How to Combat Employee Fraud

When people in the business community think about fraud, they often assume that the threat will come from outsiders. Research, however, shows that approximately 75% of all fraud is committed by employees. In Australia, employee theft is estimated to cost the business community AU$1.5bn a year.¹ The damage that is inflicted is not purely monetary though. The impact of fraud can manifest itself in a company’s share value, reputation and staff morale.

There have been some spectacular and extreme cases of employee fraud in Australia. In two separate Australian cases, workers killed their bosses to prevent them from discovering that they were committing fraud. In one case, the worker had also committed fraud at their previous employment, but it was not reported to the police.

Prominence of Employee Fraud

Many frauds are perpetrated by employees or ‘agents’ in positions of trust. Often, these frauds are not reported for a long time because the victim cannot comprehend that such a trusted colleague, friend or advisor, would abuse their trust and steal their money. A financial advisor in Australia was responsible for selling superannuation (retirement benefit) plans to a large number of staff in the hospitality industry. He would personally collect the premiums on a regular basis, but did not pass the premiums onto the superannuation company. Instead, he misappropriated the funds for his personal use. As a result, many staff were left with little or no retirement funds.

How many firms, particularly the smaller ones, adequately scrutinise the activities of administrative staff? Do you have one staff member who is making payments, handling accounts, paying bills, writing and signing cheques and conducting reconciliations? It is often the well-trusted, ‘reliable’ members of staff who, when presented with the opportunity, cannot resist the temptation to ‘borrow’ a small amount of funds.

For example, in a Sydney case, a long-serving secretary was given a corporate credit card for the purpose of making office purchases. Each month her boss should have checked the credit card statement against the receipts and signed-off on the expenses. However, for more than 12 months, he failed to conduct these checks. The secretary therefore had the opportunity to commit fraud. Like many fraudsters, she convinced herself that she would just ‘borrow’ a small amount, and then pay it back. So she started using the corporate credit card to take taxis to work, buy lingerie, purchase gifts for her children and eat in restaurants. She eventually spent over AU$20,000 in personal expenses, using the credit card. Each month, when the credit card statement came in, she forged her boss’ signature on the statement and sent it to the accounts department. Eventually, someone noticed the unusual signature and the matter was reported to the fraud department. When the investigator interviewed the secretary she said she was relieved to be caught. The fraud had spiralled out of control, particularly as she continued to get away with it.

In another Australian case, an investment firm hired a recruitment company to employ a clerk. Some time later, the investment firm discovered that the clerk was stealing money from the company. The recruitment company had not conducted adequate identity checks on the clerk and did not realise she had provided a false name to them. Fortunately, the investment company reported the matter to the police. They then discovered that the clerk was already being investigated for other frauds, which had been committed at her previous place of employment. The recruitment company were subsequently sued for negligence. This case stresses the importance of conducting adequate pre-employment screening.

Identity Fraud

Identity fraud has become a huge problem for companies and individuals. This is where someone either steals the identity of another person, or uses a completely fictitious name. They then use that name to commit crime and/or avoid detection, just like in the case above involving the fraudulent clerk. People who want to hide the fact that they have a criminal history or have been bankrupt often use this practice. You should also be aware that identity fraud is often committed by friends and family; people who have access to your personal and financial information.

There have been several cases around the world where fraudsters have passed themselves off as professionals, such as doctors and lawyers. An Australian survey in 2002² showed that 13% of birth certificates presented as proof of identity were fraudulent. Criminals have even monitored police scanners to obtain people’s names, drivers licence numbers and other personal details.

You may have heard of the e-mail scam that fraudulently alerts the recipient that their identity has been stolen. The e-mail is titled ‘YOUR ID WAS STOLEN’. It attempts to induce the recipient to visit a website which offers assistance. If the recipient visits that website, a Trojan is activated, allowing the fraudsters to log the user’s computer usage, thus obtaining the user’s personal and financial details.

In Australia and other countries, there have been cases where organised crime gangs have placed gang members into temporary employment where they have access to large customer databases. The gang member will often use a false name when applying for the job and their job is to steal customer information from the company. These customer details may include their name, address, date of birth, tax/social security number, bank account number and names of family members. These details are passed back to the gang and used to commit various offences.

Contractual Arrangements Between Companies and Recruiting Firms

Whose responsibility is it to check the bona fides of job applicants? Companies that use recruitment firms must ensure that their contract outlines the responsibilities of the recruitment firm. Contracts with recruitment firms, should contain the following:

• Whose responsibility it is to check the identity and background of the applicant?
• What checks will be conducted by the recruitment agency to ensure that the applicant’s CV is accurate?

Unfortunately, discrimination laws in Australia can sometimes make it difficult to refuse employment to someone who has a criminal history. However, if the job applicant is specifically asked to provide written details of prior convictions and they omit these details, then the employer should have sufficient grounds to refuse an application, or to dismiss the person if they have already been hired.

Contracts Between Employers and Employees

Employment contracts between employers and employees should contain a section on improper conduct, whereby an employer can terminate the services of a dishonest employee. Contracts should also include a section on intellectual property. There was a case in Singapore where two lawyers were charged after they had ‘stolen’ intellectual property from their previous employer. Employee contracts should include a definition of intellectual property, and the rules regarding usage.

All employment contracts should also include a probationary period so that non-performing employees can be dismissed during the period of probation.

Pre-employment Screening

HR departments and recruiting firms may decide to outsource the pre-employment screening of certain personnel or do it themselves. However they decide to do it, they must first decide what level of screening will apply to various staff. For instance, should certain positions be subject to enhanced screening procedures? These positions may include:

• Cash and fund handling – whether it be company funds, or those invested on behalf of clients.
• Managers, team leaders and executives (remembering that approximately one-third of employee fraud is committed by management).
• Payroll and accounting.
• Advisers such as financial advisers.
• IT personnel.

Screening Methods

There are a number of simple checks that can be conducted as part of the employee screening process. The checks may differ, according to the position being advertised. These checks may include:

• Obtaining 100-points (worth of) identification – the standard adopted by financial institutions in Australia. For example, this may consist of a passport and a photo identity card. Remember, there is no point in conducting this check unless you insist on viewing the original identification documents. The best document is a passport, which is worth 70 points. However, passports do not provide proof of address. Also, there are currently fake drivers licences in circulation that appear genuine, so other photo ID may be more appropriate. A recent tax return will also provide confirmation of name, date of birth, address, previous employer etc
• Media/internet search.
• Australia-wide criminal history search. Of course, you may need the applicant’s permission for this, but if they seem unwilling to give it, you should seriously consider not employing them.
• Education/qualifications – simple technology can produce fraudulent, authentic-looking educational documents such as degrees. Therefore, production of such documents by themselves may no longer be a valid form of proof. Written consent should be obtained from the applicant, so that their credentials can be verified by the relevant educational/training organisation.
• Verification of professional qualification e.g. CPA, Law Society.
• Bankruptcy check – ascertain whether the applicant has ever been declared bankrupt; you may need their written consent for this.
• Birth certificates can sometimes be verified by contacting the Births, Deaths and Marriage Registry.
• Conduct a credit reference association check to determine their financial standing.
• Reference checks:
  • Always ask the applicant to provide the name of their previous employer and supervisor. If the applicant is reluctant or refuses to provide this information, this may be suspicious.
  • In certain situations, you may want to conduct reference checks using video conference calls. This will deter fraudulent referees. When conducting reference checks via telephone, if possible, do not ring the telephone number supplied by the applicant. Try and find an independent listing of this number in the telephone directory.
  • Ask the right questions when conducting reference checks, especially with ex-employers. Due to privacy restrictions, employers may be reluctant to divulge adverse information about ex-staff. A good question to ask is ‘Would you employ this person again?’

You should not rely on:

• Third party identifications, i.e. where a third party has sighted the applicant’s identification documents and signed a statutory declaration to that effect. As you never get to meet this third party, how do you know they even exist? Sometimes the fraudster has just picked the name of a Justice of the Peace from the phone book.
• Photocopied or faxed documents, such as certificates of attainment, proof of education, pay slips or identification documents

Obviously, the extent to which you can screen foreign nationals depends on which country they come from. At least two original, primary photo identification documents should be viewed as well as their employment visa. Referee interviews should be conducted by video conference wherever possible. Other checks are best conducted using reputable, international firms who specialise in conducting due diligence enquiries.

Other Tips

• If your company hires temps from an employment agency, and you later decide to employ the temp on a full-time basis, make sure you screen them first. Some temps have not been screened as thoroughly as full-time employees.
• Do not place temporary staff in positions where they have access to funds/personal details.
• Check that your business insurance covers you for fraud and read the policy thoroughly if you suspect that fraud has occurred.