Stat

On average the typical U.S. business organization loses about 7% of its annual gross revenue to fraud.  Since the U.S. gross domestic product was $14.196 trillion dollars in 2008, the best estimate for fraud losses is $994 billion.

How accurate is this figure?  Let’s consider just one of the elements of fraud: secrecy.  Secrecy is an essential element of business fraud.  Unethical employees discover ways to convert money or other valuable company items for their own use.  This is the essence of embezzlement: the taking of cash, property or services entrusted to an employee.  Many fraudsters operate in the shadows of a business. Perpetrators often rationalize their thefts with unfulfilled promises to “pay it back.” (It must be easier to swallow if one tells oneself it is just a loan).  After he is caught the fraudster will minimize the total amount taken over the years or months that the scheme was in operation.  He does this to make his criminal activity appear less serious than it actually was.  The amount of loss can also enter into figuring out the seriousness of the crime for sentencing considerations and for court ordered restitution.

Fraudsters often devise alibis before converting funds to their own use. Having an alibi ready boosts their confidence.  One enterprising employee in his first attempt at embezzlement diverted $65,000 to a stock brokerage account in his own name by sending a company check in this amount and justifying it as a deposit to employee IRA payments.  He was ready with his alibi, but his chance to use it did not come for about 18 months.  When this irregularity was discovered, I was asked to investigate.

Like most schemes, this one went unnoticed.  This was partly due to management’s full attention to building their business by obtaining more customers and more investors.  In time, business waned and management shifted attention to scrutinizing all expenses.  A number of checks were identified as having been sent to the stockbroker for a collective total of over a half a million dollars.  I determined that the account was in this employee’s name and retrieved the checks that were all signed by him.  He told me during the interview that when he wrote the first check for $65,000 he was prepared to be challenged, and if so he would have told me then that it was just a mistake.  But since the next check was written ten days later for $85,000, and others after that, this established a strong pattern that clearly demonstrated his actual intent. He had to face the facts, and he simply confessed.

One of the reasons fraud schemes “work” is because they are perpetrated in plain view.  The operator will take care to disguise and conceal the crime amidst the blend of daily activity. Even after the fraud has run its course, the operator will take strategic steps to delay the victim from finding out that he has been taken.  The later steps are called lulling letters and/or dirty up the mope.  We will discuss these terms in a future newsletter.  Moreover, the victim once he realizes that he has been defrauded may not want anyone to know.  His motives vary from being personally embarrassed to maintaining the image of the business intact.

To illustrate: a wealthy man in Colorado Springs, CO became the victim of a version of a stock fraud.  He was given a free ticket on the railroad to meet the operator in Kansas City, MO.  When he arrived he could not find the operator or his money.  He then searched the U.S. until he found this man operating the same scheme in Denver, CO.  He reported this offense to the District Attorney with the request, “Please keep my name out of any reports as I would be embarrassed by having my associates know I was duped”.   In another case a large charitable organization requested our assistance as cash donations were down significantly.  We identified the embezzler as one of the charity’s employees.  He was dismissed quietly and no prosecution was sought that might cause supporters to withhold future donations.

In conclusion, $994 billion is an estimate, but no doubt a good one.

The purpose of this estimate is sound, that is to let all business owners and managers know that fraud does exist and it can be devastating to your business.  Fraud should always be foremost on the mind of a business owner.  He or she should establish a strong relationship with a professional investigator and engage him or her in frequent conversations about the financial health of their business.

If you suspect fraud, call Cadfael at (763) 694-6086.  Cadfael Investigative Group, Inc. provides educational tools in the form of training and fraud workshops to help you fight fraud in your business more efficiently.