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CPE for Government Auditors

Expense Reimbursement Fraud Schemes

We are still working through the cash disbursement schemes mentioned in the fraud tree.  For a picture of the fraud tree, see this link: http://www.acfe.com/fraud-tree.aspx. Last time we discussed the categories of fraudulent disbursements, we covered payroll schemes and billing schemes. This time we will cover the third out of five schemes classified by the Certified Fraud Examiners as cash disbursement schemes and expense reimbursement schemes.

 

Go tell that long tongue liar,
Go and tell that midnight rider,
Tell the rambler, the gambler, the back biter,
Tell ‘em that God’s gonna cut ‘em down.
Run on for a long time
You can run, Lord, for a long time.
You can run, Lord, for a long time
But let me tell you God Almighty’s gonna cut you down.
Traditional folk song

 

Expense Reimbursement Schemes

Another way to falsely extract money from your employer is to make up fake or inflated business expenses.  Under this section of the tree, the Association of Certified Fraud Examiners lists four components:

  1. Mischaracterized expenses
  2. Overstated expenses
  3. Fictitious expenses
  4. Multiple reimbursements for expenses

Mischaracterized Expenses 

When I was in college, I worked as an accounts payable clerk at a high tech company for a summer.  One of my jobs was to review travel expense reports for compliance with corporate policy.

The company did not pay for movies in the hotel room – especially not adult movies.  Adult movies are more expensive, so I knew that one executive was being – shall we say ‘creative’ – with his entertainment charges.  The phone call was a little tense, “Your film is not allowable, sir…”

Robert Half International, a professional recruiting firm, asked 150 senior executives with some of the nation’s largest companies, “What is the most outrageous thing that an employee has tried to pass off as a work-related expense?”  It turns out creative employees have tried to expense tropical fish, traffic tickets, the cost of transporting a pet gerbil overseas, ‘lodging’ at a storage facility, expensive silk sheets and silverware, excursions to Europe and the Masters, health care coverage for a pet, and my personal favorite, divorce costs.  I can see the reasoning there: employers expect so much nowadays, they probably trigger most divorces in the US.[1]

Overstated Expenses

I enjoyed working with a Medicare audit group in 2008.  They were responsible for finding fraud, waste, and abuse in the Medicaid program.  That is quite an undertaking since so many people and so many systems are involved, and so many folks are in need. Doctors, hospitals, nurses, pharmacies, suppliers, patients, and families can be mighty creative in getting just that little extra from the federal government by overstating expenses.  Here is another executive summary from a GAO audit.

Medicare Fraud, Waste, and Abuse: Challenges and Strategies for Preventing Improper Payments[2]

Summary

GAO has designated Medicare as a high-risk program since 1990, in part because the program’s size and complexity make it vulnerable to fraud, waste, and abuse. Fraud represents intentional acts of deception with knowledge that the action or representation could result in an inappropriate gain, while abuse represents actions inconsistent with acceptable business or medical practices. Waste, which includes inaccurate payments for services, also occurs in the Medicare program. Fraud, waste, and abuse all can lead to improper payments, overpayments and underpayments that should not have been made or that were made in an incorrect amount. In 2009, the Centers for Medicare & Medicaid Services (CMS) – the agency that administers Medicare – estimated billions of dollars in improper payments in the Medicare program. This statement will focus on challenges facing CMS and selected key strategies that are particularly important to helping prevent fraud, waste, and abuse, and ultimately to reducing improper payments, including challenges that CMS continues to face. It is based on nine GAO products issued from September 2005 through March 2010 using a variety of methodologies, including analysis of claims, review of relevant policies and procedures, stakeholder interviews, and site visits. GAO received updated information from CMS in June 2010.

GAO has identified challenges and strategies in five key areas important in preventing fraud, waste, and abuse, and ultimately to reducing improper payments. GAO has made recommendations in these areas. CMS has made progress in some of these areas, and recent legislation may provide the agency with enhanced authority. However, CMS faces continuing challenges. 1. Strengthening provider enrollment process and standards. Checking the background of providers at the time they apply to become Medicare providers is a crucial step to reduce the risk of enrolling providers intent on defrauding or abusing the program. In particular, GAO has recommended stricter scrutiny of providers identified as particularly vulnerable to improper payments to ensure they are legitimate businesses. 2. Improving pre-payment review of claims. Pre-payment reviews of claims are essential to helping ensure that Medicare pays correctly the first time. GAO has recommended that CMS further enhance its ability to identify improper claims through additional automated pre-payment claim review before they are paid. 3. Focusing post-payment claims review on most vulnerable areas. Post-payment reviews are critical to identifying payment errors and recouping overpayments. GAO has recommended that CMS better target claims for post payment review on the most vulnerable areas. 4. Improving oversight of contractors. Because Medicare is administered by contractors, overseeing their activities to address fraud, waste, and abuse is critical. GAO found that CMS’s oversight of prescription drug plan sponsors’ compliance programs has been limited. However, partly in response to GAO’s recommendation, CMS oversight of these programs is expanding. 5. Developing a robust process for addressing identified vulnerabilities. Having mechanisms in place to resolve vulnerabilities that lead to improper payment is vital to program management, but CMS has not developed a robust process to specifically address these. GAO has recommended that CMS establish an adequate process to ensure prompt resolution of identified improper payment vulnerabilities.

Here in Austin, the directors of an electric co-op, the Pedernales Electric Cooperative (of which I am a member), paid themselves ten times the salary of the nation’s second largest co-op!  Board members were reimbursed for about $700,000 in expenses between 2002 and 2006 for everything from first-class airfare to top-tier hotel stays to costly purchases of meals, furniture and concert tickets, according to court records. All of these board members were, thankfully removed in shame, but not before they lived the high life for a good long while.[3]

Fictitious Expenses

Yes, another Medicaid story!  The plethora of Medicaid stories shouldn’t be too surprising since over 20% of our federal budget is spent on Medicaid.[4]

The number one crime in Miami isn’t drug trafficking; it is Medicare fraud. A 60 Minutes investigation uncovered hundreds of tiny pharmacies and doctors’ offices in South Florida that weren’t staffed or open; some were really just storage facilities!

One fraudster shared with 60 Minutes how easy it is to set up a fake supplier or pharmacy and bill the feds using names and social security numbers of real patients. Hackers steal the names and social security numbers from legitimate doctors’ offices and pharmacies and sell them for up to $10 a name to these illegitimate ‘suppliers.’  One retired judge’s social security number was used to charge for a prosthetic right and left arm.  Only problem is, he still has both arms and they work just fine!

Medicaid auditors are understaffed and overwhelmed. And most scammers are able to operate without any trouble – quietly ripping off $20-40 thousand a day.[5]

An aversion to IT Cost a New Zealand Company $1.7 million!

A simple fraud, using Microsoft Excel templates to create the 350 bogus invoices, lasted six years and made Trevor Uialatea Esera richer by $1,758,193.  As the company’s IT manager, he was responsible for signing off expenditures, preparing the IT budget, and ordering equipment and computer software.

He created fake invoices from three companies. Two of the companies – Intergra Images and Software Plus – were bogus, and the third had no idea what he was doing. Court documents described the fake firms as “companies of his own invention.”

Esera’s bosses were oblivious to his fake invoicing because senior staff at Rinnai, a water heater manufacturer, had little or no experience in IT.[6]

Multiple Reimbursements for Expenses

Have you seen the website that lets you create fake receipts?  Just Google ‘fake receipts,’ and Google lists pages and pages of sites.  One of the sites is generic, but for a small fee you can upgrade to get better logos for well-known companies.  Here is an image of what you can create using one of these sites:

Looks pretty good, doesn’t it?

If you think you can get away with it, why not submit the same expense more than once!  You’d score extra points for commiting two frauds at once – a fake receipt and double payment on the same receipt.  You over-acheiver you!

I receive ridiculous proposals and promises of riches every day via email. “Please let me introduce myself.  I am blah blah from X, Africa seeking to transfer funds to the United States.  I will share the proceeds with you, blah blah.”  A CPA in my class confessed that one of his elderly clients fell for this scam and lost $50,000 because he gave the scammers his bank account number.

I have heard of (but can’t tie down with a news story) scammers creating hundreds of fake invoices and sending them to every corporation they can find.  Even if only 2 out of a hundred pay, they still have something with which to buy that coveted wide-screen TV!

I can easily see this happening, because when I worked as an accounts payable clerk the summer of my junior year in college, one of my horribly boring tasks was to match up the vendors’ monthly statements to their invoices.  It was hard to reconcile the two because the vendors would call complaining that we weren’t paying them in a timely manner and the accounts payable supervisor would often pay whatever was in front of her… It was a mess.  Several times, we decided to pay whatever the came in through the mail because we were getting so backed up.   We wrote a check, crossed our fingers and hoped for the best.

 

 

[1] Robert Half International. Can You Expense a Tropical Fish?  What Workers Try to Put on the Company Dime. September 24, 2009.

[2] United States. Govt. Accountability Office. Medicare Fraud, Waste, and Abuse: Challenges and Strategies for Preventing Improper Payments. June 15, 2010. GAO-10-844T.

[3] Claudia Grisales. “Settlement Reached In Pedernales Co-Op Lawsuit.” Austin American Stateman. March 11, 2008.

[4] Policy Basics: Where Do Our Federal Tax Dollars Go? Center for Budget and Policy Priorities. April 14, 2010.

[5] Ira Rosen and Joel Bach. “Medicare Fraud: A $60 Billion Crime A.G. Holder Tells 60 Minutes More Oversight Is Needed; Scammer Explains How Easy It Is To Steal Millions.” Sixty Minutes. WCBS. October 25, 2009. Television.

[6] Kerry Williamson. “Bogus invoices got IT chief $1.75 million.” The Dominion Post [New Zealand]. December 12, 2009.

Fraudulent Disbursements – Billing Schemes and Payroll Schemes

More in the series on getting to know the fraud tree better. To get a better sense of where we are on the fraud tree and which branch we are talking about in this newsletter, please see the entire fraud tree at http://www.acfe.com/fraud-tree.aspx.

Learn to do good;
seek justice, correct oppression;
bring justice to the fatherless,
plead the widow’s cause.
Isaiah 1:17

Misappropriating cash through fraudulent disbursements is a sizable portion of the fraud tree because there is a lot of room for creativity.  See an illustration of the fraud tree here: http://www.acfe.com/fraud-tree.aspx   In this newsletter, we will cover billing schemes & payroll schemes.  In future newsletters we will cover expense reimbursement schemes, check tampering, and register disbursements.  Five creative categories under fraudulent disbursements in all!

With fraudulent disbursements, the fraudster causes an organization to disburse funds through some trick or device such as submitting false invoices or forging checks.  The disbursement is often disguised as a legitimate business activity so that it can slide through the accounting system undetected by controls.

And with these sorts of schemes, the fraudster is usually caught when they get too bold or too greedy.  If they would just keep it small, they could supplement their income for decades!

Billing Schemes

Here the fraudster creates a valid looking bill and causes the organization to issue payment for the fraudster’s personal benefit. The Association of Certified Fraud Examiners classifies billing schemes into three categories:

  1. Shell companies
  2. Non-accomplice vendors
  3. Personal purchases

Shell Companies 

In this creative scenario, the fraudster creates a fake company that has a valid sounding name and then sends checks from the victim company to their fake, or shell, company.

In my hometown, LouAnne Aponte stole over $800,000 from a large not-for-profit, Family Connections, for which she was the executive director. For six years she forged a well-known local CPA firm’s name on audit reports to avoid questioning by auditors and to satisfy federal grant requirements.

In March 1993, Aponte formed a business named Excite and Challenge, and then paid Excite and Challenge from Family Connections funds.  She used the money to pay her mortgage for a home in a tony Austin neighborhood and bought herself a convertible Mercedes.

For a decade LouAnne Aponte also volunteered as the treasurer for the Texas Association of Child Care Resources and Referral Agencies.  Aponte was accused of stealing over $100,000 from that organization.

Aponte had a history of theft dating back to the 1980s when she stole about $60,000 from two employers. In 1987, she served only four months of a four-year prison sentence for her crimes. Unaware of Aponte’s past, the nonprofit Austin Families hired Aponte in 1990 when she was still on parole.

Having served only two and a half years of her 25-year sentence for the crimes against Family Connections, Aponte was up for parole in May 2013.[1]

Straw students are like shell companies, aren’t they?

Creating fake students has always been a popular scam when it comes to milking money out of student financial aid programs.  When you actually see students in a classroom in college environments, it is hard to keep a scammer from succeeding – but how do you verify online students?

Between 2006 and 2009, Trenda Halton defrauded Rio Salada College in Arizona for over a half a million dollars.  Having discovered how to defraud the registration system of Rio Salado College, Halton worked with four accomplices to create 136 “straw” students.

In her scheme, she recruited “straw” students who prepared and filed bogus admissions applications, financial aid applications, and Pell Grant applications in the students’ names. The financial-aid recipients received aid money after Rio Salada deducted tuition.

Halton’s cover was blown when a Rio Salado employee noticed that the applications all had the same handwriting and the students were enrolled in the same classes. In 2009, Halton was indicted with 64 other defendants and charged with offenses such as conspiracy, mail fraud, financial aid fraud, and making false statements in connection with financial aid.

Rio Salada’s small distance learning college was a prime digital target for Halton. Other colleges that have been victimized by online financial-aid fraudsters include the University of Phoenix’s Axia College, Michigan’s Lansing Community College, and Texas’ Dallas County Community College.[2]

Non-Accomplice Vendors

My small business has several names, and I have been married 15 times.  OK, OK, I have wed only twice.  But I have three last names!  And the bank will take any check from me using any of my last names or business names.

A banker in one of my classes told me that the bank doesn’t check endorsements or names on the check if the amount is under $10,000.  The volume of checks is just too high for them to watch.  Banks also put on the back of your bank statement that you have 60 days from the date of the statement to resolve any discrepancy, otherwise the bank is not responsible.

So imagine taking a valid vendor name – say ABC Pest Control – that your organization would spend money on and changing the address on the payment to your own PO Box.  And if you have already succeeded depositing checks under ABC Enterprises, the bank will take it. You will enjoy the money, and your organization probably won’t know the difference.

Personal Purchases

Whether personal purchases are considered fraud by an organization depends on the type of organization.  In the corporate environment, use of the company credit card to buy golf equipment while entertaining clients could be perfectly valid.

2 shoesIn government, we never entertain!  OK, we seldom entertain, but governments would seldom find the purchase of golf equipment valid.  Remember our discussion about what fraud is, what abuse is, and whether something is worthy of the attention of those in charge of governance? That applies to personal purchases, big time.

But HP wasn’t as lenient with their money as some other corporations.  They ousted their CEO, Mark Hurd, in 2010 for expense report irregularities and for hiring a model/actress that he had a personal relationship with to represent HP at trade shows for $5000 to $10,000 a pop.[3]

Payroll Schemes

Another way employees can extract money from their employers using a false disbursement scheme is to make false claims for compensation.  The fraud tree is divided into four parts under payroll schemes:

  1. Ghost employees
  2. Commission schemes
  3. Workers compensation
  4. Falsified wages

Ghost Employees

In this scheme, the government is charged for employee wages for fake employees or, if you prefer, “phantom” employees.

3 ghostsDo you remember Paul Bremer? He was the administrator of the Coalition Provisional Authority (CPA), the transitional Iraqi government. In 2007, Bremer acknowledged to the House Committee on Oversight and Government Reform that during the 2003 to 2004 rebuilding of Iraq, for which he was responsible, America had paid nonexistent “ghost employees.”

Bremer suggested that the organization feared the consequences of stopping payments to determine who were truly employed. Those who were employed supplied the Iraqi ministries with security, and Bremer did not want to anger these 74,000 armed men.

The problem of the “ghost” employees was just one piece of the puzzle of the missing $8.8 billion that the CPA distributed to Iraqi ministries. Stuart Bowen, the Special Inspector General for Iraq Reconstruction stated that the problem was not a major reason that so much money was unaccounted for. He blamed the lack of transparency for the missing funds.[4]

Commission Schemes

 

The Pyramid

Although I can’t imagine this happening in government, or that a commission/pyramid would be relevant in government, you may have personally been the victim of a pyramid scheme in your past.  In a pyramid scheme, the fraudster promises consumers or investors large profits if they can recruit others to join the program.  Some schemes purport to sell a product, but the product is really just a cover for the pyramid.

Victims of a pyramid scheme are often asked to inventory load – or buy stock inventory of a product in order to sell.  In this way, the company does make profit, and the folks on the top of the pyramid profit, but the front-line salesmen are stuck with a bunch of inventory they can’t sell!

Also beware of claims that the product is selling like hotcakes!  Who is buying the hotcakes: actual customers or just players in the pyramid?[5]

A few cautions about marketing ‘spin’!

I remember my mother buying a horrible car – a Ford Taurus – in the 90s because the dealer told her it was the best selling car in America.  Yes, it was, but only because Ford made incredible deals to get the rental car industry to buy beaucoup of them. Consumers hated the car and for good reason.  Ah, marketing spin wins again!

A well known vitamin company in the US is advertising that they are the first vitamin company to get clearance from an organization they say is an independent evaluator of vitamin quality.  Only problem is that the vitamin company founded, funds, and shares staff with this independent evaluator.

And it isn’t just creative Americans: Customer complaints against four of the United Kingdom’s largest energy firms led to an investigation of nPower, Scottish Power, Scottish and Southern Energy, and EDF Energy by the energy regulator Ofgem.

Many of the complaints were against door-to-door salespeople and telemarketers who were persuading customers to switch suppliers. Customers were given misleading information and quotes, which resulted in the customers being in worse positions than before switching suppliers.

Confirming the customer complaints, Ofgem’s 2008 investigation showed that changing firms at the persuasion of pushy door salespeople left almost half of gas customers and electricity customers worse off.

As of September 2010, energy regulators were considering fining suppliers a portion of their annual revenue if customer complaints proved true.[6]

A bit about the the Ponzi

Although a Ponzi scheme is not specifically mentioned on the fraud tree, it is definitely worth talking about!  A Ponzi scheme is similar to a pyramid scheme, except there is no product to sell, and the schemer doesn’t pay a commission to salespeople to find new recruits. A Ponzi schemer uses the money from new recruits to pay existing members.

The most notorious Ponzi schemer of our day is Bernie Madoff who defrauded investors out of $60 billion.  Madoff paid investors significant returns using money he collected from new investors, which he never truly invested.

Enticing new investors by paying his investors more money allowed Madoff to keep the scheme rolling for about two, maybe three, decades. Madoff told investors that their investments were earning high returns and would give them large payouts to keep them onboard.

While he probably believed that his venture could last forever, it couldn’t withstand the decline of the stock market. In 2008, he could no longer keep up his lie. Investors weren’t paid on time because of his inability to yield sufficient cash out of his holdings.

On March 10, 2009, Bernie Madoff was charged with eleven felony charges including securities fraud, investment adviser fraud, mail fraud, wire fraud, three counts of money laundering, false statements, perjury, false filings with the United States Securities and Exchange Commission (“SEC”), and theft from an employee benefit plan.  On June 29, 2009, Madoff was sentenced to 150 years in prison.[7]

Workers Compensation

5 boxI like to work, don’t you?  I like to get something done and create new things.  But not everyone is motivated to create – some people think the world owes them a living, and false workers comp claims are an easy route to income without exertion.

It makes me very sad to see a video on 60 minutes of a guy moving a piano who has been claiming workers comp for three years.  Can you imagine being related to that guy? How could he, and you, stand it?

Here is an executive summary from a report by the GAO on fraudulent benefits:

Social Security Administration: Cases of Federal Employees and Transportation Drivers and Owners Who Fraudulently and/or Improperly Received SSA Benefits[8]

Summary

This testimony discusses the results of our investigation of the disability programs managed by the Social Security Administration (SSA). SSA administers two of the nation’s largest cash benefit programs for people with disabilities: the Disability Insurance (DI) program, which provides benefits to workers with disabilities and their family members, and the Supplemental Security Income (SSI) program, which provides income for aged, blind, or disabled people with limited income and resources.

In 2008, the DI program provided about $104 billion to some 9 million beneficiaries, and the SSI program provided about $38 billion in financial benefits to some 7.5 million recipients. Given the magnitude of these cash benefit payments, it is important for SSA to have effective fraud prevention controls in place to minimize fraudulent and improper payments.

This statement summarizes our most recent report, describing cases of federal workers, commercial drivers, and commercial vehicle company owners who fraudulently or improperly received disability benefits. The objectives of the investigation were to (1) determine whether federal employees and commercial vehicle drivers and company owners may be improperly receiving disability benefits and (2) develop case study examples of individuals who fraudulently and/or improperly received these benefits. In conducting this investigation, we compared DI and SSI benefit data to civilian payroll records of certain federal agencies and carrier/driver records from the Department of Transportation (DOT) and 12 selected states.

We found the following:

1) Thousands of federal employees, commercial drivers, and owners of commercial vehicle companies received Social Security disability benefits during fiscal year 2008, though we could not determine the extent to which beneficiaries improperly or fraudulently received payments. Because further investigation is required to determine whether these individuals are entitled to receive payments, our analysis provides only an indicator of potentially improper or fraudulent activity. Federal salary data from selected agencies for October 2006 through December 2008 show that about 1,500 federal employees may be improperly receiving payments. These employees were (1) DI beneficiaries who received federal salary above the earnings threshold for more than 12 months after the start date of their disabilities or (2) SSI recipients who received more than 2 months of federal salary above the maximum SSA earnings threshold for the SSI program after the start date of their disabilities. Based on their SSA benefit amounts, we estimate that these federal employees received about $1.7 million in benefits a month.

2) Based on our overall analysis above, we selected 20 nonrepresentative examples of federal employees, commercial drivers, and registrants of commercial vehicle companies who received disability payments fraudulently and/or improperly. The 20 cases were primarily selected based on our analysis of SSA electronic and paper files for the higher overpayment amounts, the types of employment, and the locations of employment, and thus they cannot be projected to other federal employees, commercial drivers, or commercial vehicle owners who received SSA disability payments. In each case, SSA’s internal controls did not prevent improper and fraudulent payments, and as a result, tens of thousands of dollars of overpayments were made to individuals for 18 of these 20 cases. For the 20 cases, our investigations found the following: (1) For five cases, we believe that there is sufficient evidence that the beneficiaries committed fraud to obtain or continue receiving Social Security disability payments by withholding employment information. (2) For 10 cases, SSA improperly increased the benefit amounts of the disability payments because the individuals had increases in the reported wages on which the disability benefit payments are based.

(3) Several individuals from our cases were placed in long-term, interest-free repayment plans for improperly accepting disability overpayments, even though SSA can charge interest. One individual’s $33,000 repayment plan was in $20 monthly installments–resulting in a repayment period of 130 years. For 10 cases, the individuals were continuing to receive disability benefits as of October 2009. For 18 of these 20 cases, the individuals also received $250 stimulus checks as part of the American Recovery and Reinvestment Act of 2009 (Recovery Act) while they were improperly receiving SSA disability payments. According to SSA officials, most of these individuals were entitled to and would have received the $250 stimulus checks even if SSA had properly suspended the disability payments to them. Specifically, SSA officials stated that beneficiaries covered under the DI program would have been covered under an extended period of eligibility (EPE), which is a 36-month period in which SSA does not pay any benefit amounts (i.e., payments are suspended) if the beneficiary has earnings above the substantial gainful activity (SGA) threshold. According to SSA officials, all working DI beneficiaries covered by an EPE received the $250 stimulus check.

 

Falsified Wages

Here is a report from the NY Attorney General regarding contractors who falsified employee wages:6 nurse

Three Contractors Arrested For Underpaying Employees And Falsifying Business Records In Connection With New York City Housing Authority Construction Projects[9]

State Attorney General Spitzer and New York City Department of Investigation Commissioner Rose Gill Hearn today announced that three construction contractors were arraigned on felony and misdemeanor charges arising out of their falsification of records that made it appear that $367,000 in legally required prevailing wages were paid to 19 workers on New York City Housing Authority projects, when, in fact, such wages were not paid.

Mohammed Abdur Rashid, and his company Columbus General Construction Inc., and Tarcisio Ferreira and Harrison Jarvis, whose construction companies are now defunct, were charged with failure to pay wages, falsification of business records, false filings and perjury in connection with Housing Authority contracts at the Edgemere and Arverne Houses (Ocean Bay) located in Far Rockaway.

The defendants entered “not guilty” pleas in Queens County Criminal Court, and were ordered to return to court on October 15, 2003.

“The message is clear: falsifying records and failing to pay the prevailing wages on a public work project are serious violations of the law. Contractors who engage in such tactics can expect criminal sanctions,” Spitzer said.

“These contractors unjustly chose to enrich themselves rather than pay employees their rightful wages. DOI will not tolerate this type of fraud or other acts of dishonesty and will investigate them with vigor. Upon recovering any improprieties, DOI will seek to prevent the company in question from obtaining future contracts with the City,” said Commissioner Gill Hearn.

The joint investigation by the Attorney General’s office and the Department of Investigation’s Office of the Inspector General for the Housing Authority revealed that between July 2, 2001 and December 31, 2002, Rashid, Ferreira, Jarvis, and their respective companies employed nineteen workers at the Edgemere and Arverne Houses. The work was subject to federal and state prevailing wage laws, which dictate the hourly rates that must be paid to employees working on public projects. In each case, the defendants are alleged to have failed to pay workers prevailing wages, and attempted to conceal their wrongdoing by filing false payroll showing that their employees were paid properly. The workers received between $70 to (sic) $110 per day instead of up to $48.53 per hour, which they were entitled to by law.

The Attorney General is also seeking restitution for the underpayment of wages to employees, which totals more than $367,000.

As a result of the continuing cooperation between the OAG and DOI, over one million dollars in wage restitution orders have already been obtained this year. 

Next time… more on fraudulent disbursement schemes including expense reimbursement schemes.



[1] Andrea Ball. “Woman who stole from nonprofit up for parole two years into 25-year sentence.” Austin American Statesman. May 14, 2013.

[2] Marc Parry. “Online Scheme Highlights Fears About Distance-Education Fraud.” The Chronicle of Higher Education. January 13, 2010.

[3] Ben Worthen and Joann S. Lublin. “Mark Hurd Neglected to Follow H-P Code.” Wall Street Journal. August 8, 2010.

[4] Melinda Henneberger. “Bremer paid ‘Ghost Employees’ to avoid ‘Real Trouble.’” Huffington Post. February 6, 2007.

[5] Debra A. Valentine.  Prepared statement. “What is a Pyramid Scheme and What is Legitimate Marketing?” International Monetary Fund’s Seminar On Current Legal Issues Affecting Central Banks. Washington, D.C. May 13, 1998.

[6] Tim Webb. “Ofgem investigates doorstep gas and electricity sales agents.” The Guardian [UK]. Web. September 2, 2010.

[7] New York State. Department of Justice. United States v. Bernard L. Madoff and Related Cases. FBI, August 5, 2009.

[8] United States. Govt. Accountability Office. Social Security Administration: Cases of Federal Employees and Transportation Drivers and Owners Who Fraudulently and/or Improperly Received SSA Benefits.  August 4, 2010.

[9] New York. Office of the Attorney General. Three Contractors Arrested For Underpaying Employees And Falsifying Business Records In Connection With New York City Housing Authority Construction Projects. Media Center. September 2003.

Misappropriation of Cash: Larceny & Skimming

More in the series on getting to know the fraud tree better.  To get a better sense of where we are on the fraud tree and which branch we are talking about in this newsletter,  please see the entire fraud tree at http://www.acfe.com/fraud-tree.aspx.

Objectives: 

  • Differentiate between skimming schemes
  • Differentiate between schemes to misappropriate cash

“I was a guy sitting in a courtroom making $100 million a year, and I think a juror sitting there just would have to say, “All that money? He must have done something wrong.’ I think … it’s as simple as that,” 
On 60 Minutes: Dennis Kozlawski, CEO of Tyco,
who was convicted of misappropriating more than $400m

Of the three main branches of the fraud tree (corruption, asset misappropriation, and fraudulent statements), asset misappropriation has the largest number of categories or sub-branches.   Please notice that assets include not only cash (my favorite asset!) but also inventory and equipment, which will be covered in a later chapter. Let’s begin with the beautiful green stuff.

Cash can be taken from an organization at one of three moments:
1.    When the cash is received,
2.    When cash is hanging around ‘on hand,’ and
3.    When the cash is disbursed.

You will often hear about the theft of cash using two terms: larceny and skimming. The difference is in the timing: larceny is the theft of cash that the organization has already accounted for, and skimming is the stealing of money before the organization has the opportunity to account for it.

A third way to take cash is through fraudulent disbursements. Because of the multitude of ways to take money in this manner, we will cover fraudulent disbursements in a later chapter.

Larceny

When someone commits cash larceny, the fraudster steals cash from an organization after it has been recorded on the organization’s books and records.

Of Cash on Hand 

Larceny of cash occurs at cash registers or other cash collection points, the mailroom, or from deposits in transit.

One of my clients, a large hospital, instructs its medical clinic clerks to take their cash proceeds to the bank each day before they go home. So, nearly a dozen clerks board a downtown bus with a bag of cash and take it to the bank!  What an opportunity for larceny!

Cash larceny is detectable if the accounting records are properly maintained and analyzed and will become apparent during cash register or bank account reconciliations.

From the Deposit 

I found several juicy examples of seemingly harmless government clerks quietly taking thousands…

Courthouse accounting clerk steals $12,000 a week
Marie Morey, a 38-year-old single mother of two worked in the probation department of a Massachusetts court.  She employed a host of complex accounting maneuvers to pocket some $12,000 a week for three years and left amid sharp questioning from suspicious auditors.

Morey, the only person in the department authorized to change entries in the court’s accounting system, used her position to manipulate the records and bank deposits to cover her tracks.

Morey is also accused of pilfering courthouse fees paid in cash and then submitting falsified money orders to mask the theft.  It is believed that she pocketed cash and substituted money orders to make it look like the proper amount of money was deposited. 1

Mayor’s assistant colludes with payroll clerk to steal $370,000

Dorothy Triplett, a payroll clerk in Washington Park Village, Illinois, was sentenced to 18 months in prison for stealing over $143,000 and colluding with the mayor’s assistant to steal $370,000.  Triplet had access to the village’s financial information. Court documents show that money was transferred to various accounts under Triplett’s name several times a month, and sometimes up to three times a day. The transfers ranged from $200 to $5,825.98.  2

Other 
Have you heard about the administrators of Bell, California  who fraudulently collected excessive taxes from citizens and then awarded themselves huge bonuses and raises? Here is an excerpt from a report by the State of California Controller 3:

Background

The City of Bell is located in Los Angeles County, California. The population was 36,664 in the 2000 census. At 2.5 square miles, it is 13th among the 25 geographically smallest cities in the United States with a population of at least 25,000.

City residents voted to become a charter city in a special municipal election on November 29, 2005. Fewer than 400 residents, representing approximately 1.1% of the city’s total population, turned out for the special election. The charter provided more autonomy to city management and exempted the city from needing to follow state contracting procedures or complying with a state law that limits council members’ salaries.

News media reports in July 2010 revealed that some City of Bell administrators and council members were receiving disproportionately high salaries.

Many Bell citizens became outraged and called for the suspension of the salaries of these officials, and later, the resignation of several council and staff members. On July 23, 2010, some administrative officers resigned their positions with the city, while the mayor and the city council continued to govern the city until September 21, 2010, when the mayor and three of four Bell City Council members were indicted on felony charges.

On July 24, 2010, the Bell City Council hired Pedro Carrillo, a partner of Urban & Associates, Inc., as the Interim CAO. The newly-appointed interim CAO requested that the SCO audit the City of Bell. In response to this request, the SCO agreed to perform a series of audits including one to review the expenditures of state and federal funding the city received.

For accountability and transparency, it should be noted that the issues identified in this audit report also exist in payments made to the interim CAO’s firm, Urban & Associates, Inc. From August 25, 2008, to June 28, 2010, the city made payments totaling $222,000 to Urban & Associates, Inc. based on approval by the former CAO. Despite making repeated requests, neither city staff nor the interim CAO could provide the SCO auditors with a valid contract to identify the scope of services to be performed by Urban & Associates, Inc. and conditions and terms of payment. We reviewed Bell City Council minutes and city resolutions and found no evidence suggesting that the Bell City Council had approved a contract for Urban & Associates, Inc.

Conclusion

Under the former CAO, the City of Bell management ignored and circumvented internal controls and the Bell City Council failed to exercise proper oversight governing the city’s procurement activities. For the period of July 1, 2008, through August 31, 2010, the City of Bell reported total state and federal expenditures (excluding Fund 04–Gas Tax Fund) for contracts and purchases in the amount of $2,356,018. Of this amount, we reviewed $1,944,085 (82.52%) and determined that $710,459 was questionable. The questioned amount represents 36.54% of the total amount reviewed. We question the payments because they were made without a valid contract or outside the scope of the contract. In addition, none of the goods or services was procured through competitive bids.

In previously issued SCO reports, we found evidence suggesting that the former CAO may have used public funds for personal gain. The fact that the former CAO was able to select vendors without proper approval and without competitive bid raises serious questions about possible conflicts of interest, favoritism, and other improprieties.

Skimming 

In a skimming fraud, cash is stolen from an organization before it is recorded on the organization’s books and records. So skimming must take place as the cash is received before the accounting system captures it.

Skimming is an off the books type of fraud, as it is never recorded. Obviously, skimming is more difficult to detect than larceny because there is no direct audit trail. Employees who deal directly with customers and handle customer payments often have an opportunity to skim.

The skimming section of the fraud tree has three categories:

1.    Skimming from sales
2.    Skimming from receivables
3.    Skimming from refunds

Skimming from Sales 

Cash businesses are more prone to skimming than businesses paid by check, credit card, or electronic transfers. But businesses receiving checks can be affected by skimming as well; checks that are stolen can be deposited in false company accounts that have a similar name but belong to the thief, not the company.

Under skimming from sales, the tree is further divided into:

1.    Skimming from unrecorded sales: the fraudster puts cash into their pocket and does not properly ring up the sale.
2.    Skimming by understating sales: the customer pays full price, and then the fraudster enters a discounted sale in the accounting records.

Unrecorded Sales

In this scenario, a sale never makes it into the books at all, as opposed to an understated sale, where the sale is recorded, just not at full price.

One summer when I was in college I worked in an art gallery in Houston.  My mother was one of a handful of salesmen, and I helped with inventory, data entry, filing, and accounts payable. The owners of the gallery were siblings, although the sister owned the majority interest and reminded her brother of this frequently!  He was, as you can imagine, a disgruntled partner.

Many pieces of art, mostly lithographs, oils, and prints, were let on ‘consignment’ to designers who would show them to their clients but keep them for as long as they needed. Some pieces of art never came back as some designers disappeared or moved without returning the art.  And some of the art got damaged during framing or transport.  The brother had a half-baked system for tracking this inventory. Of course, he benefited from this poor excuse of a system; he pocketed cash sales while his sister wasn’t looking.

One of our customers was a gentleman who worked for Chili’s, which was growing fast and building restaurants throughout the southwest.  This man’s job was to find art and other weird appropriate artifacts to populate the walls of the restaurants. He purchased in cash hundreds of southwestern prints from the gallery.  The brother pocketed the cash, and that was the last anyone said about it.  I was only 19, but that didn’t look kosher!

One day, I got bored and needed to get up from my desk, so I took it upon myself to straighten out the inventory, put new plastic sleeves and backing on some pieces, and alphabetically organize the art.  I wanted a record of what they had, once and for all! The brother didn’t like that!  He found me something else to do in the framing department until my tenure was over.

Not the lunch lady in the hair net!
Even sweet old lunch ladies can be tempted to skim.  The former bookkeeper of the Concord School District in New Hampshire stole between $300 and $400 from the lunch program every day for seven years. By the time she was indicted she’d stolen $418,876!  That is a lot of milk!

During the bookkeeper’s nine years with the school lunch program, she was responsible for counting the roughly $5,000 students spent each day in the district’s cafeterias. She was the only district employee who handled deposit slips.   4

A little vending machine money can go a long way!
During his four years as manager of a recreation center in Michigan, Scott Muir kept the profits from the two vending machines at the center.  He initially forwarded the profits to the city treasurer’s office a few times, but then stopped because no one was double-checking his work.  He embezzled $40,000 before he was caught.  5

$300,000 from utility payments
A former cashier with Colorado Springs Utilities pleaded guilty to stealing more than $300,000 over a nearly four-year period.  Donna Inzer, 69, took money from utility payments and then altered the daily balances so the thefts wouldn’t be detected when deposits were made.   6

And taking money from children… Shame, shame, shame!
William Snyder, 48, and Kevin Beaver, 43, formed REMAX Classic in 2005 and collected donations for the Children’s Miracle Network. They continued to collect donations from 2006 to 2009 but didn’t give the money to the charity. When the theft was discovered in late 2009, they gave $52,000 to the charity. The men were accused of stealing from charity, people with disabilities, a bank, a school and the tobacco tax fund. Beaver pleaded guilty to theft and was sentenced to five years of probation.7

Bogus charity
That case reminds me of an ex-brother-in-law who set up gum and candy machines in gas stations and mechanic’s garages that had a big sign at the top saying that the money was going to a bogus charity that sounded very much like a true, well known charity – the title of the charity was just off by one word!  And my ex-brother-in-law, who had a problem with cocaine, collected and pocketed the money and had the audacity to brag about it at a Passover dinner!  Amazing.  Drugs do indeed make you crazy.

3-10-2A-2 Understated Sales

While most skimming is done via unrecorded sales, it can also be done via under-recorded sales. A skimmer sells 10 widgets at $100 each, but records 8 at $100 each and pockets the $200. Or he could record 10 sold, but at $80 each, and achieve the same result.

Scale manipulation
A scale house operator figured out how to manipulate scales at a paper mill and share the proceeds with truck drivers. Aaron Freeman, an employee of Temple-Inland in Rome, Georgia manipulated the scale house computer system to produce two weight readings when a single truck passed through the paper mill’s scale: a reading for the weight of the timber actually delivered, and a second reading for a phantom load.  Freeman then recruited drivers to take credit for the phantom loads, and the drivers shared their $4.8 million in payments with Freeman.  8

Skimming from Receivables 

Skimming doesn’t only happen in face-to-face sales situations. It can also occur in the mailroom.  If the fraudster is creative, he can figure out a way to deposit checks intended to cover receivables.

One $27,000 check triggers 14th arrest
Lisa Michelle Darden stole a Georgia Department of Revenue check while working in the state-processing center, which handles tax refunds, returns, and payments.

Investigators said they found that she had a lengthy criminal record and should never have been working there in the first place.  Investigative TV reporter, Jodie Fleisher, found that she had been arrested more than a dozen times in the past 15 years.  The Department did not conduct a background check as she was brought in by a temp agency. 9

Under receivables skimming, you will find two categories on the tree: write-off schemes and lapping.

Write-off Schemes

VanDyke Walker, an accounts receivable specialist for the Hartsfield-Jackson International Airport in Atlanta, embezzled at least $235,000 of city revenue over a six-year period. Walker was responsible for receiving $40 to $50 payments for badges, fingerprinting, and vehicle permits collected by the security division from employees who need access to the airport. The findings came after an internal audit started in March 2009 found “numerous irregularities.”  Walker threw away his copy of reconciliation reports and rewrote them in order to facilitate the scheme. 10

Lapping Schemes

Lapping is a complicated ongoing fraud usually perpetrated by an employee who has custody of cash and check payments plus responsibility for accounts receivable recordkeeping. The fraudster receives a payment to a legitimate customer’s account receivable and pockets it for himself. To cover this up, the fraudster replaces the stolen amount at a later date using receipts from another customer. This is repeated over and over and over again.

Former Hospital Secretary Indicted in Connection with Allegedly Stealing Over $200,000 in Check-Lapping Scheme 11

A former administrative assistant at Beverly Hospital has been indicted in connection with stealing hundreds of thousands of dollars from Sodexo, Inc., a hospital vendor, in a scheme where she took cash from the hospital’s cafeteria and other sources and fraudulently changed accounting system entries to cover her theft, Attorney General Martha Coakley’s office announced today.

Diane Thistle, age 63, of Beverly, was indicted by an Essex County Grand Jury on charges of Larceny over $250 and Making False Entries in Corporate Books.

In April 2010, the Attorney General’s Office began an investigation into Thistle’s alleged activities after the matter had been referred by Beverly Hospital and one of the hospital’s vendors, Sodexo, Inc. Thistle was an administrative assistant at Beverly Hospital for over 14 years, and one of her duties was to oversee the processing of checks and cash generated by the food services division. She was supposed to collect cash that came in from the cafeteria and checks that came in from catering jobs. In the spring of 2009, the hospital decided to stop using Sodexo to manage its food services and the two parties began the process of settling their account. Sodexo’s records showed that invoices to the hospital totaling hundreds of thousands of dollars remained open. The hospital’s records, however, showed that those invoices had been paid in full. After this discovery, Sodexo immediately initiated an audit of the account.

Authorities allege that Thistle stole money from the account using a “check-lapping” scheme. Investigators discovered that Thistle allegedly stole cash that came to her from the cafeteria revenue and then replaced the stolen cash with older checks that the hospital intended as payment for catering. When the amounts did not perfectly match, Thistle would insert her own personal checks into the deposit to balance the amounts. When the hospital paid Sodexo, Thistle received the check and arranged for its deposit into the vendor’s food services bank account. Thistle would then access Sodexo’s cafeteria records and fraudulently change the entry for that day’s cash intake. She allegedly entered a new amount that equaled the catering invoice. Thistle would then pocket some or all of the cafeteria cash, but deposit the hospital’s catering check as if it were the cafeteria cash.

As a result, Beverly Hospital’s records would show it had paid its catering bill, while Sodexo’s records would falsely show that the deposit was for cafeteria revenue. At some later point, Thistle would pay the open catering invoice with an older catering check from the hospital, and use her own personal checks to balance the amounts if necessary.  Authorities allege that between 2005 and 2009, Thistle stole over $200,000 from Sodexo and used those funds for her own personal use.

An Essex County Grand Jury returned indictments against Thistle yesterday.  She is scheduled to be arraigned in Essex Superior Court in Salem on July 22, 2010.

The case is being prosecuted by Assistant Attorneys General Marc Jones and David Waterfall, both of Attorney General Coakley’s Corruption and Fraud Division, and was investigated by financial investigators Davin Lee and Jessie Dean and members of the Massachusetts State Police.  Beverly Hospital and Sodexo, Inc. cooperated fully with the Attorney General’s investigation.

Refunds

Unfortunately, I haven’t found a true-life example of skimming from funds.  But when the register is open to give a customer a refund, the fraudster can alter the records and take a little cash.  Where there is a will, there is a way! If you have a story, please share it with me at Leita@yellowbook-cpe.com.


Peter Schworm and John Ellement. ”Clerk held in sophisticated $2m theft.” The Boston Globe.  December 4, 2009.2 KSDK. “Former Washington Park payroll clerk sentenced to prison for theft from village.” KSDK.com. Web. March 20, 2009.3 John Chiang. State of California. Office of the Controller. City of Bell Audit Report: State and Federal Expenditures: July 1, 2008 through August 31, 2010. Report. Press Release. November 2010.

4 Meg Heckman. “Lunch money embezzlement to end in deal.” Concord Monitor. September 16, 2008.

5 Francesca Chilargi. “Former city manager take plea deal in skimming scheme.” The News Herald [Southgate, MI]. August 27, 2009.

6 Associated Press. “Former Springs utilities cashier admits embezzlement.” cbs4denver.com. Web. May 8, 2008.

7 Donna J. Miller. “Men accused of stealing from charity, people with disabilities, a bank, a school and the tobacco tax fund: Court Watch.” Cleveland.com. Web. December 14, 2010.

8 Georgia State. Department of Justice. Final Three Defendants Sentenced to Federal Prison for “Phantom” Timber Scheme. Atlanta.fbi.gov. Web. February 2011.

9 Jodie Fleisher. “Woman Accused Of Stealing $27K Check.” WSBTV.com [Atlanta]. Web. January 20, 2010.

10 “Airport worker accused of theft. Report says man stole $235,000 of city funds over six years.” Atlanta Journal Constitution. A11. September 3, 2009.

11 Commonwealth of Massachusetts. Attorney General’s Office. Former Hospital Secretary Indicted in Connection with Allegedly Stealing Over $200,000 in Check-Lapping Scheme. Coakley, Martha. Press release. Salem: Commonwealth of Massachusetts. July 1, 2010.

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