Some fraudsters steal money by opening a fraudulent bank account and funneling funds into that account. Today, I show you how one controller did this and walked away with millions.
In May 2015 James Hammes was arrested for the theft of $8.7 million from his former employer, G&P Pepsi-Cola Bottlers. After Mr. Hammes was confronted about the theft in February 2009, he left his home and hid on the Appalachian Trail, which runs from Georgia to Maine. Hammes assumed a hiking name of “Bismarck” and spent several years on the popular trail. Fellow hikers enjoyed Bismarck since he seemed to be one of them.
The FBI reported the following:
Court documents show that Hammes’ embezzlement began around 1998. As a controller, he was responsible for all financial accounting and internal controls for his division, including supervising accounts payable to several hundred outside vendors. He carried out the fraud by establishing a new bank account for an existing vendor at a different bank. He then deposited hefty payments to that vendor—often $100,000 at a time—in the phantom account that he alone controlled. He then could transfer money from the phantom account to his personal accounts.
“He knew how to cover his tracks by manipulating audits and ledger entries,” Jones said. “He got away with it for so long because he knew how to manipulate his subordinates and how not to raise accounting red flags.”
So, Hammes opened a fraudulent bank account at another bank (one the company did not use) and deposited vendor checks into that account. Then he transferred funds out of the fraudulent bank account to himself. Since he opened the account, he was the authorized check signer. Simple but effective.
If extra payments were made to vendors (and it appears that occurred), then the company may not have been reviewing vendors payments. It’s easy to just make vendor payments without seeing patterns, especially if hundreds of checks are processed each month.
Also, it appears the company may have lacked sufficient segregation of duties since Hammes was able to disburse extra vendor payments without detection.
Periodically, review total payments made to each vendor. For example, generate the total monthly payments made to XYZ Company. Then compare the monthly payments over a two to three year period. If payments dramatically increase, then someone within the company may be making additional payments and stealing those checks. Or there may a legitimate reason for the increase. Either way, it’s wise to review vendor payments for anomalies.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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