Financial Fraud & Embezzlement Investigations & Prevention in Businesses, Divorces, Estates, Trusts & Probate
The author, renowned nationwide banking expert witness Don Coker, discusses financial fraud and embezzlement committed by employees as well as financial fraud and embezzlement in divorce, partnerships, estates, trusts, probate, and bankruptcy situations; and nationwide industry standard practices and procedures for avoiding many of these problems.
This article deals with fraud and embezzlement committed by an employee or other inside or known person.
Employee Financial Fraud and Embezzlement
Even the most conservative estimates of the extent of employee financial fraud and embezzlement are in the billions of dollars each year. On top of these scary estimates, consider the following:
● The estimates typically cover only what fraud is known, yet many frauds go on for years without ever being detected.
● Many frauds that are detected go unreported since a business is reluctant to admit that its business and security procedures were lax enough to allow a fraud to be perpetrated on them.
Typical Employee Fraud and Embezzlement Techniques
● Paying a False Invoice – Employees sometimes create false invoices to justify payments from their company. The employee may have created a bank account in the name of the false company in order to facilitate depositing the invoice payment checks.
● Diverting an Incoming Check to Their Own Bank Account - Sometimes an employee will take an incoming check that is intended to pay a particular invoice and deposit it to their own bank account or one created under a false name, usually a corporate or d/b/a name.
● Diverting a Company Bank Deposit to Their Own Bank Account – Similarly, an employee will sometimes take a bank deposit that is made up of cash or checks or a mixture of the two and deposit all or some of the funds into a bank account under the employee’s control.
● Paying Their Own Bills with a Company Check – Sometimes an employee will pay some of their personal bills with a company check. This is especially easy to do in the case of the employee paying their utility, telephone, credit card, or other bills that could just as easily be for a company as for an individual employee.
● Phony Loans from a Bank Employer - I have seen bank employees create false loans to fictitious, non-existent parties, set up false loan payments, and even roll the loans over for renewals, etc.
● Phony Loans in the Name of the Employer – Employees have been known to obtain unauthorized loans in the name of their employer, and then run the funds through a false bank account in order to gain control of the funds.
● Cash Back on Company Deposits – One of the simplest forms of employee financial fraud and embezzlement is for an employee to go to the bank to make a deposit for their employer and take cash back on the deposit. Banks should never allow this to happen, but it sometimes does.
All of these methods of employee financial fraud and embezzlement can be detected by an experienced expert who knows where to look.
Some of the preventative measures a business can use in order to help protect itself from employee financial fraud and embezzlement include:
● Check out prospective employees before you hire them. This includes obtaining a credit report, checking references, and checking with past employers. Be aware that a past employer may be reluctant to say anything negative about their past employee, and may only volunteer a cryptic answer that may be your signal that there was a past problem.
● Know the personal situation of your employees, especially those that are in a position where it would be relatively easy to commit a fraud or embezzlement. For example, if a particular employee lives a lifestyle that appears to involve more money than you know or expect the employee and their family to have available, then you may have a situation that needs to be looked into more carefully.
● Sometimes employees resort to financial fraud and embezzlement in order to alleviate personal financial problems. Therefore, an employer must be aware of any extreme personal financial situations that might place an employee in a tempting situation. Periodic credit reports can help in this regard. Employee approval in advance is required for an employer to obtain credit reports on the employee.
● Almost all employee fraud and embezzlement is carried out by one person as opposed to a group of two or more. Therefore, it makes sense to structure your operations so that you have more than one person involved in each function, by either actual participation in the function or by review or oversight.
● It is a good idea to periodically temporarily shift employees from one function to another so that a new employee can see firsthand what has been going on in the position they step into temporarily.
● Likewise, it is imperative that employees be required to take a vacation on a regular basis. It is incredible how many financial crimes turn up when an employee who has not taken a vacation or other time off is eventually forced by management policy, sickness, etc., to take time off from their job, allowing another person to step into their position and observe what has been happening.
● Periodically perform a random check of transactions to insure compliance with company policies and procedures.
● Update policies and procedures as needed in order to adapt to changing corporate structure, changing business and IT systems, etc.
● Make it easy for employees to report suspected financial fraud and embezzlement by other employees.
● Have your policies and procedures clearly spelled out in a manual that is explained to all employees upon their hiring and that are available to the employees as they carry out their job functions.
● Make sure that your insurance coverage includes employee dishonesty.
● Make it known that the company will involve law enforcement and pursue all avenues available in order to bring a wayward employee to justice.
Financial Issues in Divorce
The most common financial fraud issues encountered in a divorce usually fall under the two general headings of false or undisclosed income or false or undisclosed assets.
Methodologies that a forensic financial investigator can use to expose these tactics include:
● Examining bank and investment accounts to identify hidden assets or income, and diverted income, funds, or assets.
● Reconstructing reasonable replacement financial records where the actual records have been intentionally or otherwise destroyed.
● Reviewing closely-held business financial records for any hidden income or assets.
● Reviewing financial records to uncover hidden sources of income.
● Reviewing financial records to uncover hidden real or personal property.
● Reviewing actual filed tax returns and comparing them to other financial records.
● Reviewing for compliance with industry standards any valuations of businesses or professional practices that are at issue in the divorce.
It is not unusual for a partnership to encounter the problem of a partner using partnership funds for their personal benefit. Likewise, a partner may divert partnership assets to their own personal use. These situations often can be demonstrated by a careful examination of the financial, accounting, banking, and tax records of the partnership.
Estate, Trust, and Probate Issues
There are several common techniques that executors and trustees use to defraud trusts, estates or probate situations:
● Failing to include certain assets on the inventory of the estate or trust -
● Overbilling for their fees
● Billing for work actually carried out by others
● Double-dipping on their fees
● Commingling estate or trust funds with their own funds
● Diverting income from estate or trust assets to the trustee’s own use
● Failing to maximize the income of the value of the assets in the estate or trust
● Self-dealing in the sale or other disposition of the assets of the estate or trust
● Failing to carry out their administrative duties in a professional manner
● Failing to operate in a manner consistent with good faith, fair dealing, ordinary care, honesty in fact, and the observance of reasonable commercial standards
Financial Fraud and Embezzlement in Bankruptcies
Many bankruptcies result from an entity being drained of cash and assets by someone who is committing financial fraud or embezzlement. Many of the possible types of fraud discussed in this article can occur in an entity and cause that entity’s financial condition to deteriorate to the point that bankruptcy must be filed.
All of the expert analysis techniques discussed in this article can be applied to an analysis of how a financial fraud or embezzlement scheme contributed to or caused an entity’s bankruptcy.
Forensic Analysis in Financial Fraud and Embezzlement Cases
No matter what the nature of the financial fraud is, interesting things can be learned from a knowledgeable comparison of financial records and financial statements. Opinions can be provided regarding compliance with nationwide industry standards as well as opinions on reasonableness and completeness.
Missing records, whether due to loss or deliberate destruction, often can be reconstructed to a reasonable degree.
Many important financial questions can be answered by an examination and comparison of the various financial, accounting, banking, and tax records of the entity.
Determining the Extent of the Financial Damages
No matter whether the situation is employee embezzlement or theft, financial aspects of divorce, or trust, estate, and probate matters, the damages will need to be calculated before a demand can be made for restitution and settlement.
Depending upon the circumstances of the particular situation, there are usually two elements of damages. First, you have the actual amount of the funds taken or the value of the assets that were taken illegally. Second, you have the lost income and other financial ramifications that result from the funds and assets that were illegally removed.
A reasonable estimate of the total damages will probably be required for any insurance claim that results from the fraud loss.
There are established methodologies for establishing both of these elements of damages, and they are too detailed to be covered in this article.
If you are an attorney handling a case of the type described in this article, then you should engage a competent expert to assist you in the discovery stage. The expert can tell you what documents you need to request in order to uncover the information you will need in the prosecution of the case. Waiting until too late in the litigation process can cause access to valuable information to be lost.
If you are a business that has or suspects an employee fraud or embezzlement situation may be taking place, engaging a competent expert consultant to perform an investigation. It is helpful if the expert is also capable of providing expert witness services should litigation be required in order to rectify the problem.
ABOUT THE AUTHOR: Banking Expert Witness Don Coker
Expert witness and consulting services. Over 500 cases for plaintiffs & defendants nationwide, 120 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ.
Clients have included numerous individuals, 75 banks, and governmental clients such as the IRS, FDIC. Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator.
B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.
Called on by clients in 31 countries for work involving 61 countries. Widely published, often called on by the media.
Copyright Don Coker
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.