External Bank Accounts

The Department identified that it maintains 48 external bank accounts with cumulative balances totaling more than $3.9 million, which are not controlled by the Office of Finance/City Treasurer. In accordance with City policy, LAPD, through its Fiscal Operations Division (FOD) provides a certification of balances, along with bank reconciliations, to the Office of Finance on a quarterly basis. Cash held in external bank accounts is also reported to the Controller for inclusion in the City’s Consolidated Annual Financial Report (CAFR).

LAPD’s external bank accounts are used to maintain non-City monies that are intended for the benefit of others (e.g., Youth Program account) or until the proper disposition is determined (e.g., Pre-Seizure Fund for cash seized related to narcotics arrests). The Department has 32 Youth Program accounts and 16 accounts for other purposes. FOD provides oversight of the external bank accounts to ensure expenditures are supported by receipts and there are approved reconciliations by applicable supervisors and FOD. The reconciliations list all receipts received and expenditures paid during the month.

We selected a sample of five external bank accounts that carried large balances or had commonly used purposes, which accounted for $3.1 million of the $3.9 million cumulative total for all of the Department’s accounts. A description of the purpose and uses of the bank accounts examined follows:

1. The Unclaimed Monies account is used to hold and account for funds when a suspect is taken into custody. Evidence, including currency, is seized and it may belong to another party or deemed to actually belong to the suspect. Disbursements are made to the rightful owner based on the outcome of the suspect’s hearing.
2. The Inmates’ (or Prisoners’)1 Welfare account holds funds to be used for the care of individuals while in custody. Section 4025 of the California Penal Code describes the use and restriction of these funds2, which are received from commissions from bail bond advertisement boards and telephones located in the jails; and may be spent on items for detainees’ use and improvements to jail facilities such as blankets, newspapers, personal items, televisions, security cameras, etc.
3. Excess funds from the Inmates’ Welfare account (#2, above) were previously invested in a Time Certificate of Deposit (TCD); however, these matured and the funds were subsequently redeposited into the Inmates’ Welfare bank account.
4. The Pre-Seizure Fund is handled by the Asset Forfeiture Investigative Detail (AFID) and is used to temporarily hold monies seized during narcotics-related arrests until AFID detectives are notified by the L.A. County District Attorney if they will pursue a case. Depending on the case, funds are either forwarded to the L.A. County District Attorney pending a criminal prosecution, or the case is closed and funds are transferred to the property division for disbursement through the Unclaimed Monies account.
5. The Youth Programs Unit account provides outreach services to youth in the community. This is a fiduciary account managed by LAPD staff who oversee youth programs (e.g., the LAPD Cadet program) and handle cash activity for youth programs. Receipts are donations or stipends earned by cadets performing services to the community (e.g., Dodger promotional giveaways) and are spent on refreshments and activities for the cadets.

Issues related to the need for improved controls relative to the use of external bank accounts are noted below.

Observation #1: Some checks from the Pre-Seizure Fund create an unnecessary fraud risk since the checks are made payable to “Cash” or an abbreviated payee name is used, such as USMS or LADA.

In reviewing the Pre-Seizure bank account, we noted a number of checks issued to “Cash” for funds seized in cases that did not meet prosecution standards and are due back to the arrestee from whom the funds were seized. These monies must be provided to the Property Division, which is responsible for returning the assets; however, instead of issuing a check for deposit into the Property Division’s bank account, the AFID issues a check to “Cash”, which is prohibited per Section 1.17 of the Controller’s Manual. The AFID detectives cash the check at a bank and transport the cash for the seized monies back to the Property Division, which is unnecessary, time-consuming and risky.

We also noted that checks were written to abbreviated payee names, such as “LADA” rather than Los Angeles District Attorney. The use of short and abbreviated payees should be avoided, as they could easily be altered.

Recommendations

LAPD management should:

1.1 Revise practices to prevent checks from being issued as payable to “cash”. Intradepartmental transfers should be handled through EFT or checks written from one account to the other to reduce risk.

1.2 Limit the use of abbreviations for payees to reduce the risk of check alterations.

Observation #2: Bank reconciliations have carried over stale-dated checks as reconciling items, rather than clearing them.

Reconciliations for two bank accounts included stale-dated checks3; some dating back five years. One account carried over 63 reconciling items totaling $10,147 dating back to August 2012, while another carried over several items that required corrections to be recorded in its accounting (book balance). Section 1.17 of the Controller’s Manual provides instructions to departments on stale-dated items. The policy states that any checks outstanding for six months or more should be investigated and that checks outstanding for more than one year should be stopped. Further, a fund custodian was not aware of how to properly complete the Department’s bank reconciliation (LAPD form 15.47.0), and had not received adequate instructions.

Recommendations

LAPD’s Fiscal Operations Division should:

2.1 Train staff to properly perform bank reconciliations, including how to address stale checks.

2.2 Investigate and clear any stale checks on bank accounts according to established criteria in the Controller’s Manual.

Observation #3: One bank account (Inmates’ Welfare Fund) held excessive cash balances, for which the Department should consider how to best use funds.

We noted that the Inmates’ Welfare Fund bank account balance exceeded $1 million. Penal Code Section 4025(i) allows jurisdictions to “deposit, invest or reinvest any part of the inmate welfare fund, in excess of that which the treasurer deems necessary for immediate use. The interest or increment accruing on these shall be deposited in the inmate welfare fund.”

Bank balances should not be left to accumulate cash. The Department should consider detainees’ needs that could be paid for with these funds and develop a plan for appropriate use of these funds. Until a plan is developed and actual expenditures are to occur, excess amounts could be invested into an interest- bearing account, as was done in previous periods.

Recommendation

LAPD management should:

3.1 Develop a plan to utilize the monies held within the Inmates’ Welfare Fundi in the meantime, develop appropriate procedures to enable the excess funds within the Inmates’ Welfare Fund account to earn interest, which can be redeposited and available for use to benefit detainees.

Observation #4: LAPD’s bank account oversight procedures included an account that was owned by a non- profit entity and was not controlled by the City.

We identified a Police Assistance League (PAL) bank account that is owned by a 501(c)(3) non-profit organization that was included in FOD’s records of LAPD bank accounts. FOD provided copies of bank reconciliations to the Office of Finance and to the Controller’s Office for inclusion in the City’s Consolidated Annual Financial Report (CAFR); however, this is not a City-controlled account. While LAPD’s external bank accounts hold restricted or fiduciary funds, we found that this PAL account was not a City asset, did not include City funds, and their use was not controlled by the City.

It is unnecessary for Departmental staff to provide oversight of an account owned and controlled by a non-profit organization. FOD’s bank account oversight procedures should be restricted to external accounts that are managed as part of a Departmental program, or by legal requirement.

Recommendation

LAPD management should:

4.1 Report to the Office of finance and the Controller’s Office only those external bank accounts that are controlled by the Department.

CASH

Cash Collection (Cashiering) Sites

LAPD reported 10 cash collection sites located either at the Police Administration Building (PAB) or at police stations throughout the City. Cash collection sites at police stations are used primarily for bail receipts. The funds received at PAB are for the central depository at Fiscal Operations Division (FaD) or at other divisions located at PAB to account for miscellaneous types of income (e.g., permit fees, report fees, alarm fees, and witness fees) receipted by other divisions.

We selected FaD and the Records and Identification Unit for surprise cash counts and review of internal controls, since LAPD reported the average daily collections at those sites as $50,000 and $4,400, respectively. FaD’s collections are generally checks received through the mail for grant funds, witness fees, expense reimbursements, etc. The Records and Identification Unit has cashiering windows and receives payments from the public. We observed cash handling and deposit processes and noted good internal controls, with the exception of ensuring that incoming checks are restrictively endorsed immediately.

Observation #5: Checks are not restrictively endorsed in a timely manner.

We noted that incoming checks received by FaD and Records and Identification are not restrictively endorsed upon receipt, but are endorsed just before deposits are made. One division noted that they have previously requested more endorsement stamps, but have only been given one for the entire division, so it was allocated to the person making the deposit.

Recommendation

LAPD management should:

5.1 Ensure all incoming checks and money orders are immediately endorsed upon receipt as “For deposit only, payable to the City of Los Angeles” rather than waiting until bank deposits are processed.

Petty Cash Accounts

LAPD has six petty cash accounts, which total $10,000. Most of the Department’s petty cash is managed by FOD who maintains $2,000 in cash and $5,500 in a bank account, and it was selected for a cash count and internal control review. The petty cash fund was properly accounted for and adequate internal controls are in place to ensure disbursements are appropriate and authorized.

1 “Inmate” or “Prisoner” is used in the report to be consistent with legal references regarding these monies and the Department’s bank account name. However, it should be understood that these terms refer to the detainees or arrestees who are held in custody by the LAPD for a limited time and the funds are used for the benefit of these individuals.

2 Reference to the Inmates’ Welfare Fund is included in Section 350.40 of the LAPD Police Manual.

3 Stale-dated checks are those 6 months or older, which have not been cashed and are carried over to subsequent month’s reconciliations rather than researching and replacing them. The Uniform Commercial Code (UCC) 4-404 allows the bank to decide on accepting or refusing the check; however, if a party has not cashed a stale check, it has most likely been lost.