Avoid the costly ‘Oxford Syndrome’

As the economy struggled on and on, the credit and collection manager at a large hospital system watched as the cash collected from written-off bad debt accounts nearly dried up. Just four years before, the health care system could rely on almost 10 percent recovery from delinquent accounts placed with an outside collection agency. Now, they were lucky to get 2 percent — that was a drop of more than $6 million a year! Had to be the economy, the hospital system managers decided. Patients just can’t pay during these difficult economic times. Trying to keep the home, utilities, car, kids and food just leaves nothing left for medical bills. The contracted collection service provider is a well-known and reputable company, and the hospital system bid out the contract to select the best service provider. 

One day, the hospital business office receptionist paged the credit and collection manager to let him know that an officer from the FBI was in the office to see him. Agent Carlson explained that a two-year investigation of the contracted collection service provider revealed that more than $10 million was stolen from the company’s bank accounts. The owner and his son, the company’s president, had been moving money from a line of credit — propped up by false accounting statements — to the business and not remitting collections to their clients, including the hospital system. The courts have slapped them with charges of money laundering, bank fraud, wire fraud and conspiracy to commit wire fraud in a massive scheme to steal millions of dollars from their investors, lenders and clients.

Now it made sense. The owners were greedily siphoning money recovered from collection accounts and keeping it for themselves.

OXFORD COLLECTION AGENCY STOLE FROM CLIENTS

On Jan. 30, District Judge Stefan R. Underhill sentenced Richard Pinto to 60 months of imprisonment, which will be followed by five years of supervised release.

The government indicted other executives. In December of 2012, the U.S. Department of Justice and FBI officials said that Randall Silver, Oxford’s vice president of finance, pleaded guilty to one count of conspiracy to commit wire fraud, bank fraud and money laundering, and one count of wire fraud. Charles Harris, executive vice president, and Chief Operating Officer Carlos Novelli each pleaded guilty to one count of conspiracy to commit wire fraud and bank bribery. 

“These defendants carried out a significant fraud scheme through which they stole millions of dollars from their company’s clients, lenders, and investors,” said U.S. Attorney David B. Fein.

Beginning in April 2007, the Pintos secured a line of credit from Connecticut-based Webster Bank without disclosing to the lender about Oxford’s significant client backlogs or outstanding payroll taxes. The Pintos and others sent falsified financial statements to Webster Bank, eventually increased the credit line to $6 million and subsequently laundered funds from the credit line to promote the ongoing fraud scheme against their clients.

During that same period, the Pintos also solicited millions of dollars in investment capital from various investors without disclosing the existence of their backlog of unremitted client funds. Oxford collected debts on behalf of various clients in the bank card/credit card, telecom and consumer credit industries. The Pintos and others then diverted various funds from their client remittances and used them for their personal greedy gain.

The FBI; the Internal Revenue Service – Criminal Investigation; and the Connecticut Securities, Commodities, and Investor Fraud Task Force are investigating the case. Also, because Webster Bank received funds through the Troubled Asset Relief Program (TARP), the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) was involved in the investigation. 

NATION AWASH IN CONSUMER DEBT

This case exemplifies the critical need for strict controls over outside vendors entrusted with cash handling for the business enterprise. But what could the credit manager have done to detect malfeasance, and even better, deter and prevent it all together? As Certified Fraud Examiners, we’ll learn much from studying this case.

Eliminating the use of collection service providers isn’t the answer. According to ACA International, the credit and collection industry’s professional association, accounts receivable management (ARM) companies provide a very valuable and necessary service to the creditors they serve. “Recovering rightfully owned consumer debt is essential to our nation’s economy,” according to the ACA’s website. “Businesses from Main Street to Wall Street rely on the repayment of credit to pay employees, utilities, taxes, insurance and other business expenses. Federal, state and local governments also rely on the repayment of billions of dollars in uncollected court fees, taxes and other delinquencies. Failure to recover this debt results in business closures, layoffs, higher prices, less available consumer credit and tax increases to close government budget gaps.”

The ACA reports that on the heels of the recent global financial meltdown, the U.S. is a nation awash in consumer debt. According to the U.S. Federal Reserve, in 2010 the total amount of consumer debt in the U.S. exceeded $2.45 trillion (with an average credit card debt per household of more than $16,007). In addition, at press time, the federal government deficit now tops a record $14 trillion just as most states and local governments struggle with budget crises. Based on a net of $44.6 billion recovered, third-party debt collection efforts represents $396 in savings on average per household by keeping the costs of goods and services lower, according to a February 2012 ACA-Ernst & Young study, “The Impact of Third-Party Debt Collection on the National and State Economies.”

HOW ORGANIZATIONS CAN PREVENT AND DETER THIS FRAUD

Clearly, contracted collection service providers bring significant value to business enterprises in the U.S. and the world. Therefore, the question becomes: How do we construct the proper controls to ensure that companies don’t get defrauded when using third-party debt recovery firms? A structure of best practices and financial controls for using outside collection service providers will set forth a framework to limit that level of risk and avoid horror stories like Oxford.

Risk and compliance management experts know that an organization’s culture starts at the top. When examining any collection contractor enterprise to assess the level of attention to controls, look to leadership first, then structure, followed by business processes and finally, controls.

Assessing leadership’s culture of compliance

Basic investigative principles point us to examine what people do, not what they say. An examination of the time, energy and resources that company leadership has actually invested in compliance will give insight to the culture within the business. If questionnaires and interviews don’t render specific factual, well-documented historical attention to compliance controls, you’ll no doubt see the same throughout the enterprise.

Structure for compliance

Business leaders who understand the value of risk management and compliance will set up a structure to ensure attention to this area. A compliance committee must be composed of key executives with the needed skills and capabilities to establish accountability at every area in the company. Also, the committee must have the authority to hold business leaders, managers, employees and vendors accountable to high standards for business practices and controls. No individual, group, department or even owner must be independent from the oversight of the compliance committee.

Business processes controls

The first step in evaluating business processes is to examine the level to which the firm is prepared to do business.

Collection agency licensing

Not all states require that debt collection companies hold licenses. States requiring licenses may also require bonds; these may be administrated through various departments within the state government. License requirements may be obtained at www.acainternational.org.

Employee background checks

Of course, the level of trust for any organization is only as good as the people it employs. During background investigations, organizations must check for state and federal criminal histories. Not only must they verify credit checks, prior employment and education but also match them to the original applications.

Financial statements

Organizations should carefully review financial statements of contracted vendors. Because collection contractors will hold funds in trust, they must clearly demonstrate very high standards of financial strength and stability. Only accept audited financial statements from debt collection service providers.

Litigation and/or regulatory actions

Collection agencies are regulated at the state and federal level. Attorneys general typically carry out enforcement actions for collection agency practices and for consumer protection activities. Companies can easily discover the actions because they’re public record. At the federal level, the Federal Trade Commission and the new Consumer Financial Protection Bureau share in the responsibility of regulating debt collection service providers. Their actions are also public record.

Financial controls

The creditor who’s contracting the collection service provider can manage risk by setting out various financial controls. Some controls provide a higher level of risk management than others. For example, the creditor can require customers to send payments directly to the creditor’s remittance address so the contractor handles no cash, thus significantly reducing the level of risk. However, this routine isn’t always possible because the creditor might not have adequate payment reporting resources. When accepting and processing payments, a dedicated and restricted collection trust account must authorize bank statements to be sent to the creditor and reconcile collection statement payment reports. In moving cash receipts, an immediate remittance to the creditor by Automatic Clearing House (ACH)/Electronic Funds Transfer (EFT) will reduce the risk of retained cash.

Information system controls

Organizations should periodically complete technology security reviews to adequately safeguard personal account and financial transaction information. They must review security self-assessments and confirm them with on-site audits. These audits include the physical environment and the information systems that the contractor uses. The level of protection required by the outside collection service contractor should equal or exceed that of the company contracting services.

NO 'OXFORD SYNDROME' HERE

Many companies in the ARM industry have invested significant resources to establish and maintain risk control measures that bring value to the creditor community. However, each creditor is responsible for contracting these services to thoroughly examine vendors. The competitive advantage achieved by companies in recovering payments from delinquent customers can make a big difference in product and service pricing, and return to shareholders. If you pay attention to risk controls of vendors, including collection service providers, you’ll capture the value and not end up with a case of the “Oxford Syndrome.”