In the wine industry, your most trusted employee could also be your most dangerous.
So said a panel of law enforcement and business auditors at the Wine Industry Financial Symposium on Monday and Tuesday at the Napa Valley Marriott.
“Fraud is pervasive” in business, said moderator Jim Petray, a CPA at Burr, Pilger & Mayer. “Most disturbing, it can happen from a person who is a well-trusted individual” — someone whom you’d never normally suspect of theft.”
There have been a number of examples of wine-related crimes in recent times.
Gerilee “Geri” Densberger was sentenced earlier this year to eight years in state prison for the theft of more than $600,000 from her employer, Whitehall Lane Winery, and $37,000 from winery owner Thomas Leonardini Sr.
Martin “Chris” Edwards, formerly a Napa-based executive with The Wine Tasting Network, was sentenced in federal court in 2014 to 33 months in federal prison for embezzling nearly $900,000 from his employer.
In April, as many as 250,000 consumers who used their credit cards at dozens of Napa Valley wineries had their financial information and personal data stolen by a cyber thief.
Also this year, Joshua Krummenoehl, the former owner of WineGavel.com, was sentenced to 18 months in jail in connection with the theft of more than $500,000 worth of wines stored in south Napa County.
Small family-run wineries with limited budgets or absentee owners are particularly vulnerable to fraud, said the experts.
For example, if the same employee is responsible for collecting the mail, sorting checks, making deposits, paying all the bills and then reconciling bank statements, “That’s a terrible set of controls,” said Jeff Dieleman, an agri-business auditor with CPA firm Moss Adams. That person could easily take advantage of such complete control.
“There have to be checks and balances, literally,” said Napa County District Attorney Gary Lieberstein.
Dieleman said that fraudsters usually work in accounting, operations, sales, executives or upper management roles and are typically older than 40 years of age.
“We see more theft in that age group because they are trusted more,” said Deileman. Often those employees are at the height of their careers, with the most responsibility, access and opportunity.
Dieleman said that there are three main types of business fraud: embezzlement, corruption and fraudulent financial statements.
The most common is embezzlement or theft and misappropriation of company assets, he noted. According to the Association of Certified Fraud Examiners, the median loss for such theft is $130,000. For a small winery operation, that could be devastating.
Fraud cases usually start small, Dieleman said. An employee will steal a small amount, intending to pay it back, but after no one notices, they do it again, “and pretty soon they get bolder,” stealing more and more frequently. It can take years to discover such theft, he noted.
“The longer they are stealing, the more they are going to take over time,” Dieleman said.
Warning signs of theft by an employee can include things like changes in lifestyle, living beyond apparent means, close association with one particular vendor, someone who won’t take a vacation, personal financial difficulties, control issues, family problems or addiction.
Once you have enough evidence someone is stealing, remove that person from his or her position “so they don’t have their fingers in the pie anymore,” said Michael Donovan, chief investigator at the Napa County District Attorney’s office. “Once they realize the jig is up, they have an opportunity to hide things. Evidence is gone.”
One of the most important things is to report fraud when you find it, said the panelists.
No one likes to admit someone stole from their business, said Dieleman. “It hurts, it’s embarrassing. They’d rather sweep it under the rug.”
“They don’t want adverse publicity,” admitted Lieberstein. The problem is that employee may leave your company and victimize the next employer. If there’s no record of any complaint or case, the next business owner may never know what kind of employee they just hired, said Lieberstein. “Report it.”
Lieberstein also said to be wary of electronic fraud schemes. He cited an example of a Napa real estate investor who lost $300,000 in a wire transfer scam.
“That’s a huge area where people are getting ripped off. Educate your people not to trust everything in a phone call or electronic mail,” said the DA.
Wineries are increasingly at risk from losses due to cyber crime. “We are seeing several instances where customer email is being hacked and monitored,” said an email statement from former U.S. Secret Service Agent Michael Musgrave, now senior vice president and director of the Financial Intelligence Unit for Rabobank. Musgrave had been scheduled to appear but was not able to attend.
“Fraudsters are requesting wire transactions to be sent as if the president or CEO has ordered the wire transaction. In these instances, the perpetrator represents that the requested transaction is time sensitive and that they cannot be reached by phone,” he wrote.
Petray suggested that companies create a fraud hotline, use background checks, monitor monthly operating ratios, have unopened bank statements opened by the owner first, create a culture of ethics and accountability from the top, require mandatory vacations, do surprise inventory counts and report embezzlement.
It’s not enough to create a policy in an employee handbook, said Dieleman. “Make this part of your culture. Make sure that no one thinks no one is paying attention.”
In addition the crime presentation, attendees at the Wine Industry Financial Symposium also participated in sessions about such topics as designing a successful tasting room, mergers and acquisitions, using research data and reports, social media and tied house regulations, vineyard development and how legalized marijuana may affect the wine industry.