Inside Job

It was a typical family business — a husband and wife working in their retail store along with 15 trusted employees. Then one, the bookkeeper, began to write herself checks, eventually stealing $416,000 — almost all of the profits.

In another store, another trusted employee made fictitious refunds, which in turn made him $20,000 richer.

Unfortunately, this is not unusual. In retailing, employee theft makes up the largest percentage of loss due to shrinkage. It accounts for 42.1% of retail crime, almost 10% more than shoplifting, according to the National Retail Security Survey conducted by the University of Florida.

The average organization — all businesses, not just retail — loses 6% of its total annual revenue to fraud and abuse committed by its own employees, according to the survey.

Think about it. Say a jeweler makes $500,000 a year. That means he or she loses $30,000 a year to fraud. That could equal one or two employee’s annual salary. Indeed, fraud is a $400-billion-a-year business in the U.S.

The most costly abuses occur in organizations with fewer than 100 employees, a statistic that easily applies to an independent jewelry store. In fact, the median loss in retail is $100,000. That could be an entire store’s payroll.

These statistics are from the Association of Certified Fraud Examiners, Austin, Tex., a for-profit corporation whose mission is to reduce the incidence of fraud and white-collar crime.

Mr. White Collar Crime: The Association, as it is known, was founded in 1988 by former FBI Special Agent Joseph T. Wells. It now has 15,000 members in 53 countries on four continents. Each member is taught, tested and designated a certified fraud examiner.

A CFE is a hybrid. “He or she is part accountant, part detective, part lawyer, part criminologist,” says Wells. “A CFE looks at the entire operation and sees where it is vulnerable.” Then the CFE makes specific recommendations intended to add to the company’s bottom line.

Part God-and-country-patriot with U.S. flags in his office, part chain-smoking rock ‘n’ roller, Wells proclaims that he wants to be “Mr. White-Collar Crime.”

With a wide grin, he laughs and says, “This [The Association] may be the biggest scam you’ve seen in your life.” Wells clearly has a sense of humor. He and The Association were subjects of favorable stories in The Wall Street Journal and on the “20/20” and “Nightline” television programs.

In the FBI for “nine years, three months and two days — not that I counted it,” Wells bankrolled The Association with his own money and plans to take it non-profit in three years.

The organization currently has annual revenue of less than $10 million. How much less he won’t tell. But the money is generated from membership fees of $25 to $250, sales of self-study programs (using workbooks and videos or computers) that range from $95 to $695 and seminars and conferences that charge $245 to $1,095 per attendee.

During a five-day conference, for example, participants learn about the legal elements of retail fraud, check and credit card fraud, how fraud is committed, how to interview employees and how to investigate fraud. The $995 fee includes two manuals, each one 11/2 inches thick.

Is all of this really beneficial to jewelry retailers? The knowledge, yes. The certification, perhaps not. After all, an independent jeweler or large chain operation can hire a CFE as a consultant for $100 to $300 per hour, depending on the difficulty of the assignment and the region of the country.

About a third of The Association’s members offer consulting services in fraud detection or deterrence. The rest usually are employed by a government agency — such as the U.S. Postal Service (see related story) — or a large corporation. Collectively, The Association’s members have investigated more than 1 million civil and criminal frauds.

Typical fraud risks: Rather than hire a CFE, you can “steal” a few of Wells’ tips. For example, two factors spell risk, he says — age and position.

Statistically, younger people (18-25) are more dishonest than older ones, Wells says, but older people who are managers and upper-level executives commit more expensive thefts. The average loss due to a young employee is $60,000, he says, while the average loss due to an owner or executive is $1 million. A cashier embezzling 24 hours a day couldn’t rack up losses equal to that of one executive participating in a kickback scheme, he explains.

Also, males tend to be more dishonest than females, committing 75% of all fraud. Losses due to men’s crimes are nearly four times as costly as those due to women’s — $185,000 vs. $48,000.

Lastly, married people and those with college educations commit the most fraud. Seventy-two percent are married. Forty-five percent are college-educated. Forty-two percent are high school-educated.

In sum, the typical perpetrator is a college-educated white male.

Fraud indicators: While Wells eschews the typical FBI cliche of white shirt and black tie in favor of wildly patterned shirts and boldly color-coordinated Swatch-like watches, he does rely on some cliches that can tip you off to fraud. If these occur in your store, be wary:

  • Employees arriving early or staying late without supervision.

  • Employees having frequent in-store visits from friends. This could indicate “sweethearting” — underringing purchases for friends at the cash register.

  • Employing people with a history of financial problems.

  • Maintaining a one-person bookkeeping operation in which the same person signs all the checks and receives all inventory. “That is an invitation to disaster,” says Wells. “They control your entire operation.”

  • An inability to confirm good employee references.

Crime prevention: So what do you do to prevent employee theft? Wells offers these suggestions:

  • Don’t hire anyone you don’t know anything about. Fraud perpetrators are usually fired, not prosecuted, so they are out in the work force.

  • Be mindful of any gaps in employment history. This could indicate time spent in prison.

  • Make sure your employees are content. Discontented employees see thievery as a way to “get back” at the store or owner.

  • Emphasize that you are trying to catch people who steal. Without accusing anyone, make it clear that anyone who steals will be caught and punished. For example, if the store and employees are audited regularly, inform the staff.

  • Have a hotline that your employees may use to report misdeeds anonymously. More frauds are uncovered by tips and complaints from other employees than any other way, says Wells.

The Association sells subscriptions to its own hotline. Called EthicsLine, the 24-hour-per-day, 365-day-per-year service costs $150 annually for a company with fewer than 100 employees, slightly more for larger companies. Wells says the line would pay for itself by stopping something as seemingly small as the theft of stamps from the mailroom.

But he emphasizes a bigger reason for maintaining a hotline: the U.S. Corporate Sentencing Guidelines of 1991. This law requires that a corporation be fined up to $290 million for its employees’ misdeeds if it had no fraud prevention measures in place at the time, such as a hotline or ombudsman. For example, if an employee agrees to an overseas supplier’s request for a kickback and the company has no preventive measures in place, it can be fined even if the employee didn’t benefit.

Questions to ask: Despite preventive measures, employee fraud can still occur. How do you question an employee about your suspicions? Wells offers some guidelines.

First, ask the employee if he or she suspects something is missing or if it might be a bookkeeping error. The guilty employee is more likely to answer that it’s a bookkeeping error.

Then ask who committed the theft. “People who are guilty will seldom name names,” says Wells. “They want the circle of suspicion to be as wide as possible.”

Follow up by asking, “If we find a good employee has done this, should we fire him or give him another chance?” The response “another chance” is more indicative of guilt than of innocence, he says.

Next, become more pointed. Ask “What would you say if someone claimed you took the merchandise?” Honest employees will typically give a forceful and direct denial. Guilty ones are more likely to ask who made the accusation.

Finally, ask the question. “Did you do it?” The honest employee will deny it. The dishonest employee will hesitate and then give reasons why he or she couldn’t have done it — he or she was at lunch at the time or was home sick.

Caught & convicted: In some cases, even the most intense investigation doesn’t turn up a perpetrator. The bookkeeper mentioned at the start of this article carried out her crime by writing herself a check and marking the correlating check stub “void.” She concealed her theft by inflating the next check stub to cover her “voided” check and the legitimate draft, and then tearing up the checks when they were returned from the bank.

She was caught when, during a nervous breakdown, she confessed to her husband. She agreed to pay back the money and was sentenced to seven months in prison and five years of probation.

In other cases, diligent anticrime measures can pay off. The employee who stole $20,000 through fictitious refunds committed his crime by making up a name and a dollar amount for a refund, forging a signature and removing the equivalent dollar amount from the cash register.

He was caught by the auditing department, which tracked refunds by employee. When his refunds exceeded those made by other employees by 2,000%, the auditors moved in.

He was sentenced to three months in prison.

GEMSTONE SCAM

“When I hear the word ‘gemstone,’ fireworks go off,” says Mary MacDonald (not her real name). Her image of gems and fireworks is not beautiful and thrilling. Her fireworks are full of rage and terror, her gemstones clouded with lost hope and trust.

MacDonald’s father, a farmer in Ohio, poured $150,000 — his life savings — into the pockets of Canadian-based gemstone telemarketers who hounded him three to five times a day with telephone calls lasting 45 minutes or more.

“It was brainwashing,” says MacDonald. “After you hear what a good deal this is for hours, you feel you must take the leap of faith.” Her father did, time and again, in a frantic effort to recoup his growing losses.

James MacDonald (also not his real name) was not alone. More than 2,200 Americans suffered a total of $50 million in losses due to this scam, says Michael C. Hartman, a certified fraud examiner and the U.S. Postal Service inspector who investigated the case.

James MacDonald began to invest in telemarketed gemstones in the 1980s. Back then, these “boiler room” operations were run out of Florida, with a sales pitch touting gemstones as a good investment. Poor quality stones were sold at grossly inflated prices to uninformed buyers as a hedge against inflation.

A government crackdown sent the telemarketers fleeing to Canada, first to Toronto and then to Montreal. The scam artists set up operation again, but with a new tactic — the “liquidation story” — using new company names and old client lists. The gemstone sellers called the customer and offered to sell their gems to other buyers overseas.

Great, the customer would respond.

But there was a catch. The telemarketers would tell the customer, “Because yours is the smallest portfolio, you must buy one more gemstone,” says Hartman. The customer would then invest $5,000 or $25,000 for another poor stone. The gems were sealed in plastic with a certificate of authenticity from New York or Florida. If the plastic was broken, the telemarketer would inform the client, the stone could not be returned for resale. This prevented a true appraisal.

Each time a customer was sure he or she was buying the last gemstone needed to complete a portfolio, another complication would arise.

“Imagine taking out a loan to buy one more gemstone,” says Mary MacDonald. “Imagine the joy of the anticipated windfall, the relief that the loss was going to be paid off finally, that your savings would be safe again.

“Imagine having that joy turn to fear and desperation when the deal fell through again. Being told by your salesperson, ‘It was all your fault! You screwed up the deal!’ This was the type of emotional turmoil my father endured.”

That was typical, says Hartman. The victim would be blamed for holding up the deal and would get a series of telephone calls from different people — a certificate driver, then an account opener, then a senior sales officer and then the overseas buyer — so he would think he was dealing with separate and credible representatives.

The pitch was sophisticated, says Hartman. The con artists constantly changed their business names, voices and locales to avoid capture and embellish their stories: “Oh, you dealt with (the old company name). We’re (the new company name).” They pointed out the negatives of the old company and the positives of the new one, never letting on they were one and the same.

At the beginning of each month, says MacDonald, the telephone calls would begin from companies named Equity Control Exchange, International Exchange Board, Capital Exchange Board, Associated Overseas Investor Services, Bo-Shek Cutting and Polishing Inc. and more. Each told her father not to deal with anyone else or the deal would fall through.

“It made it seem as if something was really going on in the gemstone market,” she says. She and her three sisters tried to intervene. One sister even tried to contact the salesperson, only to be told he was out. She left an angry message with his secretary.

The salesman called James MacDonald. “I do not talk to daughters; I do not talk to sons,” he said. “I talk to you because it is your money.” Her father’s face turned red.

“It became almost like a panic to my father,” she says. “He kept digging himself in deeper in hopes he could get out of debt.” In anticipation of reaping $435,000, her 79-year-old father took out bank loans — $18,000 for one stone. “They wanted him to mortgage his home,” she says. “Thank God he didn’t.”

Others did. They also took out credit card loans. They were told, “You have to beg, borrow and steal,” says Hartman. That’s how he and the U.S. Postal Inspection Service got involved. The Rev. Robert Finkbeiner, who lived near York, Pa., lost $300,000 of his own money to the telemarketing scam. Believing he could recoup his losses and make more money, he took out $1.1 million in loans under false pretenses. The loans — to pay Associated Overseas Investor Services — were from two banks, a social services agency of which he was president and the agency’s primary contributors.

While MacDonald’s family filed complaints with 16 agencies in the U.S. and Canada from September 1991 to March 1992, it was not until the U.S. Postal Inspection Service heard about Finkbeiner that it got involved. The service combined forces with the Royal Canadian Mounted Police, and the chase was on.

The Postal Inspection Service couldn’t touch the telemarketers because they were on foreign soil. But when the con artists flew to a satellite office in Boca Raton, Fla., to recruit pitchmen in September 1993, they were arrested. Eventually, 47 people and 11 corporations were charged.

Thirty-seven pleaded guilty; 26 have been sentenced to three to 51 months in prison each. More are awaiting extradition. Fines exceed $400,000. Restitution totals more than $3 million.

But this doesn’t lessen the pain and loss for the MacDonald family. One telemarketing salesman who worked five hours a day four days a week earned $2 million in commissions during a 21/2-year period. James MacDonald, now 85, will be lucky if he gets back $1,000.

“Our lives are ruined because we can’t trust anyone anymore,” says Mary MacDonald. “If they had acted on our complaint [in 1991], Finkbeiner wouldn’t have been involved.”

The MacDonalds feel victimized by the justice system. But there is one person who draws their praise — CFE Mike Hartman.

His battle continues. “I’ve been doing this almost non-stop for 30 months,” says Hartman. Currently, he’s investigating two more boiler room operations, one already shut down, one not. He estimates victims have lost $20 million in these operations.

The latest developments? One “freelancer” in Boca Raton was arrested. There is Montreal to investigate.

There are more gemstones and fireworks to be watched.