“A Catholic nun broke one of the Ten Commandments by embezzling $850,000 from a suburban New York City college and gambling it away in Atlantic City, according to federal prosecutors.”

I receive anywhere from six to twelve emails, every day, with anywhere from one to five story links within each email.  Many of the stories involve someone being arrested or charged with embezzlement, and the amounts range from thousands of dollars to multi-millions.  The stories also span the globe, with today’s links featuring an embezzlement by a revenue collector in the Fiji Islands, a low level official from China who fled to Canada allegedly with $14 million in embezzled funds, and two individuals in South Korea accused of embezzling $20.6 million.

Today’s links also included a Red Cross chapter, yet another volunteer fire department, and numerous bookkeepers and other individuals within companies here in the United States.

The statistic widely recognized in the fraud community is one in nine (1/9) fraud cases become publicly known, which means for every Google alert I receive, there are eight more that I should receive.  Google doesn’t know about those cases, and never will.  My experience has been this statistic is reasonably accurate.  Most cases are quietly settled and resolved.  Many victim organizations would prefer avoiding the negative publicity that could accompany the news article, and in some cases the publicity could pose a greater negative impact to the organization than the theft itself.  In many cases the embezzled funds are gone, eliminating any change of recovery or restitution from the suspect.  Insurance is the common source of recovery, and once paid, the claim is subrogated to the insurance company to recover from the suspect.  It is also common for the potential cost of the investigation to exceed the potential theft itself, bringing a potential investigation to a quick end.

Given the frequency of Google alerts I have received in the last six months, the question is this: is there more theft and stealing going on today, or are systems and procedures in place to better identify and detect these schemes when they occur, increasing the detection rate as opposed to the incident rate?

Here’s a link to Google News “embezzlement” for today:

http://news.google.com/news/search?aq=f&pz=1&cf=all&ned=us&hl=en&q=embezzlement

While thefts from these groups are not unusual, the amount of stories related to these groups in the last two weeks is alarming.

“LAKE OSWEGO — A woman who kept the books for a Lake Oswego parent group and two sports clubs was arrested Thursday on accusations of embezzlement.
Ranae Marlee Mason, 45, was accused on the belief she embezzled about $84,000. The baseball group noticed irregularities and audited their books, noting that $5,000 was missing. That led to the other two groups reviewing their accounts. The football league was missing $51,000 and the PTA $30,000.”

“Preston Junior High School Secretary, Idaho.  Allison Kay Hoth, 40, a secretary at Preston Junior High School was arrested and charged with theft for allegedly taking between $30,000 to $40,000 from one of the school accounts over the space of two years.”

“Magnolia Park PTO vows changes after embezzlement.  OCEAN SPRINGS, MS (WLOX) – The Magnolia Park Elementary Parent Teacher Organization in Ocean Springs could soon be changing the way it does business. That word comes a day after the PTO treasurer was arrested and charged with embezzling thousands of dollars from the organization.  Fitts, who volunteered as the PTO treasurer, is accused of taking $20,000 over a six month period.”

And yet another today -

Federal Way youth sports treasurer sentenced in embezzlement

“The former treasurer for three Federal Way youth sports leagues was sentenced today to 30 days in jail and must pay nearly $34,000 in restitution for embezzling funds from the leagues.  Colleen A. Wiley, 44, pleaded guilty Jan. 18 to first-degree theft. Prosecutors say Wiley wrote unauthorized checks and an unauthorized wire transfer totaling $33,967.20 – the restitution she must now pay.  According to court documents, the Federal Way woman stole the money from three leagues between August 2007 and January 2009. The three leagues involved are the Puget Sound Junior Football League, the Federal Way American Little League and Federal Way Junior Football Hawks.”

Here are the URL links to the referenced stories:

http://www.kgw.com/news/local/Oswego-PTA-sport-clubs-lose-84K-to-embezzeler-115211694.html

http://www.idahostatejournal.com/news/local/article_96229af8-2e2b-11e0-bb41-001cc4c03286.html

http://www.wlox.com/Global/story.asp?S=13959511

http://blog.thenewstribune.com/crime/2011/02/04/federal-way-youth-sports-treasurer-sentenced-in-embezzlement/

It seems incomprehensible how a scheme this large could have occurred and for so long.  The only explanation I can find without access to more of the case details is that this salon must of done a crazy level of business. I just never imagined a hair salon could generate such profits and cash flows to enable any individual to divert funds of this level without notice.

I liked the finer points of the article – such as the defendant’s own retained expert witness who showed that the defendant had been withdrawing funds long before she started putting funds back into the business.  It seems in most cases if the expert retained for the party identifies information that could be detrimental to the retaining party’s case, the expert is paid, released from the engagement and never disclosed in the matter.  Once again, without further details it is hard to determine what happened, but having your expert testify to facts to your detriment is usually not the desired goal of retaining an expert.   The expert has to remain objective, unbiased and uncover all the facts, supporting and refuting any allegations regardless of the party, but it is widely known that once you, the retained expert, uncover facts that could lead to the detriment of the retaining party’s case, continuing work and testifying is often no longer desired by counsel.

Here’s the URL to the full story:

http://www.mysanantonio.com/news/local_news/article/Jurors-return-guilty-verdict-in-hair-salon-984317.php

Even if coverage is maintained, I am confident most insureds are unaware of two common limitations within the coverage should there be the potential for a claim on the policy due to a potential theft of embezzlement.

First, the coverage often does not cover the acts or actions of an owner, partner, shareholder, or member (LLC) of the insured.  So, for an example of something we commonly see where an owner or partner steals funds and/or assets from the entity and the other owners or partners, the coverage would likely not be applicable to provide restitution to the entity for the diverted funds – as the perpetrator was an owner or partner. The theory is that the insured cannot steal from themselves.

Second, the coverage usually covers any employee (defined within the policy) commonly referred to as blanket coverage.  There is at least one exception to who would be covered – someone who has stolen in the past.  If there is any evidence that the insured knew, or should have known, that an employee had been dishonest in the past, whether in their present employment or in previous employments, the individual is not insurable, and therefore any actions by that individual are not recoverable.  Further, once potential dishonesty is discovered on the part of any employee, any loss beyond that date of discovery by the individual is generally not recoverable as well (the insured should have mitigated their loss and prevented any further theft).

This should have a direct impact on the screening and hiring process for most employers.  If a potential candidate will have access to funds and/or assets within their employment, and the candidate has an issue of dishonesty in the past, it is likely if the candidate is hired anyway and a subsequent loss is suffered due to the actions of that employee, there could be no recovery through the policy.  In investigating the claim, the insurance carrier will request copies of the individual’s personnel file as well as conduct their own investigation into the background of the suspected perpetrator.  Chances are they will identify the past dishonesty and deny the claim.

These are not newly added restrictions to recently issued policies.  In fact these limitations have existed for years.  However, due the growing scrutiny we have been experiencing by carriers reviewing and investigating dishonesty claims to determine if payment should be made on the claims, it is apparent many employers who maintain this coverage are unaware of these limitations.