings …………………………………….…………………………………….… 9 Supplementary Information Attachment Attachment A – Response from Agencias Universales S.A. (AGUNSA) ……….… 16

EXECUTIVE SUMMARY

Agencias Universales S.A. Embezzlement Report For the Period January 1, 2002 to June 30, 2003

EXECUTIVE SUMMARY

National Science Foundation Office of the Inspector General 4201 Wilson Boulevard Arlington, Virginia 22230 Background Raytheon Polar Services Company (RPSC) notified the National Science Foundation (NSF) of a potentially fraudulent act committed by employees of its subcontractor Agencia Universales S.A.

(AGUNSA), which is responsible for performing NSF ship chandlering duties. Ship chandlering involves the dockside supply of food, fuel, and equipment to the Research Vessel (RV) Gould and RV Palmer at Punta Arenas, Chile. The AGUNSA subcontract is approximately XXXXXX annually and is expected to continue through Fiscal Year 2009. Although a Chilean company, AGUNSA, as a subcontractor on the NSF contract, is required to follow all applicable contract requirements in the Federal Acquisition Regulations (FAR).

AGUNSA is a Chilean company with annual sales of XXXXXXXX in the maritime port services sector in Latin America, including a total of 39 offices distributed in 10 countries: Perú, Ecuador, Colombia, Argentina, Paraguay, Venezuela, U.S.A. (Miami), Jamaica, Mexico and Chile.

AGUNSA is considered to be a large company in Chile, and has begun to play an important role in the international transport sector, providing such services as cargo handling, bunkering, tug services, serving as a logistics and stevedoring agent, and airport concessions. Overall, the Company employs approximately 1,200 people.

In 2003, two AGUNSA employees at the Punta Arenas office were charged and convicted in a Chilean court of embezzling funds using a vendor invoice lapping scheme through which payments intended for vendors were diverted. The employees delayed payments intended for AGUNSA vendors in order to divert the funds for their own private use. The two employees involved in the embezzlement were XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXX. The embezzlement was uncovered when vendors complained about late or missing payments.

Historically, the Company has been managed on the basis of trust, and there has been very low employee turnover. Most employees have been with the Company for many years. In fact, the two embezzlers had each been with the Company for over 15 years. According to Company officials, the embezzlement that took place in the Punta Arenas office has been a major source of embarrassment for AGUNSA.

In August 2004, the two employees were arrested, tried, and jailed. Both were released and are appealing their convictions. Their preliminary convictions were based on their confessions of guilt that they now seek to appeal. A new judge was assigned to the case, but a date for hearing the appeal has not been scheduled as of the date of this report.

-4Objectives, Scope, and Methodo1ogy The objectives of our review were to: 1) determine whether NSF and/or other federal funds were diverted for personal use by AGUNSA’s employees; 2) if a diversion occurred, identify the amount of funds and the time period involved; and 3) identify the events that allowed the embezzlement to occur without immediate detection. We also reviewed AGUNSA’s internal controls over its vendor payment process to identify weaknesses and recommend corrective actions to safeguard NSF funds for the remaining term of the subcontract.

We have reviewed the documentation surrounding the embezzlement (vendor invoice lapping scheme) by the two AGUNSA employees, for the period January 1, 2002 to June 30, 2003. We conducted our review at the AGUNSA main office located in Valparaiso, Chile and at the Punta Arenas office, in May 2005.





Our review was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and the standards applicable to attestation engagements contained in Government Auditing Standards (June 2003 revision), issued by the Comptroller General of the United States. A review is substantially less in scope than an examination, the objective of which would be to express an opinion on the extent of the embezzlement (lapping scheme) noted above. Accordingly, we do not express such an opinion. If we had performed additional procedures, other matters might have come to our attention that would have been reported to you.

To achieve the audit objectives, we applied selective and random sampling techniques to select and test AGUNSA’s RPSC invoices. We inspected AGUNSA’s financial management, human resources, and financial accounting system procedures. We also inspected the internal management and financial reports, financial audit reports, contract documentation, annual financial reports, job descriptions, and all other relevant background documentation that was made available to us, including the AGUNSA-commissioned XXXXXXXX CPA Firm Audit Report1 and the Chilean Police’s Economic Crime Unit Report.

Summary of Findings

We determined that funds intended for invoice payment had been diverted for personal use by two AGUNSA employees from the period January 1, 2002 to May 31, 2003. These invoices were later billed to RPSC and then NSF. AGUNSA had no other U.S. government contracts.

Our review of invoices for that period disclosed that the embezzlement loss to AGUNSA totaled approximately $157,0002 of which approximately $7,200 related to AGUNSA’s subcontract with RPSC. The two employees involved in the embezzlement were XXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX. We also identified that up to approximately $616,000 of potentially lapped (delayed) payments to vendors servicing the RPSC contract could have been part of the embezzlement scheme. AGUNSA, after the discovery of the embezzlement in May 2003, held itself accountable for the employees’ embezzlement and made payments to all affected parties, including $7,200 to the RPSC vendors.

AGUNSA hired the CPA firm of Guerra Raby to produce a report which outlined the extent of the embezzlement in terms of outstanding unpaid vendor invoices.

All monetary amounts identified in this report are stated in U.S. dollars unless otherwise indicated.

- 5In general, AGUNSA’s lack of management oversight, lack of internal control over the accounting and vendor payment process, failure to enforce its own policies and procedures, and noncompliance with the RPSC subcontract terms enabled the embezzlers to perpetrate the vendor invoice lapping scheme. Properly designed internal controls that are monitored and enforced could have prevented or allowed earlier detection of the embezzlement. See the NSF OIG Report No. OIG-07-1-009 titled Agencies Universales, S.A. Internal Control Report For the Period January 1, 2005 to May 15, 2005, for further discussion of AGUNSA’s internal controls and recommendations for corrective actions.

The following is a brief description of our findings surrounding the embezzlement.

1) AGUNSA Employees Embezzle Approximately $157,000, Including Approximately $7,200 of RPSC 3 Funds Approximately $157,000 was embezzled by two Punta Arenas XXXXXXXXXXXX, of which approximately $7,200 related to two vendors on the RPSC subcontract. Based on our discussions with AGUNSA management; review of court documents, accountant reports, and NSF materials, along with our review procedures, we concluded that an embezzlement (diversion of funds by use of a vendor invoice lapping scheme) was perpetrated by two employees in the Punta Arenas office of AGUNSA. The embezzlement was discovered in May 2003 after a vendor complained to the Office Manager at AGUNSA’s Punta Arenas office that old invoices were unpaid. AGUNSA paid the outstanding invoice amounts to the RPSC and other vendors at the time the embezzlement was discovered. Properly designed and enforced internal controls could have prevented or allowed for earlier detection of the embezzlement.

Lapping Scheme May Have Affected As Much As $616,000 of RPSC4 Funds 2) Based on the amount of invoice payments that were delayed during the 17 months prior to discovery of the embezzlement; May 2003, we estimate that as much as $616,000 of RPSC related funds may have been lapped or diverted, including the $7,200 actually embezzled and discovered at the end of the embezzlement period. These funds should have been used to make timely (within 30 days of recording the receipt of the invoice) payment of vendor invoices associated with the RPSC subcontract, as required by the FAR and the RPSC subcontract terms and conditions.

3) Lack of Internal Controls, Lack of Management Oversight, Lack of Enforcement of Corporate Policies, and Collusion Allowed the Embezzlement to Occur Without Being Readily Detected.

The vendor invoice lapping scheme perpetrated in the Punta Arenas office went undetected principally due to a lack of segregation of accounting duties, XXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX and AGUNSA’s lack of management oversight, failure to enforce its own policies and procedures in the vendor payment process, and noncompliance with the RPSC subcontract terms. In collusion Tracing funds to RPSC-related vendors was used to determine the amount of NSF or RPSC funds that were diverted.

The term “RPSC-related funds” is used to designate those funds which were to have been paid to AGUNSA vendors under the RPSC subcontract.

- 6with the XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XxxxxxxXXxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxXXXXXXXXXXxXXXxX xxxxxxxx also did not provide proper oversight in his role as the xxxxxxxxxxxxx in that xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx documentation supported each payment, accounting records were updated properly, or invoices were paid promptly in accordance with AGUNSA policies and procedures.

Specifically, the poor internal controls that allowed the embezzlement to occur included:

1) xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

2) the poor oversight of the xxxxxxxxxxxxxx over the xxxxxxxxxxxxxxx and xxxxxxx xxxxxxxxx

3) the failure to enforce the company policies that require that checks be restricted for deposit only;

4) the failure of the Punta Arenas Office to comply with company policy which requires the reconciliation of invoices, checks and accounting records; and,

5) the lack of timely payment of invoices. These weaknesses, coupled with collusion, allowed the two employees to embezzle funds, delay vendor payments, and manipulate accounting records.

To accompany this report that describes AGUNSA’s embezzlement, we have also prepared an internal control report that provides recommendations to improve the weaknesses in internal controls that allowed the embezzlement to occur. In addition, we identify the internal controls in AGUNSA’s vendor payment process that were put in place after the discovery of the embezzlement and after the vendor payment procedures were revised. That report identifies the weaknesses in internal controls that still exist, the controls that were subsequently in place but not adequately designed, and the controls that were adequately designed but not followed or enforced. See the NSF OIG Report No. OIG-07-1-009 titled Agencias Universales S.A. Internal Control Report For the Period January 1, 2005 to May 15, 2005.

For a complete discussion of the audit findings, refer to the Independent Accountant's Review Report on Agencias Universales SA Embezzlement.

Exit Conference We attended an onsite exit conference with AGUNSA in December 2005. xxxxxxxxxxxxxxx (PKF Witt Mares) met with xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx to present in detail, and obtain comment on, our preliminary findings. We were informed that they agreed with some of the findings and had various levels of disagreement with certain other findings and would like the opportunity to respond in writing.

We presented AGUNSA with a draft report on March 2nd, 2007 to which they responded in writing on March 15th, 2007. AGUNSA’s response dated March 15th, 2007, indicated that, in general, they agreed with the findings in this report. AGUNSA's response has been included in its entirety in Attachment A.

–  –  –

National Science Foundation Office of the Inspector General 4201 Wilson Boulevard Arlington, Virginia 22230 To the National Science Foundation Office of the Inspector General We have reviewed the documentation surrounding the embezzlement (lapping scheme) by two Agencias Universales S.A. (AGUNSA) employees for the period January 1, 2002 to June 30,



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