Ghost Vendor Fraud Steals From Payroll Account

  • 10 min read

We’ve talked about and written about company embezzlement for many years, and it’s one of the most common methods. This is what’s called a “ghost vendor,” and you would think in this day and age, since this has been going on for decades and embezzlement using ghost vendors has been talked about and warned about, it wouldn’t be happening anymore. And this particular article is about a year old and from 2019, but it’s a perfect example of how an employee who went wrong can use their knowledge of the insight system to embezzle money, and this employee worked for a large company. Weyerhaeuser is a very large logging paper company in the Pacific Northwest, and this employee didn’t just steal $20 worth of pencils or a hundred dollars’ worth of gas for their car using their corporate credit card. They stole $4.5 million from a large company that has the resources to protect against fraud. This isn’t just a company; it’s a small agency that doesn’t have any extra money to do fraud prevention or to hire auditors, or this is a very large firm that has resources and should have proper protocols in place. We’ll take a look and see how this happened, and it’s a good company. Weyerhaeuser is a very well-run company, and this is not meant to be an indictment of them. They do a fantastic job of running their business. So this is an accounting manager who worked at their Springfield office and was suspected of stealing four and a half million dollars by contracting with bogus vendors, or “ghost vendors.”

Basically, this is what you do as a bookkeeper or an insider—you create fake companies or fake payees. That sometimes sounds like real vendors. So if you do business with XYZ office supply company, you might create a company that’s called XYZ LLC Office, so it’s similar to your existing vendor, or maybe you just created a brand new company that has a name that sounds like somebody you might do business with. Let’s say you’re a paper company, and you hire loggers and truckers, and you create a corporation that’s Joe’s logging transport, and because you know the internal workings, you create invoices that sound like they would make sense in certain situations, products and services that match what that company normally buys, and this employee’s needs were ordered because the case is not over yet, but the judge found enough evidence to say, “Look, don’t try to transfer any assets. We think you might have assets that belong to the company, so don’t transfer any assets.” 

This employee worked for the company for 42 years; this is a very common scenario. The employee is a long-term, trusted employee, and a lot of times a business will let its guard down based on a long-term, trusted employee. You want to do the opposite with a long-term employee; you want to keep the same level of excellence in business practices in place because a long-term employee is actually more likely to become involved in fraud or embezzlement than a new employee. Here’s why: First of all, because they have more access, they’re going to be more knowledgeable about the company’s inner workings, and here’s the worst part of it: We do a lot of investigations to discover embezzlement. When we finish an embezzlement investigation as an agency and we lay out the results to the CEO or the ownership of the company and say this is what happened, it was this person. They stole so much from the company that, in many cases, the loss to the employee is greater than the loss of money. In this case, it was four and a half million dollars. So maybe that’s not the case. But if this person, let’s say, stole $400,000, you’re about to lose a 42-year employee who presumably is doing a great job of doing great things for your company. That might be a harder thing to replace than $400,000. 

Sometimes the employee doesn’t necessarily need to be a bad person. To have this happen, they need to be put in a position where it can happen. So again, you can refer back to our fraud triangle. We’ve talked about it many times. If the person has the ability to do it, they have the need to do it, and they have the entitlement or the justification to do it, they’ll do it. So if you have the ability because they are a trusted employee, they will be trusted with assets, and they may have the need. They might have some financial needs. They might have some medical events happen where they need money. They might have some outside factor in their lives that makes them tight on cash. But that’s not enough to actually do. It’s going to be the entitlement, where they feel like they’re overlooked as an employee, they’re mistreated, and they’re going to have an open field to get the money. They’re not going to have any audits or any double-checking of funds, presumably. If somebody had double-checked some of these vendors, $4.5 million would have been stolen, and the rest of the story goes on to say that this employee acknowledged the fraud in her assigned statement, and she said there’s no one else to punish me. She did it by herself a lot of times; these frogs don’t take a big bite. You understand how to organize people, and in her case, it’s also very sad because you know she’s going to lose her retirement. She’s going to lose her 401(k), and she’s going to probably have legal problems. It’s been referred to the US attorney’s office. There are no charges yet, but they will be brought up.

The biggest problem for the company now is that you lost that employee and you lost the money. What did she do? It describes it here by creating fake vendors and approving payments to the vendors by forging co-worker signatures; an easy audit would overlook that she said no one else had knowledge of what they’re doing. Well, that’s part of the problem—that no one else had knowledge of it; there should be other people who have knowledge, and some companies require that high-level financial people take vacations. So somebody else does their job for a week. They require that, and here’s a good example: She has to give up 12 weeks of banked vacation pay. Well, if you get one week of vacation every year, that means for 12 years she didn’t take a vacation, and that could be part of the problem. No one else had knowledge of what she was doing. Other people in the company should know what they’re doing, and it’s not an insult to the person if you can tell they look good. Corporate procedures: we want to have somebody else know what you’re doing; this is nothing against you. It’s not that we don’t trust you; we just want to make sure things are correct. So if something is being overlooked, you know we will help you with your job. Most legitimate employees will appreciate that, and they’re not going to be offended by it; if they are, then that might say something.

Good corporate governance means cross-checks and verifications of everything. You can do it anonymously. You can verify things without notifying the employee, but it’s probably a good practice to notify them. So that way, I’m sure if this person is confident that if all of this is true, and it is all alleged at this point, but if this employee knew that somebody was watching over their shoulder and that it was verifying all their transactions, they may not have committed this fraud. In fact, in hindsight, this employee wishes that somebody had taken that look over their shoulder. So they didn’t commit the fraud because they couldn’t walk away with any money. They may have spent a lot of money and had a lot of fun going on vacation and going out to dinner over the last 12 years. But if they’re going to now be bankrupt and have no job, I’m sure if they went back in time they wished that they had just done things, so it’s good for the employee as well to keep them honest. And it’s not anything like that that’s overbearing or that’s too excessive. It’s just good, proper corporate procedures, and it can be done just as simply as it looks. 

Here’s the thing: By contracting with bogus vendors, including one in her mother’s name, a very simple way we do this all the time: is to verify vendors. Do you have a vendor list? And you run a background check on all the vendors. Who’s the owner? Who’s the registered agent of that corporation? What are the addresses of those corporations, and who were the officers of those corporations? And when you make a spreadsheet, it’s a matrix, and then you take a list of all the employees, you can run a matrix on all the employees of the five closest people to those employees—their parents, relatives, associates, and colleagues—and you can take two lists and compare them to see if there are any overlaps. Do any of the vendors on the list have a name that’s also closely related to an employee? And if there is, it’s something to look at. It doesn’t mean anything bad. It could be that somebody does legitimately have a relative that works for a small town, the logging company, or the trucking company; or maybe they met, they met for their job, and they got married; or maybe one of the salespeople married the guy who is the rep for the advertising agency, and who knows, but at least you’re kind of finding that if they had discovered this one in her mother’s name. The $4.5 million may have stopped at 50,000, and it could have been a much smaller loss.

As a large company, I’m sure that Weyerhaeuser would have a good use for those $4.5 million. How many people could they have hired? How many people could have gotten a raise? How much more advertising could they have done? How many more resources could they use to purchase new equipment, or maybe they could buy a piece of land that could be used for a new office? The $4.5 million could go a long way toward advancing the company. If you’re a small business, forget about $4 million. Pick a number that’s more in line with a smaller, medium-sized business. Let’s pick $50,000 as a number. If somebody dropped $50,000 on your lap right now, even if they said you had to spend it on business, you could hire a private jet and go to the islands. You have to use it for business. What type of business? What could you do with an extra $50,000 dropped on your lap? What could you do for advertising? What bill could you pay off? What employees could you retain more importantly, and how much gross sales does it take for you to generate $50,000 in net profit? Because this all came from the bottom line, not the top line. So if you’re a company that has, let’s say, a 20% gross profit, it might be $200 or $50,000 in sales that you have to make extra of to make up for those $250. So our 200,000, so either way there are big losses when it comes to these corporate frauds, and they’re very easy to prevent for a few hundred dollars or you can do it yourself. And with a few hours of labor, you can pull aside maybe an administrative person or a trusted employee and just run these lists of ghost vendors. There are other types of fraud besides that of ghost vendors, but this is one that’s easy to discover with very little effort and very little cost.

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