PRINCIPLES OF FRAUD EXAMINATION

Chapter 4: Billing Schemes

Case Study: Rosemary Heinen

Case Narrative
Rosemary Heinen, allegedly with help from her husband Gerald, used her position of
employment at Starbucks to swindle almost $4 million from the Seattle-based coffee
company. She was hired at the Seattle headquarters of Starbucks as an applications
manager in the Information Technology and Business Systems division and initially had
authority to approve invoice payments in amounts of up to $5,000. That authority
increased within a few months.

Within a short amount of time, Mrs. Heinen created a shell corporation named RAD
Consulting Services, Inc. To complete the setup of the phony billing scheme, Mrs.
Heinen forged the signature of Michael Keneipp, a Starbucks vice president who was in
charge of vendor agreements, on a consulting agreement between Starbucks and RAD
Consulting, Inc. Once the consulting agreement was in Starbucks’ system, the Heinens
then began submitting phony billings from RAD to Starbucks for services that were never
rendered, which Mrs. Heinen then approved herself. Though she started with smaller
amounts, within 5 months Mrs. Heinen began to expand her activity by submitting
different invoices from RAD averaging a total of almost $100,000 a week.

Initially, payment checks were sent to RAD’s mail drop address, which just so happened
to be a few blocks down from the Heinen residence. However, as the fraud increased
Mrs. Heinen began picking up the checks in person, but for some reason this raised little
suspicion at the time. Later, her boss began to question the validity of RAD’s existence
and eventually told her not to allow anyone to employ RAD in the future (that is, no more
RAD invoices should be approved through his division).

However, her boss did not commence any other investigation and as a result Heinen
continued to furtively bill RAD services to other accounts for three more months. These
later invoices were billed to random dormant company projects or for
warehouse/distribution programs, including one in the amount of $533,805. This raised
the eyebrows of the different supervisors of those dormant projects and is how Mrs.
Heinen was eventually caught.

Supervisors began questioning Heinen about her interaction with different RAD
employees named on various invoices, but each time she responded by telling her
supervisors that they had “just missed them;” that the RAD employee was either just on
the phone or in the office moments before. Only later did the supervisors and officials
discovered that RAD Consulting was not licensed to do business in the state of
Washington, that they were not even listed in the yellow pages, that they had absolutely
no offices and only used a mail drop address located just down the street from the
Heinens’ residence. They ultimately learned that Rosemary Heinen approved
approximately 150 invoices from RAD at a total cost to Starbucks of about $3.75 million.
She was promptly fired and prosecuted.

This case study was contributed by Jacob Aguero. It is based on the January 2004 Seattle Weekly article
entitled “Wake up and smell the coffee”.
 PRINCIPLES OF FRAUD EXAMINATION

Chapter 4: Billing Schemes

Case Study: Rosemary Heinen

During her trial Heinen’s attorney offered evidence that she suffered from a number of
psychiatric disorders (acute depression, obsessive compulsive disorder and impulse
control disorder, among other things) which left her in a trance-like state that made her do
things over and over, and which led her to commit the billing scheme. It was
demonstrated that Heinen's pathological impulse to spend left her house so cluttered with
needlessly large amounts of random products stacked practically to the ceiling, (items
such toy dolls, unused exercise equipment, Avon merchandise, unread novels and unused
CD players) that there was scarcely room for her family to live. Despite this evidence,
King County Superior Court Judge Carol Schapira held that those disorders did not keep
Heinen from discerning right from wrong, and therefore they did not relieve her of
culpability for the crimes. Mrs. Heinen was sentenced to four years in prison and will be
ordered to pay restitution. Her husband was later acquitted after a lengthy investigation
led to inconclusive evidence about his role in the scheme.

Team A: Please analyze & explain the case background and related fraud schemes AND
identify fraud schemes specific to this case.

Team B: Please explain related prevention and detection measures AND recommend
measures effective in this case.
-implement the controls properly assuming they had them in their code of ethics already
-use data mining/ computer systems to analyze amounts, look across time how much rad
is billing compared to other vendors – called analytical review (want to do this per
vendor and compare each vendor to one another)
-ask who had requested and approved these invoices (why is she the only one who knows
rad and hired rad?)
-starbucks should look for shell company invoices (look for key red flags)
-have an anonymous reporting system if they are scared to retaliate (need a hotline)
because of the weird nature of her picking up the cheques in person
-have multi-level approval system for opening up a vendor since she only forged one
signature
-Before sending the first payment to vendors, check if the vendor is legitimate and is
licensed
-segregation of duties, she was authorized the approval of the invoices, she shouldn’t be
the one to hire the vendor, there should be a service request form filed in by someone
individually (who is requesting the service, who is approving the service, has the services
been rendered, or have the goods reached the warehouse- service completion report, then
the approval of pmt) before approving the invoice
-should have controls on dormant projects
-renewal of vendor approvals on a regular basis
-have more than one signature for invoices > 20K
-turn around time: the amount of time it takes to get the cash from the receivable : crooks
need cash;

This case study was contributed by Jacob Aguero. It is based on the January 2004 Seattle Weekly article
entitled “Wake up and smell the coffee”.