Description

A recent investigation un-covered a novel avenue of fraud whereby criminals recruit municipalities as unwitting

coconspirators to their own loss. Initially brought to the attention of the U.S. Attorney’s Office for the District of

Maryland by a local municipality, the investigation, conducted jointly with the FBI, concerned a vendor who

contacted the city’s department of finance to request the reinsurance of a check. The retailer explained that the

original check, received 1 year earlier, had been misfiled and only discovered during a routine review. Because

the date was well be-yond the 180-day life allowed by the municipality, as indicated on the check, the merchant

sought a replacement. Upon reviewing its records, the city discovered that a third party claiming to represent

the vendor already had requested and been issued a replacement check. The third party, in fact, had provided

a signed limited power of attorney showing that the retailer had entered into an agreement with this company to

collect the payment. Because of the significant monetary amount, the municipality began an audit to determine

what had occurred. It quickly discovered that this third party, located out of state, had paid a nominal charge

and received a stale-dated check listing. 1 The city’s initial review disclosed four other requests made by and

checks issued to this same firm for stale-dated check replacements.

The investigation subsequently identified a total of nine replacement checks, totaling in excess of $157,000, as

having been requested and received by this third party from the complainant municipality during a 9-month

period. It also deter-mined that this firm received numerous checks from multiple jurisdictions under similar

circumstances. Further analysis of those records identified additional companies acting in concert with the

original subject business or having the same ownership ancestry. A review of disbursements made from

various bank accounts operated by these companies disclosed that no payments were made to any of the

original vendors that the third parties claimed to represent.

In total, the main subject of this investigation received more than $.5 million in municipal government payments

through fraudulent requests and representations. However, and more important, this investigation illuminated a

heretofore under-estimated vehicle for commit-ting fraud.

DEFINING THE TERM

Typically, a government check carries a life limitation printed on the front warning that it will become void after a

specified number of days. Banks should not honor or negotiate a check beyond the indicated period.

The issuing municipality has a department or bureau that accounts for issued checks. A subset to this

accounting involves the maintenance of a stale-dated check registry of those checks not negotiated within their

allowable life limitation. The issuance of a check in payment for provided goods or services does not eliminate

a city’s liability. Jurisdictions recognize this and will reissue a payment upon the request of a vendor after deter-

mining that the original check has not been negotiated and is included on the stale-dated check list. Many also

honor requests for repayment to third-party collection agents acting on a vendor’s behalf.