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More important: Are his co-members aware of this arrangement and ok with it?

In my experience, most broker type firms don't offer this service. Outside of platforms or bundled providers, it usually falls on the sponsor or TPA. I had one client a few years ago who said his broker took care of it, only to find out that they sent the IRS a check marked taxes with his SSN in the memo line and said they took care of the withholding

I have seen (and did) what ESOP Guy has done - but I think the issue is more of whether or not an operational error occurred in that money went into the plan on the basis of that which is not "compensation." Money taken (even through payroll) that is fraudulently obtained is not "pay for work performed" and hence should not count for allocation purposes. The fact that it was done means an error occurred - that should be correctable. It would be interesting to see someone (not me) file a VCP based on not following the plan's definition of compensation..... Keep in mind that the embezzled money may still be "taxable" to the theif - but that doesn't make it "comp" for plan purposes.