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Misplaced Trust

An embezzler steals a lot more than money or property. They exploit their positions of responsibility to steal the trust instilled in them by their employer. The victim of an embezzler grants these criminals access to their property or money for the purposes of managing, monitoring, or using the assets to operate an organization.

In this type of fraud, the individual may have lawful access to the assets, and even has a right to possess them. However, they use these assets for their own gain, which results in a breach of fiduciary responsibilities, and most importantly, the victims’ trust.

This type of crime is most common in corporate settings. The crime can be as minor as a cashier taking a few dollars from a cash register or as major as an executive transferring millions into a personal account. Techniques can vary. Some embezzlers take a large sum of money all at once, while others misappropriate small amounts over a long period. Methods include fraudulent billing, payroll checks to fabricated employees, records falsification, and Ponzi financial schemes.

In order to support a charge of embezzlement, must be present:

  • There must be a fiduciary relationship between the two parties, that is, there must be a reliance by one party on the other.
  • The defendant must have acquired the property through the relationship.
  • The defendant must have taken ownership of the property or transferred the property to someone else.
  • The defendant’s actions were intentional.

Embezzlement Statistics and Cases

Embezzlement, fraud, and money laundering can seem like an afterthought when it comes to the biggest risks facing special districts. This could be because few are of sufficient financial size and complexity to seem similar to the large corporations depicted in embezzlement cases in the news.

Typically, white-collar crime does not often appear on a district’s radar, although it should. According to Hiscox’s 2017 embezzlement study, 55% of cases occurred at companies with fewer than 100 employees. Finance or accounting professionals committed 37% of the cases. Most relevant, 30% of cases occurred in the financial services or government sectors. In addition, the median loss to government industries was $68,705, and in most cases, the embezzlers were employees working at some of the smallest organizations.

Cases

Recently, a water district in Oregon dealt with a case of embezzlement involving the loss of $24,000. The courts sentenced the culprit, a temporary office manager, to 24 months in jail after she increased the limits on her corporate credit card and used the card for personal use. In addition, the manager stole three district checks, which she signed with forged signatures. While a relatively small sum, given the size of the entity, the crime proved to be a setback.

One of the most notorious instances of embezzlement, dating back to 2016, involves a high-profile developer and his use of falsified contracts to make him and five associates “eligible electors” in order to be able to form a metropolitan district in Colorado, in turn, issued $35 million of bonds that ultimately defaulted.

The developer included the purchasers of his condominiums into the newly formed special district without notice and consequently roped them into paying taxes to pay off the bonds, although no purchaser knew either of the special district or of the bonds.

By the time an Arapahoe County grand jury indicted him on 20 felony counts, he had withdrawn about $8 million of the bond proceeds and used them for personal benefit.

A 2016 financial audit of a California cemetery district revealed that its manager had embezzled more than $1 million over a five-year period. The district received cash payments over this span of time, but the money never reached the district’s bank account. It was not until an audit of the cemetery’s finances revealed mismanagement. This audit was conducted due to a change in the way the district collects payments, which included allowing direct cash payments.

The Fraud Triangle

All of these cases share the common denominator of what is known as the “Fraud Triangle.” First coined by American sociologist Donald R. Cressey, this framework is the reasoning used to explain a employee’s decision to commit workplace fraud through three different stages of influence: pressure, opportunity, and rationalization.

Stage One: Pressure – This is better categorized as the motivation behind the crime. It can be due to personal financial pressure, debt problems, or a lack of revenue. Other common examples include pressure due to gambling problems or maintaining a lavish lifestyle.

Stage Two: Opportunity – This is the means in which the individual will defraud the organization. They can see a clear course of action to immediate or perpetual financial gain. In addition, this individual is in a position of relative authority with limited oversight, putting them into a mindset that their deceit will be difficult to detect. As the old adage goes, “the opportunity makes the thief.”

Stage Three: Rationalization – This is a cognitive stage that requires the individual to justify the crime in alignment to their personal moral compass. The fraudster can base rationalizations on external factors such as the need to take care of family, or the presence of a dishonest employer. Many people in this position do not consider themselves criminals, but rather victims of circumstance.

Punishments

Depending on the size of the crime, embezzlement can be punishable by large fines and jail time. In Colorado, embezzling property valued less than $50.00 is a Class 1 Petty Offense and results in a penalty of up to 6 months in jail and a fine of up to $500.00.

A Class 1 Misdemeanor means the case involved more than $750 but less than $2,000. The penalty for this action is mandatory jail time of 6 to 18 months and a fine of up to $5,000.

The highest class of criminal offense for embezzling is a Class 2 Felony, which occurs after someone has embezzled $1 million or more. This results in 8 to 24 years in prison and a fine of up to $1 million.

How Do We Prevent Embezzlement?

In many instances, after the fallout, those in charge are often wondering: “Why didn’t I catch this sooner?” In order to identify a perpetrator, one has to know the warning signs. Below are some common characteristics of embezzlers. Bear in mind that these attributes are also fairly common, and not all people with these characteristics are embezzling money from your district:

  • Intelligence and curiosity – Embezzlers pick up tasks quickly and are eager to know how everything in the office works. They learn from watching others, solidifying the process, and manipulating it for their own gain.
  • Extravagance – Embezzlers often show off their wealth. Watch for employees that are living a lifestyle perceived to be outside of their current salary.
  • Egotistical risk-taker – Breaks rules at work and outside of work, be it regarding traffic laws or company policies. They will do what they can to “beat the system” for personal gain.
  • Diligence and ambition – An embezzler might seem like the ideal worker. They are always on time, stay late, and are incredibly dependable; however, this is a tactic meant to mask their trail.
  • Disgruntled – An embezzler might be an employee who feels they are receiving the short straw. They may be unable to relax or undergo changes in behavior.

Schemes

In addition to these character traits, be on the lookout for specific kinds of schemes. Typically, the most common kinds of embezzlement schemes involved funds theft and check fraud.

For funds theft, perpetrators take cash or bank deposits and transfer the funds to an account they control. This is when an accountant, or someone in a similar position, directs company funds into a personal account.

Check fraud, on another hand, is when checks are altered or forged to be made payable to or, in the benefit of, the perpetrator. This occurs when someone in a position of power issues company checks to themselves and makes false entries in the organization’s books to cover the theft.

Catching an Embezzler

If you suspect an employee is embezzling money, knowing what not to do is as equally important as knowing what to do. Most importantly, do not jump to conclusions. Falsely accusing an employee is a crime on its own and cannot only permanently damage that person’s reputation, but the reputation of the organization. It can also land you and the district in an intense and uncomfortable legal mess.

Do not conduct group interviews of employees and do not interview employees by yourself. Always have an human resources representative present. In addition, take good notes and write a summary immediately after any interview. Do not rush to confront a suspect because you only get one chance at a first-time confrontation, and that is when the perpetrator will be the most unprepared. Have evidence ready.

Preventing the Next

However, the best defense is a preventative one. If your organization does not already have these checks and balances, consider implementing them:

  • More than one person should review all bank statements and cancelled checks.
  • Make sure more than one person sees every transaction.
  • Have corporate bank statements delivered to a board member or trusted executive, even if that means sending these statements directly to a home address.
  • Perform background checks for all employees.
  • Divide duties so that no one person has end-to-end oversight or control of all financial matters. That way, multiple people are seeing the funds come in and out and the opportunity for misappropriation is greatly reduced.

Last, but certainly not least, if you do check all the boxes and find someone within your organization is embezzling money, file charges. Staying quiet sends the wrong message to others. Not only that, but if the perpetrator is simply fired, it means they will most likely work for another company and do the same things there.

Currently, only 1,309 of 1,496 districts buy Crime coverage. While not always foolproof, if you cannot proactively catch someone before they commit the crime, it can bring peace of mind to make sure you have insured your district for cases such as embezzlement. In most instances, only a small part of embezzled funds winds up returned.

In this publication, we talk about embezzlement a lot. That’s because it keeps happening. In numerous cases, affected Pool members simply weren’t looking for it, were not prepared for it, and did not have sufficient coverage to respond.

Having the right coverage can ensure that even if your business takes a hit, it can rebound without a problem. Check with your broker or email us to talk about coverage options. To see a display of what other members are buying, please visit our website.

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