Tips to fight fraud: ‘Trust is not control’

An ounce of prevention is worth more than a pound of cure

The most common saying in the fraud fighting field is “trust is not a control.” This basically means that while you might want to trust somebody, don’t use it as an excuse to not have other methods, or controls, to prevent fraud.

The first steps should be to limit opportunities for fraud by instituting fraud prevention controls.

First Lines of Defense

Probably the most effective control is to install video cameras throughout a property, particularly over the cash registers and the cash vault, and let employees know they’re being recorded. Many security companies exist to help with that. But, to make it truly effective, you must inform the employees that if they’re caught stealing, firing will be the least of their worries, as you will seek prosecution. And do so if you catch anyone stealing; do not bluff.

Never let an employee handle cash alone, other than to put it into the register during a sale. Institute a two-person rule for all cash counts. If you can, mix the people up randomly to prevent collusion. Require all refunds be approved by a manager and require a receipt. It’s also a good idea to limit the number and type of discounts.

A common control employed at many retail establishments is to offer a reward to customers if the employee does not give them a receipt upon the sale. This makes it difficult for employees to skim.

(Pay attention to the red flags mentioned in Part I of this series, published in the June issue of Marijuana Venture. If an employee or business partner starts exhibiting any of them, it’s time to take action and investigate further.

Segregate duties and have those who handle the cash and statements take at least a week off each year. Have somebody else step in for that person. You’d be surprised how many people have been caught committing fraud by using this simple technique.

Have all bank statements, including canceled checks, sent to your home address. Never give anyone an opportunity to hide them from you. Review them each month to ensure that all the deposits appear normal and there are no suspicious withdrawals or payments. Never sign checks in advance, for any reason, and do not use or keep a check signing stamp on the business premises.

Be sure to incorporate inventory tracking and accounting software into your business. Some common tracking software are Flowhub, GreenBits and MassRoots Retail (formerly Odava). A good accounting software is QuickBooks. Inventory tracking and accounting software offer the ability to review what’s going on and are suitable for forensic accounting actions by experts.

Routinely conduct audits specifically for fraud. Do not trust a regular audit, as auditors are not typically looking for fraud. You want to ensure that any fraud happening is caught as early as possible.

Establish a fraud tip line and place signs throughout your business notifying people of the tip line. Make sure it can receive tips anonymously and reports those tips immediately. If there is more than one business owner, the tip needs to be reported to all. Almost 40% of fraud is caught through tips, as opposed to less than 4% from external audits.


Due Diligence

It’s important to know your employees. Not just their names and likes (or dislikes), but their past employment and criminal history. Always have a background check done on any employee who is in a position of handling cash (sales clerk/budtender, bookkeeper, comptroller, manager). Many states mandate this, including fingerprinting. It’s best to leave background investigations to the professionals, but if you can’t afford one and want to check on a potential employee’s background, be sure to get a signed authorization release form from the prospective employee before beginning. Many past employers will require a release and authorization before talking to you and many of them will not talk to you for fear of legal action. One question to ask a former employer is: “If you had a position open for which this person was qualified, would you consider rehiring them?” Any response other than “absolutely” is not a recommendation.

Get to know what’s happening in your employees’ lives. Are they struggling financially? Are they having family problems? Do they like to gamble or go out a lot on weekends (or weekdays)? Are they or their family members having any medical issues? Are they happy to be working or do they grumble about low pay and feeling unappreciated? Do they or their spouse/partner have any outside businesses?

An overbearing boss who take a “my way or the highway” approach — and doesn’t listen to or care about the employees — may have problems, by giving employees more ammunition to rationalize their theft. Remember, the “tone” for appropriate conduct is always set at the top of any organization. If employees or business partners know the boss is unethical, imagine what type of message that sends.

With partners, it’s imperative you know as much about them as possible. Don’t just assume they’re as honest as you. Your due diligence should be more thorough than that of a manager or cash-handling employee. Go by their home and see how they are living. Are they living beyond their means? If your partner has been caught stealing once, it’s more than likely they’ll do it again. Fraudsters seldom stop until caught, and even then, some don’t learn.

Remember: trust, but verify.


Fraud Detection Actions

Once fraud is identified, the first step is to contact an attorney, if you don’t already have one on staff. The attorney should operate as the go-between for you and the experts that you will most likely have to bring in.

Unfortunately, many small police departments are not qualified to conduct fraud investigations, or if they are, they might be so swamped they won’t have time for your business. That’s where independent professionals can assist.

Along with an attorney, you’ll want somebody with an accounting background — one specific to fraud investigation or forensic accounting. This could either be a certified fraud examiner (CFE), a CPA with a certified in financial forensics (CFF) designation or a qualified forensic accountant. The difference between the three is that a CFE is a trained fraud investigator, while a CPA with the CFF specializes in forensic accounting, and a forensic accountant is simply one who will review the books for legal purposes (be it fraud or business losses).

One thing to keep in mind, to avoid legal issues, is to ensure the experts you bring in are licensed by the local jurisdiction, if licensing is required. For example, in Washington state, a licensed private investigator, a CPA and a forensic accountant may review your financial matters, but the forensic accountant cannot interview anyone, and the CPA can only talk to those who they work for; however, the private investigator can interview anyone willing to talk to them.

Another type of expert you might need would be one well-versed in digital forensics — the ability to access and review digital data, such as computer hard drives, Outlook files, emails, etc. Many cases have been solved by bringing in digital forensic experts.

But this leads to another problem facing those engaged in state-legal cannabis businesses — the fact that marijuana is still illegal under federal law. Those experts who assist cannabis businesses cannot be, knowingly or unknowingly, involved in receiving illegal proceeds or assisting anyone in committing a federal crime.

An attorney who represents defendants charged with drug violations provided some examples of possible legal sources of funds that can legally be used to pay experts:

– Funds from a person not involved in the illegal activity;

– Funds from a home equity line of credit or bank/personal loan taken out by the victim or family members (not derived from any form of illegal activity);

– Funds from the victim’s prior business activity that are not considered illegal at any level of government;

– Funds from the victim’s prior earnings or activities that are not considered illegal at any level of government; and

– Funds from the client trust account of the attorney not derived from illegal activities.

When hiring specialists, they might require affidavits stating that the money used to hire them did not derive from any unlawful activity (such as the distribution of marijuana). These should be prepared by an attorney. Be prepared to provide those affidavits to a specialist.


Planning Ahead

Any investigation will take time and cost a considerable amount of money. Be prepared to pay at least $5,000. But don’t hold out any reasonable expectation that this is all it will cost you. It will likely cost you two to four times as much, especially if you have to bring in a digital forensics specialist. CFEs, CPAs, forensic accountants and digital forensic specialists are all specialists with years of training and experience. They don’t come cheap, but they are critical to the success of a fraud prosecution and/or civil recovery of stolen proceeds.

Once the specialists have completed their work, they will provide you with a report outlining their findings. If a crime has occurred, take action. File a police report and request the local law enforcement agency work with the prosecutor to press charges. The specialists can’t do that for you, but they should be more than willing to help, going so far as to discuss the case with law enforcement and provide copies of all the evidence.

Justice moves slow. Don’t expect things to be resolved in hours or days like a television show. Rather, any case brought to justice might take months or years to be resolved. But you should be sure to seek prosecution in all cases, if not for you, at least on behalf of potential future victims. Just terminating an employee or ending a partnership leaves the door open for those people to steal from others.



As in medicine, an ounce of prevention is worth more than a pound of cure.

Set up your fraud prevention techniques early so you don’t have to pay for fraud investigations later. Pay attention to your employees and partners, keeping an eye out for the red flags described in the June issue of Marijuana Venture. If possible, identify those funds that did not come from the marijuana business and keep them set aside in a separate account in the event an investigation by experts is needed in the future.


James S. Peet, Ph.D. is a Certified Fraud Examiner and the principal manager of Peet & Associates, LLC, a Washington state-licensed private investigative agency. He also teaches criminal justice classes on white-collar crime. Peet & Associates focuses on fraud investigations and forensic accounting.


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