Fraudsters seek to get something for nothing—they steal. In cases of large thefts from companies, they are often perpetrated by the very people who are trusted to run the companies, whether they are executives or bookkeepers. One way that these insiders steal is through a scheme known as “diversion of assets.” It is similar to a “skimming” scheme, when an employee steals from the cash register, but usually at a higher dollar amount, and in a variety of ways. This blog post will detail a few recent cases involving the diversion of funds.
Many employers lose money in various ways: inventory is scrapped or obsolete; parts are damaged and too expensive to repair; employees are trained and stay for a short time and cause hiring and training expenses to skyrocket. One not so obvious way companies lose money is through the intentional diversion of financial resources from the entity. This is called the “easy embezzlement” because no one really knows the funds are missing. Unlike a scheme where the bookkeeper is writing checks to themselves or to cash, reviewing the bank statements or checks usually will not uncover this type of fraud, because the funds never make it to the business bank account to begin with.
These cases require much more investigation, usually by outside trained forensic accountants or fraud investigators. And they often require much more intensive scrutiny on the subject who is believed to be stealing the money, as investigators must prove that funds in their personal account were actually funds intended for the business. It is a longer and more complex puzzle. Sometimes, as detailed in some of the cases below, diverting assets involves more sophisticated concealment mechanisms, such as fake names, business bank accounts, or moving money through different institutions.
This article will briefly examine three cases that involve the “easy embezzlement.” For more background, please note, there is a second form of this diverting that will be briefly covered: asset or inventory diversion. In asset diversion, the rouge employee takes advantage of their position to utilize their employer’s asset, such as a backhoe, truck, or other major equipment, to either do personal work or to compete with the employer through part-time or side employment, all without authorization.
Inventory diversion is theft, plain and simple. Whether it is for personal use or to sell, stealing inventory is costly and causes significant disruptions. These diversion schemes are also prevalent in cases of retail theft, or marketable goods that can be bought and sold. For example, rings of organized shoplifters target specific retailers and then steal cases of goods, which are then sold on a variety of digital platforms, or on street corners or other locations. A 2016 report from the Maryland Office of Crime Control details some of the interesting findings on this topic. Occasionally, these rings are provided information or assistance from insiders or employees who help facilitate the thefts, in exchange for kickbacks or other things of value.
The first case is from Florida where an employee of an aircraft charter sales company was convicted of stealing funds from his employer. He did this by opening bank accounts in nominee entity names (i.e., shell companies) and sending funds to those accounts, over which he had signatory authority over. This is often called a diversion of revenue scheme, where the fraudster, often an insider, channels funds due to their employer into another account.
Sometimes the names of the employer and the shell company are slightly different, such as “REM, Inc.” versus “Resource EM, Inc.” The fraudster will describe it to the parties, aside from their employer, as a “special purpose vehicle” to conduct the transaction for tax purpose. Finally, it may just be a simple variation that wouldn’t be likely to get noticed, such as “Resource Equipment Material, LLC” versus “Resource Equip. Materials, Ltd.” Ironically, but sadly, this employee was on federal probation at the time of the theft for a 2004 conviction for money laundering.
In Pennsylvania, Federal prosecutors charged a former vice president of operations of a paper mill in a scheme that cost the company over $218,000, according to the allegations. Prosecutors alleged that he used his corporate credit card for personal purchases and then paid for the credit cards from the company bank accounts. Corporate credit cards should only be used for specific business purposes, otherwise they do not qualify as true business expenses under the tax law and must be reported as income. He also allegedly set up college savings accounts for his kids that were paid for by the company. In addition, he had a diversion of inventory scheme that involved him selling inventory of paper off the books and funneling the profits into his personal bank accounts.
In Indiana, a young accountant for Carrier Corporation, an air conditioner manufacturer, pulled off a scheme that involved him opening a personal checking account, “Carrier Services,” a very similar name to that of his employer. He did this only four months after he started work there. For the next two years, he worked with vendors of his employer and instructed them to make payments payable to the Carrier Services account, depositing those funds through checks and wire transfers. He also inflated invoices for the amount owed and then diverted the refunds due to Carrier into his personal accounts. By using the unauthorized personal account, and making false representations to the vendors regarding the name, account number, and amounts due, he committed wire fraud and illegally gained over $1 million, which he ultimately pled guilty to in May 2015.
Finally, diversion of funds schemes can help fraudsters purchase assets or luxury items for themselves or family members. In a case from October 2016, a tax lawyer and his accomplice, an accountant, used their expert knowledge of the tax code and accounting principles to set up tax shelters without their firm’s knowledge. They diverted the funds due to the firm into other entities they had set up, including a partnership the lawyer and accountant had set up. From reading the indictment, this partnership then purchased a $500,000 home in East Hampton, New York, which was portrayed as a rental property, when in fact, it was used rent-free by another employee of the law firm, with whom the tax lawyer had a “close personal relationship” (see page five of the indictment). Clearly, diverting funds into items of value for the fraudster is very important—otherwise they wouldn’t be able to enjoy the things they acquired through their stealing.
Some fraudsters are running multiple types of schemes at a time, especially once they figure out that it is highly unlikely that anyone has noticed the missing funds. They only get caught once the numbers are too high to miss, or if something unexpected happens, like an ex-spouse informs authorities of the scheme, or a particularly aggressive auditor begins to question the transactions.
From reading the cases detailed above, it is easy to see that that fraud and embezzlement affects nearly every business type, every industry, and impacts all types of financial behavior. The variety of these cases is often one of the major benefits of being a fraud investigator—you learn a lot about a lot of different industries and schemes. No case is ever the same. The challenge of finding the fraud is also unique in each case. As investigators, we need to be as creative and imaginative as the fraudster to figure out how they are doing it.
Adjunct Professor Colin May, M.S., ’08, CFE teaches courses on Forensic Studies for Stevenson University Online. Professor May is a former federal criminal investigator and has worked on a wide array of fraud, money laundering, and other investigations for several federal agencies. He has written widely on fraud, forensic accounting, and investigation in Fraud Magazine, the FBI Law Enforcement Bulletin, and the Journal of Public Inquiry.