Employee fraud is estimated to cost Australian businesses about $18 billion each year. But there are ways for businesses to curtail fraudulent conduct by employees and remedies to be taken when fraud occurs.
Employee fraud has again hit the media spotlight with recent cases such as the rogue trader, Jerome Kerviel, who cost French bank, Société Générale, a record US$8.2 billon through unauthorised trades. Recently in Australia, senior staff at RailCorp in New South Wales allegedly defrauded the business of at least A$20 million and in another case, a St George Bank employee has been charged with defrauding the bank of A$1.4 million over eight years.
The case of Société Générale
News of the fraud committed by Jerome Kerviel, trader with Société Générale, was a big shock, not just because of the scale of the fraud but the fact that the incident demonstrated that large, well established banks with rigorous risk management procedures face serious risks of internal fraud and that risk management procedures can and often do fail. In short, the case has raised awareness that risks are real and internal processes can fail.
The Bank has published two reports since the incident which blames weak supervision and poor control systems for the rogue trading scandal. The latest report says that Mr Kerviel's direct supervisors lacked the relevant experience for their jobs, carried out inadequate reviews of Mr Kerviel's trading activities and failed to react to the alerts that would have allowed them to identify Mr Kerviel's concealed positions. The Bank has since fired the two supervisors involved.
What options are available to Australian employers to prevent employee fraud?
The problem with corporate fraud is that the people doing the defrauding are experts in their field. They know their companies inside out. They know the computer systems and they know exactly what to do and how to hide it. The failure of companies to demonstrate a hard line on fraud and control the problem, creates added temptation for employees who are convinced they can succeed in their fraudulent activities.
Firstly, businesses should recognise the threat of fraud as a business risk and a very real and substantial one, and in turn manage those risks. Too many businesses are complacent about the risk of fraud and think it cannot happen to them.
Secondly, the risk of employee fraud should be included on the agenda of corporate strategy planning meetings and raised at the Board level on a regular basis. Systems and controls should be examined to identify weaknesses which make the company susceptible to the risk of employee fraud. Employment and recruitment practices should be scrutinised, to ensure that only those candidates whose references have been checked thoroughly are employed. For example, if the employer discovers at the preemployment stage that the candidate has been declared a bankrupt twice and has moved addresses 10 times in three years, 'warning bells' should start to ring for the employer, particularly if the position being offered involves cash handling, purchases or accounts payable.
Thirdly, employers should introduce policies and procedures aimed at reducing, as much as possible, employee fraud. For example, clear 'whistleblowing' policies should be in place in every company, and employers should ensure their employees are well aware of the policies. A number of large companies in Australia have introduced whistleblower policies. Whistleblower policies can assist to foster a culture of corporate compliance and also demonstrate to a company's employees that the business takes its commitment to prevent and eradicate any fraudulent and dishonest conduct seriously.
Fourthly, companies should also have a short policy statement on fraud which:
- Applies to everyone in the organisation including directors and temporary employees.
- Demonstrates the company's commitment to combating fraud and corruption wherever it is found.
- Communicates the company's attitude and approach to the threat of fraud.
- Includes allocation of responsibilities for overall fraud management, formal procedures if fraud is discovered, staff training needs and response plans to minimise fallout.
In their attempts to prevent employee fraud, companies must be alive to privacy issues as they relate to employee information that falls outside the employee record exemption.
The Commonwealth Privacy Act 1988 (Privacy Act) broadly regulates the collection of personal information. There are some exceptions, the most relevant here being the employee record exemption. Section 7B(3) of the Privacy Act grants employers exemption from the Act in certain circumstances. Three elements must be satisfied for the exemption to apply: the organisation must be acting in the capacity of a current or former employer; the dealings with the data must be directly related to that employee/employer relationship; and the dealings with the data must be directly related to that employee's employee record held by the employer.
In addition to the Privacy Act, employers operating in New South Wales, Victoria and Western Australia also need to consider their obligations under those states' specific workplace surveillance legislation. (Queensland, South Australia, Tasmania, the ACT and the Northern Territory do not have any specific workplace surveillance legislation.)
For instance, in New South Wales, should an employer wish to conduct surveillance of an employee's computer use, the employer must notify employees and have a detailed policy that is brought to the attention of employees at least 14 days before the surveillance. The policy should, amongst other things:
- Be explicit on what activities are permitted and forbidden, and management should ensure that staff members are aware of the policy and its contents.
- Set out exactly what information is recorded and who is going to have access to that information.
What remedies are available to employers once employee fraud is uncovered?
In most extreme cases of employee fraud, civil proceedings are likely to be futile, primarily because all misappropriated funds may have been spent and the rogue individuals made bankrupt. However, in less extreme cases, there may be good reasons why civil proceedings should be pursued, for example, to preserve improperly obtained property, to recover misapplied funds (at least those that have not been spent) and to claim equitable or other interests in property obtained through the fraud.
Two important types of relief can assist companies in recovering loss and damage arising from employee fraud.
Freezing orders (also known as Mareva orders) have the purpose of freezing a person's assets, to an extent that assets cannot be dealt with other than in accordance with court orders. Generally, these orders are directed at freezing the bank accounts and other property interests of the ex-employee to prevent the dissipation of misappropriated funds.
If an employer has sufficient evidence, it could also consider seeking search orders (also known as Anton Pillar orders) which have the purpose of securing or procuring evidence and permitting entry into the ex-employee's residence. Generally speaking, these orders are directed at searching say the ex-employee's home to obtain documents, computers and other evidence relevant to the fraud.
The courts seem generally more willing to use these orders to assist an employer seeking to recover from an ex-employee who may have defrauded the business.
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