Protect Your Hard Earned Money from Loss by Fraud
It is not enough to make money. You have to protect it. A few times each year we receive a request that we investigate an apparent fraud, either from a client or from a referral. We investigate and, if the facts support it, we either prepare a civil complaint or present the claim to law enforcement for prosecution. This has become a pleasant morphing of our white collar criminal defense practice. The sleuthing and analysis are professionally satisfying but probably not great material for a movie treatment or an episode of CSI. This is just as well because any competent actor would refuse to play my character for obvious reasons - age, gut, and hair loss.
Whether we call it fraud, embezzlement, or conversion, financial crime is persistent. Your money can be stolen from you by business associates, transaction partners, vendors, employees, family, friends, or fiduciaries. There is nothing embarrassing about being a victim. It is not due to a lack of intelligence, competence, or fairness. The victims we have helped are successful people and companies. The cause of financial crime is the coming together of the three "legs" of the well-known "fraud triangle" pressure, opportunity, and rationalization. Pressure refers to the external pressures which drive a person to steal, e.g., I can pay my bills. Opportunity generally exists due to the victim's lack of controls, oversight, or information. Rationalization often takes one of two forms: I deserve it or I want it.
In these demanding financial times people and companies are often too busy making money to make the effort necessary to protect it, but it is equally important. Protecting your money has two components: (1) actions to mitigate the risk of loss and (2) actions to pursue a remedy if a theft is discovered.
A mitigation effort lessens the opportunity for fraud. Think of it as keeping the cookie jar out of reach of the children, keeping your wallet in your front pocket, or installing a burglar alarm in your home and posting a sign on your lawn. A well-conceived mitigation effort employs a combination of information collection, controls, deterrence, and timely reviews to (1) reduce working with or employing persons with indications of pressure or rationalization concerns and (2) control access to money to make fraud or embezzlement difficult.
Mitigating the risk of theft begins with obtaining information about the people with whom you are dealing or the people you are employing. When entering into a business venture with third parties, you should request references and conduct a background check. Similarly, you should interview references and conduct a background check when considering an applicant for employment in a position of trust. You should also interview colleagues and clients/customers and conduct a background check when considering promoting an employee into a position of trust.
Background checks should secure criminal, civil judgment, and credit histories. Offers of employment or signing deals should be contingent upon your satisfaction with the check results. The use of background checks in making employment decisions is regulated by the federal Fair Credit and Reporting Act, Title VII of the Civil Rights Act of I964, as amended, and similar state laws. The Federal Trade Commission and the Equal Employment Opportunity Commission have also issued regulations and guidance governing background checks. These should be reviewed and a compliance plan implemented to govern use of the background checks.
Mitigating the risk of the theft requires a robust program to control funds, negotiable instruments, records, accounting, financial information, and identity information. When dealing with third-patties, the key elements of control are: timely information about the use and status of your money, safeguards that give you control over disbursements, and deal documentation that assures you timely access to a remedy if things go south.
Similarly, controls in-house require strict limits on access to and transmittal of information, documents, negotiable instruments and checks; bank records and statements; billing and invoicing records; payment records; and the accounting ledgers. This should be supplemented by maintaining a secure record of all original documents and conducting scheduled and unscheduled reviews, sampling audits, "file dives" and e-searches. Employees and vendors should never have access and authority within the financial flow which is so broad or absolute that it defeats the control, review, and accountability procedures.
Lastly, controls should be supplemented with an educational program that demonstrates the company's commitment to managing its finances and locating and prosecuting offenders, if necessary. The educational program should also help encourage a culture of loyalty and mutual benefit that teaches that there is harm to all if one employee is allowed to steal and makes employees feel that they are part of a team.
There are really only two remedies to a theft: making an insurance claim and/or taking legal action. The primary remedy is access to (a) an insurance policy defalcation coverage limit and (b) a bond both with substantial limits. Embezzlers often burn up the stolen money in paying for their lifestyle. This leaves little in the way of assets to attach or liquidate when the theft is discovered. The embezzler also incurs income tax liability for the stolen money, which, under federal and local law, may have priority over your claim. In other words, the embezzler steals your money and then the government gets first shot at whatever is left when the theft is discovered. Preparation of an insurance claim is relatively quick, but it must be submitted in a timely manner. Most carriers require that a claim include evidence of the filing of a police complaint. Recovery sometimes involves punching through the usual insurance carrier "rope-a-dope."
The secondary remedy is litigation. The victim may pursue a civil and/or a criminal claim. Recovery may be limited by the subrogation rights of a carrier making a policy claim payment, if an insurance claim is filed. A criminal claim may be best if: the embezzler's assets cannot be readily identified and located with date of bit1h and social security information; secured with a prejudgment attachment; the cost of hiring an attorney to pursue your claims is a prohibitive factor; or your priority is to create a public record, punish the thief, and prevent them from obtaining future work in a position of trust. Civil claims sometimes produce a better financial recovery. An embezzler may turn over assets, if they still have them, which are not otherwise available in order to avoid a referral to the government for prosecution. Legal ethics preclude making such a threat during negotiations. But embezzlers and their lawyers know that once they are caught, the threat of criminal prosecution exists.