Anatomy of trust accounting fraud (and how we help you stop it)

June 16, 2020

Anatomy of trust accounting fraud

Trust accounting fraud: it’s every principal’s worst nightmare. And during periods of economic uncertainty, the nightmare can unfurl into reality. Exceptional cases of fraud and theft tend to make the news, but typically, most instances of fraud involve small sums of money being transferred irregularly over a long period of time. Take for example this Western Australian case, this Queensland example and this very typical example.

Monitoring transactions is time-consuming for principals, and even then, fraud is a tricky activity to catch.


How we can help prevent fraud in your business

To help our customers stay ahead of risks like trust accounting fraud and theft, we’ve built a new feature in Console Cloud that alerts business owners to possible fraudulent transactions. This feature identifies disbursements, trust accounting actions and other behaviour in Console Cloud that exposes the agency to some element of risk. It then reports these transactions with direct links to the suspicious activity to the nominated business owner.

To understand how effective this feature really is, and how else you can protect your business against trust accounting fraud, let’s look at the anatomy of trust accounting fraud in real estate.


Fraud, theft, and economic recessions

The falling tide of business income tends to go hand in hand with tighter supervision of finances from all parties. According to leading professional services firm PWC UK, it’s this heightened sensitivity to finances that often leads to the discovery of past acts of theft. Such was the case in this Western Australian incident, during the collapse of the primary industries boom in Perth.

In most Australian cases of trust account fraud and theft in the real estate industry that made news headlines however, financial hardship played either no or only a small part in the decision to steal.

That’s not to suggest employees are no more likely to commit fraud during a recession. Typically, suggests American services firm WIPFLI, more employees are motivated by dire circumstances to commit occupational fraud during a recession.

Anecdotal evidence from our customers and the Property Management industry generally supports this view. But most of these cases are unlikely to make the news, because they involve much smaller dollar figure amounts, squirrelled away through a complex web of transactions and accounts. Many such instances of trust account theft are probably still as yet undetected.


Who is most likely to steal or misuse funds in a trust account?

The two biggest factors that determine whether someone will attempt to steal or misuse funds are (1) how easy it is to do, and (2) how likely the perpetrator feels it is that they will get caught. These two key factors—easiness of the task and likelihood of getting caught—indicate that the greatest perpetrators of fraud within your business are likely to be trusted people in senior positions. (This view is supported by the sheer number of Australian cases involving principals or senior staff members.)

In other words, it’s those employees who (1) have access to the trust account, and (2) are less frequently supervised (or supervise others) who pose the greatest threat—not the junior staff. This means senior staff.


How it happens

Most internal trust account fraud happens in one of two ways: either a staff member siphons money from the trust account into their own bank account or pocket, or the money is skimmed. That is, it simply doesn’t make its way into the trust account in the first place. This tends to happen more with cash payments, such as bond and initial rent payments.

The rise of the cashless economy has caused a natural decline in cash payment theft and skimming in agencies. The manipulation of money via trust account transactions, however, remains a risk.


How to spot it

Typically, trust accounting fraud cases that make their way into the news involve huge sums of money. If fraud was so easy to detect, how could sums reaching into the millions go unnoticed for months or years?


Three ways, principally:

  1. Withdrawals are small and/or irregular
  2. They tend to occur over a long period of time
  3. They involve the addition, substitution or other transfer from the trust account to a suspense account or payee that has no business being in your system.

The latter is the perhaps the most difficult detail for principals to detect and manage, and yet is the single most consistent element in cases of trust account theft. And that’s exactly what the fraud detection system monitors: new payees, and changes to payment details.


We help you spot it: How Console Cloud customers are alerted to interesting transactions

In Console Cloud, our fraud detection system performs a review of bank details and payments every time an agency runs a disbursement. It then picks up payments most at risk of fraud and emails this list to a single email address within about 10 minutes of the disbursement. If you’re the principal of your agency, this should be you.

The fraud detection system in Console Cloud considers every payment made to owners and creditors in the disbursement, and identifies interesting payments. An interesting payment includes:

  • The first time a creditor or owner is being paid since their account details were added; and
  • The account details for a creditor or owner were changed and a payment has been processed.

When an interesting payment arises, Console Cloud will send an email alert to the nominated person with details of the transaction with a link to that activity in the change log in Console Cloud, including details of who made the change, and at what time. It is then up to the email recipient to review this transaction and make sure it’s safe.

If you do your due diligence and review transactions in isolation like this, the chances of fraud going undetected on your watch are significantly lower.

Note: If you would like to start using this feature in Console Cloud, please get in touch with our service team to authorise a person to receive these alerts.


How this protects you

By detecting changes in bank details, Console Cloud alerts principals to even the smallest payment into an unauthorised account. This means no longer having to rely on matching creditor and owner bank details with your system forensically to make sure certain transactions were legitimate.

It also means you won’t find yourself in the position commonly encountered by principals whose trust accounts have been misused—discovering the issue months down the track, and only after noticing large discrepancies in funds, or after identifying an unauthorised transaction by chance.


Better, more sustainable leadership

One other feature of Console Cloud’s fraud detection system is that it acts as a deterrent to would-be offenders. In the outgoing communications tab, all users can see when a transaction alert email was sent to the principal or nominated recipient—but not the content of the email. In other words, ordinary users can tell when their actions have been reported to the boss.


Say no to micromanagement!

Ultimately, principals have to be able to trust their employees to do the right thing. Micromanagement erodes trust and rapport with staff, and is pretty closely linked to costly things like staff turnover and absenteeism.

With Console Cloud alerting you to any interesting transactions, trusting your staff to do the right thing is something leaders can now demonstrate, without exposing the business to nasties like trust account misuse and fraud.

Our fraud detection system means you can manage transactions by exception, and review payments that make sense to review. And then? Get on with your day!

It’s just another way that Console Cloud helps principals to do less admin and spend less time auditing staff, so they can spend more time growing their business.


Wondering what to read next?

We've given owner statements a complete makeover. Here's what's changed, or read about how we are protecting your property management business: a look at compliance. Or check out what we've done to assist with tenant self-inspections with this new feature in Console Cloud.

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