An Ounce of Prevention is Worth A Ton of Cure

By Michael Paul Smith

The Court of Appeals recently decided the case of Citizens Bank of Maryland v. Maryland Industrial Finishing Co. (MIFCO) on June 8, 1995. That case involved an employee of Maryland Industrial Finishing Company embezzling from her employer. MIFCO, a small company with seven employees, had an account at Citizens Bank. Pagani, an employee of MIFCO, was entrusted with many of the deposit and bookkeeping duties. MIFCO had a process by which Pagani would receive checks from customers, retrieve the invoice from the file, mark it paid, write the check number on it, the date of the check, the date the check was received, and the amount of the check. Pagani was instructed to then put the paid invoices in a "PAID" file. Pagani was then instructed to endorse the check by stamping the back with two stamps -- one with the name and address of MIFCO and the other containing the words "For Deposit Only." Pagani was then directed to deposit the endorsed checks into MIFCO's account at Citizens Bank and file a copy of the deposit slip in MIFCO's files.

Pagani, however, did not deposit all MIFCO checks into the MIFCO account. Rather, she would use the MIFCO stamp to endorse the check, obtain a blank Citizens Bank deposit slip, and hand write MIFCO's name and her bank account number on same. The checks were thereafter deposited into her account. The scheme went undetected for several months. As is true in most embezzlement situations, by the time MIFCO discovered the embezzlement, the employee had spent the money. The employer is basically left with a claim against the bank.

The appellate decision focused on whether MIFCO's claim against Citizens bank was viable. To that end, the Court focused on MIFCO's policies and procedures and the employee's failure to comply with same. the employer's policies and procedures are vital in that they are the key to its ability to seek recovery against the bank. The use to which the agent/employee later puts the check does not affect the employer's ability to collect from the bank. It is rather the actual, implied, or apparent authority which the agent has been given which is dispositive (i.e., the policies and procedures).

As Citizens Bank v. Maryland Industrial Finishing Company demonstrates, it is important to have policies and procedures in place to protect the company against the unfortunate circumstances of employee embezzlement. Appropriate safeguards will help prevent embezzlement at its inception and could result in a protection of a company's rights against the appropriate financial institutions should the unfortunate circumstances occur. Please review your internal procedures with regard to these matters and if you have any questions, do not hesitate to call. An ounce of prevention is worth a ton of cure.