9 million reasons to fight internal fraud

UPDATE: Patricia K. Smith sentenced to six and a half years. Read more here.

Patricia Smith will be sentenced today, May 8 for embezzling $10.2 million from Baierl Acura. The US Attorney recommends that she serves five to six years. I wouldn’t be surprised if she receives less time than that.

“The $10 million stolen is not an insignificant amount to Baierl, as it might be for a Fortune 500 corporation,”

– U.S. Attorney Steve Kaufman

The majority of Fortune 500 corporations can absorb seven-figure losses and continue operations. Employees may be fired for failing to detect the fraud, processes may be revised and additional technology purchased to prevent a similar loss in the future, but for the most part, the company will shrug off the loss within weeks, sometimes just days.

Does that mean that small companies will automatically close their doors if they experience a $10 million loss? Not necessarily… As we’ll see below, it is actually a little more complicated than that.

Here is another quote from U.S. Attorney Steve Kaufman.

“The defendant’s pattern of theft negatively impacted the finances of Baierl Acura each and every year from 2005 through much of 2011. Fortunately, her activity did not affect Baierl’s timely payment of its payroll, tax and business obligation and liabilities.”

“No harm, no foul?” Patricia committed a crime, but the dealership didn’t suffer that much damage, right?

In my first blog post, I discussed the untold story of small business fraud. I noted that opportunities for the business to expand disappear while the fraudster lines their pockets with ill-gotten gains. In some respects, that is one of the saddest outcomes of fraud within a small business. It robs these businesses of their future.

As this case shows, some businesses can continue operations while a fraud scheme is running. However, the lack of cash puts the business on a different course – they just don’t know it…

With less cash in the bank, hiring decisions are delayed, bonuses canceled, and expansion plans shelved. What would Baierl Acura have done with the $10.2 “extra” dollars? We’ll never know. What we do know is that the business had earned that money. Here is a novel thought… the dealership could have kept the money in the bank and earned interest! They had the right to invest it as they saw fit. Patricia Smith did not have the right to use the money as she saw fit.

So what did Patricia do with the money?

We know that she bought real estate, cars and took luxury vacations, including a VIP trip to the Vatican.  AUSA Kaufman can help answer the question.

“A large portion of the money also was wasted on gambling activity, both by herself and by at least one family member,”

Given that Smith had assets, how much of the $10.2 million does the government expect to recover?

$1 million… 10% of what she embezzled.

At the end of the day, the dealership waves bye-bye to $9 million ($9.2 to be exact) and well as the future that might have been. And we’re left with yet another sad ending involving internal fraud at a small business.

UPDATE: Patricia K. Smith sentenced to six and a half years. Read more here.

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.



“I’m as mad as hell, and I’m not going to take this anymore!”

Regular readers of this blog will know that many of the fraud losses I discuss here are largely avoidable. Well, my business partner and I have decided to do something about it. Today, we launched Consult-OnLine, an online platform that provides fraud and intellectual property theft prevention services for small- & medium-sized companies.

Why now, and why online?

Quite simply, the number of fraud cases involving small-and medium-sized companies is staggering. SMEs need help, and they need it fast. They are often overlooked by traditional consulting firms as too small to purchase services – or worse, the companies suffer in silence and do their best to muddle through without the assistance of a fraud expert. The most common reason for not engaging a fraud consultant is cost. Small companies can’t afford to pay the hourly rates and expenses that traditional firms charge. They are also genuinely concerned that once a fraud consultant enters their office, they will have a hard time convincing them to leave.

Believe it or not, other firms have offered professional services online before. One in particular was phenomenally successful, but for a number of reasons they shut the site down. We strongly believe that professional services can be delivered online. In fact, we built an innovative platform to do exactly that.

In addition, over the last three months, we have developed a proprietary database that contains analysis of fraud cases from the news. There are so many lessons to be learned from fraud at other companies. We thought it made sense to build a database that companies could access and use to learn how to avoid a similar fraud at their company. I have over 16 years of fraud experience, yet even I am amazed at the number of six- and seven-figure fraud cases that we have gathered from around the world. We are absolutely convinced that the database will “open eyes” and help companies dramatically reduce their fraud risk.

So, I am mad that small- and medium-sized companies coffers are being raided by fraudsters with impunity. AND my firm is prepared to do something about it.

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.”

– Dictionary.com

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.


New hires can create new problems

In the not-too-distant future, companies will begin hiring again. Some of the newly hired employees will be receiving their first paycheck in months, possibly years. Others will be abandoning small companies that they started in favor of the stability that comes with a full-time position.

These newly hired employees will likely be extremely grateful for their new job, but they may also bring a great deal of baggage accumulated during their unemployment. Are they likely to commit fraud in their newly found role? Not necessarily, but how well prepared is the company that they are joining to prevent and detect fraud?

Throughout the recession, companies have maintained a laser-like focus on cutting costs. In order to be “lean and mean,” checks and balances meant to prevent fraud have often been abandoned or neglected. Even if the internal controls remain, the employees responsible for ensuring compliance may not. They could have been either laid off or assigned to cover the work of other employees that have been laid off previously.

Academics will argue that there is a strong correlation between unemployment and corporate fraud. I’ll leave that discussion for another day, as it deserves its own post. However, there is a strong link between lack of internal controls and fraud (so says the Association of Certified Fraud Examiners). And let’s not forget the “fraud triangle” developed by Donald R. Cressey, which includes three factors that are present when fraud is committed:

  • Pressure – The “would-be fraudster” has an urgent need for money

How many employees, when faced with calls from collections agencies and/or losing their house or possibly their significant other, have not been at least momentarily tempted to commit fraud? Contrary to popular belief, not all fraudsters are “bad” people. In fact, the vast majority of the fraudsters that I have met during my 16-year career are normal people that have made bad choices or experienced a run of bad luck.

  • Rationalization – “It’s OK; I deserve it” or “They’ll never miss it”

Sometimes, by its own actions a company can unwittingly help an employee rationalize why it is OK to commit fraud. For example, a fraudster that I interviewed was passed over for promotion three times with no real explanation as to why. Shortly after the third rejection, she decided to steal from the petty cash. It was her way of punishing her employer. Unfortunately for her, she ended up being the one who was punished; she lost her job shortly after the fraud was discovered

  •  Opportunity – Checks and balances have been removed. There is minimal management oversight, or management is overly distracted with running the business. Preventing and detecting fraud is not a high priority.

Now more than ever, employees have the opportunity to commit fraud. With no one minding the store, the opportunity to take money without being caught may be too appealing to ignore.

So what should a company that’s about to begin hiring do? Here are some areas to consider:

  • Revisit existing internal controls – You don’t have to automatically reinstitute all of the internal controls that were previously in place and subsequently abandoned. However, existing employees as well as new hires should have a strong belief that the company will catch them if they commit fraud. The  “perception of detection” can serve as a very strong deterrent for most employees.
  • Hire ethical employees – Conducting background checks, verifying an employee’s educational credentials, and calling references are all necessary steps to ensure that new hires have integrity and can be trusted. Take the time to understand what makes the candidate “tick.” After all, you are about to grant them access to your business and ultimately, your money. Trust, but always, always verify.
  • Have new hires sign a code of conduct – Establishing early on their employment, ideally on their first day with the company, what is expected of them as employees is often overlooked by small- and medium-sized companies.

Hiring new employees is not a risk-free endeavor, and this is certainly not a complete list of steps that you can take to prevent fraud by new hires.

Your company has weathered the worst economic cycle in recent memory. Now is not the time to welcome a new employee in to the company only to have him or her commit fraud.

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.


Small business fraud – the untold story

Fraud costs small businesses money – lots of it. But that’s not the end of the story. In fact, for some business owners, that’s only the beginning of a rather painful journey. Whether the fraud involves employees, third parties, or both, the impact on a small business often takes the following forms:

  • Fraud destroys the owner’s confidence – Having a fraud take place on your “watch” can trigger a wide range of emotions. Anger, frustration, regret, and self-doubt are all normal reactions to fraud. How the owner overcomes those emotions can make a huge difference in how quickly the business recovers – or whether it recovers at all.
  • Opportunities to expand disappear – Opportunities to expand typically require a cash investment. While the fraudsters line their pockets with your cash, opportunities to expand evaporate.
  • Family and friends lose faith – Many small businesses, at least initially, rely upon investments from family and friends. When the owner has the unfortunate task of notifying them that the company has been a victim of fraud, the reactions can range from pity to anger. Post-fraud, investors are understandably reluctant to put more money into the business.
  • Likelihood of business failure increases – With less cash on hand, small businesses are often unable to respond to the inevitable “surprises” that occur while running a small business. In the event that a critical piece of equipment breaks or cash is needed to meet payroll, the company’s financial resources can be stretched to the breaking point. Meanwhile, the fraudster is spending the product of the fraud as they please.

Preventing fraud losses keeps hard-earned cash in the business. Just as importantly, it also helps small business owners avoid the severe emotional toll that fraud creates.

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.