Volume 7 Issue 5 -- September/October 2003
Volume 7 Issue 5 -- September/October 2003
Certain themes occur in client
situations seen by my law practice with astonishing regularity B embezzlement, failure to pay
taxes, and failure to file returns being fairly persistent.
Another consistent theme is disappearing cash, diverted (stolen) by
insiders. Here is a typical example.
Gaylan Good (“Gay”) and Sly Slink
(“Sly“) formed a Limited Liability Company (LLC), called Lapping Leeches,
LLC, to grow and distribute leeches used for medical purposes in hospitals and
surgical facilities. Gay and Sly did
the normal initial documentation for their LLC and gave little thought to how
the bank account signatories should be determined.
As usual, either Gay or Sly could withdraw funds using one signature, as
could the Office Manager, Faye Lorn (“F. Lorn”).
As an aside, special attention should
be given to having employees such as F. Lorn signing checks.
Allowing employees the authority to sign checks, if not carefully
monitored, can be an invitation to steal. See
the May/June 2003 issue of our newsletter, Tax & Business Insights, “Embezzlement
Scorecard,” and the March/April 2003 issue of Newland=s Business Notes, “Embezzlement B
In any event, what often happens, and
what happened with Gay and Sly, is that Lapping Leeches, LLC, fell upon hard
times when it was discovered that the chemicals in ziplock bags (used to
distribute the leeches) caused the leeches to lapse.
It seems that leeches don=t like plastic, probably since
there are few plastic rocks in streams. In
any event, as their business prospects dimmed, Sly started observing the leeches
sucking blood and came upon the idea that perhaps some funds could be sucked
from the Lapping Leeches bank account. There
was $100,000 in the account so Sly decided to take $90,000 and left.
Since there weren=t
enough funds left for the business to continue, it failed.
What steps can be taken to avoid a
catastrophe such as this? The simple
answer is to have two signatures required for checks that exceed $5,000 or more.
Would this have prevented Sly from repeatedly cashing many checks for
$4,999? No, but at least he would
not have been able to take a large portion of the bank account in one fell
swoop. Sly=s slow siphoning of funds should
be, and probably would have been, detected by whoever opened the bank
The concept of having two (or more)
signatures for large withdrawals provides a measure of protection against
unexpected, large, or illegal withdrawals of cash in the manner perpetuated by
Will your bank afford such
protection to your account? It
depends. Branches of certain large
banks, like Bank of America, have
informed me that dual signatures on bank accounts will not be permitted.
Smaller banks here in Virginia, like Fauquier Bank, and probably others,
still permit such dual signature arrangements.
signatures, in addition to protecting Gay from Sly (and vice versa), also
protect Lapping Leaches, LLC, from the potential large theft by F. Lorn.
Stated differently, a business can entrust an employee, F. Lorn,
with funds and know that there is some degree of protection from that employee
writing a check to herself or others for a large sum that was not authorized by
the employee and at least one other signer.
There is another reason for requiring
two signatures on checks. An
investor or lender may be more inclined to invest or lend if assurances are
provided that one of the principals, Gay or Sly, cannot take all of the business
funds at one time and disappear. In
addition, the existence of such a protective device will signal to others that
the business is “thinking ahead” and trying to prevent theft of business
It is too early to guess if all banks
will eventually adopt the policies of some larger banks.
If the entire banking industry prohibits dual signature accounts, it
would be unfortunate for businesses in general.
In the meantime, if you are opening a business bank account and you have
concerns about an employee or associate taking some or all of the funds in one
fell swoop, it might be a good idea to consider requiring two signatures on
If you have questions about this issue
or how to document the requirement for two signatures, contact
Newland & Associates for assistance and advice.
Published by the law firm of Newland & Associates, PLC
9835 Business Way
Manassas, VA 20110
Call us at (703) 330-0000 for a full range of business law and tax-related services.
While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.
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