Fighting Crime in the Wine Business

Experts to discuss prevention and detection of financial fraud and other crimes at upcoming WIFS

by Andrew Adams
Napa County District Attorney Gary Lieberstein is among the panelists scheduled to speak at the Wine Industry Financial Symposium.
Napa, Calif.—For years the owners of Whitehall Lane Winery in Napa Valley trusted a local woman to handle their books.

On the surface, their trust in Gerilee “Geri” Densberger would seem to have been well placed. Densberger was in her late 40s, had a family and volunteered for a Napa County nonprofit group that paid rewards for information about area fugitives and local crimes.

But the bookkeeper became a fugitive herself for a short time in 2014, when Whitehall Lane’s owners discovered Densberger had been siphoning cash from the winery as well as using company credit cards to buy expensive items for herself and her family. “Ms. Densberger was a trusted employee and was treated like a member of our family. Sadly, her actions have and will continue to hurt her own family and have a lasting effect on them,” the owner, Thomas Leonardini Sr., told the Napa Valley Register.

On Aug. 21, following her arrest and conviction, Densberger was sentenced to eight years in state prison. She had been found guilty of embezzling $600,000 from the winery and stealing $37,000 from Leonardini Sr.

The news of Densberger’s arrest came after Martin Chris Edwards was caught in Mexico, where he had fled after stealing nearly $900,000 from fulfillment firm The Wine Tasting Network. Edwards was sentenced to 33 months in federal prison in September 2014.

‘Trust but verify’
If it sometimes seems as if the wine industry has a higher rate of financial fraud and embezzlement cases, that may be because it does, at least according to Rob McMillan, who oversees the wine division of Silicon Valley Bank. In a post on his blog, McMillan details six other recent fraud cases in which a winery employee stole more than $100,000.

Based on his experience, McMillan said the trusting, hospitable nature of the industry and the “low value placed on accounting and proper management” are why wineries are more vulnerable to these types of crimes. He recommends winery owners adhere to a policy of “trust but verify” and also conduct audits with an outside accounting firm.

Strategies for detecting and preventing fraud and crimes like identity theft will be a focus of the 24th annual Wine Industry Financial Symposium (WIFS), which will take place Sept. 21-22 in Napa. The focus on crime stems from the recent fraud cases as well as the data breach at credit card processor and point-of-sale provider Missing Link, which served dozens of winery clients.

WIFS will feature a panel of crime experts including former Secret Service agents, representatives from the Napa County District Attorney’s office and experts from the banking and accounting sectors of the wine business. “While our office has recently and will continue aggressively prosecuting individuals who embezzle from their vintner employers, we would like to assist in educating the industry to help prevent such financial abuse in the future,” Napa County District Attorney Gary Lieberstein said in a statement released by the Wine Industry Symposium Group, which organizes WIFS. “While no system will be entirely failsafe, we believe that building better safeguards into internal inventory and accounting practices can reduce the risk and deter future offenders.”

Lieberstein will be joined by Jim Petray CPA, partner at Burr, Pilger & Mayer; Jeff Dieleman CPA, partner at Moss Adams; Michael Donovan, chief investigator at the Napa County District Attorney’s Office and Michael Musgrave, senior vice president and director of the Financial Intelligence Unit of Rabobank.

The real cost of fraud
According to the Association of Certified Fraud Examiners (ACFE), financial fraud caused $3 billion in loses last year based on the group’s review of nearly 1,500 cases. Financial statement fraud caused a median of $1 million in losses per case.

Small businesses—or those with fewer than 100 employees, which would include most U.S. wineries—bore the brunt of financial fraud. Crimes against these types of companies had a higher median loss of $154,000 compared to the $120,000 median loss for companies with more than 100 employees. Small companies are far less likely to use control methods and a much higher incidence and vulnerability of fraud.

The most effective methods for minimizing or preventing fraud were proactive data monitoring analysis, employee support programs, management review and installing a code of conduct

Other findings from the ACFE’s survey included:

• The higher the perpetrator’s level of authority, the greater fraud losses tended to be. Owners and executives only accounted for 19% of all cases, but they caused a median loss of $500,000. Employees, conversely, committed 42% of occupational frauds but only caused a median loss of $75,000.

• Collusion causes greater losses and helps perpetrators avoid detection. The median loss in a fraud committed by a single person was $80,000, but as the number of perpetrators increased, losses rose dramatically. In cases with two perpetrators, the median loss was $200,000; for three perpetrators it was $355,000, and when four or more perpetrators were involved the median loss exceeded $500,000.

• Approximately 77% of the frauds in the study were committed by individuals working in one of seven departments: accounting, operations, sales, executive/upper management, customer service, purchasing and finance.

• It takes time and effort to recover the money stolen by perpetrators, and many organizations are never able to fully do so. At the time of the survey, 58% of the victim organizations had not recovered any of their losses due to fraud, and only 14% had made a full recovery.

Male fraudsters outnumbered females by nearly two to one, according to the ACFE, which also found fraud committed by a man tended to result in losses 123% higher than crimes committed by a woman. Most of those committing fraud were between 31 and 45. Employees who had been with a company for more than six years also caused the most expensive losses.

In addition to presentations on crime, the WIFS program will also feature insights into the domestic and global wine industry from a trio of wine industry leaders Ted Baseler, president & CEO of Ste. Michelle Wine Estates; Ian Harris, chief executive at the Wine and Spirits Education Trust, and Dr. Damien Wilson, Hamel chair of wine business at Sonoma State University. For more information, or to register, visit winesymposium.com.

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