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Embezzlement and Theft of USC Funds

SGIG Nicholas Padilla, Jr.


USC Chief of Security

This presentation is made to educate the USC membership on


the following topics:
Tennessee Reporting Requirements
Law Enforcement Reporting Requirements
Internal Revenue Service Requirements
Avoiding Federal Penalties
Basis for Criminal Investigative Referral
Preliminary Criminal Investigative Referral
Memphis Grizzlies NBA Suite
Frederick McWilliams Arrest
Failure to Report or Perform Required Internal Audits
Federal and Local Nonprofit Embezzlement Press Releases
Inside the Hidden World of Thefts, Scams and Phantom
Purchases at the Nations Nonprofits

Any theft, embezzlement, diversion or misuse of a


nonprofit organizations charitable property or funds,
regardless of the amount of the loss, must be reported
on the annual filing with the Tennessee Attorney
General
If any of these incidents have occurred, the organization
must report the nature, date, and amount of the loss; a
description of steps taken to recover the loss and a
copy of any police or insurance report; and a
description of steps implemented to prevent such a loss
from recurring

In the case of embezzlement, the Attorney General has taken the


position that the duties of care and loyalty require nonprofit directors to
take reasonable steps to recover stolen assets and to refer the matter to
the local District Attorney for possible criminal prosecution
If the nonprofit receives federal funding, it may face scrutiny by the
granting agencys Office of Inspector General (OIG)
Besides performing traditional audit work, the OIGsand sometimes, the
FBIwork hand-in-hand with federal prosecutors at the Department of
Justice in Washington, DC, and the U.S. Attorneys Offices across the
country, to investigate fraud and embezzlement at nonprofit
organizations
Federal prosecutors may elect to bring charges under, among other
applicable federal statutes, 18 U.S.C. 641, which makes it a crime to
steal money from the United States or any department or agency thereof,
and 18 U.S.C. 1341, which makes it a crime to devise a scheme to
defraud another of property or money with the use of interstate wire
communications

Many nonprofits try to handle instances of fraud or


embezzlement quietly to avoid unwanted attention and
embarrassment
That is no longer an option for 501(c)(3) organizations that
file Form 990 information returns
In 2008, the Internal Revenue Service implemented additional
regulations designed to enable the public to more easily
evaluate how effectively larger nonprofits manage their
money
Tax-exempt organizations with gross receipts greater than or
equal to $200,000, or whose assets are greater than or equal
to $500,000, must report any unauthorized conversion or
use of the organizations assets other than for the
organizations authorized purposes, including but not limited
to embezzlement or theft

Specifically, these organizations are now required to


publicly disclose any embezzlement or theft that
exceeds $250,000, 5% of the organizations gross
receipts, or 5% of its total assets
Charitable asset diversion in any amount, regardless of
whether reportable on Form 990, is serious
Embezzlement in particular can damage donor trust and
agency reputation, undermining a nonprofits good
work
In extreme cases, it can lead to the revocation of tax
exempt status and even personal liability for directors

When the suspected embezzler is also a disqualified person,


the risk to the organization and its directors of IRS
intervention and penalties increases
Under section 4958 of the Internal Revenue Code, if a
501(c)(3) tax-exempt organization provides an excess
benefit, the insider who receives the excess benefit is subject
to excise taxes, as are any organization managersincluding
officers and directorswho approved the excess benefit
With an automatic excess benefit transaction like
embezzlement, where there was no literal approval of the
action, directors are not likely to be personally subject to the
excise tax (unless, of course, one or more were knowing
participants in the scheme)
The board must still be vigilant in their plans to explain and
rectify the fraud

This matter was referred the Shelby County District


Attorneys Office (Memphis); Memphis FBI Office; and
the Memphis IRS Criminal Investigation Division
The Public Corruption & Economic Crime Prosecution
Unit (PCEC) is a unit within the Shelby County District
Attorneys Office
The PCEC is responsible for the prosecution of public
corruption; fraud and theft from governmental
agencies, non-profit organizations and businesses; and
money laundering cases
Prosecutors and investigators work hand-in-hand with
local, state, and Federal law enforcement agencies in
the investigation and prosecution of these offenses

On April 27, 2015, SGIG Samuel Hobbs, Jr., Grand Auditor,


reported to the USC Council of Administration (Executive
Board) of significant misappropriations of funds and
questionable financial transactions in excess of one million
dollars occurring during a one year period of Grand Treasurer
General Arvin Glass' time in office
During this audit review, it was also determined that
Sovereign Grand Commander (SGC) Deary Vaughn and Grand
Treasurer General Glass gave Frederick McWilliams
unsupervised authority and responsibility to the financial
accounts and credit cards, which McWilliams personally
endorsed checks and made what appears to be personal debit
card charges with United Supreme Council funds from
December 2013 to April 2015, totaling in excess of
$1,000,000.00

Grand Treasurer Glass transferred $700,000 of the USC funds


between April 2014 and June 2014 to an account for an annuity for
Sovereign Grand Commander Deary Vaughn
The two transactions occurred more than a year ago and without the
approval by the Council of Administration or the USC
The AXA Equitable listed in Treasurer General Glass' report that he
presented in Houston, Texas at the Annual session shows this
account as an investment of the USC
There was no reference in Glass report that the Sovereign Grand
Commander Deary Vaughn and as the Treasurer General signed on
behalf of the USC, a contract to set up an account to pay the
Sovereign Grand Commander at least $50,000 a year as a salary
when he leaves the Sovereign Grand Commander's office
This transfer of funds has never been presented to or approved by
the USC or the Council of Administration

A IRS Notice that was issued to the USC on October 25, 2009 for
$332,107.00 concerning SGC Vaughns levy
This notice was recently brought to the attention of the investigative
authorities
This garnishment was not paid by the USC based on orders "to not
pay" given to the former Treasurer General Gill Redding by SGC
Vaughn as evidenced by letter and other documents provided by
SGIG Redding which does not appear to have been listed in any of
the audits
The civil court transcript dated July 23, 2015, USC v McWilliams
hearing, which Vaughn has stated in open court that the funds
obtained from the casinos and other sources were for his salary
without any taxes being withheld.
In October 2014, a USC check was disbursed in the amount of
$46,455.71 under check# 7209 which was made payable to the IRS
for SGC Vaughns levy

McWilliams was hired as the building manager and IT specialist with


an annual salary of $32,000.00 and began writing checks to himself
and for fictitious accounts after gaining unauthorized access to the
USC accounts
McWilliams appears to have wrote payroll checks in excess of
$300,000.00 to himself claiming to be an independent contractor
while making numerous transactions and authorized PayPal account
for his own personal needs. McWilliams used computer generated
pre-signed Grand Treasurer General checks
while making
fraudulent ledger postings
McWilliams also obtained the SunTrust debit card to purchase
Memphis Grizzlies Tickets and other transactions which included but
not limited to the Funeral Home Caskets; Bud Davis Cadillac;
Christian Brothers Automobile; Church & Chapel Metal Arts; Cheryl
Ford (Shelby County Commission Chairmans Spouse); Joe Ford
Funeral Home, totaling in excess of 1,000,000.00

Grand Auditor General Hobbs also reported to the Council of


Administration (Executive Board) that they reviewed the USC bank
statements and had not seen any cash receipts from PayPal
concerning transactions related to membership dues, supplies and
convention transactions
Grand Auditor Hobbs confirmed with PayPal that they did not see
any of the USC funds (in excess of $140,000) in the PayPal account
being transferred to the USCs operating bank account which that
the primary contact person for PayPal account was McWilliams
Vaughn also diverted approximately $120,000.00 by directing
transfers from the USC's general account to a USC Charitable
Foundation and then to an Oklahoma Grand Lodge Educational Fund
for Vaughn's benefit without any authorization or knowledge of
USC's full Board
Those transfers appeared to have been a disguise for unauthorized
compensation to Vaughn

USC Credit Cards purchased the suite for the Memphis


Grizzlies NBA games which is reported in excess of
$240,000.00

On June 19, 2015, an arrest warrant was issued by the


Criminal Court of Shelby County, Tennessee for Frederick
McWilliams, who did unlawfully commit the offense of Theft
of Property in excess of $250, 000 which related to the USC
Finances
McWilliams was subsequently arrested, held in a Shelby
County Correctional Facility and released on a $100,000 bond
pending further proceedings
On September 24, 2015, a public criminal probable cause
hearing concerning McWilliams USC financial transactions
was held at the General Sessions Criminal Court, Memphis,
TN, where the Judge ruled that the State did have sufficient
probable cause to proceed in a criminal case against
McWilliams

$1M stolen from Masonic group; $240K spent on Grizzlies tickets


Posted: Jun 23, 2015 7:10 AM EDT By WMCActionNews5.com

It was reported by SGIG Gilbert S. Redding that during his tenure as


the Grand Treasurer General (October 2006 to October 2012),
Former Grand Auditor General Curtis had never asked for any
financial data from him as required by the USC By Laws
In 2008, SGIG Redding queried SGIG Curtis why he had not
performed any internal audits which SGIG Curtis responded that:
"Vaughn said he did not have to do audits
SGIG Redding also contacted SGIG Curtis concerning some of
questionable Visa credit card charges and the only response Redding
received was from Vaughn who stated that: "the visa cards charges
were none of your damn business"
SGIG Curtis had a responsibility to take action but only chose to
inform Vaughn that Redding was questioning his expenditures
SGIG Curtis was placed on notice about his responsibilities and was
alerted to the inappropriate expenditures but chose to enable the
USC fraud scheme

Money Stolen Over Eight-Year Period; Non-Profit Alerted Authorities


Upon Discovery of the Scheme
WASHINGTONEphonia M. Green, 44, of Upper Marlboro, Maryland,
pleaded guilty today to federal charges stemming from her
embezzlement of more than $5 million from her former employer,
the Association of American Medical Colleges, a non-profit
corporation
Green pled guilty in the U.S. District Court for the District of
Columbia to one count of theft concerning programs receiving
federal funds and one count of engaging in illegal monetary
transactions
As part of the plea agreement, Green agreed to criminal forfeiture
and restitution in the amount of roughly $5.1 million
Under the voluntary federal sentencing guidelines, she faces
between 41 and 51 months of incarceration

Joan Cordell, 62, was sentenced to eight years in prison by Shelby


County Criminal Court Judge W. Mark Ward, who also ordered her to
pay restitution of $81,149.59 to her former employer, Commercial
Data Corporation
Cordell, of Horn Lake, Mississippi, wrote unauthorized checks to
herself from the company bank account and issued payroll checks to
herself that were higher than her authorized salary
She was the bookkeeper and administrative assistant to the
president of Commercial Data on Regal Boulevard
The payroll checks she issued to herself were for 40-hour work
weeks when she only worked a mandated 35-hour week, the
investigation showed
She also paid herself for unauthorized mileage, for vacation time she
had not accrued and for vacation that was not approved

Greenbelt, Maryland - U.S. District Judge Peter J. Messitte sentenced


Diane Michelle Pimble, age 41, of Washington, D.C., today to 14
months in prison, followed by three years of supervised release, for
interstate transportation of stolen money and tax evasion
Judge Messitte also ordered Pimble to pay restitution of
$152,918.03 to her employer and $26,697 to the IRS
IRS Criminal Investigation views embezzlement schemes as a form
of organized tax evasion, said Shelia Olander, Acting Special Agent
in Charge, IRS Criminal investigation, Washington DC Field Office
Pimble wrote over 100 unauthorized checks to herself, including
grossly inflated salary checks for herself, that drew off her
employers bank accounts
Pimble stamped these unauthorized checks with her employers
signature, and transported them from Maryland to the District of
Columbia, cashing them at her local bank

The Washington Post reported that from 2008 through 2012, over
1,000 nonprofit organizations disclosed hundreds of millions of
dollars in losses attributed to theft, fraud, embezzlement, and other
unauthorized uses of funds and organizational assets
According to a study cited by the Post, nonprofits and religious
organizations suffer one-sixth of all major embezzlements, second
only to the financial services industry
While the numbers are shocking, the reasons nonprofits can be
susceptible to fraud and embezzlement are easy to surmise
Many begin as under-resourced volunteer-run organizations with a
focus on mission rather than strong administrative practices
As agencies established for public benefit, nonprofits assume that
the people who work for them, especially senior management, share
their philanthropic goals
Nonprofits often are more trusting of employees, and frequently
have less stringent financial controls than their for-profit
counterparts

Unfortunately, nonprofit employees are as vulnerable as anyone else


to economic distress, including personal financial difficulties,
overspending, and even gambling and other addictive behaviors
Nonprofit employees who engage in fraud often rationalize their
unlawful conduct. Such rationalizations can include perceived
injustices in compensation or treatment compared to their peers at
for-profit enterprises; unhappiness over denied promotions,
requested raises, or the absence of similar benefits; and that the
employees are borrowing from the organization with the plan to
fully return the money to the organization at a later date
In addition, high-level employees at nonprofit organizations and
their close associates have significant access to the organizations
funds and financial records, causing them to believe not only that
they can commit the fraud and embezzlement but also that they can
successfully conceal their conduct from outside scrutiny

This criminal investigative matter is currently ongoing and


further action is pending receipt of additional documentation
We will continue to support the Shelby District Attorneys
Office; the Memphis Federal and Local Law Enforcement
entities in the furtherance of this criminal investigative matter

QUESTIONS