Degree in Deception
Misuse of university endowments and school funding tax dollars
Money laundering is usually associated with criminal activity, but that is a narrow view. Money laundering takes many forms. In this article, Professor Larry Crumbley contends that money laundering occurs in multiple instancesâ€”from the local school board to the university setting. Learn the keys to identify the misappropriation and misuse of funds in an academic setting.
My co-author, G. Stevenson Smith of Southeastern Oklahoma State University, and I wrote a short case study that is included in Case Studies in Forensic Accounting and Fraud Auditing, published by Commerce Clearing House. Most people associate money laundering with drug activities and other criminal behavior. However, the concept of money laundering can be used to launder money in a seemingly legal context. For example, at least one university has excess professorships and endowed chairs, so they use the monies to fund operating expenses. What the university is doing can certainly be questioned on ethical grounds, but probably does not fall into the category of criminal money laundering. However, state legislators and the legislative auditors might find this layering activity as unwise and inappropriate.
In a university or college setting, restricted assets are resources set aside for a particular purpose resulting from a contractual, legal, or regulatory restriction. Endowed funds for professors would fall under the restricted asset category. The university that does not use donated monies for the purpose for which they were intended (i.e., professorships or chairs) is taking a chance that the donor will find out that donated monies are not being used at all or are not being used for the purpose for which they were donated. The donor has the right to seek legal regress and request the monies be returned as the contract related to the gift has been violated.
“Universities will try to charge a restricted fund for â€śservicesâ€ť that allow university administrators to convert restricted monies into discretionary, general-use monies.”
A broad definition of money laundering that covers both legal and illegal situations is to take funds that come from one source, hide that source, and make the funds available in another setting so that the funds can be used without incurring legal restrictions or penalties. Thus, all money laundering techniques have the same objectiveâ€”to disguise the fundsâ€™ original source. Universities will try to charge a restricted fund for â€śservicesâ€ť that allow university administrators to convert restricted monies into discretionary, general-use monies. Such services may be consultation fees, as their â€śservicesâ€ť are hard to identify.
Most money laundering involves three steps. First, the funds obtained from criminal activities are deposited in a bank or financial institution which is called placement. Second, a set of complex transfers is made to disguise the original source of the money and to hide the audit trail. This process is called layering the transactions. The final step, called integration, takes place when the money is integrated back into the legitimate money supply.
Some universities have been caught using methods similar to traditional money laundering, as they converted federal grant monies into discretionary spending. Yet, it would be unlikely for university administrators or controllers to consider themselves to be money launderers, even as they adopted money laundering techniques to move restricted grant monies into a fund with no spending limitations.
For example, universities receive federal, state, and grant monies that restrict expenditures to specific spending purposes. These monies must be accounted for in separate funds to show that restricted monies are spent appropriately. Such monies cannot be used for discretionary purposes without converting them from their restricted fund classification by layering. One method to complete the conversion would be to record a charge against the restricted fund for â€śservicesâ€ť rendered by the university. Such a charge may be for the rent of facilities or IT support charges as long as they are allowable charges under the grant. Once the monies are cleared out of the grant and paid to the university as revenues for the services rendered, they now become available for discretionary spending.
GASB Statement No. 33, â€śAccounting and Financial Reporting for Non-Exchange Transactions,â€ť applies to universities and colleges. Four classes of nontaxable exchanges are derived tax revenues, imposed non-exchange revenues, government-mandated non-exchange transactions, and voluntary non-exchange transactions. Grants and private donations fall within the voluntary non-exchanged category.
Different standards apply to two types of stipulations: time requirements and purpose restrictions. Universities that receive grants, chairs, and professorships with purpose restrictions should report resulting net assets, equity, or fund balance as restricted (or a reservation of fund balance for governmental funds.)
This situation may not really be a form of criminal money laundering, as the university department often makes no effort to hide their use of the earnings from the donation. They simply withdraw the earnings and use it for discretionary purposes. In order for illegal money laundering to exist, administrators must show that the moneys are no longer restricted monies by charging the fund with bogus charges, such as â€śadministrative services.â€ť The bogus charges transfer the fundâ€™s earnings into an unrestricted fund. They have not done this at this particular location, but, instead, they are directly withdrawing the funds without trying to hide their actions. It is an indication that the department head or dean has no idea what he or she is really doing.
Even if there is no state law defining the activity as illegal, the situation is not ethical and a violation of the endowment contract since most donors want universities to follow their wishes. Donors want a faculty member to be hired and designated as the holder of their chair/professorship. The donorâ€™s name will appear on the professorâ€™s office door, on correspondence, articles, book, newspaper articles, grants, etc. The university is certainly cheating the donor, and the investment income should be allowed to accumulate in the endowed account until a chair/professorship holder is hired.
I was engaged in a similar money laundering scheme with a Parish (county) school located in Louisiana. The scheme went as follows: Sales taxes were earmarked in Louisiana to pay teachersâ€™ salaries. Notwithstanding that requirement, the Parish School Board was using the sales tax money for general operating purposes rather than for teachersâ€™ salaries. In my expert witness report, I called this situation money laundering. Auditors, experts, and consultants should look for similar strategies by universities, colleges, counties, and state entities.
From the point of view of normal money laundering, accountants can use a gross profit analysis to spot money laundering. Other approaches to revealing money laundering from inside companies is to compare receipts with deposits, conduct surprise cash counts, and investigate customer complaints. The cash flow statement may flag this type of fraud. Banks and other financial institutions are the main defense against money laundering. Knowing the companyâ€™s customers and a proper set of internal controls can help banks reduce the risks from money laundering.
D. Larry Crumbley, CPA, MAFF, CFF, is a KPMG Endowed Professor at Louisiana State University and co-author of the Forensic and Investigative Accounting textbook published by Commerce Clearing House. He is the author of 13 novels, most having the main character a forensic accountant. He can be contacted at firstname.lastname@example.org.