Simple fraud, shocking results: $718,167 walks out the door

“Even a mom-and-pop business with only a few employees needs to provide oversight for anyone involved in accounting or bookkeeping operations. Businesses are especially vulnerable when one employee both issues payments and reconciles company bank accounts.”

– Beth Phillips, United States Attorney for the Western District of Missouri

Could not have said it better myself, Ms. Phillips. Small business owners, listen up: if you won’t take my word for it, how about taking the word of the US Attorney for Missouri? Law enforcement is often left to clean up the mess caused by small business fraud. They see what needs to be done to stop it from happening in the first place. Maybe you should listen!

The perpetrator in this scheme, Kim Brown, plead guilty to stealing $718,167 from her employer, Standard Sheet Metal, over a seven-year period. Again, this was not a particularly complex scheme. Brown wrote “at least” 474 checks from her employer’s bank account and deposited them in her personal account. That’s all she wrote (pun intended), and now the employer is left with a huge loss that will likely never be recovered.

Brown was a trusted employee. From 1998 to 2009, she had been promoted from receptionist to accounting and bookkeeping. What a kick in the gut! The company gives her more responsibility, and presumably a bigger salary, and she commits fraud in return.

Note: Notice that the bank did not stop this from happening. As I have said before, never rely on your bank to stop embezzlement.

Maybe now is the time to proactively address fraud within your company? You’ve got the backing of the US Attorney to do so.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.


Shell games: Trust, but definitely verify

Shell company: “An inactive company used as a vehicle for various financial maneuvers or kept dormant for future use in some other capacity.”


Jon C. Shain admits that he is guilty of playing “shell games.” Using a remarkably simple scheme, Shain secured an $884,000 loan from Amcore Bank that he then used to enrich himself.

In my opinion, the bank involved (renamed BMO Harris Bank) failed to adhere to a fundamental principle of due diligence: “trust, but verify.” However, this is not going to be a discussion regarding bank fraud. It’s about trust and not taking it for granted.

In order to convince the bank to lend money to his company, Coating Technologies, Shain created fake invoices detailing expenses payable to Qualified Industrial Services and Industrial Equipment Supply Corp. The bank didn’t know it, but Shain controlled both those companies. The invoices were in fact fake. But wait; there’s much more.

Shain also formed a joint venture with another company to do business as Barron Finishing Technologies. Amcore funded yet another loan for $2 million that was supposed to buy real estate and equipment. Shain again submitted fraudulent invoices, this time to Barron Finishing, that allowed him to pull out the loan proceeds.

He then transferred proceeds from Barron’s loan to Industrial Services (the shell company he used in the $884,000 scheme that I first detailed). Eventually, funds taken from Amcore were used to  purchase personal property in the name of yet another entity – Rock River Reality, LLC.

Confused?! Of course you are! That’s what Shain wanted. Just like the street entertainer that uses actual shells to hide the ball in plain sight, Shain used five different companies to keep the money moving and the bank none the wiser.

The bank made a number of mistakes in funding the loans. They should have done much more to verify that the expenses Shain supposedly incurred were legitimate. Just as importantly, they should have researched his ownership in the shell companies. Certainly, Shain did a good job covering his tracks. However, based on my reading of the case and experience investigating shell companies, the document trail that indicated a fraud was taking place should have been uncovered before the losses mounted.

In a broader sense, what lessons can we learn from this case? You don’t have to be a bank to be on the losing side of a shell scheme, also called a confidence scheme. You trust that your business partners are what they say they are. You trust that they are not going to steal from your organization. Where did this trust come from? How did the business partner earn your trust? Shouldn’t it be earned before it is given?

As the title of this post suggests, trust that your business partners are on the up and up, but always take the time to verify. That applies to banks that lend money, venture capitalists that are funding startups, and new customers that approach your organization to purchase goods or services. Take the time to research who you are about to do business with. There are numerous resources online that can help. Start with the secretary of state’s website to see if the company is registered to do business in your state. Research the principles and registered agents; check out how old their website is (if they have one) and who owns the domain. There are more steps that I typically recommend, but that’s enough to get you started.

Remember, there are lots of good people out there, but there are also some really smart people just like Shain that can literally destroy your company, if you let them.

Trust, but definitely verify.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.

Nonprofit fraud can be very profitable

Don’t let the word nonprofit fool you; as this case shows, there is plenty of money up for grabs.

Over the course of eleven months, Jeffrey Bernstein allegedly embezzled over $2 million from the Albert Ellis Institute, a nonprofit based in New York. The Institute’s mission is to provide “global access to the benefits of Rational Emotive and Cognitive Behavioral Therapies through the training and education of mental health and allied professionals worldwide.” I’m not sure what that is either, but clearly they have money on hand to fund their efforts. Or at least they did.

Yet again, we have a remarkably simple fraud. Bernstein allegedly transferred funds from the Institute’s bank accounts at J.P. Morgan Chase to personal accounts that he controlled. Here is the twist; the Institute is not pursuing Bernstein. Instead, they have sued J.P. Morgan Chase in civil court. Presumably, they believe that Bernstein has spent the money and that a judgment would be worthless.

In order to prevail in a civil suit, the Institute is going to have to show that J.P. Morgan was at fault. In practical terms, how much responsibility should the courts place on a bank to detect embezzlement? Unless J.P. Morgan Chase made a glaring error that was entirely inconsistent with their own policies and procedures, I don’t see the Albert Ellis Institute prevailing in court. Further, the Institute better be able to show that they had taken the necessary steps to prevent the fraud in the first place.

Each year, J.P. Morgan Chase invests tens of millions of dollars to prevent, detect, and investigate fraud. Speaking from experience, banks will never get it right 100% of the time, with embezzlement being the most difficult fraud for a bank to guard against. By definition, the transactions are initiated by authorized individuals that are granted access to the organization’s bank accounts to conduct routine business transactions. In most circumstances, expecting a bank to detect embezzlement in a sea of routine transactions is just unrealistic. (Each case is different, so I stress “most circumstances.”)

In my opinion, given that the fraud took place over eleven months and was perpetrated by the president of the Institute, the burden that the plaintiff must overcome to prevail in court will be considerable.

Stay tuned…

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.

No more free coffee

Never underestimate the power (and stupidity) of people in large groups. It will take months, possibly years to figure out all the reasons behind the riots in England, but themes are emerging. Community leaders as well as many of the rioters themselves appear frustrated with cuts in social services and the widening of the gap between the haves and the have nots. English society has always functioned on a class system; it’s not as pronounced as it was even 100 years ago, but it is still very much apparent in certain professions and areas of the country. The cuts in services as well as the overall collapse of the economy have helped ensure that those in the “lower” classes feel even more disenfranchised.

When you take what people believe to be theirs and further reaffirm what they perceive to be their lower class status, they can react in a number of ways. When “wronged,” they often band together in a shared sense of anger and frustration at what transpired. A few will act out and take steps to let the group know how angry they are. Others will react purely for the attention and thrill of “doing something.” Some will sit in the corner and internalize what has happened and figure out how to react.The English riots are obviously at the far extreme of those reactions. That said, companies can learn from what happened.

Since the recession began, companies have cut back expenses, using a broad range of tactics. From reducing headcount to cutting benefits, executives have gone back time and time again to capture savings. In most companies, free coffee in break rooms was a casualty long ago. It was either removed entirely or replaced by a cheaper brand that is supposedly coffee yet looks and tastes like dishwater. It’s a seemingly inconsequential action, but the strangest triggers can push people over the edge. At the same time, the pay gap between a company’s CEO and its employees continues to grow.

The more companies “take” from their employees, be it through revoking coffee and benefits or giving pay cuts, the more likely the employees are to rebel in some shape or form. In very isolated incidents, they will react with physical violence, but most will soldier on until they can’t take it anymore. With over 76% of former employees declaring that they are disgruntled, clearly companies are not winning many fans.

Let me be very clear: most of the steps that companies are taking to reduce costs are largely unavoidable. Without cuts in benefits, reductions in headcount, changes in 401K plans, etc., many companies would have closed their doors long ago. However, companies should acknowledge that cuts come with risks.

Each time a company “takes,” the risk that employees will react badly to the decision increases. Production can go down, employee departures can increase, and customer service can plummet. Not surprisingly, employee fraud can also skyrocket. My earlier post shows that employees need some form of rationalization to commit fraud. By continuing to make cuts, your company is providing the perfect excuse for an employee to “get even.”

Sooner or later, cuts will go to the bone and trigger a reaction. Please bear that in mind as you decide whether to remove coffee from the break room entirely.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.

Don’t let the door hit you on the…

Source: Dmscs

An article in the Wall Street Journal today referenced exit interview statistics collated by the Corporate Executive Board (CEB). In 2008, the CEB reported that 42% of employees would not recommend their employer to others. In 2011, that number jumped to 76%.

“Big deal,” you say. Employees are being asked to work harder, and some of them are leaving. Disgruntled employees that are voting with their feet can’t harm your company, right? On the contrary! Let me share some thoughts.

  • The employees that are sharing this information during their exit interviews are being honest and forthright. How many employees choose not to answer questions truthfully as they exit a company? I would hazard a guess that a sizable percentage chooses not to bad-mouth their employer, no matter how disgruntled they may be.
  • If over 75% of employees that are leaving are disgruntled, what about the employees that remain? Surely some of the remaining employees are just as disgruntled as the ones that are leaving? The only difference is that they have chosen to stay—or they have no options outside of the company.
  • As soon as an employee becomes disgruntled, does he or she leave a company? Rarely. The anger and frustration normally fester and grow until the employee can no longer stomach working for a company that he or she hates. While the pressure builds and the resentment grows, it is realistic to assume that the employee’s performance will suffer.

All very interesting, but why include this in a blog about fraud?

Readers of this blog may recall my previous post where I discussed the “fraud triangle.” The triangle contains three elements: pressure, rationalization, and opportunity. Disgruntled employees don’t like working for their company. In fact, some may hate the company with a passion that’s normally reserved for mortal enemies. How hard do you think it is for them to rationalize that committing fraud is justified? Would committing fraud help them “get even” with their employer?

So, disgruntled employees have at least one component of the fraud triangle covered: rationalization. They also likely have the opportunity to commit fraud, as oversight and compliance efforts have been cut back in companies of all sizes. All that remains is a form of pressure to complete the triangle. That shouldn’t be too hard to find. Not many employees can claim to be better off today than they were five years ago.

Given my expertise, it is not surprising that I read the WSJ article and thought of the points raised above. What I hope you learn is that disgruntled employees leaving your company is not cause for celebration. It may be a symptom of a much bigger problem that might end up costing your company money. Lots of it. I hope that I am wrong, but history has a habit of repeating itself.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.