UK: How To Avoid The Cost Of Employee Fraud

Last Updated: 19 July 2012
Article by Stuart Evans

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.

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