Business Journal: Embezzlement Survival Guide

From the Central Valley Business Journal (10/1/2014):

STOCKTON — Dealing with the possibility of betrayal by employees is one of the hardest aspects of owning and operating a business. Still, with the growing number of embezzlement cases both in the Central Valley and across the nation, it’s something no business owner can ignore.

“The owner says, ‘We treated this person like family. We couldn’t imagine them doing something like this,’” said Chris Marquet, CEO of Marquet International, a boutique investigative firm. “The owners need to do the right thing and take care of their fiduciary duties. Many entrepreneurs love the creating, social and business aspects of their jobs. A lot don’t care about the back end, the office aspects of it.”

Ignoring those “office aspects” can be costly. In two recent Stockton-area cases, employees were accused of stealing more three quarters of a million dollars from their employers.
In January 2011, Brenda Kemper pleaded guilty and was sentenced to three years in prison for stealing nearly $500,000 from Big Valley Aviation. The 59-year-old bookkeeper was a longtime, respected employee of the firm.

Sawtantar Singh Jaspal, a manager at hat manufacturer Dorfman Pacific Company, was arrested in June at his home in Tracy, accused of embezzling $277,000 from the company. In September, Jaspal entered guilty pleas to embezzlement and tax evasion and was sentenced to five years in prison.

These are just two of the most recent in what has been an uptick in embezzlement cases across the country.

“The first thing to understand is this phenomena is happening all the time, all over the country,” said Marquet. “Employers really have to keep on eye on things.”
One of the biggest traps that employers fall into is placing too much trust in a single employee. Bakul Patel, Dorfman Pacific Company’s chief financial officer, found that out the hard way when the company discovered irregularities with Japsal’s work.

“You give managers a certain level of trust,” Patel said. “A manager can create a fictitious business, and he then has the power to pay those businesses.”

That is a fairly common scam used by embezzlers, according to San Joaquin County Deputy District Attorney Stephen Taylor. Taylor prosecutes many of the embezzlement cases in the county and has seen an increase in cases since the recession.

“I don’t know that there are more crimes being committed now,” he said. “When you have harder economic times, businesses are more conscious of where every dollar is going. More of these crimes are discovered. You look back in history, and you see the same thing during the depression in the ‘30s.”

Marquet International released a report in 2013 that studied the trend nationwide. The average embezzlement scheme went on for 4.7 years before being discovered and the median loss for companies was $340,000. The average prison sentence for a convicted embezzler was 49 months.
Marquet said that tough economic times can also prompt people to do things they wouldn’t otherwise do.

“Many times, these people led a regular life and any number of issues led them to just say, ‘I’ll borrow this money and pay it back,’” Marquet said. “Well, they can’t pay it back, and it just keeps going on. You have people that are faced with losing a house or maybe a spouse’s business is suffering, and they do things they might not otherwise.”

Another contributing factor that Taylor often sees is compulsive behaviors that contribute to the thefts. Nearly a third of cases nationwide involved perpetrators who had gambling issues.
“People have drug or gambling problems that they fund this way,” said Taylor. “We’ve had several cases where people used the money for gastric bypass surgery.”

So what are business owners to do? Investigators and police agree that monitoring employees’ financial activities is the key to uncovering and preventing such crimes.

“These are not difficult crimes to uncover,” said Taylor. “They are all in writing.”

That means keeping track of where expenses are going. Employers need to make certain the vendors and employees being paid really exist. That can be a challenge for smaller businesses that lack the employees to doublecheck the books.

“Our accountant came in and helped us put in some additional processes,” said Dorfman Pacific’s Patel. “Now we have dual signing of checks instead of just one manager signing.”

Doing extensive background checks and knowing the history of those in charge of a company’s financial dealings is also vital.

“We had a case where a lawyer was ripped off by an eighth grade dropout,” said Taylor. “We have had companies that have hired people right out of drug rehab and put them in charge of large sums of money.”

Getting stolen money back from an alleged embezzler is often impossible. Embezzlers have often already spent the money that they stole from an employer by the time they’re caught.

“It’s not like they usually have the money laying around,” said Taylor. “They have usually spent that money on trips, or gambling or items they wanted.”

That is one reason that protecting one’s business beforehand is so important. Getting various forms of insurance is an important and relatively inexpensive way for businesses to protect themselves. Dorfman Pacific Company had such policy which made up for the majority of the loss.
“Our insurance paid us back for most of the loss,” said Dorfman’s Patel.

A fidelity bond is a form of insurance protection that covers policyholders for losses they incur as a result of fraudulent acts by specified individuals.

While called bonds, these obligations to protect an employer from employee-dishonesty losses are similar to insurance policies in most respects. A $5,000 bond for a company with five employees or fewer can cost as little as $100 per year. A $25,000 bond for the same employer can cost around $170 per year. The larger policies are determined by the employers size, and industry but can still be a company-saving investment.

“We recommend these to our business clients,” said Rick Sanguinetti, insurance agent and customer service representative at Sanguinetti Insurance. “The bond will cover whatever you amount you choose. The only hangup is there is a conviction clause in most cases.”

Many insurance policies have endorsements that also cover these kinds of crimes, but business people need to check to make sure the policies cover embezzlement.

One of the best things business owners can do is to help prevent theft before it ever occurs. Keeping track of exactly what comes in the mail each day may not be the most exciting part of running a business, but it can save owners a lot of headaches, according to area insurance and law enforcement officials.

“Creating an environment where this kind of crime isn’t easy to occur is a big step in preventing losses for businesses.” said Taylor.