By Ruth Simon
Troubles tied to a payroll processor sent hundreds of small
businesses scrambling for funds this month, triggered an FBI
investigation and cast a spotlight on a critical but lightly
regulated industry.
About $30 million destined for paychecks and related tax
payments went missing on Sept. 4 because of problems tied to
MyPayrollHR, based in Clifton Park, N.Y. Workers at firms that used
MyPayrollHR saw funds yanked back out of their bank accounts -- in
some cases twice -- after another firm discovered the money backing
the deposits wasn't available.
Roughly 8,000 employees at nearly 400 companies across the
country were affected, according to Nacha, the organization that
oversees the ACH Network, which was used to move money from one
bank account to another. Banks report that funds have been returned
to roughly 90% of those affected, a Nacha spokeswoman said.
Law-enforcement officials said they are looking into allegations
of criminal conduct at MyPayrollHR and related companies. In a
tweet issued Sept. 13, the Federal Bureau of Investigation's
Albany, N.Y., office said it was investigating MyPayrollHR and
asked potential victims to fill out a questionnaire. The FBI
searched the home of MyPayrollHR owner Michael Mann on Monday, an
FBI spokeswoman said. "It's going to be a complicated case," said
the spokeswoman, who declined to answer specific questions.
An attorney for Mr. Mann said his client was cooperating with
investigators and would continue to do so. "Michael Mann has
voluntarily and proactively met with and is cooperating with the
U.S. attorney's office in order to fully address the consequences
of recent events," said the attorney, Michael Koenig. He didn't
respond to detailed questions.
The situation has raised questions about the actions of other
parties involved in the transactions, including the firms that move
money electronically.
James LaFlamme said he advanced about $100,000 to replace missed
paychecks for the roughly 60 employees of his two Vienna, Va.,
businesses. Mr. LaFlamme said he immediately filed a fraud claim
with SunTrust Banks Inc. after $14,000 of his own pay was withdrawn
from two personal bank accounts.
While Mr. LaFlamme said he still isn't sure when the bank will
reverse those withdrawals, he said many of his employees had money
returned to their accounts Friday. Some of those employees came to
the office Monday with checks to repay the advances.
"We were able to scrape enough cash together to make the last
payroll this past Friday, but if all the money doesn't come back to
the employees, then there could be a problem with payroll coming
up," Mr. LaFlamme said.
A SunTrust spokesman said the bank couldn't discuss specific
customers but is working with clients.
There appear to be several failures in how the matter was
handled, said Romeo Chicco, president of the Independent Payroll
Providers Association, a trade group. "To say it's just the payroll
industry or the payroll service would not be correct," he said.
The payroll-processing industry is sprawling and lightly
regulated, with thousands of competitors. They include the publicly
traded Automatic Data Processing Inc. and Paychex Inc. as well as
smaller players including MyPayrollHR.
From the outside, the movement of funds from employer to
employee appears to be a seamless process. But there is a lag
between the time money appears to have moved into an account and
when it is actually there. "It's not like a wire [transfer] where
it is there in an instant, " said Frank Fiorille, vice president of
risk management, compliance and data analytics at Paychex.
This month's incident with MyPayrollHR involved $26 million
destined for workers and $4 million in tax payments. The system
broke down when funds pulled from employers' accounts couldn't be
accessed by third-party processors, even though the money appeared
to be there.
Pioneer Bancorp Inc. in Albany, the payroll company's bank, said
in a Securities and Exchange Commission filing that it "recently
became aware of potentially fraudulent activity...by an established
business customer." Pioneer said it is working with law-enforcement
authorities. A Pioneer spokesman declined to provide additional
comment.
Cachet Financial Services, one of the firms that manage the flow
of payroll funds through the ACH system, said it was unable to
access $26 million from MyPayrollHR's bank.
Cachet's attorney Wendy Slavkin said the file containing
instructions for how to handle money collected from MyPayrollHR
customers was manipulated. Money that should have moved into
Cachet's holding account instead moved into a different account at
Pioneer Bank under the control of MyPayrollHR, she said. The second
account, where the money had been moved, was frozen, she said. Ms.
Slavkin said the company believes that some payroll deposits were
actually made to fraudulent accounts in the names of employees who
didn't exist.
As a consequence, Cachet reversed the paycheck deposits. Many
employee accounts were debited twice because Cachet discovered an
error in its initial instructions and submitted a new set of
orders, Ms. Slavkin said.
"Based on the information we have, Cachet's reversals of the
payroll deposits appear to be in violation of Nacha rules," Nacha
said in a statement. Payroll deposits can be reversed only in very
limited circumstances, the nonprofit group said, such as when an
employee is overpaid. "Cachet should not have done it at all,"
Nacha said.
Ms. Slavkin said Cachet has instructed banks to return the money
to employee accounts. "When all is said and done, we remain the
victim," she said. A Cachet spokeswoman said the firm was following
industry standards and the company's own fraud protocol in
reversing the transactions. The spokeswoman said 8,214 employees
were affected by the reversals.
Mike Walls, the owner of a home-care agency and an
assisted-living facility in Lake Jackson, Texas, said he took out a
$50,000 line of credit to deal with any short-term problems.
Mr. Walls said he wrote checks to five of his 75 employees so
that they could pay urgent bills and provided workers with letters
they could show landlords or creditors. All except two employees
have had their money returned, Mr. Walls said Monday.
"I can deal with this as a business owner, but my employees are
profoundly affected," he said. "The snowball that could come from
this is so scary."
Write to Ruth Simon at ruth.simon@wsj.com
(END) Dow Jones Newswires
September 18, 2019 09:17 ET (13:17 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.