Are you going to make a federal case out of it?

Employees who handle cash in small towns often have few safeguards, so it’s easy for fraudsters to abscond with millions over several years. Here’s how to prevent and deter these supposedly trusted and longtime staffers and how to prosecute them under federal laws.

By now, we all know about Rita Crundwell’s infamous $53 million embezzlement from the city of Dixon, Illinois, when she was its comptroller and treasurer. She stole an astronomical amount, but crooked employees often rip off small municipalities. Vicky Vinson Capetillo, former city clerk of the city of Groveton, Georgia, stole almost $900,000. And Nancy Dobrowski, clerk of the village of Burnham, Illinois, stole $700,000 in her nine-year scheme. [See Former Groveton City Clerk Pleads Guilty To Embezzling Nearly $900,000, U.S. Department of Justice (DOJ), Dec. 18, 2017, and Former Burnham clerk given 18 months in prison for theft from village, Sept. 9, 2014, Chicago Tribune.] These are just two of too many.

Lack of internal controls, poor separation of duties and little professional skepticism cost taxpayers millions in small towns around the globe. Each of these little places — whether in rural Nebraska, the Nigerian countryside or the foothills of the French Alps — usually employ just a few staff members and have part-time mayors and volunteer councils. Yet they entrust their employees with hundreds of thousands and even millions in currency. And sometimes just a supervisor or a very part-time board of directors manages water and sewer utilities.

In this article, we explore the unique fiscal frailties of small municipalities plus how U.S. fraud examiners can use federal statutes to successfully prosecute fraudsters instead of solely relying on local law enforcement.

Receiving cash with the right hand and taking it with the left

The greatest risk of embezzlement or theft is in the handling of cash. Yet in many small public entities, the employee who receives cash payments for fines, posting bonds or water or sewer bills is likely to be the same person who makes the bank deposits and receives the monthly bank account statements. Of course, that scenario is a crime just waiting to happen, yet no one seems to notice until it’s too late. This lack of separation of duties and the failure to have someone perform even a simple review, such as comparing cash receipts with actual deposits, can easily lead to huge losses.

According to the DOJ, when Capetillo of Grovetown, Georgia, pleaded guilty, her duties as clerk included the preparation of the regular bank deposits of the city. She developed a scheme to steal the cash from the deposits by intercepting checks sent in by citizens as payment for utility bills. Then, after collecting a stack of checks, she’d pocket cash from regular deposits and replace it with the intercepted checks to make the deposit ticket balance.

As part of her fraud scheme, Dobrowski, the former Burnham Village clerk, took cash from the village’s cash register and the car-towing fee collection, according to the DOJ’s release. She recorded lower amounts of collected car-towing fee money and sometimes used it to balance the cash register.

To conceal her misappropriation from the cash register, Dobrowski would wait a week to deposit cash into the village’s bank accounts instead of making daily deposits. She could then use funds the village received during that week to make up for funds she’d taken the previous week, so the deposit would appear to match the revenues.

Dobrowski further concealed the scheme by failing to record checks received from the public as payment for village fees and services, according to the DOJ. She’d place the unrecorded checks into the register to compensate for an equal amount of cash she’d taken so the register would appear balanced. She provided false information to the village’s outside audit firm about revenues and regularly disposed of cash register tapes to conceal that the village’s revenues often didn’t match the deposits into village bank accounts.

Successfully prosecuting under federal laws

A small town anywhere in the world that discovers employee embezzlement often, of course, immediately takes the case to local law enforcement. However, the town might find that the alleged fraudster had violated federal laws in their countries; that would mean officials can go directly to the FBI (or other global agencies in their countries) with their complaints.

Almost all public entities receive federal funds, and when they do, the federal government has a right to know how those entities do business. The commonly charged U.S. federal statute, Title 18 U.S.C. § 666, makes it a violation for an agent of a public entity to steal, not just the federal funds, but also any other funds of that public entity. Federal authorities have prosecuted many federal cases when the funds stolen weren’t federal funds nor even commingled with federal funds. When Title 18 U.S.C. § 666 is charged, the headlines usually contain, “Theft Concerning a Program Receiving Public Funds.”

If you become aware of a possible theft of a relatively large amount of money from a public entity by an employee or appointed or elected official, and if that entity received federal funds for any purpose (such as money for police department equipment, sidewalk construction, etc.) no more than 12 months before the crime began, consider referring the matter to the FBI instead of your local law enforcement agency.

This isn’t a self-serving push; we just want to make you aware of the option to seek federal prosecution. Your local law enforcement agency might not have the resources to conduct a possibly complex, long-term, white-collar investigation. (Of course, after the FBI or U.S. attorney’s office considers your case, it might refer it back to your state or local investigative agency because of certain minimum federal prosecutive guidelines.)

The general elements of Title 18 U.S.C. § 666(a)(1)(A) are that:

• The defendant is an agent of an organization or of a state, local or Indian tribal government.
• The organization, government or agency receives benefits in excess of $10,000 in a one-year period pursuant to a federal program involving a grant, a contract, a subsidy, a loan, a guarantee, insurance or another form of federal assistance.
• The defendant embezzled, stole, obtained by fraud or otherwise without authority knowingly converted to the use of any person other than the rightful owner — or intentionally misapplied — property, which had a value of $5,000 or more and was owned by or under the care, custody or control of such organization, government, or agency.

For further information about these elements, such as the requirement for someone to be an “agent” of the entity, please research the many resources available online.

For those cases in which the public entity didn’t receive any U.S. federal funds, you can still seek prosecution in federal court under alternative statutes, such as Title 18 U.S.C. § 1341, the mail fraud statute, and Title 18 U.S.C. § 1343, the wire fraud statute.

The elements that must be proven for someone to be convicted of violating the mail fraud statute are that the defendant 1) devised or intended to devise a scheme to defraud (or to perform specified fraudulent acts) and 2) used the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts).

For example, a former clerk for the city of Casey, Iowa, was indicted for, and pleaded guilty to — among other things — mail fraud because she used the United States Postal Service (USPS) to mail city checks as payments for her personal charges on the city’s credit card. Interestingly, this former clerk went further than most in covering up her scheme by setting on fire and destroying a city building at or near the time of an audit.

To meet the “mail” element of the charge, the USPS doesn’t have to mail or ship the money; private carriers can do it. Also, the mailing or shipment doesn’t have to cross state lines.

Here are the elements that must be proven for someone to be convicted of violating the wire fraud statute:

• The defendant voluntarily and intentionally devised or participated in a scheme to defraud another out of money.
• The defendant did so with the intent to defraud.
• It was reasonably foreseeable that interstate wire communications would be used.
• Interstate wire communications were in fact used.

“Interstate wire communication” can simply be the employee’s use of the public entity’s credit card for personal purposes if there’s proof that the electronic signal to complete the transaction crossed state lines.

Through our years of investigating public corruption matters — involving theft of public funds and those involving bribery of public employees and public officials — we’ve seen many fraudsters perpetrate schemes who sought to enrich themselves and betray the trust put in them. We encourage you to be very diligent in your efforts to combat fraud at your local public entity and consider referring the matter to your local FBI office.

(Read "A town employee can easily buy a personal TV on that official debit card" at the end of this article.)

Tom Mayhall, CFE, CPA, is a special agent with the FBI in the Birmingham, Alabama Division. Contact him at tmmayhall@fbi.gov.

Sarah Malcom, CFE, CPA, is a forensic accountant with the FBI in the Birmingham, Alabama Division. Contact her at sarah.v.malcom@gmail.com.

A town employee can easily buy a personal TV on that official debit card

Municipal employees don’t just rip off incoming cash; they misuse official debit cards. Many entities now issue debit cards to employees so they can easily buy items for operations, but they can easily conceal purchases because of lack of documentation.

In several cases we’ve worked, public-entity employees used debit cards for thousands of dollars of personal purchases. Their schemes remained concealed for years because the only place where those fraudulent transactions appeared was in the monthly bank account statements.

In one case, the town clerk consistently took vendor invoices to the town council meetings for proper approval, and the council members likely thought the town’s money was safe when they reviewed and approved those payments by check. However, the clerk, who intentionally misled the council, never took the monthly bank statements to those meetings. She told the council members that they could come by her office to review them. Of course, they weren’t interested enough to pay her a visit. Even a cursory review of those monthly statements would’ve revealed many suspicious transactions and likely would’ve led to a much earlier discovery of the theft.

Angela Betty Curry, the former clerk of Tabonia, Utah, the wife of a country sheriff, stole more than $140,000 from the town. A Tabonia town councilman said town leaders repeatedly asked Curry to provide bank statements for the municipality’s accounts, but she’d answer, “Oh, I’ve given them to our CPA to audit them.” The councilman said, “She kept having excuses and hiding all the bank statements. She was very convincing.” (See “ Tabonia town clerk charged with theft, forgery,” by Geoff Liesik, for The Deseret News, Aug. 12, 2010.)

Banks often now don’t send monthly paper account statements to public entities, so officials don’t catch illegal debit card transactions unless they check online statements. In another case, board members of a public utility did occasionally ask to see bank account statements, but the supervisor always had an excuse for not bringing the statements to the meeting. Yes, that should’ve been a red flag, but the part-time board members were just not that interested, skeptical or engaged.

But did these stealing employees really need to hide the bank statements after all? Possibly not, because they used the municipalities’ debit cards for official purchases — maybe at Amazon for a truck part or at Best Buy for computer hardware. So, town authorities likely wouldn’t have noticed extra purchases from these companies for personal purposes.

Can you imagine how many personal items you can buy for yourself online during the workday using your employer’s money and an office computer? Unfortunately, in one such case, the external accountant for a public utility missed an opportunity to discover thefts via a clerk’s business debit card and stop the losses. He’d asked utility employees about debit-card purchases at Lowe’s, but they told him that the entity often bought tools at Lowe’s for its operations, so the accountant didn’t follow up. Neither the accountant nor anyone else ever required employees to produce every order form, invoice, and/or receipt for every debit-card purchase. One employee became so comfortable with her illegal debit card purchases that she scheduled select household items to be shipped to her house monthly — all because no one was reviewing the monthly statements and asking questions.

Interview time for debit-card fraudster

Once you’ve gathered sufficient evidence that someone has stolen funds, and you’ve identified the subject, it’s time for the most critical point: the interview. The evidence might be clear, so a confession would definitely save significant time and effort in bringing the case to a quick resolution. It’s always a good day for us in law enforcement when we leave a subject’s interview with a confession because these cases rarely go to trial.

To get the most from these interviews and increase your chances of getting a confession, you must anticipate the lies. The employee might say, “I was not the only one with access to the card,” or “If I used it, it was a mistake. I thought I was using my own debit card.” Yes, one of our subjects actually had a personal account at the same bank as the public entity and had a similar-looking debit card. (Probably not just a coincidence, eh?)

For the former subject’s assertion, hopefully you previously determined through investigations that no other employees had access to the card. Or you obtained from the store a copy of the receipts for the questionable purchases with your subject’s signature. Or better yet, you obtained a store video of your subject checking out at the cash register.

For the latter subject’s assertion, maybe you confront them with the fact that the store purchase probably would’ve required a different personal identification number (PIN) from their own, and for online purchases, they would’ve had to enter the card number and security code from the card, which meant they likely had to be holding the card in their hand when they made the purchase. Also, if you found repeated illegal purchases, the “mistake” assertion wouldn’t be persuasive.