Sunday, October 8, 2017

Fraud on Everyone

A reader recently emailed me a link to a news story about fraud. It came without explanation or context, just a link. Perhaps it was inspired by an August Post on "Real" Fraud. But, that story was on my mind when a second fraud story hit the daily headlines. 

The first story from USA Today is Payroll Services Firm Owner Defrauded Small Businesses of $15.8M. Andrea Rudd of Powell, Tennessee plead guilty to tax evasion and both wire and mail fraud. She "took money from small businesses to cover payroll taxes and workers’ compensation insurance that she instead pocketed." The damage to the small business owners is obvious. Their taxes were not paid and they did not have the workers' compensation coverage that they believed they did. 

What may be less obvious to the casual observer is the impact on people who did not personally do business with Ms. Rudd. The people that worked for those defrauded businesses were likely not covered by workers' compensation. For working Americans, workers' compensation is a safety net. Some are critical of the volume of benefits provided, the procedural requirements, and more. But, workers' compensation is there for a huge population of American workers. When insurance premiums are not paid, however, coverage is likely not provided. Ms. Rudd seemingly defrauded more than the small businesses. 

If one of those "small business'" employees had been hurt on the job, they would likely have required medical care. That care would be provided, despite the potential that no one would pay for it monetarily. As I have written, when someone is hurt, the truth is that Someone has to Pay. But that may mean an employer, workers' compensation or health insurance paying monetarily for the treatment, or an employee going without care and paying with lost productivity, lost function, and pain.

Ms. Rudd "was sentenced to serve eight years in federal prison and ordered to pay more than $15 million in restitution."

More recently, Erin and Lean Finan, plead guilty to "mail fraud and money laundering" in a case involving Amazon, reported by Fox News. This suburban couple created false identities, ordered electronics, complained about their quality and received "replacements at no charge." They then sold the replacements to a middleman, who in turn sold them at a mark up to a "New York outfit." Presumably that outfit then resold the goods. 

The Finans "were ordered to repay Amazon $1.2 million, and they face up to 20 years in prison." They have not been sentenced yet, but may well go to jail. 

Just as Ms. Rudd's crimes are actually against more than the "small businesses," the Finan's crimes are against more than Amazon. One of the prosecutors noted that "Consumer fraud is absorbed by all of us through higher retail prices." That makes sense. When people steal someone's identity and open credit accounts, their gains are someone else's loss. Those losses are not absorbed, but are passed on to the rest of us as higher costs. For that reason, identity theft is a crime that most states (not Kansas) prosecute. 

Both the Finans and Ms. Rudd will be ordered to pay restitution. Restitution is a criminal law concept that reclaims monetary damages. Of course, Amazon could have sued the Finans, just as those "small businesses" could have sued Ms. Rudd. But, the criminal justice system provides restitution as a mechanism for recouping such damages in the course of a criminal prosecution. The criminal court orders the repayment of damages. And, both of these cases illustrate that those damages can be extensive. 

The headlines catch restitution stories. A suburban couple ordered to pay $1.2 million, or a local business owner ordered to pay $15 million grab attention. And, that is what headlines are all about, grabbing attention. But, after these restitution orders, and their headlines, do the wrongdoers really have a likelihood of paying those millions of dollars. 

USA Today quotes the U.S. Census Bureau saying that the average U.S. household income in 2014 was $73,298 or $65,751. USA Today does not explain which of these two quoted figures is accurate, or why two numbers are quoted. According to The Indianapolis Star, you would need $46,016 "to have enough money for needs and wants" there. It cautions, however, that the "median income for the city is $42,076." So, the Finans would presumably need $46,016 and yet perhaps they could earn the average, $65,671, leaving a surplus of $19,735. 

And, if they paid all of that surplus toward the $1.2 million in Amazon restitution, the entire debt would be paid in just under 61 years (without any interest of course). When the debt is thus paid, Erin (38) and Leah(37) will be 99 and 98 years old respectively. If Ms. Rudd paid at that $19,735 rate annually, her $15 million in restitution could be paid in only 760 years. By which time, of course, Ms. Rudd (38) will have been dead for several centuries. And, these projections conjecture that these felons will begin making these restitution payments immediately, while they serve prison sentences (to which Ms. Rudd has been sentenced already, and to which the Finans may be). 

These hypothesis are also based on the criminals being able to earn average incomes, and devoting significant portions toward paying restitution. Some would question if either of these are realistic. According to the Center for Economic Policy Research, "An extensive body of research has established that a felony conviction or time in prison makes individuals significantly less employable." And, human nature may suggest that the odds of a felon making such payments over the course of decades is unlikely. 

So, while the restitution figures and facts are good for headlines, are these restitution orders effective? Some will no doubt suggest that they empower the seizure and sale of a person's existing assets. Perhaps the sale of a home, cars, etc. will bring significant funds to contribute to the restitution total, and decrease the balance. But that is not necessarily the case. Assets sometimes do not bring expected value. And, sometimes defendants later ask the courts to reduce restitution, as reportedly a defendant recently did in North Carolina, after the asset sale brought less than expected. 

In the end, the only real recovery may in fact be what is owned by the defendant(s), and what that property can be sold for in its depreciated condition. And, the rest of the loss may just have to be made up for by the rest of us in higher prices for products and services? Maybe when we say Someone has to Pay, that essentially means us.