Fraud Case Exposes Weakness in KVH’s Financial Controls

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PARIS — Maritime satellite communications services and terminal provider KVH Industries says it discovered in March a fraud on the part of the senior accountant at its Danish subsidiary that lasted at least three years and cost the company between $118,00 and $250,000.

Discovery of the activity, which apparently involved only one person, highlighted sufficiently large gaps in KVH’s internal financial controls that the company delayed the release of its year-end accounts to the U.S. Securities and Exchange Commission (SEC).

Middletown, R.I.-based KVH, whose maritime satellite terminals that operate in Ku-, Ka- and C-band frequencies have propelled the company’s growth recently, says it has since implemented additional controls to remedy the situation, with a special focus on oversight of non-U.S. affiliates’ accounting.

The company refers to its financial-controls gaps as a “material weakness” not because of the size of the fraud, but because the controls were so weak that a much larger sum of money might have been misappropriated without triggering alarm, KVH said in its now-released year-end filing with the SEC.

KVH says the employee in question, who has since been dismissed, organized a scheme that included “fraudulent wire transfers to a personal bank account, fraudulent documentation, forged signatures and use of a corporate credit card for personal expenses.”

As recounted by KVH, the damage could have been much worse insofar as the employee was able to override access controls for the company’s banking security devices and PIN codes to make unauthorized wire transfers of cash. Adding to the problem was insufficient oversight of spending by KVH’s country manager.

KVH’s Kokkedal, Denmark, offices manage KVH’s business in Europe, the Middle East and Africa.

The company says it is studying whether any of the losses are recoverable under the company’s insurance policies. It does not say whether it is taking legal action against the ex-employee in Danish courts.

KVH did not respond to a request for comment April 17.

KVH, which uses technology from ViaSat of Carlsbad, Calif., has made a splash in the maritime satellite communications market in the past couple of years by introducing small antennas for telephone and broadband communications in C-, Ku- and Ka-band.

The company has purchased additional satellite capacity to extend the reach of its services to the world’s oceans. In 2012 it added a C-band overlay to its existing Ku-band coverage by signing a five-year lease for three C-band transponders on satellites operated by Intelsat of Luxembourg and Washington. KVH spent $2.7 million to purchase three hubs to accommodate the new C-band service and said the total cost of the transponder lease agreement and associated teleport services was $9.5 million.

KVH said its C-band overlay now covers the region from 75 degrees north latitude to 70 degrees south latitude. The satellites are in geostationary orbit over the equator and do not cover the poles.

While KVH sells equipment compatible with the L-band mobile satellite services provided by Inmarsat of London and Iridium Communications, its growth has been in what it calls its mini-VSAT Broadband product line. The company also provides shipboard antennas that receive Ka-band television transmissions from U.S. satellite television broadcaster DirecTV of Los Angeles.

In 2012, KVH’s mini-VSAT, or very small aperture terminals, were selling at a rate of 250 ships per quarter, or 1,000 per year, a rate that KVH Chief Executive Martin Kits van Heyningen said should climb to 1,200 ships in 2013.

KVH has said that it will attempt to broaden its customer base to military customers operating in the high seas and to smaller ships including yachts for which the small size of the KVH product should be an advantage.

In its SEC filing, KVH says it knows of no other competitor that is commercializing terminals as small as the KVH product line, which depending on the customer need is capable of operating in dual-frequency mode — migrating between Ku- and Ka-band, or C- and Ku-band — with no change of hardware.

KVH said a new SEC regulation requires that companies whose products regularly use certain minerals — among them tin, tantalum, tungsten and gold — examine their supply chains to be able to affirm that none is a “conflict mineral” coming from the Democratic Republic of Congo or any of DRC’s neighbors.

“Because our supply chain is complex, the due diligence procedures that we implement may not enable us to ascertain the origins of any conflict minerals that we use,” KVH says in the SEC filing. “We may also face difficulties in satisfying customers who may require that our products be certified as DRC conflict-free.”