Ethics Puzzle

latetoschool · January 14, 2006, 6:45am

Is anyone here a sole proprietor, or business leader who can maybe shed some light on a question?

I do consulting work for a small business; all has gone well, the relationship has been very good, the principals seem to be well respected, and seem to have solid reputations and reasonable competencies. I work directly with the president, who is on extended international travel for the next several weeks.

So I was at the headquarter location earlier this week, and as outgrowth of another discussion with the office manager, discovered that she has several checks from customers - payments that arrived in the mail from late November through December - in amounts ranging from $2,000 to $9,000 - piled up in a drawer.

As you can imagine, I was astonished to see this, so I asked her “when are you planning to deposit these checks”? Her answer was even more astonishing - she explained that the instructions from the ceo are to hold the checks, and to only deposit a few at a time; to wait for specific instructions from him as to when to deposit the checks.

I said “you’re kidding, right? you must be mistaken” - and she insisted that this was the procedure she was instructed to follow. Then, she showed me her email - inbox, and showed me an email she received from the ceo this week, and it said exactly - word for word - this: “please select about $5,000 to deposit today”. Then, yesterday, she received another email with the same instruction.

The thing is, this sounds to me to be suspiciously like “structuring” - the intentional planning of deposits to avoid the bank filing a CTR (cash transaction report). In addition, there were some (two or three) NSF charges from late December - the ceo as well as the technical officer told her that they intentionally did not deposit any money in December. (This business has plenty of money and the checks piled up in the drawer total something close to $40,000, while the NSFs were for amounts under $200.)

Structuring is a criminal act; actually, I think it’s a felony. (So is passing bad checks, for that matter.) But what is puzzling is the ceo is not a stupid person by any means - he’s highly educated, a former banker himself, he certainly knows the law, and it’s hard to imagine that he would intentionally commit ANY sort of crime. In addition, it’s hard to imagine why he would see any advantage in avoiding the bank filing a CTR - banks are required to do this for ANY cash transaction over $10,000, and, he is in a business where payments from clients in excess of this threshhold are normal. But why would any legitimate business fear a CTR? In addition, after 10 of them or so, the bank can “exempt” a customer from the CTR filing, so again, why fear it?

I asked the office manager - “did you ask WHY these checks are to be handled in this manner” - and she said “no, because I don’t want to know, and as long as I don’t know, I cannot be considered an accomplice if he’s doing something wrong, furthermore, he’s a former banker, so I am going to assume he has to know what he is doing”.

Anyway, since I am not trained in banking, or business, or law, can anyone here guess if there is some legitimate reason why deposits would be intentionally withheld - in other words, does this perhaps speak to some reasonable and customary business practice that I am simply not seeing?

The argument I’m having with myself in my head is that - while I understand what FINCEN says, what BSA says, and what the law says about structuring, is there any specific requirement that the ceo of a privately held company make deposits according to some decided schedule? In other words, the checks are HIS, so why can’t he deposit them whenever he wishes - March, April, May, sometime next year, etc.?

Last, if he intentionally wanted to structure deposits for some reason, it seems to me that there would be easier ways to do this, rather than communicate through an office manager, and then leave an email trail (???).

If he were here, available to speak to in person, I would ask him directly, but, since he isn’t, it would be rather difficult and inelegant to ask the question via email or long distance international call “are you structuring deposits” etc.

(At the end of it all, my challenge is to try to come to some decision about continuing my relationship with the company - obviously, if something illegal is in play, or even slightly unethical, I have to end the relationship.)

Should I be concerend, or should I consider this none of my busines, or (???) I’d be very grateful for any guidance anyone has.

dmd77 · January 14, 2006, 8:39am

Me, I’d make an appt with the CEO and ask him myself. I’d probably get fired, too, but I have this thing about not doing anything that makes it tougher to sleep nights.

a_ravin_hurt · January 14, 2006, 8:46am

well i am a kid but still a reply from someone is better then noone replying :)

latetoschool
continuing to work with the company is entirely upto you.
let your conscience guide you :D

basically you have three options

1) you can stay mum and ignore whats happening…(which will be wrong considering that what is happening is illegal).

2) maybe you can tell the ceo that what he is doing is wrong. i mean dont say something like " i am going to report you." maybe something like “mr. ceo, i think you dont know this, but i think structuring deposits is illegal.” (you get the idea dont you?)

3) go report him and say goodbye to your job :)

do what you think is correct and what suits the circumstances.

my advice:
I) dont go with 1 or 3…choose 2. maybe mr. ceo really is not aware of the law. maybe you are mistaken. lots of possibilities. its better to clarify before taking any action.

II) wait for a few days. there are a lot of smart people here and they ususally come up with great advice.

hope this helps.

latetoschool · January 14, 2006, 9:18am

dmd77, I would ask him directly, but, he’s traveling abroad for the next several weeks, and so that leaves me with email, or international call - neither of those media are desirable for this sort of discussion. Since this is consulting work for me, it represents only a portion of my revenue stream, and I can replace it, so getting fired isn’t a concern - although the bigger concern is that the office manager - an employee - would almost certain be in some hot water for revealing information.

a_ravin, thank you for your response - you’re so right, there are a lot of very smart people here! There are two very troubling issues though that make a judgment call so difficult - (1) he certainly does know what structuring is, and that it is illegal, with steep penalties, including prison time, and (2) the other side of the argument (in my head) is - whose business is it when he decides to deposit the revenue from paying clients? I don’t know if there’s any law that requires a business owner to race to the bank with the day’s proceeds.

The definition of structuring is sorta weird, in that you’re not allowed to intentionally prevent the filing of CTRs. However, if that’s not his intention - perhaps he has some other intention - then (???). But then why an email, that I saw with my own eyes (in addition to seeing the drawer of checks) that says “please select $5,000 to deposit today”. It’s the word “select” that’s really damning here IMO.

daaaaad · January 14, 2006, 9:31am

Rather than confront him, act like a professional and propose a “solution” to a perceived problem. Regardless of what you think, there may actually be a legitimate reason for what he does (although I don’t know what it is). Suggest a cash management plan to the CEO. Say: while working on another project, I noticed there is a time lag in deposits of client payments, and as a result, you are losing money that could be gained by putting this money in a interest bearing account, and/or avoiding other account costs such as the NSF fees. The CEO may thank you and implement the program, or tell you thanks then ignore you, or just fire you for being nosy.

ADad · January 14, 2006, 10:13am

IMO you should consult with your attorney to determine (1) whether or not what you have found constitutes evidence of illegal activity; and (2) what, if any, legal or professional obligations you may have when you reasonably suspect illegal activity.

IMO you should have this discussion with your attorney before you speak with the CEO.

If something illegal is going on, and if/when it comes to light, there is a good chance that the office manager will reveal that she discussed the matter with you.

kluge · January 14, 2006, 10:44am

Slow down. First, unless I’m missing something here, structuring and CTRs are about “cash” - currency, $100 bills and the like, to ensure a paper trail and prevent money laundering. Delaying deposits of checks doesn’t have anything to do with it. If your consulting work has anything to do with finances or cash flow, I’d ask the CEO about the delayed deposit of the checks. If it doesn’t, I don’t think you have any reason to suspect criminal or fraudulent activity, so I’d suggest you attend to whatever it is you are consulting on.

NJres · January 14, 2006, 2:11pm

I’m with kluge. I thought the reporting requirements related to cash transactions, not checks. I do find the CEO’s behavior (as described) strange. The only thing I could think of was that he was helping the party who wrote the check with their cash management, but if he is instructing his secretary to pick a $5,000 check more or less at random, well, there goes that explanation.

It is possible that the CEO is going to all this trouble because he doesn’t understand the reporting requirements, in which case his behavior would not be unethical, merely stupid. (Just my opinion)

And if in fact it turns out that his behavior is illegal, then ignorance of the law may not be an excuse for his secretary, or you either.

In conclusion, I recommend the direct approach: Ask the guy why he is doing this strange thing that you observed.

calmom · January 14, 2006, 3:40pm

First of all, its pretty dumb practice - unless the customer specifically asked that a check be held, then a $9000 check written in November may very well be worthless in January. Some people aren’t so good at keeping track of their outstanding checks and assume that their current bank statement is accurate, and spend accordingly.

My guess is that its more like trying to manage income to reduce taxes than structuring - he’s trying to reduce the 2005 gross income by pushing receipts over to 2006, which will work if he’s doing cash basis accounting. If this has been going on for longer than the checks you saw indicate, maybe he wants to make sure that his bank balance shows a leaner financial picture than reality.

Another very real possibility is that he’s avoiding some other creditor – maybe there’s an unpaid judgment and he doesn’t want there to be funds in the bank to satisfy any lien - so he deliberately keeps the balance low, even riskng NSF payments to avoid having any larger lump sum sitting in the account.

However – here is my advice to YOU:

If you are ever in a position where something that a client is doing makes YOU feel uncomfortable, then you can either confront the client with with facts if you feel you are likely to get an honest answer – and if you are not satisfied with the answer - or you decide that you don’t want to confront the client – GET OUT. Trust your gut. You can simply decide you are too busy and write to the client and say that you are sorry but you must end your consulting agreement, or you can be more direct about what is bothering you – but the point is, unless you can fully satisfy yourself that there is nothing illegal or unethical going on, you don’t want to be part of that operation.

I’d note that if there is anything to the scenarios that I speculated, it could result in a seizure of assets that would mean that the business would be unable to pay what it owes you – so just in terms of your own protection you probably don’t want to run up a lot in the way of receivables from a company that might end up being hit with liens that will impact their ability to pay their own debts. Nor, for that matter, do you want to rely on payment from a company with a history of writing NSF checks.

NJres · January 14, 2006, 10:52pm

calmom - a very good theory about pushing income from 2005 to 2006, especially since:

I guess you stagger the deposits so it doesn’t look obvious that you were collecting checks from last year and depositing them in bulk. Of course even a cursory audit would show the date on the checks was 2005.

BigGreen · January 14, 2006, 11:03pm

my guess is also that it has to do with taxes. that he’s smoothing his revenue flow to reduce or even out his tax burden. It may not just be an annual issue but something he does to smooth quarterly earnings. He may have outside investors and he wants them to “see” even cash flow. Depositing two or three checks that “in toto” go above $10,000 wouldn’t be of interest to the Federal government.

For all you know, his wife has access to his accounts and spends too much - maybe he’s trying to limit her spending in some way. I don’t mean that to sound sexist - but you just don’t know.

Personally, given that you know the person and I don’t get the impression you think he’s into any illegal activities, I’d keep my nose out of his business. You’ll probably get the office manager fired - assuming the CEO was doing nothing wrong, the office manager was totally out of line to share so much information with an outsider.

latetoschool · January 15, 2006, 7:27am

Thanks to everyone who responded. Half of me agrees with posts that say my nose doesn’t belong in this, however, it got to me because of a business process question. Oversimplified, client called and said “where is my widget”, followed by office manager saying to me “should I fullfill this order when we haven’t posted it as paid, even though it sort of really has been paid since early December” etc., and the rest follows. I agree that the office manager should not have shared this info, however, she had no one else to ask about the widget fullfillment, and while I should have simply directed her back to the ceo, at the time it didn’t seem logical to send her to the ceo, because her initial question was so benign.

I was absolutely shocked into speechlessness when she opened the draw and showed me the pile of December checks sitting there - something I have never seen before in any operation (though maybe it happens a lot more than I have ever been able to learn about). When all I could manage to finally say was something like “you’re kidding, right?” followed by something like “surely you must be mistaken” and “surely you misunderstood and this was not his intention”, then she showed me the email(s) (there are now more than one).

BigGreen, I cannot simply ignore this. It is critical - for a lot of reasons - that my business relationships be 100% pristine at all times, and in all circumstances. That’s not really too difficult to accomplish - usually, business leaders who are inclined to do something illegal or unethical reveal themselves in other ways, long before the relationship ever deteriorates into something like an office manager showing a drawful of checks, or NSF notices.

As to the CTRs, I don’t know with absolutely certainty, but I thought “cash deposits” included checks. Under BSA law banks are required to file CTRs for any single transaction over $10,000, and I thought this meant checks - though surely the federal government isn’t going to comb these filings very deeply. However, if the bank detects structuring, they are required to file a SAR, which is a very serious matter, and the federal government does look very closely at SARs, even distributing them around to all federal agencies where there is an office specifically charged with antimoneylaundering as a component of preventing terrorist financing. (This part at least I do know with absolute certainty.) SARs are very fertile ground for all sorts of datamining in the investigatory process (which makes it even weirder - why in the world would this ceo - not a stupid man by any means - and a former banker at that - risk a SAR?).

Calmom, as always, your advice is right on target. After reading your post, I am going to re-evaluate the entire relationship and come to some decision about it by the end of the month. I do think think this could be more a matter of reducing taxes, however, it’s a very flaky way of so doing. Allowing checks to bounce even if entirely by accident is very, very bad practice - and in this case ridiculously avoidable given that the checks were all under $200. In any case, I cannot be associated with anything illegal or unethical, obviously.

If I decide to let the relationship continue, when he returns to the U.S. early March I am going to ask him directly. ADad, if it does get this far, I will take your advice here though and talk to my attorney before talking to the ceo. I do carry professional insurance but have no clue if it covers this sort of thing.

But even if he’s merely trying to reduce taxes - and nothing really wrong with that - who among us doesn’t try to use every LEGAL strategy to pay less rather than more - my gut says that the time and effort invested against the outcome represents very poor business decisioning. If the checks in the drawer total maybe $40,000, how much can this possibly shave off of 2005 tax liability - especially if it just means delaying the pain into 2006? In a business practice sense, it would be far more productive to redirect the time spent playing with the checks, sending emails to the office manager, etc. into marketing, client outreach, etc. - activities that would produce more revenue.

Oh well, at least I have some guidance I can work with. Thanks again to everyone who responded.

kluge · January 15, 2006, 12:07pm

Actually, “CTR” stands for “Currency Transaction Report” - and it only applies to cash money, not checks. Checks create their own paper trail - you know who paid who and how much. Cash is, of course, slipperier. I agree with CalMom and BigGreen - what you’re seeing is probably dumb and a little sketchy ethically, but not (seriously) illegal. It’s up to you to decide how far you want to stick your nose into it. If you follow up, you may well find out that this is not a business you want to be associated with, for practical reasons. Sketchy ethics are a good thing to avoid. But I wouldn’t be thinking in terms of criminal activity based on what you’ve described.

itstoomuch · January 15, 2006, 1:27pm

Banks will may not clear a check until 3 days after the deposit. They have the ability to clear that check on receipt. When you make a ATM deposit, the banks have additional time to clear that deposit-mine says up to 7 days.

Banks have for a long time have been able to clear checks virtually immediately. and they do. Except that they create a "float. This float is a tremedous amount of cash which is an lendable asset. You and I can float also but if we are not careful, it can get us into a lot of trouble. However, it is not so for financial institutions if they keep the float within the Fed Reserve time frame.

Its been many years since I read about this stuff, so I may be out of date. However with electronic deposits, the banks are able to hold the a little bit money longer. Read the fine print when opening a new checking account, credit card.

These people used to be “bankers,” I’d MMOB until you get more experience. You may think that you see smoke but haven’t smelt it and you definitely haven’t seen any hot coals.

GL

somemom · January 15, 2006, 3:10pm

Hmm, maybe he is income shifting for the FAFSA? Does he have a HS senior?

Okay, perhaps too serious a question for levity, but what people have said before about currency is correct- checks are their own paper trail. I cannot think of anything illegal he is doing and, it would seem, he is putting himself at risk if those checks later bounce!

On the surface it looks, basically, like a dumb & odd strategy, therefore, you ethical nose is twitching, why would a CEO be so dumb? That makes it look shifty, what is he really trying to do? A conversation with him seems in order here, the office manager was doing their best to keep the wheels on in asking your advice, the situation may be odd, but ethical, or you may need to leave.

I hope you will let us know what you learn when the time comes!

calmom · January 15, 2006, 5:02pm

LTS, obviously if the business is not fulfilling orders after payment has been tendered, it is very, very bad business practice. Knowing that is their practice, would you buy from them? Would you recommend to a friend that they purchase from that company?

I am in an position with company where I often get email inquiring as to unfulfilled orders – its supposed to be going to the customer service department, but sometime people end up writing to “webmaster” instead and then it comes to me. It is not my job to worry about fulfilling orders, but I ALWAYS follow through to make sure that the inquiry has gotten to the right place, and I ask the customer service department myself if anything seems odd. I just feel that my own reputation is on the line simply by association, and that it is part of my responsibility to help ensure that the company maintains its high standards.

So it goes beyond the ethics question-- you said that it is critical to you that your business relationships be 100% pristine – and I think that it is a good position to take for those of us who can financially afford to stand on principal. An independent consultant can get stained by the reputations of who she works with – just think in terms of your reference list or resume.

There are some basic assumptions about doing business that are being violated by this company’s practice, whether or not illegal. People expect that a check that they put in the mail will be received within a few days; they expect that their checks will be negotiated when received; and they expect that their goods will be shipped within a few day of payment. A violation of those assumptions is really a breach of trust – and a business that violates the customer’s trust usually loses the customer.

So whatever the reason, I don’t think this is the kind of company someone who wants to be 100% pristine will want to be involved with… unless they take action ASAP to clean up their act. It’s not just a matter of ethics – its a matter of overall quality of the product or services produced by the company you work for. If your goal is to be the best at whatever it is you do, then it really helps to develop a high-quality clientele. It sounds to me that right now, for whatever reasons, this company doesn’t meet your standards. So either they need to clean up their act… or as I said above, you can find yourself suddenly “too busy” and move on.

latetoschool · January 15, 2006, 5:46pm

Calmom, you (once again) hit on exactly the bigger picture that is so troubling to me. Very nervously I checked my bank balance online today to make sure the check I deposited from this firm didn’t also bounce (and it still might, since I didn’t deposit it until days after receiving it), and my brain is straying into areas along the lines of “how do I know their credentials are real” and “what if the product doesn’t contain what they claim” and “what if they didn’t pay their taxes and it comes out” and so on. Scarier still is something like “why didn’t my radar clue me in before the cold facts of a drawerful of checks happened…”…maybe it did, but cash flow silenced the warning.

Your post provoked a concern about an unrelated issue though - early December, I received a check for about $700, a company paid me to write what amounted to a 12-slide PP presentation. I’m still carrying the check around; their AP department sent email to me last week, did I receive payment? I assured them I did. But I still have the check. I have never, ever been paid for writing before - didn’t seek the project, they called me, and I’m over the top ridiculously happy about it. My plan is to photocopy the check before it goes in the bank and gets converted to groceries or gasoline or dinner and a movie etc. Then, I intend to frame it and hang it in my office, so I can always know - I didn’t solicit the business, and someone actually paid me to write something, and though I never formed the intention to write as a means of revenue, if I did it once, I can do it again and again and again. Anyway, it gives me such incredible pleasure to have physical possession of this check, I just hope the company doesn’t take notice and decide I’m a flake! - or worse, start to have the same sort of ethical questions about me. Of course, I certainly WILL claim the “income” on my 2005 tax return, and on the FAFSA, etc.

Kluge, you’re right on the definition of CTR, it’s cash only. I somehow assumed it meant checks too. Which unfortunately leads to final, ominous conclusions. I can think of only one or two possible reasons why any ceo would write an email stating “please select $5,000 to deposit today”. And no one on this board, a concentrated community with a sizable population of very smart people has come forward and posted something like “here’s a potentially legitimate reason” or “we do this all the time in my company, here’s why” or any such mitigating information.

calmom · January 15, 2006, 7:26pm

Some practical advice, LTS:

<ol>
<li>Deposit that check for the writing project! My son recently told me that he has a bad habit of carrying paychecks around for weeks without depositing them… I don’t know where we get these habits. Both my kids have also been bad about depositing birthday checks from the grandparents - which of course leaves the grandparents wondering what happened. Maybe it is that idea that if we don’t deposit it, we won’t be tempted to spend it. So its a fairly common, bad habit. (I don’t have it because when I was in my early 20’s I worked for someone who habitually overdrew her account - so I got in the habit of depositing checks ASAP before the money ran out). </li>
</ol>

But people who write the checks really deserve the courtesy of being allowed to track their expenses in real time – it is not fair to anyone to mess up their bookkeeping by holding onto a check written months ago. The bookkeeper for the company that hired you for the PP project isn’t worried about ethics – she’s expected to keep accounting records and balance sheets current, and she’s got a check still outstanding that is more than a month old… and she needs to account for it.

<ol>
<li>Here’s a solution to the potentially-bounced check problem AND the writing project check you aren’t quite ready to deposit. Open a second savings account at the same bank where you have your checking account. Deposit any special funds into the saving account. This is what I do with ex-hubby’s child support checks, because for awhile there was a 50% bounce rate on them. So essentially I use the savings account as a buffer to give those checks time to clear. Also, whenever you receive a check from someone who tends to bounce checks – you need to either deposit the check right away, or if you are really suspicious, get in the habit of calling the payer’s bank to verify funds before you deposit. Some habitual check bouncers (like my ex) simply don’t know how to balance a check register or accoun for checks outstanding, so they write checks against whatever their bank statement shows as the current balance - for them its out-of-sight, out-of-mind. </li>
<li>One more issue to keep in mind concerning the company with the strange check deposit policy: odd cash flow issues can be a red flag of an impending bankruptcy. I honestly cannot give you the logic behind it … its just that sometimes in my life when I have seen companies handling money strangely, it was followed very shortly thereafter by a bankruptcy. </li>
</ol>

By the way, the fact that someone was a banker doesn’t mean anything. Back at the time of the savings & loan crisis, I did legal work for a s&l going into receivership…and geez, were they messed up. I don’t think a 10 year old kid could have mismanaged their finances as badly as this financial institution did. So sometimes working inside an industry can only be a training ground for bad habits – rather than learning all the rules and the standards, the person simply learns how to cover up for mistakes, because they happen to be in an office surrounded by incompetent and careless people. And whenever you meet someone who is a “former” anything, you have to keep in mind that they might be “former” because they weren’t much good at whatever it was they did. Many people (including myself) switch careers for excellent reasons, but the world is also full of people who were promoted past their maximum level of competency and washed out at some point after that.

latetoschool · January 17, 2006, 6:53pm

Calmom, thanks for this. I’ll circle back and let you know how this one turns out. :)

ariesathena · January 18, 2006, 1:20am

About the “structuring:”
<a href=“http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_104.htm[/url]”>http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_104.htm</a>

If you feel like reading legal code. ;)

Anyway - Calmom’s advice is great.

The only thing I would add is that “willful blindness” is not a defense. You might want to inform the secretary that there are issues with what she is doing.

My guess is that this guy is trying to avoid 2005 taxes - he is supposed to report them (cash method) in 2005, when “actually or constructively received,” which is exactly what happens when someone gives you a check.

If he feels the need to do that, there are probably a lot of other issues at the company - such as the reason why he would need to avoid taxes like that.

My usual advice to anyone in this type situation (“what do I do?”) is to do something; just don’t let the decision make itself for you by being passive.

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