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Embezzlement: $4.5M was the biggest loss in 2009

Denver Business JournalOn the Money
From the  June 11, 2010 print edition

In January, Marquet International Ltd. of Boston – a corporate investigations, due diligence and litigation consulting firm – released its annual Report on Embezzlement.

The report, which talks about actions taken against U.S. companies – estimated to be in the nine-figure range – revealed that the average loss was more than $1 million and the median loss was $386,500. More than 60 percent of the incidents involved women. However, male perpetrators embezzled nearly twice as much as females.

Nearly 25 percent of all losses occurred in financial institutions, and two-thirds of the incidents were committed by employees who held finance and accounting positions. Embezzlement schemes usually last about four years.

Marquet examined 415 major embezzlement cases during 2009. That means there was a major embezzlement case in the news daily.

The largest embezzlement case of 2009 happened at Koss Corp., a premier designer of stereophonic headphones, based in Milwaukee. The perpetrator allegedly used interstate wire communications to defraud Koss of more than $4.5 million. The alleged embezzler used an American Express card to buy $3.6 million worth of jewelry, watches, clothing, furs, formal wear and fine home decor. Eventually, payments made to American Express revealed the theft.

Embezzlement has ranked as America’s No. 1 financial crime for more than 30 years, and likely will hold that distinction for years to come.

There are dozens of embezzlement schemes, often perpetrated by one person against his company.

“Lapping” is one classic embezzlement scheme. To lap, an embezzler skims a little bit of the cash that comes in each month, then adjusts the books to hide the skimming.

Another classic scheme is through fabricated vendors or consultants. Any employee with authority to approve the payment of invoices can perpetrate this method.

In larger organizations, a midlevel employee may be able to approve invoices. The thief creates imaginary vendors and deposits checks written to pay the false invoices into his or her personal bank account.

In a recent case involving a large trade association, the CFO is alleged to have embezzled $2.5 million from the organization in 13 years through recurring payments to phony consultants.

Theft of cash receipts is the simplest form of embezzlement, usually perpetrated by insiders, simply by pinching incoming cash or highly negotiable instruments. This is particularly true in organizations that deal with a large number of relatively small transactions, such as utility payment processing centers and collection agencies.

Payroll fraud and embezzlement is where the embezzler adds the names of relatives or fictitious people to the company payroll, thus enjoying several salary checks each week instead of one.

Some other examples, and things to look out for, include:

  • Pocketing cash payments from customers and not posting the charge or payment.
  • Opening a checking account under a false name, then writing a “customer refund check” to that name
  • Handing the busy executive a stack of checks – including an extra one – to sign.
  • Falsely recording past-due accounts as written off or settled, then collecting from the customer.
  • Purposely paying a bill twice, then intercepting and pilfering the resulting refund.
  • Manipulating account balances through online computers, making “adjustments” to accounts, particularly dormant ones.
  • Hiding merchandise, cash, computer data and account information in the trash for later retrieval by an accomplice.
  • Always making a copy of the bank statement first, and then using white-out to change the balance to cover what was taken.

Jarmila Pencikova with Osler, Hoskin & Harcourt LLP of Toronto, and Doug Miller with Kahn Kleinman LPA in Cleveland, presented the following profile of an embezzler:

  1. Completely trusted and never checked.
  2. Several years’ service with firm.
  3. Rarely takes vacation/holidays.
  4. Secretive and rarely delegates to others.
  5. Personal/family health or financial problems.
  6. Lifestyle inconsistent with income.
  7. Rumors of affair or drug/alcohol abuse.
  8. Unusually close relationship with vendor.

Generally, these embezzlers are motivated by greed, fear, denial and revenge. Many thieves steal from their employers as a way of getting revenge for actions the employer has taken that the employee believes to be unjust, discriminatory or corrupt.

More than half the time, the crime is exposed only through a tip or by accident, such as the May 6 flash crash.

As business owners, individual investors, and customers of potential embezzlers, it behooves us to pay attention to the basics. Offshore bank accounts, special-purpose corporations and off-balance sheet accounting make for interesting reading.

But they’re all just a form of stealing called “embezzlement.”

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.