Payroll fraud is a risk faced by any businesses with employees. Ghost employees, wage overrides, fake reimbursements, and check theft are all types of frauds that employees responsible for processing payroll could commit without proper oversight. As one of our clients recently found, some internal control structures are no match for another fraud affecting payroll – check washing.
Each week, our nonprofit client runs payroll for its small workforce composed of marginalized youth, recovering substance abusers, and other individuals hoping to get back on their feet. The organization is truly living its mission by providing the individuals they both serve and employ with on-the-job training and livable wages. Many of those employees are “unbanked,” meaning they are among the 6% of American adults that do not have a bank account and instead make use of check cashing services, money orders, and cash apps to receive funds. Our client’s unbanked employees receive their pay as physical checks. Use of physical checks increases the risk of theft to the employee if someone steals it, and to the employer even further should the check be falsely manipulated.
One week, an employee artfully changed a “1” to a “7” on the face of the check, cashing the check at a check cashing store for $600 more than it was written for. Two weeks later, a relative of another employee stole a paycheck from the employee’s home and attempted the same – this time for a much larger sum. By the third time a check-washing incident occurred, leadership was exasperated.
Direct deposit can’t happen without a bank account. And even if an employee has one, New York State labor law §292 holds that an employer cannot implement it without advice written consent of the employee. Compelling unbanked employees to open a bank account – especially individuals from marginalized groups who are distrustful of the financial systems they’ve historically been excluded from – would go against the nonprofit’s very mission.
So how does an organization that can’t implement direct deposit protect itself from check washing fraud?
Here are some options:
- Use of high-security checks with watermarks, security inks, holograms, magnetic ink, specialized fonts, or microprinting.
- Positive pay for payroll – each week the employer’s bank gets a list of check numbers and amounts, and only honors matching checks when presented.
- Payroll deposit to prepaid cards – Visa, Mastercard, Discover, American Express, and many more financial institutions offer prepaid cards that can receive direct deposit from wages.
- Payroll deposit to instant payments apps – Venmo and Cash App are just two instant payments apps that permit the deposit of wages.
- Anti-fraud training – as with all employee fraud, educating employees on an organization’s fraud prevention strategies are a strong deterrent, especially when the organization promotes a “zero tolerance” policy that mandates reporting of any fraudulent activity to law enforcement.
- Partnership with a local bank that is focused on expanding access to banking services to the unbanked and the underbanked population may assist advocacy agencies with critical conversations around the opportunities and benefits of participation in the financial system (see a great list of such institutions via the National Credit Union Administration Database of Minority Depository Institutions here).
By implementing these measures, employers can significantly reduce the risk of payroll check washing and protect their organization from financial losses. Understandably, victims of these kinds of payroll fraud – both at the individual and organizational level – may find it difficult to report or resolve the illicit activities. A mix of financial education, community outreach, and critical governmental and policy work to address the systemic barriers faced by unbanked and underbanked populations can help create a more equitable financial landscape for all.
Bonadio’s Fraud and Forensic Team helps clients navigate complex fraud issues every day. If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.