Payment fraud schemes plague businesses, governments, and individuals, costing the U.S. economy billions annually. Among these schemes, lapping stands out as a deceptive yet straightforward method fraudsters use to conceal stolen funds. In this guide, I dissect lapping—how it works, who commits it, and how to detect it. I provide real-world examples, mathematical models, and preventive measures to safeguard against this financial sleight of hand.
Table of Contents
What Is Lapping?
Lapping occurs when an employee or insider steals a customer’s payment and covers the theft by applying subsequent payments from other customers to the original account. The fraudster keeps shifting payments like a shell game, making detection difficult until the scheme collapses.
The Mechanics of Lapping
Imagine three customers—A, B, and C—each owing $1,000.
- Customer A pays $1,000. The fraudster steals this payment.
- Customer B pays $1,000. Instead of crediting B, the fraudster applies it to A’s account.
- Customer C pays $1,000. This payment covers B’s balance.
The cycle continues until the fraudster either returns the stolen funds (rare) or the discrepancy surfaces.
Mathematical Representation
The fraud relies on delaying the recognition of missing funds. If is the payment at time , and is the stolen amount, the fraudster ensures:
The longer the scheme runs, the more payments must be juggled to prevent detection.
Who Commits Lapping?
Lapping typically involves employees with:
- Access to accounting systems (e.g., accounts receivable clerks).
- Trusted financial oversight roles (e.g., bookkeepers).
- Lack of segregation of duties (one person handles receipts and records).
Real-World Case: The Small Business Embezzlement
A 2018 case in Ohio involved a bookkeeper who stole $250,000 over five years. She credited later payments to earlier accounts, masking the theft until an audit uncovered inconsistencies.
Detecting Lapping: Red Flags
| Indicator | Why It Matters |
|---|---|
| Delayed postings | Payments take unusually long to reflect in customer accounts. |
| Mismatched payment dates | Payment dates don’t align with bank deposits. |
| Customer complaints | Customers dispute balances despite making payments. |
| Frequent overrides | An employee frequently modifies transaction records. |
Analytical Detection Methods
- Benford’s Law Analysis
Benford’s Law predicts the frequency of digits in naturally occurring data. Fraudulent transactions often deviate from this distribution.
Where is the leading digit (1-9).
Payment Timing Analysis
Compare payment dates with posting dates. A high variance suggests manipulation.
Prevention Strategies
1. Segregation of Duties
No single employee should control the entire payment cycle. Separate:
- Receipt recording
- Bank reconciliations
- Customer account updates
2. Automated Reconciliation Tools
Software like QuickBooks or SAP can flag irregularities in real time.
3. Surprise Audits
Unannounced audits disrupt lapping by catching discrepancies before they’re concealed.
Legal and Ethical Implications
Under U.S. law, lapping constitutes embezzlement, punishable by fines and imprisonment. The Sarbanes-Oxley Act (SOX) mandates internal controls to prevent such fraud in public companies.
Conclusion
Lapping thrives in environments with weak controls. By understanding its mechanics, businesses can implement safeguards to detect and prevent it. Vigilance, automation, and ethical oversight form the trifecta of fraud prevention.
