CONSISTENT AND DILIGENT attention to financial transactions are among the strategies likely to identify 'bookkeeper fraud,' which is committed by employees with access to company resources, according to attorney Geoff Millsom.
Geoff Millsom is a shareholder in the litigation department of Adler Pollock & Sheehan P.C. who represents companies in business disputes. Many of his clients are in the financial services industry and commercial banking. Millsom has been a business litigator for 17 years and, prior to moving to Providence, he practiced at a large law firm in New York City. He has been admitted to practice in Rhode Island, Massachusetts, Connecticut and New York. Millsom was selected by his peers for inclusion in the 2013 edition of The Best Lawyers in America.
PBN: Recently, you have been handling a number of cases involving what is loosely referred to as “bookkeeper fraud.” Is there a common thread among these, as far as the situation or type of fraud?
MILLSOM: Yes. We use the term “bookkeeper fraud” to refer to lawsuits against banks by business customers who claim that someone in a position of trust embezzled money by misusing one or more bank accounts. These cases typically involve an accountant or office manager who has access to the business’s checkbook, debit card or online passwords who either writes checks to themselves, or creates various schemes that allow them to draw money from the business and take it for their own personal use. The schemes sometimes get pretty sophisticated and elaborate, but they almost always involve lots of small transactions that add up to significant amounts over time. If someone is writing themselves a few small checks each week it can be hard to detect. But it can add up to hundreds of thousands – or even millions - of dollars over time. By the time the scheme is detected, the thieves have usually spent the money or gambled it away, leaving the employer with pretty limited options to try to recover the losses.
PBN: Have you noticed an increase, or a decrease, in these fraud cases over the past few years?
MILLSOM: I think the amount of embezzlement or bookkeeper fraud is actually pretty steady over time, but when the economy is bad it seems like businesses are much more likely to bring suit against their banks. So, we’ve seen an increase in these cases over the past several years.
PBN: Does technology make is easier or more difficult for fraud to be committed in a corporate environment?
MILLSOM: Technology and the rise of electronic banking in particular definitely make it easier for this type of corporate theft. Many smart business owners who would never consider allowing their office managers to become signatories on their checking account and who insist on signing all of the company’s checks themselves think nothing of giving their bookkeeper their online banking password to transfer funds or do other routine transactions. They don’t realize that an employee with access to the company’s banking passwords can do just as much, if not more, damage than they could with access to the checkbook and signing authority. When a check is presented to a teller at a bank branch, the teller can check the identity of the person who is attempting to cash it, they can compare the signature on the check to examples of authorized signatures or the account’s signature card - in other words they have some ability to backstop their customers and catch fraudulent activity. If the account is accessed over the Internet, however, none of that exists. The bank has to assume that, if the person has the password, the person is authorized to transact business in the account.
PBN: What legal issues do these fraud cases raise?
MILLSOM: Well, the law heavily favors banks in these cases. It is exceedingly difficult for companies to recover against their financial institutions when they are victims of this type of fraud. The Uniform Commercial Code puts the onus on account holders to review their monthly statements and limits the time in which they can raise issues with the bank based on other unauthorized checks that were reported on those statements. This makes sense when you think about it, because the company that employs a thief is in a much better position to prevent and detect serial embezzlement than the bank where the accounts are held. Where the unauthorized checks were part of a scheme conducted by the same person over time, the customer can at most seek to hold the bank liable for the previous 12 months. To establish that liability, however, a bank customer needs to show that the losses were more the fault of the bank than their own fault. It’s usually pretty tough for a company to argue that it was diligently overseeing the dishonest employee and scrutinizing its monthly statements and the bank’s negligence is the real reason that these transactions went undetected for so long. Many times, defrauded companies try to argue that the transactions were so obviously unrelated to its business that the bank should have known they were unauthorized and should raised red flags. Sometimes, they point to debit card transactions at gambling casinos or electronic fund transfers to a Third World country widely associated with email scams, but this isn’t enough. Banks are not legally obligated to regularly monitor their customers’ transactions or audit the activity in customer’s accounts.
PBN: What’s your general advice for a business once it’s discovered a bookkeeper is stealing? What legal issues most impact the recovery of the business?
MILLSOM: Obviously, the first step is to report the theft to the police – even before you confront the employee. This probably more than anything else impacts how much ultimately will be recovered. Next, you need to report the unauthorized transactions to the bank, change your passwords, cancel any debit cards the employee had access to and maybe even close the accounts, start fresh and stop the bleeding. Then, work with the bank to try and trace the funds, recall any wire transfers that may not yet be settled and start to try to claw money back from third parties that the employee may have paid. Unless you find that the nature of the embezzlement was such that bank personnel were either complicit or so grossly negligent that it amounts to complicity, I do not recommend suing the bank. In my experience, the legal fees incurred in the course of a lawsuit against the bank are far more likely to increase the size of the companies’ loss than the remote chance of recovery is to offset the loss.