D. DETECTING FRAUD in CHARITY GAMING by James V
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D. DETECTING FRAUD IN CHARITY GAMING by James V. Competti and Conrad Rosenberg Contrary to popular belief, bingo cannot be categorized as a low-stakes game played by middle-aged and elderly women. It is, rather, a billion-dollar industry whose popularity permeates all aspects of American society, and the abuses of which often go undetected or unremedied. Despite bingo’s popularity as a charity fundraiser and its reputa tion as a harmless pastime, it has been the object of abuse by a number of sources: Illegal parlors resort to tricks to circumvent the law or openly defy it. Racketeers are thought to control bingo games- legal and illegal- in a number of urban areas. Skimming and other scams are practiced by both organized groups and shady independent operators. Some bingo players have devised elaborate cheating schemes. Gambling in America. Final Report of the Commission on the Review of the National Policy Toward Gambling. Washington: 1976; at pages 160 and 164. Although the report was written over 20 years ago, its observations and conclusions are still essentially valid, if not possibly even a bit understated in light of the recent growth of the gambling business in the United States. 1. Introduction The subject of exempt organizations conducting gaming activities, ostensib ly to raise funds for charitable uses, has been the focus of a significant amount of interest. The April 1992 Pennsylvania Crime Commission Report entitled, Racketeering and Organized Crime in the Bingo Industry, at page iv, explains why, in its view, bingo may attract a criminal element: Promoters have infiltrated this industry and have very little to fear from law enforcement because of their low profile and be cause of the benign way in which society views Bingo. However, the significant amount of monies which these scams, frauds and diversions of revenue produce, represent a multi-million dollar loss to legitimate charities with very little risk of the perpetrators being prosecuted. In a very real sense, fraudulent charitable Bingo is the perfect white-collar crime. The purpose of this article is to educate exempt organizations examiners about abuses that have been uncovered in some gaming programs and inform them of audit techniques to detect possible diversion of funds from the charity Detecting Fraud in Charity Gaming by the professional operator. This article will also assist examiners in ac complishing the EP/EO Examination Quality Case Standard of adequately considering and developing issues of possible fraud when examining organiza tions conducting gaming activities. Lastly, this updates articles on gaming activities in the 1985, 1987, 1990, and 1996 CPE Texts. 2. Factor that Causes Embezzlement in Charity Gaming A. Inadequate Oversight by the Charity (1) General Members of these organizations know little about how to operate a Bingo game. Therefore they rely on the operator at the facility. This reliance eventually becomes essential to the organization continuing their games at the facility. Within a short period of time the organization finds that it has, in effect, given the Bingo hall operator/facility the organization’s license to operate their Bingo game. We find that the organizations knowingly allowed nonbonafide members to manage the intimate details of their organization’s Bingo financial affairs. We are convinced often times that these organizations merely "turned their head" and allowed non bonafide members to take advantage of the organization’s ap parent good name and reputation because it was an easy way to make money without any responsible supervision whatsoever. The charitable organization is given every opportunity to raise funds through Virginia and local statutes. Yet a low percentage of their actual gross income goes to the charity. One of the main reasons this happens is that the true charitable organization who entrusts its name to an operator is charged exorbitant expense to run their Bingo operation, and then the operator takes advantage of their position and actually steals from the charity. Special Grand Jury Impaneled to Investigate Bingo Operations in Henrico County, Va., on September 30, 1992, December 16, 1993, at Sections 4-4, 7-3, and 4-3. (2) Discussion An article in the Dayton Daily News dated April 26, 1992, discussed problems with professional bingo operators. The article was headlined "Big Bucks, Big Business. No One Really Knows Where the Bingo Cash Goes." An investigative reporter had interviewed several sources and the story was the same: people outside the charities are controlling this megabucks cash business. 32 Detecting Fraud in Charity Gaming In the article, one minister described signing management contracts with a professional operator. The professional operator ran the bingo game in ex change for a percentage of the gross receipts. Another minister said he allowed operators to obtain bingo licenses in his church’s name in exchange for $100 per week. The following are examples of the typical relationship between the profes sional operator and the charity. With control over the bookkeeping, money- counting, record-keeping, and an assortment of other duties such as bank deposits and the hiring and firing of workers, the professional operator may create a situation conducive to the diversion of funds. Pennsylvania Bingo Law requires that bona fide members of nonprofit associations operate bingo games. However, according to the April 1992 Pen nsylvania Crime Commission Report entitled, Racketeering and Organized Crime in the Bingo Industry, at pages 6 and 34, the investigation revealed that after the legalization of bingo, professional operators ran bingo games on a commercial scale using charities as "fronts." In exchange the "sponsoring" charity received either a percentage of the profits or a flat fee. The promoter utilized an established formula when distributing the bingo proceeds to the charitable organizations. Regardless of how much money was taken in from the bingo games, the charitable organizations received a specific amount based on the formula. Officers of the charities that sponsor bingo games related that they trusted the individuals that ran the bingo games. No one from the charities ever challenged the operators regarding financial matters, primarily because bingo was their biggest source of revenue, and they could not afford losing these revenues. Testimony clearly demonstrated that the promoter controlled virtual ly every facet of the bingo operations. Ohio Revised Code Chapter 2915 also requires that nonprofit associations be the operators of bingo games. However, an IRS Special Agent’s affidavit filed on February 9, 1996 with the United States District Court for the Southern District of Ohio provides another example of problems when the promoter controls the entire operation. During the period 1988 through 1990, a promoter and his associates operated seven bingo halls in the Cincinnati and Dayton areas ostensibly for and on behalf of certain tax-exempt organizations. In addition to the bingo games, pull-tab tickets were available for sale at these halls. The associates of the promoter worked as office manager, floor manager, and floor workers at each hall. The promoter and these associates obtained the required pull-tab ticket supplies, sold the pull-tab tickets, and operated the bingo games at the halls. The office manager’s duties at each hall were to count the nightly proceeds, to pay the workers, to remove the cash to be given to the promoter, and then report the remaining proceeds to the tax-exempt organiza tions. The currency given to the promoter from nightly pull-tab and bingo sales 33 Detecting Fraud in Charity Gaming was not reported on the nightly work papers given to the exempt organization. The promoter received approximately one-half of the proceeds from the nightly instant lottery ticket and bingo game sales from each of the seven halls. Based upon the Special Agent’s examination of the records and interviews of the promoter’s associates, the above affidavit described that the operator skimmed approximately the following total amounts of cash from the proceeds for the seven bingo halls: $1,546,346 for the year 1990; $1,017,848 for the year 1989; and $703,382 for the year 1988. (3) Audit Procedures to Determine Adequate Oversight by the Charity Conduct a detailed interview with the officers of the organization to deter mine its corporate structure and history. The interview should also discuss whether and, if so, how the Board monitors the bingo game to ensure that all funds are collected from the bingo operator and workers. The examiner should determine if the bingo operation has a system of internal controls to safeguard adequately the revenue generated from the game. The internal control system should be structured so that various parts of the bingo activity are handled by different members of the charity, each of whom serves as a check on the others. The following is an example of various positions and responsibilities when an internal control system is functioning properly. This example is not a mandatory internal control system; it is merely illustra tive. 1. The bingo operator has control over the execution of the game and records the transactions of the game on the daily sheet. 2. The cash controller independently counts the cash receipts and compares the cash on-hand to the inventory/paid out reports. 3. The inventory controller reviews the daily sheets received from the operator to determine the inventory usage and profit achieved. 4. The check writer is responsible for making all payments related to the bingo game and for ensuring that all deposits stated on the daily sheet actually appear on the bank statement. 5. The Board of Directors or Trustees reviews and compares the bingo reports or daily sheets with the previous reports for consistency. The board should monitor the bingo game to ensure the internal controls, as described above, are functioning properly.