July 30, 2019
by Gregory S. Dowell
As reported by several news outlets, a lawsuit has been filed by KeyBank, claiming that the bank is the victim of a massive payroll fraud that was perpetrated by a payroll processing company. According to the lawsuit, KeyBank is out about $122 million dollars, which was to be covered by funds drawn on another bank (Lake City Bank), but the checks bounced when the account at Lake City Bank was overdrawn. It appears that other businesses are out funds as well. Several businesses have been advised by employees that payroll funds did not hit their accounts, and businesses have had to use additional funds to cover the shortfalls. Presumably, taxes were not deposited with the Federal and State governments as well. It remains to be seen who will suffer the ultimate losses (insurance may pick up some of the brunt of the fraud), but businesses will certainly be impacted.
The payroll processing company, IOI, has been in business for several years and claims to have some 6,000 clients across the country. Its owner, Najeeb Khan, is well-known and sits on several corporate boards. Apparently, he is also a lover of the good things in life, and has an extensive collection of cars, boats, and planes.
While there is more information needed to complete this story, businesses can learn some lessons from this experience.
- If the fraud charges are accurate, the lavish lifestyle of the owner served as a tip.
- Businesses should have a process to check every payroll period to be sure that taxes were deposited with the proper authorities.
- Mailing addresses for payroll should not be changed from the business’ address, so that delinquent notices will come to the attention of management.
- While IOI was relatively large, businesses should also think twice before using a payroll service that is unknown or too small; in those cases, it may be very difficult to have any semblance of internal controls, the owners may have unfettered access to the employer’s cash, and it may be impossible to recover any funds.