Embezzlement and Fraud

Embezzlement and Fraud

Embezzlement and fraud are closely connected concepts, and it is not surprising that there is some confusion between the two. Put simply, fraud in general involves an act or acts of deception for personal gain. Embezzlement is a specific type of fraud, where people steal through fraudulent activity. Penalties for these crimes vary, depending on the specifics of a case, and it can be prosecuted as a criminal act in some cases, not just a civil crime.

People who commit embezzlement are in a position to legally have possession of property, and use fraud to gain control of it. For example, a bank teller legally has access to accounts and can transfer and control funds as part of the teller’s work. If the bank teller transfers funds from a customer’s account to her own, this would be embezzlement. She is using fraud, misrepresenting the transaction as approved by the bank to steal money belonging to someone else.

It is possible for people to be charged separately for embezzlement and fraud, as people may commit other fraudulent activities during the process of embezzling assets. To build a case, people must show that the defendant had legal authority over the assets, took them with the use of fraudulent activity, and restricted the ownership rights of the person who actually owns the property by making it impossible to access.

People with responsibility over assets are held to very high standards of behavior due to concerns about embezzlement and fraud. When actions involving transfers of title and movements of assets are undertaken, they are documented carefully to show they are valid and legal and to reduce the risks of unauthorized transfers. The practice of keeping proof of title in separate locations is one way to address concerns about embezzlement and fraud; a mechanic, for example, cannot illegally transfer a car into her ownership while it is in her care by reregistering it if the car’s title documents are securely stored.

The difference between embezzlement and fraud can be important in cases where the finer details of the case are being argued. People can commit fraud without embezzling and it is possible for people to steal in ways that are not fraudulent, as for example when a bank robber enters a bank and demands funds, or when someone fraudulently claims to have a university degree and uses this degree as a professional qualification to get jobs.

Fraud costs U.S. organizations over $400 billion annually. The average organization loses approximately 6% of its total annual revenue to these abuses. And these abuses are perpetrated at all levels of the organization.

How do you prevent theft, fraud, and embezzlement?

Every organization should have a strong system of internal controls. Without good internal controls it could take months to become aware of a problem.

Internal Controls  A process designed to provide reasonable assurance regarding:

Reliability of financial reporting  Effectiveness and efficiency of operations Compliance with applicable laws and regulations
Provide assurance that fraud will be: Discovered on a timely basis Perpetrators will be identified Act as a strong deterrent to improper activities that loss will be:  Covered by insurance (lack of internal controls could be grounds for denying insurance claims!)
Good internal controls will take away the opportunity needed by desperate people to commit a crime. What will cause a normally good person to reach this point? Debts, divorce, illness, drug problems, peer pressure, and work lay-offs are some of the reasons that are given when people are questioned about these abuses. It may be hard to take appropriate action when you have compassion for the person committing the fraud, however that should not be part of the consideration.

Steps to prevent fraud:

Open and review bank statements – someone independent of the check processing should receive the unopened bank statement and review the activity before passing it on to the Treasurer for reconciliation. The person initially checking bank statements should be identified (by position) in the Money Management Policy. This individual should sign the bank statement or make notations (as appropriate) before turning over to the Treasurer. If irregularities are noted, report immediately to the PTA President. A report should also be made to the Board.
Reconcile bank accounts monthly. The importance of bank reconciliations should not be overlooked. They should be completed monthly and presented to the executive committee and/or finance committee. It is the responsibility of members to question unexplained reconciling items.
Verify wire transfers – work with the bank to set up a system of verifications of wire transfers. Avoid wire transfer transactions if at all possible. 
NEVER set up for use of debit cards, check cards, or credit cards in your PTA unit.
Provide appropriate system access – make certain everyone has system access to perform their duties but access should be limited to what they need to do their job.
Verify cash logs – verify cash logs, Funds Received forms, and the bank deposit slips.
Counting cash – have a second person involved in verifying the cash count. 
Make daily bank deposits – it’s the organization’s money and they should have access to it as soon as possible.
NEVER take money home. Night deposits are available at most banks. 
Review the accounts payable vendor list – review periodically for suspicious names and addresses. 
Protect checks – store checks in a secure area; never pre-sign checks; limit the number of check signers and bank accounts; use pre-numbered checks; watch for missing checks or checks used out of sequence; do not make checks payable to cash. Work with your bank to have “Two signatures required” printed on the checks of the organization. 
Paying bills – requests for payment should be well documented; invoices should be marked paid; paid invoices with documentation should be filed timely; do not pay a photocopied invoice; do not pay an altered invoice; description of services or products on invoices should be clear and understandable; do not make unauthorized refunds.
No payments should be made without a properly filled-out Check Request form.
No payments should be made unless included in budget. 
Preparing financial statements – financial information should always be timely and complete. 
Ask for proof of filing – if the organization is required to file a Form 990 and/or other legal documents, ask for proof of timely filing. 
Prepare a budget – use your budget as a control document for comparison to actual expenditures. 
When a new group of signatories sign the bank card, be sure the old signature card(s) have been deleted by the bank.

What are some of the reasons fraud is not reported?

Many organizations fear the effects of negative publicity if they file an official report of insider theft

A nonprofit organization may be threatened with civil action by the offender for defamation, if public statements are made 
In many cases the offender has children in the school and the organization may not want to cause them embarrassment
Concern for personal safety if the abuser becomes aggressive

What is the downside of not prosecuting?

This may set a precedent that causes additional fraud later on. 
It may create an environment that encourages fraud rather than deters fraud. 
This may cause loss of credibility and respect for the organization among the members, community, partners, and donors. 
This may void the insurance policy 
If your board decides NOT to prosecute, individuals could be considered co-conspirators

Impact of fraud:

Financial loss 
Cost of investigation in actual dollars and time lost 
Lost opportunities 
Damaged relationships with vendors, partners, members, community Loss of donors 
Litigation

Investigate all suspected fraud and decide if sufficient probable cause exists to prosecute. Don’t be afraid to talk about fraud and make it well known that theft will not be tolerated in your organization and that prosecution may result. Promote safeguards to reduce incidents of fraud. Encourage people to come forward if they suspect irregularities.

What are some of the action steps to consider should fraud occur?

Determine if insurance covers the loss
Consider whether to call the police 
Consider whether to call the district attorney
Consider whether to meet with the individual
Consider whether repayment is sufficient

Have a written policy with procedures describing how future incidences will be handled. Check the insurance policy before you have a problem to see if it requires prosecution in order to recover a loss. You should also check the policy to see if it will cover losses if you do not have written controls in place or what happens if the controls are not followed. Many times this is grounds for denying a claim.

Piracy and Copyright

Be aware of the limits of the fair use of intellectual property, which is protected under copyright law in cyberspace as well as the real world.

Protected Property

To the general public, intellectual property, in the form of computer software and digitized entertainment, is a highly tempting target for reproduction and distribution. But intellectual property is protected under copyright law in cyberspace as well as the real world, and you need to be aware of the limits of your fair use. Illegal duplication, filesharing or use of any type of intellectual property constitutes copyright infringement and could be subject to corporate disciplinary action and civil and criminal penalties, including fines.

Copyright law generally gives authors, artists, composers, and other such creators the exclusive right to copy, distribute, modify, and display their works or to authorize other people to do so. Moreover, creators’ works are protected by copyright law from the very moment that they are created regardless of whether they are registered with the Copyright Office and regardless of whether they are marked with a copyright notice or symbol [©]. That means that virtually every e-mail message, posting, web page, or other computer work you have ever created – or seen – is copyrighted.

Piracy is the popular term for the illegal activity that is more correctly known as copyright infringement. Software piracy involves the violation of license agreements and occurs when you download, copy, file share, install, or distribute digitized material in the form of computer software programs and entertainment media without authorization from the owner/creator.

“Piracy” includes the reproduction and distribution of copies of copyright-protected material, or the communication to the public and making available of such material on on-line communication networks, without the authorization of the right owner(s) where such authorization is required by law. Piracy concerns different types of works, including music, literature, films, software, videogames, broadcasting programs and signals.

“Piracy” is the popular term used to describe the phenomenon. However, national copyright legislations generally do not include a legal definition.

Part I: Illegal Downloads, Copyright, File Sharing & Piracy

Generally, copyright is enforced as a civil matter although some jurisdictions do apply criminal sanctions. Copyright limitations are recognized by most jurisdictions and some exceptions to the

author’s exclusivity of copyright are allowed giving users certain rights. However, the Internet and digital media have created new and challenging tests of the copyright laws. New technologies, including peer-to-peer sharing of digital files, have prompted reinterpretations of the exceptions and a new surge in the fight for copyright protection.

Digital Music and Software

Most recently, the music industry launched a campaign to fight the illegal downloading of songs via the Internet and file sharing, peer-to-peer networks like Ares, BitTorrent, Gnutella, Limewire, and Morpheus. These networks provide the framework for users to request and receive digital transmissions of copyrighted sound recordings from other users on the network. A request is sent out over the Internet to find the requested song on another user’s computer. Within seconds, that illegal file is downloaded to the requestor’s desktop.

Criminal activity on these networks isn’t confined to the music industry. These file-sharing networks also allow users to search for pirated (illegally copied copyright material) software packages. The software is easily downloaded along with the serial number needed to install and access the program. Videos are also being illegally copied and shared.

Risks of File Sharing

Some of the illicit networks actually seize a portion of the user’s hard drive for illegally uploading and downloading files to network members around the world. It all happens once you register as a member and all of the files on your computer hard drive can be accessed. Depending upon the settings you choose everything including financial information, private data and sensitive documents become fair game. Not all users are aware of this vulnerability. The practice of using file sharing sites also invites the threat of viruses, Trojan horses, and other harmful code that may be resident in unauthorized files.

The risks involved in illegally reproducing or distributing copyrighted material are significant. It is against the law both to upload and download the copyrighted works of others without express permission to do so. It is stealing and both civil and criminal penalties are severe. Criminal penalties for first-time offenders can be as high as five years in prison and $250,000 in fines even if the offender didn’t do it for monetary or financial commercial gain.

When the offender is a minor, it doesn’t make the infraction any less of a crime. In fact, it may subject the minor’s parents or guardians to legal action. Civil liability can extend to parents even if they are unaware that their child is stealing.

There are websites and programs from which it is legal to download digital music files for a fee, such as iTunes, Napster, and Yahoo Music, among others. Users should note that some illicit peer-to-peer networks charge a fee to upgrade to a higher version of their program. This fee should not be interpreted as payment for legal copies of the digital files. It is not, and therefore any files downloaded are done so illegally.

The sale of Illegal copies or downloads of CD’s and DVD’s containing music, movies, or software, as well as the prolific sale of fake or counterfeit goods, is inextricably linked to organized crime, people trafficking, prostitution, drug dealing and terrorism. Don’t become an unwitting supporter of these illicit and often dangerous organizations. buy only from legitimate sources

Copyright infringements and piracy are not victimless crimes as many people think; the true victims are the creators, designers, the authors, composers, songwriters, film makers and investors. Without these individuals there would never be anything new.

Part II: Illegal Copying

Virtually everyone knows that it is illegal to copy and distribute movies music and software but the reasons why it is illegal are not so well understood. The answers lie primarily in the way that copyright laws apply to movies, music and software.

To ensure there are proper incentives for companies and individuals to continue investing in the creation, production, promotion and marketing of software, film and sound recordings, international treaties and national laws grant the creators and producers of software, film and sound recordings various rights.

These rights include the exclusive right to commercially copy the recordings and to distribute/import/export those copies. Depending on the country you live in, these rights may be called copyrights, or ‘related’ or ‘neighboring’ rights. These are separate to any rights that may subsist in the music or the lyrics that are being recorded.

It is these rights that enable law enforcement bodies to take criminal action against those who copy and distribute software, movies and music without the permission of the companies or individuals that invested in producing it. They also allow record and film producers to take civil actions to recover compensation for damages suffered as a result of movie and music piracy.

While there are often other laws or regulations that are broken by movie music and software pirates (eg. tax laws, trademark laws), the rights of movie music and software producers under copyright or related/neighboring rights laws are the fundamental basis for the illegality of such piracy.

Part III: Copyright Infringement

Copyright Infringement is the unauthorized use of copyrighted material in a manner that violates one of the copyright owner’s exclusive rights, such as the right to reproduce or perform the copyrighted work, or to make derivative works that build upon it. There are many different ways copyright owners may find their copyright has been infringed. For example, in the film and music industry, infringing activities include the following:

The illegal copying of music products that have been released without permission from the copyright owner. Common ways this is done are by copying music onto or from a cassette, CD, a hard drive or the Internet. Pirate products are not necessarily packaged in the same way as the original, as opposed to counterfeit products (see below);

Counterfeiting

Involves duplication of both the music product and of its packaging. For this reason unwitting buyers are less able to recognize counterfeit copies than is the case with some pirate copies.
A counterfeit is an imitation, usually one that is made with the intent of fraudulently passing it off as genuine. Counterfeit products are often produced with the intent to take advantage of the established worth of the imitated product.

Forgery

Forgery is the process of making, adapting, or imitating objects, statistics, or documents with the intent to deceive. The similar crime of fraud is the crime of deceiving another, including through the use of objects obtained through forgery. When we speak of forgery we usually refer to money, paintings or documentation such as ID, diplomas or passports.

Bootlegging

Where recordings are made of live performances without the performers’ consent; Bootleg recordings are musical recordings that have not been officially released by the artist or their associated management or production companies. They may consist of demos, out takes or other studio material, or of illicit recordings of live performances. Music enthusiasts may use the term “bootleg” to differentiate these otherwise unavailable recordings from “pirated” copies of commercially released material, but these recordings are still protected by copyright despite their lack of formal release, and their distribution is still against the law. The slang term bootleg (derived from the use of the shank of a boot for the purposes of smuggling) is often used to describe illicitly copied material.

Plagiarism

Is theft of another person’s writings or ideas. Generally, it occurs when someone steals expressions from another author’s composition and makes them appear to be his own work. Plagiarism is not a legal term; however, it is often used in lawsuits. Courts recognize acts of plagiarism as violations of copyright law, specifically as the theft of another creator’s intellectual property. Because copyright law allows a variety of creative works to be registered as the property of their owners, lawsuits alleging plagiarism can be based on the appropriation of any form of writing, music, and visual images

Trade Marks

Trade marks are symbols (like logos and brand names) that distinguish goods and services in the marketplace. If someone deliberately uses your registered trade mark, without your knowledge or consent, they may be guilty of the crime of counterfeiting

Patents

A patent is an intellectual property right, granted by a country’s government as a territorial right for a limited period. Patent rights make it illegal for anyone except the owner or someone with the owner’s permission to make, use, import or sell the invention in the country where the patent was granted Patents protect the features and processes that make things work. This lets inventors profit from their inventions. Patents generally cover products or processes that contain ‘new’ functional or technical aspects.

They are primary concerned with:

how things work:
how they are made:
what they are made of:

Identification marks

Some person’s mark articles sold with the terms “Patent Applied For” or “Patent Pending.” These phrases have no legal effect, but only give information that an application for patent has been filed in the Patent and Trademark Office. The protection afforded by a patent does not start until the actual grant of the patent.

International piracy poses a tremendous threat to the prosperity of one of America’s most vibrant economic sectors: its creative industries. Accordingly, it deserves our utmost attention. This attention must be consistent and long-term if it is to be successful. At the same time, we must be realistic in the goals that are set, lest we become discouraged in spite of our successes. While it is not realistic to expect to eliminate all piracy, we do believe that we can continue to improve the global situation, to the benefit of authors and right-holders here in the United States and throughout the world.

Wrongful Termination

Wrongful termination is a broad term with a specific legal meaning. Although many individuals who are terminated from their employment feel their termination was “wrongful,” the legal definition of wrongful termination is limited to only those circumstances where an employee was fired for an illegal reason. An employee cannot be fired on the basis of her race, gender, ethnic background, religion, or disability. It is also illegal to fire an employee because they lodged a legal complaint against the employer, or because the employee brought the employer’s wrongdoing to light. Below you can find information on how states define wrongful termination and what steps to take should it occur.

If you have been laid off or fired recently, and believe that you may have lost your job for an unlawful reason, you may have a right to bring a claim for wrongful termination against your former employer. Legal remedies that may be available to you include money damages and, if you haven’t been officially released yet, negotiation for an appropriate severance package that includes adequate compensation.

What Makes a Termination “Wrongful”?

The term “wrongful termination” means that an employer has fired or laid off an employee for illegal reasons in the eyes of the law. Illegal reasons for termination include:

Firing in violation of federal and state anti-discrimination laws;
Firing as a form of sexual harassment;
Firing in violation of oral and written employment agreements;
Firing in violation of labor laws, including collective bargaining laws; and
Firing in retaliation for the employee’s having filed a complaint or claim against the employer.

Some of these violations carry statutory penalties, while others will result in the employer’s payment of damages based on the terminated employee’s lost wages and other expenses. Certain wrongful termination cases may raise the possibility that the employer pay punitive damages to the terminated employee, while other cases may carry the prospect of holding more than one wrongdoer responsible for damages.

One of the most widely known forms of wrongful termination is terminating an employee based on discriminatory grounds, such as his or her race, instead of their performance. Federal law protects workers from being fired or penalized for certain discriminatory reasons. Firing an employee on the basis of his or her race, color, national origin, sex, religion, disability, pregnancy and age clearly meets the definition of wrongful termination. Several states and localities also prohibit employment discrimination on the basis of sexual orientation and/or gender identity.

Employees who have been fired or penalized for a discriminatory reason may file a charge of discrimination with the U.S. Equal Employment Opportunity Commission or a state or local anti- discrimination agency. Employees who have been wrongfully terminated for discriminatory reasons should act quickly. Generally, claims are subject to strict time limits and must be made before further legal action can be taken.

Retaliation

Employers can’t fire or punish employees for engaging in certain protected activities. Some activities which a worker can’t be fired for include informing an employer about harassment or discrimination, filing a complaint with the EEOC, taking permitted medical leave, or participating in an investigation of wage and hour violations. Many “whistleblower” statutes protect employees who report illegal or harmful activities, such as violations of environmental regulations or safety laws.

Similarly, many states prevent employers from terminating employees in violation of the state’s public policies. In such cases, an employer can’t retaliate against a worker for taking time off to vote, sit on a jury, or serve in the military or national guard.

Termination in Violation of Employment Agreements

An employer who fires workers in violation of the terms of their employment contract may be engaging in wrongful termination. Written contracts or other statements that promise workers job security, regular advancement or specific termination procedures, provide evidence that employment is not at will. For example, an employment contract may specify that a worker can be terminated only for certain specific reasons, such as failure to meet performance requirements. Firing that worker for other reasons would be a violation of their employment contract and wrongful termination.

It may also be impermissible to fire an employee in violation of a company’s specific discipline or termination policy. If an employer handbook lists specific discipline procedures, such as requiring a certain number of warnings before termination, the employer may be bound to follow those procedures, even when employment is otherwise at-will.

Terminated employees may also be able to show that their firing violated an oral or implied promise. Where an employer made verbal promises of continued employment or specific termination procedures, for example, a court may find that an implied employment contract existed. In examining whether an implied contract existed, courts will look at factors such as the duration of a workers employment, the regularity of promotions, oral or written assurances made to the employee, and the employer’s typical practices and patterns of behavior.

Cyber-Stalking

Computer Forensics Advanced

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