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Protecting Your Financial Documents: Strategies to Combat Fraud
In today’s digital age, fraudulent activities in financial documents have become increasingly sophisticated, making vigilance and proactive measures crucial. Whether it is tampering with official documents, forging signatures, or manipulating numbers, the ramifications of such activities can be devastating for individuals and businesses alike. Here’s how you can ensure the integrity of your financial documents and steer clear of fraudulent activities.
1. Understand the Common Types of Fraud
Knowledge is power. Familiarize yourself with the common types of financial document frauds:
- Forged signatures
- Altered amounts or details
- Fake documents or receipts
- Unauthorized transactions
2. Secure Your Physical Documents
While much of today’s documentation is digital, many important financial documents still exist in physical form.
- Lock them up: Use a secure safe or a safety deposit box at a bank.
- Limit access: Only authorized individuals should have access to financial documents.
- Shred: When disposing of documents, make sure to shred them to prevent unauthorized retrieval.
3. Employ Digital Safeguards
- Encryption: Make sure that all your electronic financial documents are encrypted. This ensures that even if someone were to gain access, the data would be unreadable.
- Multi-Factor Authentication (MFA): Employ MFA for accessing financial accounts or systems. This adds an additional layer of security beyond just a password.
- Regular Updates: Always keep your software, especially security software, up to date.
4. Regularly Audit and Reconcile
Conduct frequent audits and reconcile your financial documents with bank statements or other authoritative sources.
- Timely checks: Spotting irregularities early can prevent potential fraudulent activities from escalating.
- Hire external auditors: Periodic checks by third-party auditors can provide an unbiased review and detect anomalies.
5. Educate and Train
- Staff Training: Ensure that those handling financial documentation in your organization are well-trained to recognize signs of fraud.
- Stay Updated: Financial scams evolve. Regular workshops or seminars on the latest fraud techniques can help keep you one step ahead.
6. Maintain a Strong Organizational Policy
- Clear protocols: Have clear procedures in place for handling, accessing, and disposing of financial documents.
- Whistleblower protections: Encourage an environment where employees can safely report suspicious activities without fear of retaliation.
7. Monitor Your Credit
For individuals, it is wise to frequently check your credit report. This can help you quickly spot unauthorized accounts or transactions.
- Free annual checks: Take advantage of free annual credit reports.
- Instant alerts: Many services offer instant notifications for any changes to your credit profile.
8. Stay Wary of Unsolicited Communications
Be skeptical of unsolicited emails, calls, or messages asking for personal or financial details. Always verify the identity of the requester through independent means before providing any information.
Guarding your financial documents against fraud is a blend of vigilance, education, and leveraging both traditional and technological safeguards. While it is impossible to eliminate all risk, by following the steps outlined above, you can significantly reduce the chances of falling victim to financial document fraud. Remember, in the realm of finance, an ounce of prevention is truly worth a pound of cure.
How Can You Avoid Fraud in Your Financial Documents?
We are watching right now as Donald Trump is in trial for fraud, business fraud, and specifically, this involves listing false information in financial disclosures that were then presented to third parties like banks.
The judge has already ruled that this is fraud under the New York fraud statute, and as a result, the attorney general is able to proceed with the case. Now, what is interesting in this case is there weren’t actually damages.
In other words, there was no bank out there saying, “Donald Trump didn’t pay his debt, and in order to get that loan, he provided false information.” The banks aren’t saying that because they actually don’t have damages. And that is what makes this case a little bit weak, a little bit unique, but under the New York fraud statute, damages are not required. And the attorney general has argued that because the Trump organization benefited, which they say is about a hundred million dollars through fraud, this sort of fraud is covered by the statute, and the state has the right to go after Trump for these profits illegally gained through fraud. That is what the Attorney General is arguing now.
This Is Incredibly Common
Look, you might be a Trump fan. You might not be a Trump fan. My goal today is to explain the legal concepts here so that you, as a business owner, can avoid this problem. And here is why. This is incredibly common. Think about it. How often are your financial disclosures and the applications you fill out to get a loan or a credit card? How often are they accurate? Well, think about it. In those applications, you often need to estimate, “What are my annual revenues?” Well, do you look at last year’s annual revenues? The current year? To date? Do you prorate it for the rest of the year? Or do you look at what you expect the next year to be? So even that question alone can result in you putting different numbers.
And so that is what the Trump legal defense team has argued, that there is a lot of flexibility here. It is not always clear what is meant. And their argument is we made a good faith effort. And the judge has said, no, you didn’t. And the effort you did make was not enough. We’ll talk about more, why that is, but keep in mind, anytime you as a business owner fill out a financial disclosure. This might be because you have business partners buying in to be a part owner in the business. Maybe it is a credit card application or a bank loan application. Maybe it is a real estate deal or some other large business transaction. Financial disclosures happen all the time.
Here’s the Problem
Business owners aren’t the ones putting together all the financial details. Usually they’re not even the ones filling out the applications or the disclosure statements. Now they are required to review them before signing them. And that is the gotcha. That is the moment where business owners often go from not being liable to having personal liability. By the way, I’m not just talking about the company that you own being liable, but you, as a business owner, are liable.
How to Prevent Personal Liability
So today, we’re going to talk about how do you avoid that? How do you prevent from having personal liability for fraud, especially when it is an accident? And you might say, well, I thought an accident is not fraud. You might be thinking, well, fraud requires intent to deceive. And as we have seen in this case and is often the case, actual intent to defraud somebody or to deceive. It is not always required. It is sometimes, but it is not always.
As a lawyer, I’ve spent over 30,000 hours helping over a thousand business owners avoid and prevent problems. The goal today is to help you avoid these sorts of problems in your own life and in your own business so you don’t end up on the other end of an audit or a lawsuit like Donald Trump has in the state of New York. These things are incredibly common, and business owners have a lot of opportunity to avoid this sort of problem if they simply take the time to discover what are the courts and government officials looking for.
If you are a business owner, I’m providing this information to help you spot issues to discuss with your attorney, not as a replacement for an attorney. If you, your operations manager, or your HR director is interested in figuring out how can you avoid these sorts of legal problems that take down businesses or cost an arm and a leg in defending, how can you reduce your legal fees and avoid all the distraction that comes with it? I’ve got a free resource. It is called Seven Common Legal Mistakes Made by New Businesses. You can get it at aaronhall.com/free. You will also get free exclusive videos that are not available on YouTube that will walk you through how do you avoid these sorts of problems in your business? They’re short videos with practical, actionable steps to avoid legal trouble in your company. To get this free legal checklist, just go to aaronhall.com/free.
So your goal is to avoid going to jail, being sued by the attorney general’s office, or having a bank or business partner or financial institution seek damages because you engaged in fraud or inaccuracies in financial disclosures. So think about all those financial documents that your team puts together. What happens if there are little errors in there? The next problem is that business owners often don’t understand all the legal terms in these documents. For example, an application may ask for a percentage of ownership, or who is a governor? Who is the treasurer? Well, do you have a treasurer? Do you have a secretary? Do you have a president? What if you call that person a CEO? Well, is the person who handles your financial documents, your treasurer, or are you the treasurer as the business owner? And you just have an assistant or an HR manager or an operations manager or finance manager. There are all sorts of legal terms and definitions in these documents. And if you get it wrong, is that fraud? Well, it certainly is inaccurate, and it certainly is a misrepresentation. And misrepresentations are a really big deal, especially if you say at the bottom where you sign, it says I certify under oath that the above information is true and correct. Or maybe it says true and correct to the best of my knowledge. So, let’s talk about when can you get in trouble here.
The Big Myth
By the way, there’s another big myth, and that is that disclaimers can somehow save you. Courts, time and time again, say general disclaimers can be set aside. In other words, if you know information is false or you should have known, or you could have gotten the accurate information, but you didn’t go to the effort to get it and you just throw on a disclaimer thinking, Hey, I’m fine. This disclaimer says they better check everything and double-check because there might be errors here. The court in the Trump case said, that sort of general disclaimer is irrelevant. It is worthless. Now, Trump tried to argue that it actually was a worthless disclaimer saying, look, all the information here is worthless. Check it out for yourself. You want to figure out what Mar-A-Lago is worth. Figure it out for yourself. Send an appraiser out there for yourself. We’re doing the best we can, but there are going to be plenty of inaccuracies. The judge in this case, and I’ve seen this regularly, said it doesn’t matter if you have a general disclaimer, you still have a duty of good faith and accurate information.
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All right. So here’s the heart of it. Donald Trump personally signed a lot of financial disclosure documents, and there were inaccuracies in those, but they weren’t all inaccuracies as far as misunderstandings or honest mistakes. The judge said there were some egregious inaccuracies, for example, how many square feet is the home that he stays in and the square footage that was provided in a financial disclosure was substantially different. I believe it is about three times the amount of the actual square footage of his residence. So how on earth can this happen? Was it just a flagrant intentional lie? Well, often what I see, and I can’t speak to Donald Trump’s situation, but often what I see is a residence might be a certain size at a particular time, and then it might get downsized or divided and sold off, and no update is made to the financial disclosures that are continually being sent out to new creditors and new investors. So although the information may have been true at one time, when it stopped being true, the person who updates the disclosures was not notified to update that information.
Here’s another example. Perhaps for one application, it was appropriate to include the square footage, not just for residents, but also for the common areas on that floor. Because it would depend on the definitions of the measurements of the residents. Do you measure common areas or not? Well, one application might say you do. Another application might say you don’t. Common areas are like the hotel lobby, the elevator space, the elevator lobby, vending machine space, entertainment space, things like that. It may be appropriate at times to include that, but every application is different, and so unless there is deep attention to detail, each application, copying the last application’s information can be fraudulent or inaccurate.
Excuse #1: “I Didn’t Know”
The first excuse that business owners who have inaccurate information say is I didn’t know, look, I didn’t put together these reports. Somebody else put them together, but the law says. It doesn’t matter if you knew, if you should have known. The standard is knew or should have known. So if you knew or should have known that something was inaccurate, then you’re liable for fraud or at least misrepresentation. By the way, what’s the difference between fraud and misrepresentation? Under the broad category of misrepresentation, fraud is when it is either intentional or a statute calls it fraud. The other category is unintentional misrepresentation where you still may have liability even though you didn’t intend it.
In the case of the Trump case, the New York statute specifically says that you are liable for fraud if you’ve misrepresented information and there is actually case law, so other cases where the courts have said it doesn’t need to have intent. So you, as a business owner, don’t need to know the information was fraudulent or false.
Excuse #2: “I Never Had That Information”
The next excuse business owners might have is, “I never had that information.” So not only did I not know it, but I didn’t have it. The court will say, but how difficult was it to get that information? Could you have gotten that information? In other words, were you essentially responsible for getting information before you state what the information is in the application. If you can get information fairly easily, you will often be responsible to get that. It is not enough to just say, Oh I signed these, but I didn’t go to my cabinet and check to make sure that they were accurate or I didn’t check with our other division to make sure it is accurate. Or I put the square footage on there with a good faith estimate, but I didn’t actually go check the records to see what is the square footage of that property.
Excuse #3: “We Had a Disclaimer”
There’s another common excuse. “We had a disclaimer.” We had a general disclaimer that said, Hey, we put these financial documents together, but you need to go out and verify the information. Do your own due diligence. Don’t rely on anything here. And this actually came up in the Donald Trump trial. And he basically said, look, we had a little provision that said, this information is worthless. Go confirm it for yourself. You know what the trial judge said? No, I’m not going to let you put inaccurate information in financial disclosure documents and then just wave your entire right to the accuracy of that information. We’re not going to follow that provision.
Why Is This Controversial?
This is fairly controversial because if you think about it, you could certainly argue that when dealing with banks and other sophisticated corporations, you should have a right to say, Hey, here’s some information, but go verify yourself. This is a way to get you started, but go confirm it. And if that is actually in your agreement, shouldn’t you have the right to transfer that responsibility to the other party?
I asked that of a judge who I worked for. I worked for a judge as an extern. He was appointed by President Ronald Reagan, a federal court judge. And here’s what he said to me. If the parties make it really clear that they want to transfer the responsibility to investigate and confirm information to another party, they can do that. And they should do it very specifically. Ideally, Identifying very specific information or specific transfers of responsibility. Sometimes these are called duties or fiduciary duties, but the judge explained to me a simple generic disclaimer is not enough to wipe out either a large contract or, the statutory duties that are there.
So the tip is if you are a business owner and you really want to say, look, I don’t know if these financials are accurate, the duty is on you. The key is to make sure there is a very specific provision outlining that the other parties shouldn’t rely on these, that the duty is on them to review them, that you have gathered the information, but you are not guaranteeing they’re accurate and probably list very specifically what information may be inaccurate and needs to be confirmed. You might say, well, that is ridiculous. Why would judges not honor a general disclaimer? And the reason is because in business it is often improperly used. Often business owners will throw in a little disclaimer that says, don’t believe anything you’ve read here essentially. You need to confirm everything and after pages and pages of details that obviously parties are relying on, the idea is you can’t throw away the whole disclosure and all the representations that are made by a little disclaimer hidden at the bottom. So the idea is really about honoring the intent of the parties.
If judges are convinced that the parties did intend to transfer the duty to investigate and confirm information to another party, the judge will honor that disclaimer. But where it is a little generic disclaimer thrown in at the end, or even on the front page, that is typically not enough to convince a judge that you should not be responsible for the accuracy of the information provided. Now, there’s another key point. If you’re a business owner disclosing information, any information you know is false, that is fraudulent. And the judge in this case said Donald Trump knew certain information was false. Now you might say, did he even read these applications? I mean, if his team is putting together a hundred different applications over 10 years, is the business owner who signs them really responsible to read every single one? The answer is yes. That is why it is a legal document. That is why it is signed under oath. This is a really big deal.
Now, if you present information in a document and you couldn’t have known whether that was accurate, for example, let’s say that you said there is no taconite under the ground at this property and then later taconite is found when somebody digs a hundred feet deep. There are kind of two ways the judge could look at this. First, you shouldn’t have said that you know something is true when you didn’t. So it is probably best to say, we have no information indicating there is taconite below the ground at this property. That would be a true statement, but also it is certainly possible that you made the statement in good faith. It was based on all the knowledge you had at the time, and it really was not likely that that was there. And if it is later discovered, it wouldn’t usually not be fraudulent misrepresentation, but it probably is negligent misrepresentation, and that can be a big deal if you have a statute like New York has, which is what Donald Trump is being tried for right now.
Another common excuse is it wasn’t reasonable to get that information. In other words, maybe getting information about taconite under the ground would have involved significant cost, or maybe it is about some sort of pollutants. Uh, some sort of solution that was poured into the ground prior to you taking the property. And perhaps you did a basic investigation. You hired an expert to check the ground for pollutants and didn’t find it. What if it simply wasn’t reasonable to dig a hundred feet down to find out what’s present down at that level? Well, usually the reasonableness standard in court applies. So if you do what is reasonable, you’ve hired professionals and you can show that it is commercially reasonable to do what you’ve done. In other words, this is typically what’s done and this is what the other parties understood was being done. Often that will be sufficient because the standard is, did you act reasonably? Often reasonableness is what courts inject into contracts and statutes and any other language. Because reasonableness is essentially the judge or jury saying, Oh, they did what a reasonably prudent person would have done in those circumstances.
Here is one more tip, and perhaps this is the biggest one. Imagine after information is presented, and let’s assume some sort of problem occurs, and now you have the issue before a judge. I have seen creative lawyers and I have been paid as a creative lawyer to find every inaccuracy and present that to a judge to erode the credibility of the other side. Basically, you get 10 different examples of inaccurate information and I would ask the opposing party under oath in a deposition or in trial. And I would say, isn’t it true that this information is false? Well, yes, it is. Isn’t it true? This is false. Isn’t it true? This is false. Isn’t it true? This is a lie. Isn’t it true? This was inaccurate. Now, don’t you think that a business owner should confirm that information before proceeding? Before signing their name under oath, suggesting that that information is accurate. And if it is a catch 22, because if you say no, I don’t think that is a big deal, the business owner shouldn’t have confirmed that you look unreasonable. And if you say yes, a business owner should confirm that information, you’ve essentially just convicted or indicted yourself because you’ve just said, yeah, reasonable business owner would, but I didn’t imagine now you are trying to testify and everything you say is being scrutinized by the judge as a lie. This is why precision in all these little check boxes and forms and lines that you sign are so vital.
Involve your CPA if needed. Involve your attorney if needed. Make sure that somebody can review the accuracy of this information. You might even have, and here’s another important tip. You might have somebody else review this information for accuracy and certify to you under oath that the information is accurate to the best of their knowledge.
Because most state statutes say that the president or business owner can rely on the information provided to them by reasonable people, unless the business owner has a reason to believe the information is not reliable. So if you have information presented to you by an attorney, CPA, or somebody else who works with you, that can protect you.
Why does all this matter? Because if an inaccurate disclosure signed by you goes south, or if you come under scrutiny of the attorney general like Donald Trump did in New York, or if a bank decides to sue you later, or a business partner decides to sue you later, no matter what, all of these disclosures will be important evidence of whether you are honest, truthful, reliable, or a committer of fraud and fraud is one of the worst things you can do legally because historically, there are a lot of mistakes that you can be liable for, but historically fraud involves an egregious act, often intentionally misleading another party for financial gain.
What Do You Do If Your Documents Have Inaccuracies?
I would recommend consulting with your attorney and thinking about whether to provide a corrected disclosure to the bank, to the credit card company, or anyone else. And that might be called a corrected disclosure or it might be called an updated disclosure. And then you put in there any inaccuracies that you found because at least you can probably mitigate any harm if you can show that once you discovered an inaccuracy, you use good faith and reasonable efforts to provide that information to the creditor. Now it is certainly possible it is too late, but I would consult with your attorney to figure that out.
I’m Aaron Hall. I’m an attorney for business owners and entrepreneurial companies. If you like these sorts of practical tips, I welcome you to follow me here on YouTube.