3 Payroll Fraud Schemes Embezzle Millions

Posted by Jake Richardson on Jan 14, 2015 8:06:00 AM


1. Payroll Manager Uses ‘Ghost Workers’ to Embezzle $480,000

We've written a couple of posts about fraud as it relates to timesheets and overtime pay. This one is about what happens when management level employees, like a payroll manager embezzle money.

Grady Memorial is the largest hospital in Georgia and the main public hospital for the city of Atlanta. It employs about 5,000 people, so that is a considerable payroll to manage. The thing is, a former director of payroll did a little more than manage it. He was convicted of embezzling $480,000 from the hospital. For several years, he oversaw payroll for all employees and he knew the internal payroll system well. With his administrative system access he also falsified vacation and severance pay records for employees that had been terminated.

Apparently, the strategy behind the falsification of the terminated employees data was that they wouldn't be around to say anything about the "adustments" to their payroll information. After the payroll director input vacation and severance pay to the employee payroll records, he simply replaced their bank account information with his own. The number of fraudulent payments made to his own bank account using this scam was 134.

He created paper checks with falsified the pay information which were made out to terminated hospital employees. He then took the checks, forged their signatures, and deposited them into his own bank account.
Ironically, his scam began to unravel when a vigilent terminated employee contacted the hospital saying that her w-2 form for one year showed too much compensation - more than she was allowed to earn. The reported discrepancy was cause enough for an investigation, one that revealed her payroll information had been changed and the excess compensation had been deposited in the payroll director's bank account.

He must not have considered that the extra vacation and severance pay he was adding to their payroll records was going to be reflected in their W-2 forms. Of course, the terminated employees would eventually notice this extra pay, because they would be ones on the hook to pay taxes on that income. However, the payroll director tried to reverse some of the fraudulent payments to his own bank account, but he did not complete all of the reversals. Other terminated employees contacted the hospital to report extra compensation on their W-2s. There was enough information pointing at the director's fraudulent behavior to indicate that a larger scam had taken place.

If each alteration and false payment he received was about $3,500, perhaps he assumed no one would notice these amounts. He was wrong and currently is awaiting sentencing for embezzling nearly $500,000.

2. $1.7 Million in Unpaid Payroll Taxes Lands New York Man in Jail

A New York business owner had a far less complex payroll fraud scheme; he simply did not pay his payroll taxes. Instead, he spent the money on a yacht, home-related items and $67,000 worth of cigars. As a business owner, there might be a temptation to try to stiff the government when it comes to paying taxes, but this proved to be a very bad decision.

“The crime for which Thomas Nastasi has been sentenced was not a complex scheme. His companies worked on luxury buildings in New York," said U.S. Attorney Preet Bharara. "Rather than remit payroll taxes he owed, Nastasi spent the money buying luxury items for himself. Now, he not only has to pay the taxes he owed, he has to pay for his crime with a prison term as well."

The payroll taxes alone were well over one and a half million dollars, which meant his revenue and net income was pretty high. His punishment will be one year in prison. Is it simply greed that motivates people to commit tax and payroll fraud? it isn’t always caused by what you would think. 

CPA Stephen Linker has written about fraud and come up with a concise way to understand it, “The research on fraud has identified three key factors that determine whether a person will commit fraud.  The three factors, which comprise the so-called “fraud triangle,” are: 1- perceived pressure facing the person, 2- perceived opportunity to commit fraud, and 3- the person’s rationalization, or integrity.”


Perception of opportunity and rationalization might apply in some of these more bold cases where the schemer does distort reality in order to attempt such fraud. For business owners perceived pressure could be something of red herring.  According to Linker though, all three factors are typically present when fraud is undertaken.

So, business fraud is not only "stupidity," though sometimes you hear such cases tagged with that label. In psychological terms they are often more complex and revealing.

For example, a payroll manager at one company was well known for being overly harsh with employees when communicating about submitting expense reports on time. The employees complained enough about being treated rudely to the point that the business owner wondered if he should fire her or along with some of the offended employees to keep the peace in the office.

After some time it was discovered that she had been stealing from the company for years. Have you heard the phrase, ‘If You Spot It You Got It’? It’s an easy way of talking about psychological projection. A Harvard Medical School psychiatrist wrote about it when he was discussing the woman at his client’s company that was very critical of other employees.

“My client was not prepared for my response: “I’m willing to bet Diane’s cooking the books so she can pocket cash. After catching his breath, my client took my bet. “Diane’s so honest, she could be a priest if the Pope allowed women to serve in that role,” he said. But within a year, he was obligated to buy me a rare box of Cuban cigars after losing our bet: it turned out that Diane had been embezzling funds for 20 years.”

In other words, sometimes managers that are hyper critical of others are placing things that they don’t want to know about themselves onto others. It’s a defense mechanism that allows us not to have to deal with certain aspects of ourselves that we don’t like or have not accepted, or so the theory goes.

Or it could just be a technique so no employees mess with the embezzler in any way and they can go about their illegal behavior in private.

3. Payroll Firm Accused of Embezzling Nearly One Million Dollars

Social Security, Medicare and federal unemployment taxes were allegedly withheld by payroll firm Akron Payroll. The taxes were supposed to be paid on behalf of Akron’s clients, but they allegedly were not. The firm represented about 150 clients. About 20 local businesses in Summit County, Ohio might have been impacted by the payroll fraud.

“As time goes on, people keep getting notified by state or local tax authorities that they’re delinquent, and now with the stuff hitting the paper, more people are checking their [books] and realizing he wasn’t paying their taxes either,” explained Summit County Sheriff Deputy Larry Brown.

It’s only natural that when you hire a payroll firm to process your payroll and withhold the correct amount of various taxes and to pay them to the IRS, a customer might trust that these deposits will be carried out. News stories about the case caused more businesses using Akron to see if they also had missing tax payments.

Were they not monitoring what Akron Payroll was up to? Did they not receive regular updates about which payroll taxes had been paid and how often?

Of course, you assume when you hire a firm to process your payroll and submit your payroll taxes that they will do it in a competent and trustworthy manner. No one starts such a business relationship with the expectation of being ripped off. What measures would you put in place anyway to prevent such a fraud and keep your company in good standing with the taxing authorities?

Yes, it’s true that you might be under pressure to conduct due diligence quickly on potential new vendors to work with to support your operations. Although doing such homework might take time, it will most likely be of great benefit down the road.

Some Questions to Ask before Hiring a Payroll Firm

  • Did you get a professional or personal referral for the firm, and if so who made it?
  • Did you carefully research their license(s) to practice? Do they have good legal standing?
  • What is their general reputation, and have they ever had any documented ethical issues?
  • How long have they been in business?

Do you have Good Systems in Place to make Monitoring Easier

  • Do you have the necessary systems in place to make it easy to audit employee time off taken? Or quick access to the records of severed employees?

  • Are timesheet, time off taken and time off balance records on paper stuffed in file cabinets?

  • Or do you have electronic web-based records of employee hours and balance history?

Pacific Timesheet has automated payroll timesheet, time off and absence management systems that will make it easier to track and reconcile employee work hours, time off taken hours and time off balance data with your payroll. By automating the integraton of employee payroll timesheet data with your payroll, you can eliminate a major cog in the wheel of payroll fraud.

Tell us what your experiences have been with payrol fraud and what steps you recommend to prevent it.

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Image Credits: Jayne Lucas and Chris, Flckr Creative Commons

Topics: payroll time tracking, fraud

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