Whether donating to a natural disaster fund, a Go Fund Me page or even giving to an organization you know well, there is always a risk for fraud. During this year’s Charity Fraud Awareness Week, happening October 22-26, we would like to offer some of the best tips we have come across over the past few years in regards to charity fraud.Read More
ONLINE EXCLUSIVE, FRAUD MAGAZINE
Annette Simmons-Brown, CFE
Greed is everywhere. It pollutes all industries and organizations, including those dedicated to helping the poorest and most vulnerable of our society. And it breeds fraudsters within these organizations who have profound canniness and precisely zero moral queasiness when selecting their victims. Fraudsters like Emma and Kate.
Emma Kollegian and Kate Lashua never knew each other, although my office knew both of them in painful detail. But the similarities of their profiles, the sub-basement venality of their embezzlements and the predations of their victims make them an identical sub-type of embezzler that society should be educated to recognize. My unscientific theory is that when I see two embezzlers with similar characteristics and schemes, scores more are out there, including those who wear the professional halos of social-service employees.
Program coordinator preys on vulnerable clients
For 22 years, Emma worked at a nonprofit corporation called LifeAid Inc. that provides services to people with severe mental illnesses and/or chemical dependency problems. These services include housing subsidies and case management for long-term, chronically homeless clients. LifeAid receives public funds for its work and has several employees.
During her first 19 years at LifeAid, Emma worked as a case manager for individual clients who were deeply troubled and in great need. Emma eventually was promoted to program coordinator for LifeAid's Homeless Project; she retained her caseload of clients, while also taking on new responsibilities. The promotion also gave Emma the authority to issue checks from the Homeless Project's sub-account within LifeAid.
Shortly after she was promoted to program coordinator, Emma embezzled more than $96,000 using two separate schemes. In scheme No. 1, she issued 128 checks to herself from the Homeless Project account, purportedly for reimbursements, often using the signature stamp of the LifeAid manager actually authorized to sign or stamp checks. She supplied no meaningful documentation for these issuances, and many of the "reimbursements" were for purchases outside of LifeAid's policies and procedures.
In scheme No. 2, Emma generated 23 checks payable to at least a dozen of her own clients totaling more than $17,500. For each fraudulent check, she would drive the client payee to her bank, where the client would endorse and cash the check and give her the money. Or the client would sign the check over to her and she would deposit the check herself.
Emma gave her defenseless, trusting clients a number of pure-malarkey explanations for these checks. She told them the checks were issued to them by mistake; the checks should have been paid to their landlords; the checks were actually for their apartment expenses; the checks simply should have been payable to someone else; etc. Emma's clients had so many life problems and so few resources or capabilities that often they performed odd jobs around LifeAid's property (such as moving furniture or clearing litter from the exterior grounds) as their sole employment. Emma had been their case manager for years, so they trusted her, they needed her services and they did what she asked them to do.
Emma did not deploy these stolen funds to her trusting clients. She blew the money on personal living expenses — including mortgage payments on a primary residence and a lakefront cabin she co-owned with her wife — and on booze and gambling.
Early in Emma's 22nd year of employment, and well into her embezzlement scheme, LifeAid's comptroller noticed suspicious activity in bills and documentation. The comptroller also noticed two checks payable to clients — a highly unusual occurrence because all checks for client expenses were issued to vendors, not to the clients themselves. The comptroller immediately initiated an audit and forensic analysis by an outside accounting firm. Through a process of document review, bookkeeping records review, and, most painfully, in-person interviews with all of the clients named as payees, the audit uncovered the entire scope of Emma's thefts. Many of the clients who were interviewed had significant memory problems but were still able to describe startlingly similar stories and to identify instances when someone else's handwriting appeared under their signatures on endorsed checks.
LifeAid notified its insurance carrier and filed a police report. Police investigators interviewed Emma, who LifeAid had fired by then and was working as a vocational counselor with another social service agency. Emma denied keeping any money for herself; she admitted to taking clients to the bank but stated she cashed the checks and gave the cash to her clients or deposited the endorsed checks and gave cash she already had on her to the client. She told investigators she did this because many of her clients didn't have bank accounts, and she wanted to help them avoid stiff check-cashing fees. She also told investigators that LifeAid had coached her clients and deliberately "lost" her supporting documentation, and that a member of the LifeAid staff was "evil."
Her allegations notwithstanding, Emma was later charged with two counts of felony theft by swindle, and the disposition of this case is pending as of this writing.
Read about Kate, another nonprofit embezzler, in the full article on Fraud-Magazine.com.
ACFE Communications Coordinator
Between August 2010 and March 2014 an employee within the City of Ithaca’s Tompkins Consolidated Area Transit (TCAT) diverted cash out of TCAT accounts using a fraudulent check scheme. In total, the fraud cost the not-for-profit organization nearly $250,000 over a span of four years. The fraud kept growing in the years that it remained undetected: in 2010 they lost $1,600; in 2011, $43,000; in 2012, $69,000; and in 2013, a staggering $113,000.
In last month’s Fraud Talk podcast, John E. “Jack” Little, CFE, CPA, Senior Lecturer of Accounting at Cornell University, examines this fraudulent check scheme and discusses a three-part process that every anti-fraud program should implement.
The perpetrator was Pamela Johnson, an accounts assistant clerk, who managed the bills and the accounts payable system. According to The Ithaca Voice, she created a fictitious vendor, “JTD Enterprises,” which happened to reflect her husband’s company: Johnson Tool Design. Johnson then created fictitious invoices which she paid through the accounts payable system. She cut the checks, signed them with a signature stamp and then deposited them into a business account to which she had access.
The fraud was discovered March 2014, during the audit process of the 2013 year, by a staff accountant. The accountant asked Johnson to pull an invoice and when Johnson was uncooperative, the staff accountant went to the purchasing manager and asked them to look into the issue. “The purchasing manager, of course, had never heard of the vendor,” says Little. Ultimately, Johnson was interviewed, suspended and indicted for grand larceny in the second degree.
The fraud went unnoticed mostly because of the volume of TCAT’s $13 million budget. “When you have a $1,600 fraud amongst $13 million, it’s not apt to be discovered,” says Little. “Even in the next couple of years when it’s $40-$60,000, in the grand scheme, it’s perhaps not ‘material.’” By 2013, she had gotten a little bolder and was taking larger sums and more often. And at the same time the fraud became material, it was discovered.”
According to Little, it’s essential for all entities to have an anti-fraud program and it needs to be a 3-part process: deterrence, detection and response.
- Deterrence: How companies set their top at the top. There need to be written policies that outline fraud prevention, internal controls and some sort of prevention program that is educational in nature. Organizations need to educate their board, management and staff.
- Detection: Organizations need to know how to investigate fraud. Fraud can be prevented by simply having better controls. With detection, monitoring and auditing all of the procedures on how we deal with misconduct should be written down and summarized. There has to be a response policy implemented.
- Response: What happens when an organization finds something? How do they investigate and report to when there is an alleged fraud. “It’s so important that these things get laid out and considered long before you have a problem,” says Little, “It shouldn’t be a reaction, it should be preventative in nature.”
Little’s advice to staff auditors is to be diligent in your work and follow through. Watch for unusual behaviors in your coworkers. Is there unusual behavior by coworkers at your organization that is going unnoticed; what about behavior that is evident? It’s easy to look the other way and press forward with the rest of your work but follow through with the rest of your items in question. But above all, says Little, “Be diligent.”
Hear Little's full interview with the Fraud Talk at ACFE.com/podcast.
Jacob Parks, J.D., CFE
ACFE Research Specialist
I recently had the privilege of attending a roundtable discussion on “Fraud on Charities: Analysis and Prevention,” hosted by the National Center on Philanthropy and the Law (NCPL). One of the prominent issues we discussed was the effect of the media’s portrayal of fraud at nonprofit organizations — no doubt influenced by the preceding release of the Center for Investigative Reporting and the Tampa Bay Times’ story on “America’s Worst Charities.” The series of articles and reports detailed unethical and fraudulent practices occurring at nonprofits that were often receiving millions of dollars in donations.
Many nonprofits depend on income from donations or agency budgets, and so the public awareness of a fraud against a particular nonprofit can seriously threaten those sources of funds. Several attendees of the NCPL roundtable lamented the reality that while nonprofit organizations provide so many valuable services to the general public welfare, some of the most popular news stories surrounding this sector are related to fraud and abuse. This situation is harmful to the entire nonprofit sector because it can create cynicism amongst donors and taxpayers, resulting in lower public funding overall.
For better or worse, the public holds nonprofits to a higher standard than other private organizations. When a for-profit organization is defrauded, the perceived victims are typically the owners and members of the particular company. In contrast, frauds against nonprofits are seen as crimes against the entire public. The fraud risk, therefore, is different for nonprofits because a fraud scandal can cause indirect losses from decreased donations or funding.
Anti-fraud professionals often note internal controls weaknesses in nonprofits (as seen in the chart below, based on data from the 2014 Report to the Nations). There are several reasons for this, including the desire of nonprofit leaders to reduce non-program costs. Additionally, the leaders, employees, volunteers, and members of nonprofits might be more prone to assume that they can trust each other, given that the organizational mission is to serve the public’s interest. However, trust is an inadequate control; even people who otherwise seem to be upright citizens might commit fraud under certain circumstances.
Fraud examiners who work for nonprofits or who have them as clients need to be able to recognize the common fraud schemes to which such organizations are susceptible. Additionally, they should be able to help nonprofits set up proper controls to prevent frauds that pose the greatest risk. The ACFE’s upcoming online self-study, Fraud Against Nonprofit Organizations, covers such schemes and prevention measures.
While the negative press that nonprofits receive for poor anti-fraud efforts might be disproportionate to their successes, these organizations can still be proactive in stopping fraud at their organizations. Having a fraud prevention program designed to face the unique risks in nonprofits will not only prevent or mitigate losses at a specific organization, but will also help to improve the image of the entire sector.