Pension Fraud

As companies worldwide tighten their belts, employee pensions are being reduced or eliminated. But some employers are stepping over the line and pocketing pension funds. Learn how the Cayman Islands' National Pensions Office caught one serious offender. And gather some transferable tips for other cases.

"Jack," the president and CEO of "BACME Limited," in the Cayman Islands, loved the finer things in life -- boats, airplanes, Jet Skis, and taking money from his employees' pension fund to pay for it. Though the islands had recently passed a law to catch fraudsters like Jack, he told his friends that the new legislation was just a tiger with no teeth. He didn't realize that he would soon be missing a large chunk of his posterior.

Ahhh, the Cayman Islands. Sunshine, azure waters, beach volleyball, and no taxes. What a wonderful place to work and retire! Unless your employer pirates your nest egg and spends your earnings on fancy toys that will make his life more comfortable at your expense.

You'd think that in a place where there are no taxes, an employer would be more than willing to abide by the few required responsibilities of an employer, one of which is to provide pension coverage for their employees and themselves.

NATIONAL PENSIONS LAW
The Cayman Islands government wants to ensure that workers have some type of retirement plan and prevent them from becoming wards of the state so it enacted the National Pensions Law in 1998 and revised it in 2000. The government created the National Pensions Office in 1998 to become the administrator, regulator, and enforcer of this law.

Employers are required to deduct a maximum of 5 percent of the employee's earnings and contribute from their own pockets a minimum of 5 percent of the employee's earnings to the approved pension plan. Almost all the pension plans provided in the Cayman Islands are defined contribution plans. This means that the employer must submit a minimum of 10 percent of the employee's salary (usually 5 percent from the employer and 5 percent from the employee). This amount is due by the 15th day of the month after the month the salary was paid.

The National Pensions Law is a criminal statute, which contains broad powers assigned to the National Pensions Office such as the ability to search a business without an inspection order (search warrant) and to seize any information relating to payroll and/or pension records. The law also allows for searches of personal residences with the use of an inspection order. Penalties can include fines for not making contributions ($5,000 on summary conviction or $10,000 on indictment), or not providing information to ascertain compliance ($1,000), or failure to pay arrears of contributions within the time given ($500 for each day in arrears), just to name a few.

The National Pensions Office collaborates with other government groups such as the Immigration Department (which issues work permits to expatriates a large percentage of the employment force) and the Trade and Business Licensing Department, which issues business licenses and maintains director and shareholder lists.

Courts enforce the law; however, the goal of the office is to ensure pension monies are deposited into employees' accounts. Bankrupting an employer or doling out jail time might deter fraudulent employers, but it does little to fund the retirement accounts of future pensioners.

NON-COMPLIANCE WITH NATIONAL PENSIONS LAW
As of publication, more than 490 employers are under investigation for non-compliance. (The actual number could be much higher with the incorporation of more than 1,500 new companies after Hurricane Ivan in 2004.) The office uses brochures, newspaper advertisements, and television spots to educate employers about the law, but the most efficient and effective source of "education" is publicly enforcing the law. Word of mouth on a small island is quite effective.

The pension plan administrators or company employees file employer delinquency reports and complaints. Of the 557 employers initially investigated based on the delinquency reports, 294 were made to pay any outstanding arrears and interest to the pension funds. Another 329 employers were investigated and 144 of those cases were resolved. The courts impose and levy fines only on those companies that are formally charged. These fines go back to the courts and not to the pensions. However, all delinquent employers must not only pay past-due contributions but also interest on outstanding arrears at the rate of 5 percent plus prime rate, all of which goes directly into the employees' pension accounts.

Since the inception of the law in 1998, there hadn't been one case brought before the courts by 2005 because the office had no experienced enforcement personnel. Therefore, employers had become complacent and weren't concerned about repercussions. We needed to land a blatant offender to show that we were going to enforce the law. Jack of BACME Limited had been deducting pension contributions since the beginning of the law, but in early 2002, he had stopped submitting both the employee and employer contributions to the approved pension plan. However, Jack had continued deducting contributions from his employees' salaries and illegally used the money for his personal use. When a company deducts pension contributions from an employee's paycheck, the law requires that it hold these funds and the company's share in trust.

Section 49(1) of the law reads:
Where an employer receives money from an employee under an arrangement that the employer will pay the money into a pension fund as the employee's contribution under the pension plan, the employer shall be deemed to hold the money in trust for the employee until the employer pays the money into the pension fund.  

If this trust is breached almost anywhere else in the world, the perpetrators can expect an arrest for fraud, theft, or larceny and can face jail time. Yet in the Cayman Islands, the perpetrators primarily will face monetary fines. The only way that they'll end up in jail is by not paying fines levied by the courts.

BACME first showed up in June 2002 on a monthly list of companies that had failed to make pension payments. In the next three years, Jack met many times with the National Pensions Office and signed agreements that not only acknowledged his pension debt but also dictated a specific repayment plan. Meanwhile, he was deducting pension money but not submitting any of it. By November 2004, the amount of contributions he owed (excluding interest) was more than $100,000 in Cayman Island dollars (USD$120,000). By February 2005, the only money he sent to the pension plan was a check for about CI$4,000 that quickly bounced. Obviously, Jack never intended to pay. Employees in interviews reported that Jack called the National Pensions Office a "toothless tiger." We heard from these interviews that Jack bought those boats, airplanes, and Jet Skis but was late in distributing paychecks to employees and didn't contribute to their pension plans.

Jack's derision, plus the crimes of other blatant offenders, motivated us to become a tiger with sharp teeth, so the enforcement component was added. To prepare for our first prosecution, we compiled a policy and procedure manual on conducting inspections and audits and wrote a number of working papers including an inspection order (search warrant). The office's legal counsel reviewed and approved all the documents before their use. I developed a reporting format that could be used for prosecutions and daily operations. This format allows the user to establish who the subject is, the charges, a summary of what occurred and a chronology of events on the first two pages. There are many sections that can be added to the format depending on the file, but these are the titles used in our first prosecution report: Accused Organization, Accused Subject, Charges, Summary, Complainants, Chronology of Events, Witnesses, Witness Evidence, Evidence, Investigations, Attachments, Disposition, and Distribution of Copies.

In addition to the original report, follow-up reports contain extra information under titles such as Additional Investigations, Additional Evidence, and so on.

INVESTIGATIVE PROCESS
At the start of the BACME Limited investigation, we organized the file, took inventory of evidence, and wrote a task and priority list. We located a number of ex-employees who would be witnesses.

During the interviews, it was important that they described what they believed to be the manager's position in the company. (As in the U.S. Sarbanes-Oxley Act, it was important to hold the owner/manager/CEO accountable.) In formulating charges, we needed to ensure the presence of evidence to charge both the company and the individual.

The three most crucial items in almost any prosecutable files are witness statements, accused statements, and evidence. In this particular case, there were more than 100 exhibits and eight witnesses. (Even though there were many more ex-employee witnesses, we used a small sampling because of the large number and transient nature of the workers.) We made several appointments with Jack but he cancelled at the last moment every time. However, he signed a number of exhibits and admitted the occurrences and amounts he owed so it wasn't essential that we obtain his statement.

The solicitor general, second in command under the Attorney General, took a particular interest in this case because it was the first of its kind in the Cayman Islands. The National Pension Office consulted her at every step and she was the prosecutor in court. A total of 84 counts of "employer failed to make contributions to a pension plan for an employee and two counts of "failed to supply required information within time period given" are now before the courts. If convicted, penalties could include fines of $5,000 and $1,000 for the two charges, respectively, plus $500 per each day of the infractions for more than three years. Even if Jack isn't convicted, the law says he must pay the arrears on both the employee and employer share and interest of 5 percent above prime. (The Cayman Islands prime mirrors the U.S. rate.)

After we served the summons to Jack, we phoned our media contacts and invited them to peruse the public records at the courthouse. The front-page newspaper headlines of both the Cayman Compass and the Cayman Net News detailed the charges. Within the next week, a number of delinquent employers contacted us to catch up on arrears. Our fax was constantly humming with employers finally sending requested information. Since then, every time the case is mentioned in the newspaper, we see a surge in the number of calls. (In May 2006, the office hired an additional pensions inspector and has stepped up enforcement efforts with numerous resulting court actions.)

One of our most powerful aids in achieving compliance is in section 65 of the law, which requires that the contributions due to the pension fund shall be paid prior to distributing proceeds to other entitled persons such as vendors. Section 65 stipulates that payment of those outstanding arrears plus interest will occur before distribution to any other entitled person used in combination with section 132 of the Registered Land Law, which allows the restriction of a perpetrator's sale of property for an appropriate reason.

Jack attempted to hide his assets in a holding company, so we registered a restriction on the sale of all properties within that separate company through the Cayman Islands Lands and Survey Department. That was the reason for identifying Jack as the owner or employer.

Jack's problems aren't over. We've sent him summonses for 78 charges on another company. Once again, he made it to the front page of the newspaper and we received a plethora of calls from other employers. All three accused (the two companies and the owner) are in the court system and are awaiting a verdict. In the meantime, we've secured not only the contributions but also the owed accrued interest so at least the employees will have some kind of nest eggs for the future.

LESSONS LEARNED
Because this case was the first of its kind here, we had a steep learning curve, but it provided us with information to streamline future files. We now charge first, when possible, with "fail to provide information" before we charge with "fail to provide a pension" because it's easier to prove. It shows that we're committed to enforcement of the law, and it provides the employer with time to become compliant.

It's important to develop a rapport with the media because delinquent and non-compliant employers are always motivated by bad publicity. As with the U.S. Sarbanes-Oxley Act, it's vital to hold business owners and managers accountable for any wrongdoings.

Before we began the investigation, we wrote a concise plan, which specifically showed the things we were trying to prove. The final report was more than 115 pages but we succinctly summarized the case in the first few pages, which greatly helped to convince the prosecutor to take our case.

NEST EGGS WITH NO CRACKS
Laws have enough teeth only when they're backed up by thorough fraud examinations funded by governments that mean business. Employers should help provide nest eggs not crack them.

Pierre E. Lautischer, CFE, CIG, CFI, is a pensions inspector in the Cayman Islands National Pensions Office in Grand Cayman and the co-founder and interim president of the local ACFE chapter.  

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