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 Nation’s Nonprofits”

Any theft, embezzlement, diversion or misuse of a nonprofit organization’s 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 agency’s Office of Inspector General (OIG)

Besides performing traditional audit work, the OIGs—and sometimes, the FBI—work 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 organization’s assets other than for the organization’s 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 organization’s 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 nonprofit’s 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 managers—including officers and directors—who 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 Attorney’s 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 Attorney’s 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 Vaughn’s 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 Vaughn’s 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 Chairman’s 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 USC’s 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

WASHINGTON—Ephonia 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 employer’s bank accounts

Pimble stamped these unauthorized checks with her employer’s 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 organization’s 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 Attorney’s Office; the Memphis Federal and Local Law Enforcement entities in the furtherance of this criminal investigative matter

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