Secret Bank Accounts Cause Fraud Losses
By Charles Hall | Asset Misappropriation
Secret bank accounts lead to havoc.
Substantial losses can occur when unauthorized bank accounts are opened by company personnel.
Secret Bank Account Leads to $53 in Theft
A finance director opened an unknown bank account in the name of a city, stealing over $53 million.
Four things happened:
1. The fraudster opened an unauthorized bank account in the name of the entity (and signed the bank’s signature card).
2. That person did not set up the secret bank account in the general ledger.
3. The fraudster transferred money from a legitimate bank account to a hidden one. (The thief provided fake invoices to support the payments.)
4. The fraudster withdrew money from the hidden account.
Covering Up the Theft
Here’s the journal entry when step 3 occurred:
Debit - Expense $200,000
Credit - Cash $200,000
The payments from the secret bank account (step 4.) are not recorded (since that bank account is not on the entity’s general ledger).
Weak Segregation of Duties
Such a scheme is possible when the fraudster can:
1. Sign checks for the real bank account (or by other means, transfer money from the legitimate bank account to the unauthorized bank account)
2. Reconciles the real bank account (and no one else sees the cleared checks)
Another Secret Bank Account Fraud
Another twist on this type of fraud:
1. A hospital CFO set up a secret bank account for State Medicaid payments. (CFO had signature authority for the bank account.)
2. The hospital CFO did not set up the unauthorized bank account in the general ledger.
3. The State made electronic payments to the secret bank account.
4. CFO wrote checks to himself (for over $10 million).
Actions to Take: Ask your banks for a list of all bank accounts; compare that list to the bank accounts on your general ledger. Additionally, you should contact other banks in your area, those with which your company does not do business. Finally, you should contact all payors (e.g., Medicaid) and confirm the bank accounts to which they make payments; see if those bank accounts are on the general ledger.
Another Bank Account Fraud
In another fraud, a company made frequent payments to vendor bank accounts.
The company’s CFO set up bank accounts in the name of actual vendors and made payments to those accounts.
The CFO withdrew funds from the secret vendor bank accounts.
When the CFO was about to be caught, he fled and hid on the Appalachian Trail for over five years.
Action to Take: Confirm bank account numbers with vendors.