Company financial controller milks NZ$39.6m through electronic direct debit kiting scheme over 10 months

The Bank of New Zealand (BNZ) lost almost NZ$780,300 through an electronic direct debit kiting scheme whose perpetrator siphoned off NZ$39.6 million over 10 months, the Serious Fraud Office (SFO) says.

The SFO says Steven John Roberts, a director and the financial controller of The Hub Business Services Limited, pleaded guilty in the District Court at Wellington yesterday to five charges brought by the SFO of accessing a computer for a dishonest purpose. Roberts was remanded on bail for sentencing on June 24. Under the Crimes Act, Roberts potentially faces up to seven years in prison.

Roberts used a direct debit facility to take funds from five bank accounts, skimming a portion of the money for the benefit of The Hub by way of  ‘kiting’.

"Over 10 months, Roberts dishonestly obtained $NZ39,638,815.34," the SFO says. "However, the direct debits for the greater part of the amount taken each day were dishonoured and reversed. Subsequent dishonest transfers of a greater value were then made to cover the default of the original direct debits. The loss ultimately suffered by the BNZ was $780,288.42."

The SFO says that in order to receive direct debit payments from customers  The Hub agreed a facility with the BNZ that allowed the firm, a re-seller of essential business services to small companies at a cheaper rate than they could obtain themselves, to debit monthly bills directly from an account nominated by a customer.

ASB and Westpac accounts used

Roberts’ offending, via an electronic direct debit kiting scheme, involved processing apparently genuine transactions and direct debiting five different bank accounts at the ASB and Westpac. These direct debits resulted in funds being deposited into The Hub account at the BNZ. But, because there wasn't enough money in the ASB and Westpac accounts, the direct debits dishonoured 24 hours later.

"During the intervening period the transactions gave the impression that The Hub account had a positive cash position and enabled payments to The Hub’s creditors to occur from the BNZ account," says the SFO.

"Contrary to the understood purpose behind establishing the direct debit facility, none of the direct debits generated by Mr Roberts in this way were connected to the payment of bills related to the provision of services by The Hub. In order for this process to succeed, a second set of direct debits needed to be processed before the first set were dishonoured to ensure there were sufficient funds to cover the first dishonoured direct debits."

This started a pattern of continual direct debits, creditor payments and dishonours that could only be broken when The Hub earned sufficient genuine income to cover the losses rather than being covered up by ever increasing direct debits. The Hub’s business was not successful and this direct debit cycle finally crashed on 18 June 2009, when Roberts neglected to process a set of direct debits. This resulted in a sudden unauthorised overdraft at the BNZ account of The Hub which alerted BNZ to the scheme."

'It won't happen again'

Owen Leoffellechner, BNZ's national manager for security and fraud, told interest.co.nz via a response to questions emailed through by a bank spokeswoman, that the Roberts kiting case was unlikely to be repeated.

"Fraud is a constant challenge because of it's dynamic nature,"  Leoffellechner said. "We work in an environment where we have to balance risk requirements with functional customer experience."

"This kiting case is highly unlikely to be ever repeated because we have adapted and refined our reporting systems around dishonours resulting from Automatic Payments and Direct Debit transactions," Leoffellechner added without detailing the adaption and refining that had been done.

SFO head Adam Feeley says the case illustrates the "endless varieties" of fraud businesses face on a daily basis.

“While there has understandably been a focus on finance companies in recent times, fraud occurs everywhere in business and it constantly transforms itself as criminals seek to stay one step ahead of law enforcement agencies,” Feeley says.

A priority for the SFO this year is to take a "more active role" in prevention and early detection of fraud.

Read the SFO's statement below:

Steven John Roberts yesterday pleaded guilty in the District Court at Wellington to five charges brought by the Serious Fraud Office of accessing a computer for a dishonest purpose.

Roberts, a director of The Hub Business Services Limited (The Hub), took advantage of a direct debit facility provided by the Bank of New Zealand, which allowed The Hub to direct debit customer accounts for amounts owing in return for using The Hub’s services.

Roberts used the direct debit facility to dishonestly draw funds from five accounts and skimmed a portion of those funds for the benefit of The Hub by way of a scam commonly known as ‘kiting’.

Over 10 months, Roberts dishonestly obtained $39,638,815.34. However, the direct debits for the greater part of the amount taken each day were dishonoured and reversed. Subsequent dishonest transfers of a greater value were then made to cover the default of the original direct debits.

The loss ultimately suffered by the BNZ was $780,288.42. Roberts was remanded bail for sentencing on 24 June 2011.

SFO Chief Executive, Adam Feeley, said the case illustrated the endless varieties of fraud that businesses faced on a daily basis.

“While there has understandably been a focus on finance companies in recent times, fraud occurs everywhere in business and it constantly transforms itself as criminals seek to stay one step ahead of law enforcement agencies.”

Mr Feeley said one of SFO’s priorities for the year was to take a more active role in prevention and early detection of fraud.

“The collective knowledge and resources of government agencies and the private sector will have a far greater impact on fraud than we could hope to achieve on our own.”

Mr Feeley said that recent Police secondments into the SFO was one example of a number of ways in which SFO would be working more closely with agencies such as the Police and Financial Markets Authority in the coming year.

Note to editors

1. Case summary:

Steven John Roberts is one of two directors of The Hub Business Services Limited (The Hub). The Hub’s core business is the “re-selling” of essential business services, such as telecommunication services, to small businesses at a cheaper rate than could be negotiated by the small business itself. Mr Roberts was the Financial Controller and responsible for all of the company’s finances.

In order to receive payment from customers by way of direct debit The Hub agreed a facility with the Bank of New Zealand that allowed The Hub to debit monthly bills directly from an account nominated by the customer.

Mr Roberts’ offending involved an electronic direct debit kiting scheme. This involved processing apparently genuine transactions and direct debiting five different bank accounts at the ASB and Westpac. These direct debits resulted in funds being deposited into The Hub account at the BNZ. However, as there were insufficient funds at the ASB and Westpac accounts, the direct debits dishonoured 24 hours later.

During the intervening period the transactions gave the impression that The Hub account had a positive cash position and enabled payments to The Hub’s creditors to occur from the BNZ account.

Contrary to the understood purpose behind establishing the direct debit facility, none of the direct debits generated by Mr Roberts in this way were connected to the payment of bills related to the provision of services by The Hub. In order for this process to succeed, a second set of direct debits needed to be processed before the first set were dishonoured to ensure there were sufficient funds to cover the first dishonoured direct debits.

This started a pattern of continual direct debits, creditor payments and dishonours that could only be broken when The Hub earned sufficient genuine income to cover the losses rather than being covered up by ever increasing direct debits. The Hub’s business was not successful and this direct debit cycle finally crashed on 18 June 2009, when Roberts neglected to process a set of direct debits. This resulted in a sudden unauthorised overdraft at the BNZ account of The Hub which alerted BNZ to the scheme.

2. Offence:

Crimes Act 1961, s249: Accessing computer system for dishonest purpose (1) Every one is liable to imprisonment for a term not exceeding 7 years who, directly or indirectly, accesses any computer system and thereby, dishonestly or by deception, and without claim of right,- (a) obtains any property, privilege, service, pecuniary advantage, benefit, or valuable consideration; or (b) causes loss to any other person.

(2) Every one is liable to imprisonment for a term not exceeding 5 years who, directly or indirectly, accesses any computer system with intent, dishonestly or by deception, and without claim of right,— (a) to obtain any property, privilege, service, pecuniary advantage, benefit, or valuable consideration; or (b) to cause loss to any other person.

(Update adds comments from Owen Leoffellechner).