The embezzlers' fraud wheelhouse contains a classic tool for "misappropriating funds" from their employers: the ghost employee. Simply put, "The term ghost employee refers to someone on the payroll who does not actually work for the victim company." (2015 Fraud Examiners Manual, 1.456) Ghost employees are miracles of physics: they might or might not exist and companies don't employ them, yet they draw regular paychecks. Of course, ghost employees' paychecks magically wind up in the embezzler's coffers. This fraudster often works in the human resources or payroll department, which enables him or her to create ghosts on paper. The embezzler then creates and submits time records and receives physical paychecks or money via direct deposit.
The scheme
Matthew "Sonny Boy" Chester (mostly not his real name) was the youngest scion of a family whose parents owned and operated a small manufacturer of electrical equipment, Chester Electronics Inc. (CEI) The company employed an office staff and numerous low-income immigrants who worked on the factory floor. The Chester family owned all the stock in the corporation and had a board of directors comprised exclusively of Chesters that began with mom and pop at the top, followed by their adult children.
Sonny Boy was part owner and officer of the corporation, and he was responsible for all human resources and payroll functions. He approved all payroll timesheets, but an outside vendor generated physical paychecks based on Sonny's reports on employees' net pay.
It wasn't enough for Sonny Boy to have an ownership position in the family business and a well-paying job. Few embezzlers can even spell the word "enough." Over the course of nine years, he embezzled hundreds of thousands of dollars from CEI by creating scores of ghost employees — 344, to be precise.
He fraudulently issued payroll checks to actual CEI employees who had either been absent during the pay period or who had left the company, thereby creating (wait for it) "zombie employees." He filled his zombie employee pool with CEI's low-income immigrant workers, who were mostly from Asian or African countries, needed work, weren't familiar with or were suspicious of direct deposit and whose command of English was limited.
Sonny Boy had no trouble falsifying records because he was the only one who ever looked at them. The company paid employees with physical checks cut by the payroll vendor and sent to Sonny Boy. He'd then fish out the fraudulent checks, forge endorsements in the zombies' names over to him on the backs of the checks and deposit them into his personal account. He increased his allowance from mom and pop by more than $508,000 through the issuance of more than 600 separate fraudulent checks.
Enter "sister whistleblower"
Maisie Chester, the stereotypical unnoticed middle sister, was CEI's CFO and another member of its board of directors. Sister whistleblower had the thankless job of managing the corporation's finances from stem to stern and was a tediously thorough financial steward, albeit unschooled in fraud prevention or detection techniques.
After about 8½ years of Sonny Boy's zombie windfall, just by happenstance, she decided to review the fronts and backs of the physical canceled checks from CEI's business bank account for the previous fiscal quarter rather than just the monthly statements and fronts of checks. She saw several payroll checks endorsed over to Sonny Boy. Curious and concerned, she then performed a 10-year spot-check review of canceled checks and found many more of these. Maisie then retained an outside accounting and auditing firm to conduct a complete audit, which revealed a mother lode of these suspicious checks.
The audit also discovered that the company had reported income for the zombie employees to the state income tax authority and the IRS, which, of course, created huge tax problems for these very real people. At least one of the zombies had trouble filing for public housing assistance when the state department of revenue reported his falsely inflated income to the local low-income housing authority.
Sister whistleblower was now downright scared. CEI had lost money in a contracting economy, and it had a thief as part owner, board member, manager, brother and son. The unwitting zombie employees might be able to sue CEI and wreck the company's standing in the community. CEI could stand to lose its business insurance coverage if it didn't address these thefts; CEI might be family-owned, but it still was a legally incorporated business.
Maisie presented her findings to the board of directors at a colorful board meeting attended by assorted Chesters, Sonny Boy and the outside auditor. Sonny Boy apologized, tearfully said, "I made a mistake" and promised to pay it all back (probably after he got an increase in his allowance). The rest of the Chester family, who believed this was a private family matter, swallowed his apology wholesale. But sister whistleblower would have none of it. She went to the police on the advice of the auditor because she intuited that Sonny Boy's "mistakes" had criminal implications — potential chargeable identity theft crimes — that could come back to haunt the corporation. A detective assigned to the case issued a flurry of search warrants on CEI's bank accounts, the business offices and factory.
In true modern dysfunctional family spirit, the Chester family implemented a new board policy: "shoot the messenger." They vilified sister whistleblower and ostracized her from the business and the family for reporting the thefts to the board and to the police. All of them, except for Maisie, circled the wagons around Sonny Boy. At one point during the prosecution of the case, they said that the money he'd reaped were actually company "loans." (The prosecutors shot that down when it presented the minutes of the fateful board meeting during which the auditor first described Sonny Boy's embezzlements.)
Sonny Boy was originally charged with five counts of theft by swindle over $35,000 and 12 counts of filing false tax returns because he failed to report or pay taxes on the boodle. (Would-be embezzlers should always be wary of those possible tax evasion charges before they commit their crimes.)
One of the theft counts was dismissed, and he was convicted on all of the others. He was sentenced to 23 months in prison and a $508,000 restitution order. Deputies took him directly from the courtroom where most of the Chester family sat on one side of the gallery and Maisie, the sister whistleblower, sat on the other side — alone.
Outsiders often automatically presume that the financial health and stability of a family business is always the top priority of the owners when they discover a skunk at their picnic. Inexplicably, family dynamics can be far more powerful than the family members' desire for the business' survival. They can forget that non-family employees also have rights. And Sonny Boy also forgot that his sister was an honest woman.
Annette Simmons-Brown, CFE, is a senior paralegal in the Hennepin County Attorney's Office in Minneapolis, Minnesota.