Why You Should Always Prosecute Fraud

Sometimes people think I’m harsh when I tell them to always prosecute fraud in their companies. My fraud policy is quite simple, “If you steal, you will be prosecuted to the fullest extent of the law.”

Instituting a fraud policy is one of the easiest things a company can do. But I am continually dismayed to find out how many companies don’t have one. It seems to be an issue they’d rather avoid. Until it happens to them.

When fraud occurs in a company, many CEOs are reluctant to prosecute it. The main reason I’ve found is that it can be embarrassing to admit it happened in your company. They’d rather other people didn’t find out about it. And they don’t want to get involved with lawyers and filling out paperwork. It can also be hard to prosecute someone you know. They worry about hurting the employees’ families. So they find it easier just to let the thief go and keep the entire incident quiet.

Let me remind you what one investor said about Bernie Madoff. “Bernie would never do that. He’s my friend.” That investor lost everything. As they say, with friends like that …. For more on that topic, read my blog, “Nice People Commit Fraud.”

There are several reasons you need to prosecute fraud when it occurs in your company.

One is that when people see you following through on the fraud policy, it deters others from committing fraud. And the opposite may be true if you don’t prosecute it and your employees know about it. They may figure, “Well, Susie got caught. She did get fired, but I heard she found another job right away.” So while in the short run it may be a hassle to prosecute the employee, it can pay off in the long run when you don’t have to deal with this issue again.

And another reason is that if you don’t prosecute them, odds are very high they will go and steal from someone else. Susie got another job because her new employer didn’t know she’d embezzled from the previous one.

I recently read an article in the Atlanta Journal-Constitution about Thomas Conrad, “Decades after ban from industry, Alpharetta man again accused of fraud.” Seems Thomas is a repeat embezzler. He was banned from the investment industry in a disciplinary action in 1971. He apparently behaved himself for four decades. But then he struck again.

He and his son, Stuart P. Conrad, have been accused by the U.S. Securities and Exchange Commission of defrauding investors of $10.7 million through a group of hedge funds they managed. While he cut off any payments to investors starting in 2008, the money was still flowing freely to him, his wife, his son, other relatives and a few of their favorite investors.

They also involved another money manager in one investment that turned out to be a Ponzi scheme.

And did he tell those investors that he had been banned from the investment industry decades ago? You can guess the answer to that one. That is also a violation of federal securities law.

In this case a fraud prevention policy wouldn’t have helped as he had been banned from his industry. But this story does illustrate that once a person commits fraud, he is much more likely to do so again.

Don’t pass along your problem to someone else by just letting a thief go. Prosecute the people who steal from you. They may strike again. Even if they wait four decades to do so.


Excuses for Fraud: Now We’ve Heard It All

Call it the lighter side of fraud, if there is one. As a follow-up to my columns on fraud prevention, I thought I’d share some of the more entertaining excuses people have given for why they committed some type of fraud.

One guy from Glasgow tried to use the soap opera defense. He claimed the investigators were really seeking his “evil twin brother” who lived in Pakistan about the identity and benefit fraud he was accused of. Wait, it gets better. He had two Pakistani passports with the same children listed on them. Seems his evil twin had children born on the exact same days with the exact same names. Wow, what are the odds?

This one could be called the “50 Shades of Grey” excuse. One man was collecting housing benefit money in Great Britain while working but hadn’t informed authorities. He claimed he owed money to his landlady. Her efforts to collect included wearing high heels, brandishing a prop similar to those in the movie and chasing him down for “payment in kind.”

How about the “I never got that raise” excuse? A bookkeeper was once denied a monthly raise of $100. He was angry and decided to help himself to the company till, stealing exactly $100 a month. For 20 years, until he retired.

Then there’s the CFO of a bank in Tennessee who tried the “It’s the tractors fault” excuse. The case study was reported by the Journal of Accountancy of the CFO who invested a lot of money in a local tractor dealership. He borrowed from his own employer to increase his investment and when the investment soured, didn’t want to admit to his employer that he was no good with his own money. So he began stealing from the bank, and by the end of the year had helped himself to $150,000.

He became so enamored of stealing money that when a customer accidentally paid a note twice, this guy just signed his own name on it and put it into his checking account. That was his downfall. He was caught when the customer noticed the duplicate payment and they tracked it to his account. He spent three years in prison.

And finally, the “My ego was too big to admit failure” excuse. That’s what Russell Wasendorf Sr., who was the owner and CEO of Peregrine Financial Group, said when he admitted he had embezzled an estimated $215 million with forged bank statements over a period of close to 20 years.

Wasendorf received all bank statements from US Bank and was able to make counterfeit statements and deliver those to the accounting department. He also made forgeries of nearly every document that came from US Bank and established a PO box to intercept paperwork sent by regulators.

In a signed statement, he said he began stealing when his business was on the verge of failing if it didn’t receive additional capital. “I was forced into a difficult decision: Should I go out of business or cheat? I guess my ego was too big to admit failure. So I cheated.”

In 2013, Wasendorf was sentenced to 50 years in prison and was ordered to pay $215.5 million in restitution.

Don’t set yourself up to hear any of these excuses. Make sure you have adequate fraud prevention policies and measures in place. Check my previous columns on the topic and the chapter in my book, How Not to Hire a Guy Like Me: Lessons Learned From CEOs’ Mistakes. These excuses may be comical, but fraud is not.

Tips to Embezzle-Proof Your Business

I like it when people make my job easy. During one of my stints as interim CEO I suspected the CFO was enriching himself at the expense of the company. Once when he was out of the office, I sat down and looked at his computer. He was so organized that he had a spreadsheet right in a folder on his desktop that listed all the money he had stolen. It was so nice to not have to track it all down.

The truth is it generally works the other way around. Companies make it far too easy for thieves to do their job and to steal from the company.

I’m never too surprised to read about another case of embezzlement, but here was one with a twist. After an auditor with the National Credit Union Association noticed discrepancies in the financials of a small credit union in Hawaii in 2012, it led to an internal investigation. That led to a FBI investigation. Turned out, three employees were embezzling money. But it was hardly a conspiracy — none of the three knew the others were embezzling as well.

They managed to steal half a million dollars, each operating independently of the others. Heck, if they’d known they could have had a friendly competition — you know, first one to steal $250,000 buys lunch for the others.

The fact is I know of many instances where businesses have made it too easy for embezzlers.

Here are a few of the tips on how to protect your company from theft that you’ll find in my book “How Not to Hire a Guy Like Me: Lessons Learned from CEOs Mistakes.”

1. Give Your CFO or Corporate Controller a Break

I tell all my clients to give their CFO or corporate controller two consecutive weeks off every year. During that time, nose around a bit. Review deposits, talk to his assistant, check his mail. Banks have been doing this for years for good reason. If anything fraudulent is going on, this is a good time to detect it.

Once I was sitting at a CFO’s desk and took a peek at his mail. And there were his account statements from the bank in the Cayman Islands where he was depositing the money he was embezzling. Guess he was trying to save himself the cost of a PO Box.

Yes, most CFOs are trustworthy people. But I’ve dealt with enough who are not, and have cost their companies dearly, to know that it’s good policy to always verify your finances.

2. Tighten Up your Checks and Balances

Here are two things to remember: First, any place money or goods exist or move is a place that fraud or theft could occur. Second, no one is above suspicion.

Make sure to review expense reports even at levels lower than are generally reviewed. Make sure every expense-related check has two signatures and that the second co-signor takes the job seriously. Make sure all your checks and balances are in place throughout your company and working as designed.

3. Always Poke Around Your Books

Do spot checks of your ledger or QuickBooks to see where your money is going. Ask questions about vendors. Get a list of them and call a few of them to make sure they really exist.

Remember the $1.48 million embezzlement from Woodruff Arts Center? That was done by an employee who set up a bogus vendor. Guess who was cashing those checks?

Whether it’s one employee or three, don’t let embezzlement happen in your company.