04/10/2006

Safeguards Against Preneed Fraud

By: T. Scott Gilligan, OFDA General Counsel

One of the principal items discussed by the NFDA Policy Board meeting last October was the high profile series of prosecutions that the Missouri Attorney General's Office brought against several funeral homes and cemeteries in Missouri that had absconded with preneed funds. The Policy Board recognizes one of the most significant danger spots in the preneed transaction is the time period when the funeral home has received the preneed funds, but has not yet deposited them in trust or used them to purchase an insurance policy. Funeral homes may be tempted to use these funds to address a temporary cash flow problem. In addition, a lax accounting system in the funeral home may give a dishonest preneed counselor an opportunity to pocket preneed funds. Sometimes an occasional misstep can snowball into a series of preneed embezzlements that eventually lead to default, disgrace and prison.

To avoid stepping on the first rung of this slippery slope, OFDA members should ensure that the following three requirements are strictly followed in all preneed transactions by the funeral home. First, all preneed funds received by the funeral home should be deposited into trust or used to purchase an insurance policy as soon as is practical, but in no case beyond 30 days of the receipt of the funds. Section 1111.19(C) of the Ohio Revised Code requires deposits of all preneed payments within 30 days of receipt. Failure to abide by this requirement is a fourth degree felony under Section 1111.99 of the Ohio Revised Code.

Secondly, preneed payments received by the funeral home should be logged in and recorded by at least two persons in the funeral home. Basic accounting principals require some system of checks and balances to ensure one person does not have access to funds without review and accountability by a second individual. Therefore, if the funeral home does not have such a system in place, it should institute a program that requires the input of two persons when preneed contracts are entered into and funds received.

The third safeguard against preneed theft is to confirm the deposit of the trust funds or the purchase of an insurance policy with the preneed consumer. The preneed contract form signed by the consumer should have a prominent disclosure on it informing the consumer he or she will receive written confirmation from the depository financial institution or the insurance company attesting the deposit has been made or the insurance policy purchased. Moreover, the disclosure should direct the consumer to contact funeral home management if the confirmation of the trust deposit or insurance policy purchase is not received within a specified timeframe.

The preneed contract disclosure informing the consumer to expect written confirmation can be an effective deterrent against the wayward funeral home employee who may be tempted to divert preneed funds into his or her own account rather than making a trust deposit or an insurance policy purchase. It can also dissuade a funeral home which may be induced to use a preneed payment to balance the checkbook after a slow month.
The OFDA Master Trust initiated the written confirmation disclosure over 22 years ago on all of its preneed contract forms. Moreover, instead of directing the consumer to contact the funeral home, the consumer is instructed to contact the OFDA Master Trust if the deposit is not confirmed in writing within 60 days of the date of the contract. By injecting a third party into the notification process, the OFDA Master Trust increases the effectiveness of this vital deterrent against preneed fraud.

Management at all OFDA funeral homes should carefully review their preneed funding systems to ensure the three basic safeguards outlined above are in place and are complied with. The risk of not doing so is too steep.

OFDA members with questions regarding preneed issues may contact OFDA at
(800) 589-6332.