The City of Dixon gets a $40 million settlement from the accountants

The City of Dixon gets a $40 million settlement from the accountants who missed the most outrageous fraud scheme to last almost 30 years in the City of Dixon with the notorious Rita Crundwell and her $57 million dollar embezzlement scheme.

***Help Prevent Fraud by sharing, liking and commenting on this case!***

Rita Crundwell Fraud Scheme

Small Business Fraud Prevention Tool reported in Fox News

My new internal control desktop application called Vitalics was written about in Fox News Small Business and Business News Daily!  I am very proud! 

Affinity Scams Are On The Rise!

What exactly is an affinity scheme?  Affinity schemes are investment scams that prey upon members of identifiable groups. The group leaders are in a very high regard with the kinship or members. Whether that kinship comes from religious groups (churches have a high affinity fraud problem), ethnic groups, elderly groups, minority groups and professional groups. The group leader has built a special trust relationship with the person(s) who refers them.

The victims in an affinity fraud scheme are referred into the group by a very trusting person.  Whether that person is a relative, a close friend, a co-worker or even the group leader.  These group are very tight nit in structure and don't let new members in lightly.  If they do, the new member must be someone known.  Affinity schemes are frequently referred to as  

• Ponzi Schemes
• Pyramid Schemes
• Real Estate Investment Schemes

A Ponzi Scheme - A fraudulent investment operations that pays it’s returns to its investors from their own money paid by subsequent investors. Ponzi Schemes offer a high return on investments often in a short period of time

Pyramid schemes promises participants payment for services for enrolling other people into the scheme.  It generally does not involve real products.

A Real Estate Investment Schemes creates a “Partnership" and brings in multiple investors.  These schemes promise a high ROI as well as promises ownership on the properties.  Real Estate Investment Schemes last a long time and are more drawn out where the return isn't always promised in a short period of time. 

Affinity frauds are very difficult on the victim and unfortunately the bonds the victim has with the members can blind them into believing everything the fraudster is telling them.  They don't think that one of their own would ever steal from them.  The perpetrator generally incorporate elements of charity and gift giving or giving back to the community which makes their fraud scheme even more difficult to believe because they are held in such high regard in the community.  If a victim of an affinity fraud scheme feels that something is wrong and attempts to speak with other members or even the leader, the group will claim that reporting the allegations of fraud will prohibit any possible return on their investment so they won't do it.  The members have also been known to retaliate against the victim as well.

The perpetrator being well respected in the community is very good at their disguise.  They are pathological liars and are able to adjust their behavior to appear more credible.  They are able to adept and understand the mindset of those they defraud appearing sympathetic however they have no compassion or empathy for the financial destruction that they cause.  They only time the fraudster has any regret or empathy is if they get caught. 

Some warning signs of an affinity fraud scheme:

• Won’t provide financial or investment reports
• Tax return not filed or late
• Investor makes payment to individual
• Company research lacks records
• Real Estate title not held by partnership but by fraudster
• Promises a high return on investment
• Must act now urgency
• Deal of a lifetime opportunity
• Promises quick return on investment

If you know someone who may have invested their hard earned money into a questionable investment, remember the hardest part is to get them to accept that they have possibly been a victim of a fraud scheme. If you are the investor take the time to go through your paperwork and start researching your investment.  Never leave it to chance.  The magnitude of affinity fraud schemes on the rise is alarming and the frausters don't care who they hurt along the way.

Take the quick test to see how you rank or if you know someone who has invested money into a private group investment to see if you should be concerned.  If you fail this test, I would gather all of your paperwork in relation with your investment and bring it to un-related party to review. 

Julie A. Aydlott, CFE
970-776-8395

Business Fraud Prevention, LLC

Beware of Disaster Fraud Schemes

In light of the recent flood disaster to hit Colorado, I thought it would be a priority to write this month’s newsletter on the unfortunate fraud schemes that are already happening due to the disaster. Fraudsters do not have compassion or empathy with any of their victims. Their sole purpose is to get your money no matter how they do it and they don't care who they hurt along the way.  For the fraud victims it is a very personal violation and often times very hard to get through.
When a disaster hits, fraudsters come out in full force in many different ways. Depending on the disaster itself it lays a path on what kind of opportunities the fraudster will have to gain access to your money. Because this flood has destroyed thousands of homes throughout the front range and mountain areas of Colorado, construction fraud is going to be on the top of the list to watch out for. Whether you were a victim of the flood or you have a family member or friend that was directly affected, it is important that you - or they - are able to think clearly when entering into a contract to repair the damages.
In the construction industry, it is common to get a deposit to start work. This secures your scheduled start date as well as allows the contractor to begin paying for expenses relating to your job. The amount of the deposit is crucial for red flag warnings. Contractors will generally request a deposit of 1/3 of the total contract price to start a job.  Other states vary based upon state imposed regulation so make sure you check with your state.  If you have been contacted by a contractor that is requesting a substantial deposit to begin work, don't pay them anything, don't sign anything and run for the door.  If you feel that your contractor is legitimate, get a third party to review the terms of the contract and help you research the company in full before you hire them.
Some tips for hiring a contractor:

• Get at least three estimates
• Get referrals and actually call on them
• Check their license with the city or state
• Check the Secretary of State for their registered business
• Ask for a copy of their insurance (make sure they are insured)
• Insurance should be a bond as well as liability
• Don’t sign a contract if you are pressured into it
• Don’t pay a deposit of more than 1/3
• Don’t pay them in cash
• If they accept credit cards ask to pay the deposit in the form of a credit card. If they don’t follow through on the work you can get a charge back from the credit card company.
• Find out who their sub-contractors are on your job. Get their names, phone number, mailing address and make sure they have the proper license and insurance as well.
• Any payment you make to the contractor as progress payment on the job MAKE SURE the sub-contractors are paid and you get lien releases from the subs and the general contracor for progress payments. If you paid your contractor $50,000 for a job and he didn’t pay his sub-contractors they could file a lien on your house even though you paid the general contractor in full. If your contractor has a problem with this, pay his/her sub-contractor directly or hire a different contractor! Lien releases need to be all inclusive on anyone including the main contractor who worked on your job.
• Get a written contract. Make sure it includes the complete detail of the repair or construction work to be performed, the estimated start date, the estimated completion date as well as the total contract price.

Construction and repair fraud isn’t the only one to watch out for. Scammers are burning up the phone lines as well as the pavement looking for donations to their non-existent charities. Make sure you do your homework when donating to any charities.

• Don’t donate to a charity you have never heard of
• Research the charity before you donate
• Call your local police department to ask them if they have had any complaints from an un-known charity
• If you receive a phone solicitation DO NOT give your checking account information, credit card number, social security number or any payment over the phone!
• Scammers lie, that is what they are good at.  They pretend they are the Red Cross even the Police Department or Fire Department.  Don't fall for it and if you are unsure, hang up the phone and call the actual company they are claiming to be so you can find out if they are actually trying to get donations
• Door to door scammers not only can try to scam you out of money by having you donate to bogus charities, they also have been known to "scope" out your house for valuables and return at another time to rob you.  Don't ever let a door to door solicitor in your house!

You can contact the Better Business Bureau’s Wise Giving Alliance at www.give.org to look up a reputable charity.

You can also contact the Disaster Fraud Hotline at 866-720-5721 to get more information or file a fraud complaint.  
Be on the alert while we all are recovering from these devastating floods.  Anyone can become a victim of fraud and the last person that needs that additional stress are those who just lost everything in a flood.

Julie A. Aydlott, CFE
970-776-8395

Business Fraud Prevention, LLC

Bookkeeping Shortcuts that lead to Internal Control Weaknesses

I have been seeing more and more shortcuts with bookkeeping entry into the accounting system over the past few years.  Not only from internal bookkeepers but also from professional bookkeepers as well.  Is entering in the employers or client data that much of a hassle to bookkeepers that it causes laziness,  or is it just to get the job done quicker?  As a business owner, you need to ask yourself (or your clients) some very important questions about how your bookkeeping data is entered into your accounting software.

• Do you know how much money you pay to all of your vendors?

• Could you print out a detailed listing showing the total amount paid to each vendor?

• Would that total amount include a lump sum or could you see how much you spent on a specific cost?

• Can your software print out all of the contact information for your vendors?

• Does your bookkeeper enter more journal entries to record financial transactions rather than tracking the actual transaction by payee name?

• Does your bookkeeper reconcile your business credit cards?

• Are your credit card receipts accounted for?

• Are your vendor hard files a mess and you can’t find anything?

An enormous internal control weakness in the accounts payable function is not tracking vendors in the accounting software.  This happens so often when the business uses credit cards to pay for all of the business and personal expenses so that they can accumulate mileage or points from the credit card company.  When the bookkeeper has to enter in hundreds of charges per month, they don’t seem to want to break it down and enter the charge in as a credit card transaction by recording it to the proper vendor.  They tend to enter the transaction into the bookkeeping system from the point of payment and group it straight to an expense account without tracking who the expense was for.  Realistically, this type of entry only shows that XYZ Company paid $5,000 to American Express, yet $4,500 was to Builders Supply for materials on a job site.  This type of entry system does not allow you to see how much of that actual payment made to American Express was paid to Builder Supply.  Yes it may show that your supply expenses was $4,500, but it is lacking the "to who and what for" information that causes the weakness. Not only is this system an internal control weakness in your purchasing and accounts payable function, it also prevents the business owner from being able to realistically review their overall costs which would help in their bottom line. 

When payments are entered without tracing who the vendor is, this creates several problems.

• Potential loss on profits

• Tracking vendors that require 1099’s

• Tracking billing schemes or purchases with a shell company

• Overpayment on purchases

• Not confirming receipt of materials or merchandise.

The solution is to require your bookkeeper to enter all vendor purchases properly so that you can track your total costs per vendor.  Yes, this will take more time especially if you use a credit card to purchase everything, but if your bookkeeper is efficient then it shouldn’t be that big of a change in their productivity. 

Make sure your bookkeeper;

• Enters vendor purchases to a vendor account.

• Enters credit card charges properly

• Reconciles your credit card accounts

• Can print a vendor purchase detail listing at any giving time

• Provides you with a reconciliation approval form to confirm and verify payees

• Uses purchase orders for supplies and materials to compare what was actually billed or charged to your credit card as well as what you received.

Most small business computer software is integrated with the credit card companies to import the data directly into the computer system.  If you have the ability to use this function, do.  It will save time for your bookkeeper from entering in all of those meal expense receipts………. 

Don’t allow shortcuts or laziness to be an identifying factor in your bookkeeping system, it is doing you more harm than good.

Julie A. Aydlott, CFE Business Fraud Prevention, LLC

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 

Fraud Cases provided by our partnering sponsor  Marquet International

Colorado Woman Sentenced for Embezzling $1 Million from PERA

	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

Fraud Cases provided by our partnering sponsor  Marquet International Downlaod the 2011 Marquet Report on Embezzlement

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.