Updated: Oct 29, 2021
I was a commercial insurance agent for 15 years. During that time, I was personally involved in the discovery, investigation and ultimately the prosecution of several embezzlement cases. One of the agencies that I worked for had an internal case of embezzlement. Each case was different, creative and required a lot of work to keep it going. When I started working in the HOA community business, I thought the days of hearing about employee theft and embezzlement were behind me.
Much to my surprise, I actually heard more about embezzlement cases related to selling resale disclosure documents in 7 years than in 15 years as an insurance agent. It pains me every time I'm talking with a management company owner and I bring up this topic only to hear, "that would never happen here". Which is exactly what every employer who has had this happen thought, before they realized they had been deceived. It's because of this that I am prompted to write this article.
What is Embezzlement
Embezzlement, also known as employee theft is the act of wrongfully appropriating funds that have been entrusted to your care, but which are owned by someone else.
Accounting embezzlement is the manipulation of accounting records to hide the theft of funds.
Embezzlement can be prosecuted as criminal fraud or civil fraud. In the case of civil fraud, the employer can bring the lawsuit against the employee.
What Are the Factors in Embezzlement?
For a charge of embezzlement to be supported, four factors must be present and must be proven. There must be a fiduciary relationship between the two parties; which is relationship of trust, a responsibility for taking care of the money or property (for example), and a reliance by one party on the other. The defendant must have acquired the property through the relationship. The defendant must have taken ownership of the property or transferred the property to someone else (called conveyance). And the defendant's actions were intentional.
Examples of Embezzlement (*1)
• Overpaying a vendor and sharing in the ill-gotten gains. The bank teller who pockets deposits, the bookkeeper who takes customer refunds for themselves.
• The attorney who uses the funds in an escrow account for themselves.
• The payroll clerk who doesn't deposit the correct amount of employment tax, keeping the rest for himself.
• Employees in retail businesses have a habit of walking off with merchandise.
• Of course, computer fraud by employees has many facets, many of which involve a fraudulent transfer of funds by an employee.
Although the embezzlement from resale documents may not be "main stream", here are some things that are almost always present with embezzlement in small business, including management companies:
• The employee was extremely close to the owner and felt like "family". The owner gave full authority to an employee to handle the company's finances and trusted the employee completely.
• There was minimal or no review of the employee's work. It is a closely held company. employee embezzled from the company and nearly sent it into bankruptcy. (these are cited from reference *2)
True Stories from HOA
Here are three escalating cases of resale documents embezzlement of which I have personal knowledge and permission to share.
1. The receptionist or front desk person
2. The person who puts together the packages and "sells" them when someone comes in to pick them up.
3. The person (one person) in the office who is the "Escrow Department" or who "takes care of that".
1. A straightforward case
The company didn't want to risk checks bouncing and didn't have a way to process credit cards. When someone placed an order for the resale documents, they were told to bring cash or a cashier's check when they came to pick up the order. The person who took the money just took about half of the cash. There were no checks and balances or accounting for inventory protocols in place. The owner saw a continuous stream of revenue, not even realizing that it was 25% - 30% less than what it should have been. You know how much you make on resale documents, imagine if just 25% of that was walking out the door with an employee.
2. A thought out case
This office did have protocols in place to account for the orders that were placed and packages made (by one person) and the packages that were sold (by a different person) who gave the money to accounting (third person). This is a good "checks and balances" as 3 people are involved in the process. Additionally, they kept "inventory" to make sure the sales and stock matched. In this case the middle person (the seller) would make a second copy of the package. Then when the buyer came in and paid for it, they received the second copy. The money went into the employees' pocket while the original package sat there "ready to be picked up". Because of the protocols, the missing money
was accounted for by the package that was still on the shelf. This employee was stealing from the management company in 3 ways: taking the cash; using the copier and paper to complete the scheme; and doing it all on the company's time. Too bad your employees don't wear a mask when they are stealing from you!!
3. A well planned and potentially devastating case.
This one was quite involved and continued for many years and several hundred thousand dollars was embezzled from the management company and the associations they represent.
This started soon after the employee was hired. Their only job was to take, process, collect fees, and deliver resale disclosure documents. The job title was "Escrow Manager". Soon after being hired the Escrow Manager (EM) filed with the state for a fictitious firm name in order to open a business bank account. The EM's firm name was very close to the Management companies name. (example: Bora Management vs. Boro Management) This allowed the EM to deposit checks made out to the real management company and redirect funds into their account with no problem.
Since this employee was the Escrow Manager and the only one in doing this job it was easy for them to continue unchecked for years. In addition, as a trusted, loyal employee who had several years with the company the owner and other management never suspected a thing.
As mentioned, there was also money stolen that was supposed be collected by the management company and distributed to some associations. This put the management company at great risk. Not only were they out their money but also deeply in debt to their clients, the associations. Thankfully they did have an employee dishonesty insurance policy that covered a large portion of the loss. This allowed them to payback the associations, not completely but enough to salvage the relationships. Also, since this is a great management company to their clients, the associations, were understanding and willing to work with the company to accomplish the full restoration.
Although all three of these examples were selling paper documents, don't believe that you are protected by selling or delivering documents on-line or attached to email. As they say, "when there is a will there is a way" or in this case an "ill-will". I hope this gives you a good idea of how vulnerable management companies are to ill willed employees.
Please don't continue to believe this won't happen to you. No matter what safety barriers you may have put in place or how much you trust your employees you need to be vigilant when it comes to protecting the your most important asset, your income.
1. Embezzlement and Employee Theft http://bit.ly/ET_resource
2. Embezzlement Case http://bit.ly/Embezzlement_Case