Primary policy: Workers compensation

Secondary policy: None

Items in question: number of employees

Supposed cause of loss/fraud: number of employees listed

Suspicious indicators: some employees paid by check, some by cash

Actual cause of loss: false number of employees listed

Summary

The insureds operated a temporary employment agency that supplied manual laborers to local businesses. The government stated that the insureds defrauded the government of $9.9 million in payroll taxes by paying workers in cash and failing to report those payments to the government or the workers compensation carriers.

Facts

The business was in operation from 1993 to 2001. Employees were paid by check or cash, and at times it varied. Former employees stated that they were aware that two sets of payroll records were maintained; one for workers paid by check, and a separate set of records for those paid by cash. One worker stated that despite requesting payment by check, at times she was paid in cash. Witnesses at various client offices also saw that employees were paid in cash.

Auditors from two different workers compensation companies stated that at times the insureds attended audit meetings, and that policy documents were mailed to the insureds.

On review of the company's business records, the IRS reported that the insureds were reporting payroll on the employees paid by check, but not reporting those paid by cash, either to the government or the insurers. The total amount of unpaid federal taxes from 1997 to the first quarter of 2001 was $9,982,690.51. An insurance fraud investigator testified as a summary witness about employers' obligations to maintain workers' compensation insurance and how insurers calculate premiums based, in part, on reported payroll. The fraud investigator concluded that the total loss in insurance premiums to the workers' compensation companies was $6,457,500. The case did not go into detail as to how the fraud was first noticed either by the government or the insurers.

Final Result

Daniel McElroy and Aimee King McElroy were indicted by a grand jury on one count of conspiring to defraud the United States of employment and income taxes and to commit insurance fraud by use of the mails; three counts of mail fraud,; and fourteen counts of procuring false tax returns. After trial, a petit jury returned a verdict against them on all counts. The district court subsequently sentenced Mr. McElroy to 108 months' imprisonment and Ms. McElroy to 78 months' imprisonment. Both defendants appealed but the court affirmed the judgment of the district court.

Practical tips/fraud indicators: How are employees paid; payments in cash are fine as long as they are recorded, and the number of employees should match what's reported to workers compensation insurers.

Information from others; employees and clients knew employees were sometimes paid in cash. Paying employees in cash is no longer a common business practice and is worth double checking.

Payroll records; a company should have one set of payroll records for its employees; one company with multiple sets of books is in general suspicious.