Saturday, September 1, 2012

Misplaced Trust in a Small Business

Regular subscribers to the Fraud Newsletter will have read adnauseum how the trust factor in a small business can be abused by the very same people who bask in the cozy atmosphere of a close knit group of employees where everyone gets along so well and nobody questions the morality, ethics and efficiency of those around them.  Here is another example of how abuse of trust has brought grief to a small Canadian business with strong ties to the community.
In a town some 27 miles (45kms) east of the Pacific Northwest city of Vancouver is a once thriving building supply store that was founded on trust.  Started towards the end of the second World War in a community recovering from the Great Depression, this business offered a service built around what was at that time the major industry of wood and lumber. In a Province with a wealth of lumber supplies and booming construction, the lumber yard filled a strong need. All was well for many years: the business changed hands, growing in size and thriving. In time the business was handed down from father to son and at the turn of this century a bookkeeper/accountant was hired on the basis of a recommendation from the retiring owner.  We will call this new employee Alfred to protect his real name. Alfred, a big guy in his mid 50s, soon welcomed the friendly atmosphere of his new employer and, unknown to his co-workers and more importantly the owner, he saw an opportunity to enjoy his expensive hobby of collecting old cars but at the expense of the building supply store!  You see the problem here is that Alfred had total access to the business bank accounts but with no oversight. The business also employed a lady whose job was to look after the payroll but all other financial controls were vested in Alfred.He worked there for almost ten years and towards the end of his employment he only came to work on odd days of the week and seemed to have a very casual attitude towards his duties.
An example of the sheer absurdity of what was going on at this business was the annual practice of ordering a turkey at Christmas time for each of the employees. A nice gesture from a good-spirited employer. But the quantities ordered from the supplier far exceeded the actual number of employees because Alfred made sure his family and friends were also looked after – he ordered ten extra birds and since he was in charge of looking after the books it was no problem to fix the books to cover the added cost.
Alfred’s scheme to pay for his expensive hobby was easy: he would cut a cheque drawn on the business account made out to Visa but instead of using the bank where the business accounts were held he likely chose his own bank where he had an existing relationship and was known to staff. Once there he instructed the Customer Service Representative to split the payment into two sums, one for the legitimate business credit card debt and the other to pay off his personal credit card balance. This became a regular practice as once he had succeeded and was unchallenged he had clearly found a safe way to perpetuate his fraud.
But the walls came tumbling down when the current owner hired a new manager and like all good new managers the first thing to do is look at the books. The new manager’s suspicions were already elevated because the turkey supplier called him and queried the sudden drop in orders and wondered how the business could have lost ten people off its payroll so quickly!  At first Alfred would not allow the new manager to inspect the books – a major red flag – but eventually relented and the embezzlement of thousands of dollars was uncovered. Questions were asked.  Many questions!  The manager asked the owner, the owner called his father and all were nonplussed by the news that their bookkeeper had abused their trust in him. Alfred was now running scared – he sold some of his prize collectible cars and remortgaged his home to free up money to repay what he had stolen.

As a side note, I have a personal interest in this story.  You see my step son-in-law worked for this business as a forklift operator. During Alfred’s shenanigans the business developed a not surprising cash flow problem and they had to cut back on wages and their diligent forklift operator had to take a drop in his hourly wage rate and later he was laid off as the cash crunch peaked. (He found new employment as a forklift operator with better pay so the story has a silver lining!)

This case raises several issues:

  • Alfred soon found a new job with a well-known automobile parts retailer and one wonders what background checks were made by his new employer – no right-minded employer would hire someone freshly caught stealing from his last place of employment
  • It is not unusual for a business to pay for personal credit card expenses even if they were not legitimately incurred as an employee of the business. Alfred’s bank would be aware of this and it is not surprising that no questions were asked with respect to Alfred’s personal credit card expenses being paid out of business funds despite the large sums involved
  • An employee protecting his fraudulent bookkeeping records from inspection is such a huge red flag it cannot be ignored and must be acted upon
  • Eventually this fraud would have been discovered through a diligent examination of the books but the casual enquiry from the turkey supplier to the new manager was the first major hint that something was awry but if someone had simply questioned the Christmas expenditures (this had been going on for years) earlier the damage would have been a lot less to the company
  • Blinded by trust and the family atmosphere at this business nobody questioned Alfred’s ability to maintain his expensive hobby on the meagre salary he earned
          Small business has to cast off the “blinkers” of trusting all employees and set up anti-fraud procedures – owners cannot afford not to look over the shoulders of those employees entrusted with using the business accounts responsibly – the longer there is no oversight or intervention, the attitude of the embezzler - “nobody will ever know” - will be emboldened and the risk of further more substantial fraud will be heightened.  Reliance on employees and blindly trusting them to perform their duties can be a hit-and-miss approach to running a business but employees need to know and understand that there are limitations to that trust and they should expect from time to time that their performance will be checked, not just for the specific purpose of preventing fraud, but as a constructive tool for improving the overall efficiency of the business. Anything short of that is sheer folly!
Jeff Burton, Detective
Author of The Burton Report 


Colorado Woman Sentenced for Embezzling $1 Million from PERA

Beth Ann Roybal

Beth Ann Roybal, 53, pleaded guilty in August to felony theft. A woman accused of stealing $1 million from the Colorado Public Employees' Retirement Association was sentenced Friday to 10 years in prison.
Denver Deputy District Attorney Kandace Gerdes argued for the maximum sentence of 12 years.

Read the story here: Yesenia Robles, The Denver Post

How Do You Know Who To Trust?

Each month, my articles are generally on businesses rather than individual fraud schemes.  My goal as a Certified Fraud Examiner has been to help reduce the risk of fraud in small businesses because let’s face it fraud is much less expensive to prevent than to detect.  As time progresses, new cases come into light which make me want to share more information on how a business or individual can protect their money.

I have recently finished an investigation that from the outside was a small business venture, but on the inside had the markings of a real estate Ponzi scheme that brought in unsuspecting investors to buy real estate in another country.  The outcome of this case is pending however the devastation and damage to the investor’s finances are catastrophic.


When we talk about Ponzi schemes, most people actually think of Bernie Madoff and not the guy who the scheme was actually named after “Charles Ponzi”.  Most people also put themselves on a different playing field and truly believe that they would never fall for a scam such as this, but honestly the actual victims felt that way as well.


Ponzi schemes have specific characteristics which are:
(Warning signs and characteristics from the
SEC’s website)

·        

  • Promise of a high return on investment with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  • Overly consistent returns. Investments tend to go up and down over time, especially those seeking high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.
  • Unregistered investments. Ponzi schemes typically involve investments that have not been registered with the SEC or with state regulators. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and their firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive and/or complex strategies. Avoiding investments you don’t understand or for which you can’t get complete information is a good rule of thumb.
  • Issues with paperwork. Ignore excuses regarding why you can’t review information about an investment in writing, and always read an investment’s prospectus or disclosure statement carefully before you invest. Also, account statement errors may be a sign that funds are not being invested as promised.
  • Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out your investment. Keep in mind that Ponzi scheme promoters sometimes encourage participants to “roll over” promised payments by offering even higher investment returns.
Most people who put large sums of money into an investment whether real estate or an investment broker do so based on trust.  Whether they know the person they are trusting with their money, or the person was referred to them, somewhere in the sales pitch they were so good at what they do, they gained the trust of the victim.  Once they have won that trust, the victim will believe what the scam artist tells them thinking their money is safe and yielding a high return.

Last week I went to the District Court in Fort Collins to sit in on a Ponzi case.  Outside the courtroom I met a couple who were there to watch this case so it could help them with their up and coming fraud trial.  For over an hour I listened to them explain to me how they planned their life out so they could retire and how they lost it all in a Ponzi scheme.  They reached their retirement years, had paid off their house, and saved enough so they could travel.  They didn’t owe any credit cards or have any car loans and thought they did it all correctly.  A few years prior, they met an investor through a family member.  This investor convinced them to deposit all of their retirement money in a local bank which in return would invest the money into a fund that had a decent ROI.  For the past few years they would receive statements from the bank showing where their money was invested and how much it was worth.  They had no idea that those statements were fabricated until the Colorado Attorney General contacted them.  That’s when they found out their life savings was gone.  Now in their late 60’s they both had to go back to work and are on the verge of losing their home – the one they paid off –  They also maxed all of their credit cards just to survive.  I do not have all of the facts for this case, only hearsay, but hearing this couple explain their story and the probability that it is true really makes you step back and think about who you can really trust.


So, how do you know who you can trust and who you can’t?  If a bank employee can fabricate false statements on a phony investment and the SEC can get annual notices for ten years from Certified Fraud Examiner Harry Markopolos that Madoff’s hedge fund was a Ponzi scheme and not do anything about it then due diligence is taking on a whole new meaning.


My best suggestion to anyone who was offered an investment opportunity and is really considering it - after you did your due diligence

“Never give away more than you can afford to live without”
Ponzi schemes seem to be on the rise so if you have friends or family members who are talking about an investment of a lifetime, make sure you put all of your red flags up and really make an honest assesment of who you are trusting with your money.

Julie A. Aydlott, CFE
Business Fraud Prevention, LLC



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Nevada Woman Sentenced For Embezzling $1 Million From Friend's Business (Nice friend!!)



Carolyn Sue Causey, known as "Super Sue," 62, of Sparks, Nevada, has been sentenced to 10 years in prison for embezzling nearly $1 million from  ERA Realty, owned by her friend, Pat Schweigert.  According to authorities, over a period of about 4 years, between 2007 and 2010, Causey siphoned the funds from the company by issuing fraudulent checks, doctoring accounting logs and creating bogus accounts and payments for her own benefit.  Causey reportedly stole the money to support a gambling addiction.  In addition to the prison time, Causey has been ordered to pay $479,364 in restitution. 

Read the story here and here.

When the Fraudster is a Family Member

Yes, February is the month of love and what better way to show how much family loves you than by sharing a few fraud "love" stories.  If you have family members working for your business or who is a partner in your business, it is a very fine line among obligation and a good business decision if you do not hire them rationally.  I am not saying that all family owned and operated businesses are doomed for failure, what I am saying is there is so much trust and obligation placed on family businesses that it makes any accusations on a family member more personal and damaging than if the accusation was on an unrelated employee.

Nothing hurts worse than when you find out your trusted family member whether a partner or an employee steals from you.  The overwhelming feeling of betrayal is magnified beyond comprehension.  Most business owners are blindly reluctant to require family members to follow the same protocol as a regular employee because the "family member" card always seems to trump all.  If you think for one second that circumstance would not cause a family member to betray your trust, think again. 

Just for argument sake, the related fraud story listed below in the fraud cases revolve around 28 year old Ariel Rivera.  She was the office manager at Christensen Audiology in Lincoln Nebraska.  She recently plead guilty to theft by deception for embezzling $136,000 by writing unauthorized checks.  The fraud lasted two years and unfortunately she only received probation.  One can only speculate that the sentence was light because Christensen Audiology just so happened to be her fathers business!  I imagine her dear old dad wanted to teach her a lesson without making her pay the ultimate price.  That is more than most family related fraud cases will charge against a family member.  I give the dad credit for all least filing charges, but the sentence was too light. 

Another fraud case revolves around a cabinet shop in California.  The owner decided to hire his brother who had cabinet experience as well as sales experience.  The owner made his brother an officer, which unfortunately gave the brother too much power with the shop employees who consistently did what they were told regardless if they felt uneasy about it.  During a one year period the cabinet shop started showing severe cash flow issues.  The sales were dropping, the payroll increased, the cost of goods went through the roof and the instead of showing a consistent 18% profit as in previous years, the cabinet shop was now showing a significant loss.  The biggest tell tale sign was the cost of goods which did not make any sense.  Against the owners family blinding judgment I told him that someone in the shop with authority had to be ordering materials for unrelated jobs.  After really evaluating who could be the culprit it was determined that my client’s brother was doing something he should not be doing.  After investigating, it was determined that the brother had been running a side business building cabinets out of the shop and having the corporation pay for all the labor and materials.  To make matters worse, these were jobs that belonged to the corporation so the brother would receive 100% payment for the jobs and the company was footing the bill to build them.  Adding insult to injury, the brother was also being paid a very substantial salary to manage and bring the work in.  I do not think you could pour anymore salt into this wound.  Unfortunately, the cabinet owner did not press charges against his brother which cost an estimated loss of $160,000 for that year.

To hire family or not to hire family, the big question of the day.  If you do, make sure your family members follow the same rules as any other employee or you will be setting a very poor tone at the top.  Your internal controls and fraud policy are going to be key and if all employees follow the same rules you will be able to keep peace of mind knowing that you will not be a victim of fraud, let alone a victim of fraud involving a family member. 

Julie A. Aydlott, CFE
Business Fraud Prevention, LLC


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Nebraska Woman Gets Probation After Embezzling $136K
Ariel Rivera, 28, of Lincoln, Nebraska has been sentenced to five years probation for embezzling $136,000 from Christensen Audiology & Hearing Aid Center where she had been employed as office manager and chief financial officer. Rivera is reportedly the daughter of Roy Christensen, the owner of the business. Rivera, who pleaded guilty to the charge of theft by deception, apparently wrote and forged unauthorized checks to herself from company accounts. Rivera was arrested last May. Her scheme spanned a two year period, from March 2008 to March 2010. Rivera has also been sued in civil court by the company to recover the monies she stole, which came to a grand total of totaled $136,797.67, which she has been ordered to repay. Read the story here, here and here.
Pretty light sentence, IMHO ...

The Cheque Clearing Trap - Don't Get Caught!

By Jeff Burton

Scams morph to keep up with the times because that’s the nature of the beast. Fraudsters adapt to the latest trends and craft schemes built around them to draw in unsophisticated victims. So it was a surprise to read on the Chief Officers Network that there has been a rebirth of an old scam – become an agent for an international business – aimed at business people and private individuals who are looking to make a living or boost income. The only reason old scams are resurrected is because they work and it is worth the time and effort of “fraud engineers” to run a fraud flag up a pole and sit back to see who will salute it!


As you will see from the quoted article there are several criminal aspects to the resurgence of this scam but one particular area deserves special attention because it also encompasses the Nigerian Overpayment Scam and that concerns the process of depositing cheques and the wait time before those funds can be accessed.

In the better known Nigerian Overpayment Scam a buyer of an advertised item for sale sends the seller a cheque for more than the agreed purchase price and tries to persuade the seller to wire transfer the difference back to the buyer. In the meantime the buyers cheque gets deposited and after the receiving financial institution removed its “hold” the depositor takes this as meaning the cheque is good, which it is not, and draws upon the funds created by the cheque.
Here are some cold hard facts that should help recipients of these cheques avoid being embroiled in a fraud and losing money:
    • When a bank/credit union removes a “hold” on a cheque that does NOT mean the cheque is legitimate – the length of a hold – often governed by cheque clearing agency rules – varies from institution to institution and is a risk management tool that balances the need for protecting the bank against fraud and avoiding unnecessarily hampering account holders, especially those of businesses, from accessing their funds

  • Cheques that originate from overseas especially take weeks or months to clear but no matter how long it takes they will come back declared counterfeit
  • No matter how much pressure victims get from the sender of the cheques to deposit them immediately and draw upon those funds quickly, victims should simply wait it out until the cheque has cleared before they can take the next steps
  • Failure to recognize the difference between a “hold” and a return from the clearing can result in loss of funds (the face value of the cheque and the money sent back to the originator of the cheque), hassles with your bank and a potential criminal investigation involving a counterfeit item you have negotiated
Many of these job offers and solicitations to make money by becoming an agent for an overseas “marketing” business are impressive and well scripted but those considering getting involved need to look beyond the sound of easy money and educate themselves about these pitfalls. Failure to recognize the red flags on the surface can draw well meaning victims into cheque fraud, money-laundering and other potential criminal offences not to speak of a pile of stress coping with the consequences
Jeff Burton
Retired Detective, Vancouver Police Department
Burton Report
http://www.burton-report.com/

Small Business Still Ranks Highest in Occupational Fraud Frequency

I don’t know what is more exciting, tuning into a great episode of American Greed, or getting the ACFE’s report to the nation on occupational fraud. I guess you really need to have a love for accounting and financial crimes to understand, and if you do you know what I am talking about. Well, the ACFE’s 2012 Report to the Nation is out and once again, the small business is left in the dust. This updated statistic shows that small businesses with less than 100 employees continue to rank the highest in occupational fraud frequency at 31.8% compared to larger companies. On average, the small business has lost $147,000 per fraud occurrence and continues to have the lowest prevention methods including external or internal audits, internal controls and segregation of duty.
Two months ago I was contacted by the President of the ACFE and asked if I would be interested in speaking at their events. Well, the flattery was off the charts and of course I was more than honored to be involved. Though a little concerned as my area is small business and not the publicized excitement of large corporations or government fraud, but it is something that really needs to be brought to the forefront. Even with the updated statistics from the ACFE, it is painfully obvious that small businesses continue to suffer the highest frequency of fraud and now at the end of this month, I get a chance to talk about the realities and devastation to the little guys in a Webinar - Neglected: Saving the Small Business Fraud Occupational Fraud which is available for 12 months on the ACFE website.

According to the ACFE’s study – in which I was happy to be able to include a few of my own case studies into these numbers –
  • The average of all combined fraud schemes lasted about 24 months before being detected
  • A "TIP" was still the number one detection method and the source of the tip was from an employee
  • The number one fraud scheme was a billing scheme and rose 10% in small business from the 2010 ACFE study
  • Mining, Real Estate and Construction ranked highest in the average fraud loss
  • The duration of fraud before it was detected was cut in half when the victim organization had anti-fraud controls in place
  • Men seem to commit fraud more often ranking 65% compare to woman at 35%
  • The men also seem to have stolen more as well
  • A male Owner/Executive stole an average of $699,000
  • The average age of the perpetrator was between 41-45
  • The average length of time working for the organization was 1-5 years
  • The top two behavioral warning signs were living beyond their means and financial problems.
  • 65% of cases studied were referred to law enforcement
  • 19% of the cases were denied prosecution
  • 48.7% of the victim organizations will never see a dime in restitution
Time and time again, the small business continues to rank highest in fraud frequency. Over the past six ACFE Reports spanning from 2002 to 2012, the Small Business has had a combined average of 17% more in fraud frequency compared to larger companies. It is time to get the small business more aware and educated on how to protect their business from occupational fraud.

Julie A. Aydlott, CFE
970-776-8395

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Virginia Radio Personality & Suicide Victim Suspected In $500K Embezzlement

Paul Draisey, of Middleburg, Virginia, who comitted suicide last month at the age of 55, is suspected of embezzling nearly $500,000 from the Middleburg Volunteer Fire Department, for which he was the treasurer and his son was the president.  Draisey was also known as the "Voice of Loudoun County," and a popular radio personality.  Draisey died from a self-inflicted gunshot wound apparently after learning that an investigation was underway into his alleged embezzlement.  Draisey served as treasurer for about 3 years. 

Developing...


Read the story
here, here and here.