By far, the most common type of financial crime I work on is embezzlement of organizations — usually by employees. When it comes to their modus operandi, few employee-embezzlers are overburdened with imagination: they write checks payable to themselves, submit phony invoices for reimbursement, inflate their proper wages, transfer monies online from business accounts into their own, use the company credit card for their personal expenses, etc. In fact, now when I look at new employee-embezzlement cases and I see the standard-issue raft of victim-business bank and credit card records with the continual drain of funds directly into the embezzler's sticky hands, I think, "Another employee embezzler, $267,000, spreadsheet, spreadsheet, blah, blah, blah." It gets to the point where I long for something totally outside of the box just to stay awake.
Be careful what you wish for ...
In many ways, Edith Chase fit one of the stereotypes of the traditional embezzler. She was a middle-aged woman in a mid-level accounting/bookkeeping job at a smallish business — wallpaper to most of the rest of the company after almost three decades of stolid, reliable work. The business, Precision Mold Design Inc. (PMDI), an unremarkable, invisible manufacturer in a blue-collar suburb, offered its employees paid vacation and sick leave, health insurance and a 401(k) plan.
Edith, of course, handled payroll duties for the business. PMDI used Payroll Processing Company (PPC), an outside vendor, but Edith was responsible for regularly informing PPC of employees' gross wages and of required withholdings from their paychecks. She was also responsible for informing Large National Bank — which administered PMDI's 401(k) employee accounts — of the net amounts to be withdrawn from PMDI's general account at Small Local Bank and distributed to the account holders. Including her 401(k) account.
Edith, a veteran of several failed marriages and parent to several failing children, subtly and ingeniously supplemented her income for more than eight years by using her knowledge of PMDI's accounting system and the cracks therein. She committed her crimes without ever cutting one fraudulent check to herself, making one false charge on the company's credit card or illegally wiring money to herself from her company's bank accounts — all of which made her the most non-traditional employee-embezzler in my personal pantheon. "How did she do this?" I hear you cry. Let's find out.
PMDI permitted its employees to take out personal loans from their 401(k) accounts and repay these loans via regular deductions from their paychecks back to their 401(k), which Large National Bank held and administered. Edith regularly took substantial "loans" from her 401(k) and deployed several steps that allowed her to take PMDI's money from its operating account at Small Local Bank. She would hide the thefts primarily by running the funds through the 401(k) loan program.
Edith was responsible for informing PPC of how much money should be withheld from each employee's paycheck for 401(k) loan repayments. However, she didn't tell PPC to withhold funds from her own paycheck (and PPC's payroll records would show that).
She instead created a spreadsheet to track funds directed to repayments of 401(k) loans at Large National Bank. For all employees, except for herself, she tracked on the spreadsheet the amounts withheld from their paychecks for loan repayments as processed by PPC. However, for herself, the spreadsheet falsely showed what should have been withheld by PPC for her loan repayment but wasn't.
Large National Bank would then use the spreadsheet to authorize automated clearinghouse transfers from PMDI's general operating account at Small Local Bank and make subsequent deposits into participating employees' 401(k) accounts.
Thus, Edith arranged for PMDI to unwittingly repay her loans with money that should've come from her paycheck but instead came from corporate funds.
Reread the preceding four paragraphs three times. You'll get more confused each time you do. Edith's scheme was so lyrical in its convoluted, confusing structure that even I still have to draw a picture of it — kind of the Fraud Triangle gone mad — every time I revisit it.
Cloak of deception pulled back
By Edith's 35th year with PMDI, the company had begun to struggle in a contracting manufacturing market, and the company laid Edith off. Only then did PMDI uncover Edith's thefts. One of her remaining co-workers, Shauna, who inherited Edith's duties, performed an audit of the books, quickly detected significant discrepancies in the books and notified her boss. He ordered an external CPA to perform a more extensive examination, which revealed Edith's embezzlement of more than $321,000 over the course of eight years.
PMDI called the cops and filed a report. Edith's assets were frozen. PMDI filed an insurance claim and sued her. Eventually, the courts convicted her of one count of a Theft By Swindle felony (prosecutors could only cite offenses in in the previous three years because of statutes of limitation), a 180-day workhouse sentence, and judgments and restitution totaling more than $238,000.
Edith's scheme was a testament to the importance of promoting the perception of detection, separation of duties and rotation of duties within an organization.
She was invisible because she was a long-term, nondescript, middle-aged woman in a nondescript department, in a nondescript company, in a nondescript community, and her employers were entirely complacent about her work.
She had too much singular, specialized knowledge about the payroll function, including the ability to read payroll and bank reports that looked like they were written in Cyrillic. And part of her job responsibility included her own compensation. These factors — combined with her ability to triangulate the communication among PMDI, its operating-account bank, its 401(k)-administration bank and its payroll processor — became her own personal Romulan cloaking device of fraud. I've never encountered such a successful embezzlement scheme that flew so far under the radar — and for that I must give a tip o' the hat.
Annette Simmons-Brown, CFE, is a senior paralegal in the Hennepin County Attorney's Office in Minneapolis, Minnesota. Her email is: firstname.lastname@example.org.