How did more than $70,000 in stolen checks go unnoticed?
March 23, 2013 8:00 AM
"How the money was diverted." U.S. Attorney David J. Hickton points to a diagram at his news conference Friday.
By Moriah Balingit Pittsburgh Post-Gazette
As described by U.S. Attorney David J. Hickton, the scheme that former Police Chief Nate Harper used to siphon thousands of dollars from the Pittsburgh Bureau of Police was striking in its simplicity.
Businesses that hired police officers as security guards through the special events office were billed for the officers' wages and administrative fees. The businesses sent checks to the police bureau's North Side headquarters. The checks were meant to be forwarded to the city's finance office, where employees would deposit them into the city's general fund at PNC Bank.
Instead, then-Chief Harper "instructed" staff in the police bureau's office of personnel and finance to deposit some of those checks into two unauthorized accounts at the Greater Pittsburgh Police Federal Credit Union, according to the federal indictment and a whistleblower memo obtained by the Pittsburgh Post-Gazette. Over four years, around $70,000 was deposited in the unauthorized accounts and nearly $32,000 of that ended up in the chief's own wallet, where he used it for meals and electronics, among other things.
But how did no one notice that money the bureau billed for wasn't ending up in the city's bank accounts? How did such brazen misappropriation go on for years without detection?
"There is something very wrong with this system," said Controller Michael Lamb, who is auditing the special events office. "That's part of what we're looking into."
Those are the questions many city officials are asking themselves as they craft legislation and policy to plug the holes in oversight that allowed theft within the walls of the police bureau to go unnoticed.
"We're going to use this as a learning experience to move the city forward and make sure that we're addressing the issues that we can," said Councilwoman Theresa Kail-Smith, the chairwoman of the public safety committee. She's proposing legislation that would provide more oversight of the special events office funds.
Bad accounting and fuzzy numbers
Whether Mr. Harper knew it or not, the system of pilfering checks exploited some striking weaknesses in the way the city handled the millions of dollars of cash paid to the special events office every year.
A check's journey begins at the bureau's special events office, housed in a room in the ground floor of the bureau's North Side headquarters on Western Avenue across from the chief's office. There is some accounting of the funds that occurred within those walls. A printout from the office shows invoice numbers, business names and what those businesses owe, as well as what they've paid. But it's unclear whether the office is recording the receipt of checks or their deposit in the city's bank accounts.
From there, bundles of checks are taken to the police bureau's office of personnel and finance, located in a large room about 30 feet down the hallway, adjacent to the chief's office. There, the bundles are recorded in a spreadsheet and then taken by patrol car to the city's Finance Department, located in the City-County Building on Grant Street.
An employee in the Finance Department, accompanied by a police officer, deposits the checks at a PNC Bank -- the bank that holds the city's general fund -- and the deposit slip is sent to Mr. Lamb's office.
In the controller's office, employees compare the deposit slip to the spreadsheet generated by the police bureau to ensure they were deposited.
"Right now, all they're getting is a list of checks that's getting sent over," Mr. Lamb said. The problem is, he said, the list was generated "after the checks were getting misdirected."
But no one -- not in the police bureau, not in the city's finance office and not in the controller's office -- compares invoices to deposits. And no one is verifying that the checks that arrive at the bureau's special events office actually make it to the bank.
"How did this happen?" Councilman Patrick Dowd said. "How did they deposit money into a city bank account and not know what they were and were not depositing?"
This process, called reconciliation, would have likely turned up something amiss. The indictment lists 14 checks that were deposited in the unauthorized account, some of which have invoices in corresponding amount listed on documentation from the special events office.
For example, one of the checks stolen from the bureau and deposited in the illicit account was for $2,804.17 from Fibertech, a fiber optic network firm. The printout from the special events office indicates the police bureau billed Fibertech for that amount and records a payment from the firm.
No one apparently verified that the money Fibertech was billed for ended up in the city's bank account .
"There doesn't appear to have been any periodic reconciliation of invoices versus payments or if it was done, it was not done beyond the level of the police bureau," Mr. Lamb said.
Representatives from Giant Eagle and Promowest Northshore, two other companies whose checks were diverted into illegal accounts, said they had not been contacted by authorities about the checks. As far as they knew, the money ended up in the city's hands, they said.
City officials, including Mr. Lamb and Public Safety Director Mike Huss, have said the way the funds are accounted for in the city's ledgers was also problematic and may have hidden the fact that money was going missing.
The special events office issues a monthly invoice to businesses for the surcharge -- called the cost recovery fee -- of $3.85 per officer per hour. The surcharge is meant to cover lawsuits, workers' compensation claims, court time and other expenses that might be incurred by having an officer work a side job and last year generated nearly $800,000. Some businesses are also billed for the officers' wages, while other businesses pay the officers directly -- with cash or a check.
All of that money, including the hundreds of thousands of dollars a year generated by the fee, is booked as a "negative expenditure" in the premium pay line item, the line item that pays an officer's wages for the side jobs. The money generated by the fee has the effect of "padding" the line item, Mr. Lamb said, and may have obscured the fact that money was being diverted.
"That would have enabled police officers to still get paid even if checks were being taken out," he said. "I think that's part of the reason that it was able to occur."
Mr. Huss, who's looking into reforming the special events office, said money due to officers for wages and the money due to the city in the fee should have never been mingled. "I don't know why it was ever done that way," he said. "That needs to change."
Ms. Kail-Smith has proposed legislation to direct all money that came into the special events office into a separate trust fund, where it would get extra scrutiny.
"We want to know for certain where those funds go," she said. "Now there's a way to direct where those funds go, and how they're reviewed."
Though the finer points of the bill are still being worked out, Ms. Kail-Smith hopes to move the entire administration of special events office out of the bureau.
"We're going to use this as a learning experience to move the city forward and make sure that we're addressing the issues that we can," she said.
Mr. Huss endorses the plan, saying he believes a trust fund will make it easier for them to track the money than if it's being recorded in a premium pay line item.
"We want to identify, to break out not only the hourly rate, but any fee," he said. "We want to count that money separately. We want to be able to use it for those legitimate expenses."