Stuart Evans of Rawlison Butler LLP
examines the financial and reputational cost of employee fraud, and
how you can combat the enemy within.
How bad is it?
In March 2012, the National Fraud Authority estimated
fraud losses in the private sector at £45.5bn, and at
£1.1bn in the not for profit sector.
79% of respondents to the NFA's survey conceded that their
organisation is at risk from fraud. 46% confirmed that they had
been victims of fraud in the past 12 months.
But here is the really worrying statistic. 50% of fraud, or over
£20.0bn on the above estimates, was committed by employees
and volunteers. So never mind about the dark forces of the outside
world, half of losses due to fraud are down to people you have
interviewed, fostered, trained, rewarded, known and trusted,
sometimes for many many years.
And here's another frightening statistic. Average fraud losses
were estimated at 3% of turnover. Put simply, if fraud could be
minimised or eradicated altogether, a company's turnover would
automatically rise by 3%, without increasing sales or cutting
costs. 3% growth, tantalisingly at your fingertips. How
debilitating must it be for the management of a company, striving
to succeed in these difficult economic times, coming to terms with
the fact that their turnover is being adversely affected by factors
within the four walls of their business? And with the current
unprecedented economic circumstances facing society at the moment,
figures for employee fraud are only likely to increase.
It is, therefore, vital that senior decision makers in businesses
can demonstrate that they have considered the risks of employee
fraud and put into place effective strategies to minimise and
detect fraud and react swiftly and appropriately should fraud
occur.
The costs of failing to do so go well beyond the direct cost of the
employee fraud itself. Management will have to be distracted from
everyday tasks to deal urgently with responding to incidences of
fraud, and dealing with the financial impact. The latter will
include the cost of security consultants, who can come in to deal
with the data reconciliation, forensic accountants dealing with the
impact on the numbers, and lawyers dealing with any internal
enquiries at the business, along with what may well be time
consuming and costly litigation to try and recover the
position.
What should you do when you discover fraud?
A considered and previously prepared fraud response plan
is essential when there has been a breach of security. Bear in mind
that we are not always talking here about money disappearing out of
a business, but confidential data, such as customer lists and trade
secrets, seeping away on the laptops of soon to be departing
employees and their associates. One trap for the unwary is the
instinct "to dive in" to turn employees' computers
upside down in a frantic effort to get to the evidence, and to
indulge in finger pointing as part of disciplinary investigations.
It is essential that the right advice is obtained at this stage, in
order to preserve evidence properly, as any failures to do this may
result in such evidence being inadmissible in a Court action. There
is also the critical issue as to when the police should become
involved, along with insurers and PR consultants. The timing of
these decisions is always vital.
In terms of recovery action, quite often private investigators
should be involved, in order to examine the asset position of the
suspects, be these employees or their associates. Again, however,
care needs to be taken to ensure that evidence is obtained in a
lawful manner and thereby admissible in proceedings.
What can be done to help minimise the impact?
There are a number of hugely powerful options available to
a business that has suffered employee fraud, in circumstances where
it needs to act urgently to obtain evidence and also freeze assets.
These will include search and seizure orders, which often need to
take place under the neutral guidance of an independent solicitor,
formerly known as "Anton Piller Orders". Furthermore, it
is possible to freeze an employee's assets, both in the UK and
overseas, pending the outcome of a case. It is now commonplace for
alleged fraudsters to move assets offshore, be this in places such
as the Isle of Man or the Channel Islands, or BVI or in mainland
Europe, (in countries such as Switzerland, Liechtenstein or
Austria). Therefore proceedings in aid of such freezing orders will
need to be commenced overseas. Quite often decisions need to be
made for foreign police to be requested to open a file in their own
jurisdiction as well, to make use of their extensive powers.
So let's look on the bright side, you have nipped the fraud in
the bud, most of the data and assets have been recovered, costs
have mainly been recovered from other parties, your reputation has
remained in-tact through good work on the PR side, and your
insurers are still happy to issue a policy for you next year with
the bad apples thrown out. What lessons are there to learn?
So how can we try to prevent fraud in the first
place?
The best way to combat employee fraud is to prevent it in
the first place. This involves, in essence, a vulnerability
assessment and anti-fraud strategy. Employers will need to be very
careful to look at potential candidates for positions, and to
consider the prospect of future fraud in their recruitment policy.
One tale from the not too distant past was of a bank clerk at an
overseas bank, who was paid a modest wage, but then managed to buy
the bank outright some five years later! Psychological profiles and
lifestyle checks form an essential part of the ongoing process of
vetting employees.
Furthermore, employees can help businesses too. With a proper
whistle blowing policy, things that "may not seem quite
right" can be freely reported to management, and then
discreetly investigated. The worst that can happen is that nothing
untoward will be found. Do not rely upon your auditors to pick up
on discrepancies – they only visit once a year with a lot
to do, and much can happen in the meantime.
We hope that this article gives a useful insight into a very
serious issue facing businesses today. If you can combat employee
fraud effectively, the improvements to your bottom line will be
measurable, even if you are otherwise standing still.
This document is provided for information purposes only and
does not constitute legal advice. Professional legal advice should
be obtained before taking or refraining from taking any action as a
result of the contents of this document.