Protecting Your Organization From Fraud and Employee Theft

May 15, 2012 Presented By: Todd Whiteman Vice President Property/Casualty Nonprofit Insurance Specialist

Overview

Fraud

- Definition:

- Who can commit fraud?

- Types of fraud:

- Expenses:

- Coverages:

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Crime of obtaining money or some other benefit by deliberate deception

Employees, Board Members, 3rd parties, Clients

Employee dishonesty, computer fraud, funds transfer, forgery, alteration, money orders, counterfeit currency and theft

Crisis Management, Investigative Costs and Public Relations

Can be purchased as a separate “Bond” often called a Fidelity Bond, as a separate Crime policy or as part of the Property Policy or Directors & Officers Policy

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Local Case #1

•Over the course of 5 years an employee stole $10,300,0000 ($25,000 per week)

•Sentence to 6 years, 6 months in prison & ordered to pay the money back

•It is expected she will only be able to pay back 10%

•Used much of the $10 million to take family and friends on lavish trips that included a private dinner with actor Kevin Spacey, club tickets to the Super Bowl and an exclusive Mass at the Vatican. "It goes on and on and on," the judge said. "This is mind-boggling - the nature of the crime and the purposes for which the money was spent.”

•Employee Dishonesty could provide coverage but what was the limit of insurance in place at the time the theft was realized?

•Policy and Procedure including separation of duty and audit could have prevented the claim

Pittsburgh Tribune Review

Employee Dishonesty

Employee Dishonesty

-Definition: Theft by an employee or group of employees

- In 2000 employee dishonesty cost US business over $50 billion dollars. In 2010 that number was estimated at $2.9 trillion globally –according to a report by the Association of Certified Fraud Examiners

- Includes theft of money, securities and property

- Options available include scheduled policies for an individual or location, blanket for all employees and locations or by specified position

- Can include theft from your clients, your 401k funds, your employees and executives

- The limit of coverage is per occurrence meaning all acts involving the same person/group of persons and coverage is triggered when the loss is realized

- Coverage can also be extended to cover Volunteers and Interns as employees

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Employee Dishonesty

Types of Employee Dishonesty

- Embezzlement – Employees taking cash directly or forging signatures on checks and depositing in their own accounts

- Expense Account Padding – charges for personal items, meals and expenses or inflation of the cost of legitimate expenses

- Non Existent Vendors – setup of fake vendors and invoices for those vendors in order to pay themselves

- Inventory and Property Theft – items stolen for personal use, outside sale or scrap sale for value of material

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•charges of embezzlement over an 8 year period that the employee stole $340,000

•Health Insurance was cancelled for employees for nonpayment alerting staff

•Fraudulently signed checks with stamps of two board members

•"It seems to be just a financial thing and the agency seems to have operated very appropriately," said Marc Cherna, director of the county's Department of Human Services. "As soon as they discovered something they went to the district attorney and they also had a forensic audit. They handled it right, and I think they're going to move on from here.

•Employee Dishonesty and Forgery coverages can potentially be triggered

•Since stamped signatures played role there may have been a procedure in place which may now need reviewed

Pittsburgh Post Gazette

Local Case #2

Additional Exposures

Computer Fraud and Funds Transfer

-Theft by an individual via computer hacking and password theft

- Access gained to bank accounts online via username and password resulting in a wire transfer

-Routing information changed on a legitimate payment to a different account

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Theft

- Definition: theft by a person or persons who are not employees

- On Premises (coverage for theft of money at your location)

- Off Premises (coverage for theft of money outside your location for deposit)

Additional Exposures

Money Orders & Counterfeit Currency

- Fake checks that may or may not be on actual bank check format

- Fraudulent or Modified Money Orders

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Forgery & Alteration

- Checks drawn and signed by someone not authorized to do so

- Forgery of existing checks, drafts or promissory notes

Unauthorized Business Card Use

- Personal use of business credit cards

- Theft business credit cards

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•charged that over a 3 year period the Executive Director stole $86,000 •Unauthorized raises of $38,000 over 3 years, personal purchases, debt payoff and tuition fees

•Mr. Zydel said in retrospect there were no warning signs indicating trouble brewing with a man he described as a "very qualified, well-recognized, well-regarded individual in the nonprofit and the business community."

•"People who are diagnosed ave been given one of the most difficult medical diagnoses out there, in my opinion, and it's just unthinkable they're victimized by somebody who was supposed to be taking care of them," he said

•Despite the missing money, Mr. Zydel said his chapter is financially sound and will have about $800,000 in revenue this fiscal year thanks to a record-breaking fundraising drive

Pittsburgh Post Gazette

Local Case #3

Prevention

Policies and Procedures

Segregation of duties (different person responsible for money coming in and money going out as well as check writing authority and auditing)

Mandatory 2 weeks vacation annually

Multiple signers on checks

Annual audit by a 3rd party / accountant

Background Checks on new hires

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Prevention

Insurance Policies

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Coverage

Fidelity Bond – covers policyholders for losses that they incur as a result of fraudulent acts by specified employees.

Crime Policy – covers policyholders for losses that they incur as a result of employee dishonesty, embezzlement, theft, forgery, computer fraud, counterfeit currency etc. This policy is designed specifically for these coverages and is typically the most comprehensive and can provide much higher limit options.

Property / Package Policy – same as above but included in a “Package” that also includes Property & Liability. Base limits are available and can be increased depending on options available from the insurance carrier.

Directors & Officers Policy – provides coverage to the organization, it’s Directors and Officers and it’s Employees for a wide range of suits. Many carriers will provide crime options as separate coverages and with separate limits on this policy.

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Church – Connellsville

South Butler - School

SWPA - Nonprofit

Other Local Cases

$25,000 Employee Theft / Access Fraud Wire Transfer to her personal credit cards May 14, 2012 Herald-Standard

$10,000 Employee Theft by Teacher from PTA May 8, 2012 WTAE

$49,000 Employee Dishonesty / over a 3 year period Used the organizations credit card for personal expenses Apr 17, 2012 WTAE

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Contact Information

Todd Whiteman Vice President Property Casualty Nonprofit Insurance Specialist Enscoe Long Insurance Group, LLC 80 Emerson Lane, Suite 1305 Bridgeville, PA 15017 412-206-0364 twhiteman@enscoelong.com www.enscoelong.com