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Employee Fraud

Fraud has to be taken seriously.  It costs the UK economy alone an estimated £13.9bn a year: £230 for every person in the UK. It facilitates other crime, such as terrorism, and there is clear evidence that it is becoming a crime of choice for professional criminals. The response from law enforcement world-wide has not been sufficient.  We need to bear down on fraud; to make sure that laws, procedures and resources devoted to combating fraud are fit for the modern age so we can tackle sophisticated economic crime vigorously and effectively.  But industry and business can do a great deal to protect itself from the threat of fraud.

The anticipated gains for the fraudster are enormous and the likelihood of apprehension and thus of conviction and punishment comparatively small compared with conventional crimes of dishonesty involving guns, intimidation and violence of all kinds. Fraud targeted at a business almost invariably has links within the business.

Theft or financial manipulation by staff and directors is the commonest form of fraud experienced by companies. PricewaterhouseCoopers’ latest economic crime survey reports that asset misappropriation by employees, generally the easiest fraud to detect as it involves the theft of tangible assets with a defined value, is the single most common form of economic crime affecting the great majority of those businesses which fall victim to fraud. UK companies report a higher level of asset misappropriation than elsewhere in the world.

Instances of employee fraud are numerous and hit the headlines on an almost daily basis.  Notorious examples from the past include Nick Leeson who brought down Barings, Joseph Jett at Kidder Peabody and Joyti de Laurey, the secretary at Goldman Sachs in London, who stole £4.3 million ($7.7 million) from her line manager and his wife’s bank accounts to fund her own lavish lifestyle. 
Directors are no less likely to rob their own corporations than the more lowly members of staff.  Robert Maxwell, the press baron and former MP who drowned in the Mediterranean in October 1991, left a trail of creditors and pensioners in his wake, whose money he had plundered from his own company’s pension fund.

Opportunity and motive, often heavy indebtedness, affect the finance director or the chief executive as often as the secretaries and the clerical staff.  Breach of fiduciary duty by professional men and women is a recognised element of financial misconduct and treated particularly severely by courts and regulators. A common feature of convicted fraudsters is debt. In many cases, they may have been previously honest and hard-working members of staff who were dragged into a world of corporate fraud by financial problems - ranging from “an expensive wife” or private school fees for their children to gambling or credit and mortgage repayments.

What should shake complacent CEOs and HR personnel is the ease with which they are able to carry out their crimes and the fact their activities remain undetected for some time, enabling them to continue to steal from their companies once they had cleared their debts - especially as they grew accustomed to their ‘extra income’.

Protiviti, a firm which has carried out research into convicted fraudsters, comments: “The problem with corporate fraud is that the people doing this are experts in their field. They know their companies inside out. They know the computer systems and they know exactly what to do.”

The failure of companies to demonstrate a hard line on fraud and control the problem adds temptation for staff convinced they will get away with their crimes.

A recent and worrying development is the infiltration of companies and financial houses by criminals, intent on gaining access to confidential customer information.  They then sell the details to other criminal gangs, or use it themselves to empty customers’ accounts.  Bank employees are continually targeted by criminal gangs, so much so, that many banks have forbidden their employee from wearing distinctive bank uniform or identity badges outside the office, for fear of being picked out by talent scouts for criminal gangs, offering them inducements to betray confidential information.

What can business itself do to tackle the threat of fraud?

First, it should recognise the threat of fraud as a business risk and a very real and substantial one. Too many businesses are complacent about the risk of fraud and think it cannot happen to them.

Fraud risk should be included on the agenda of every corporate strategy planning meeting; it should be raised at main Board level on a frequent and regular basis.  Systems and controls should be examined to identify weaknesses which make the company susceptible to the risk of fraud.  Pre-employment screening should be rigorous, to ensure that only those are recruited whose references have been taken up and checked thoroughly; that existing staff are surveyed regularly, if unobtrusively, by HR, to monitor their taking of leave, their use of corporate credit cards and their own lifestyles, where this is possible.  Many lower paid staff enjoy a startlingly extravagant private life, with sumptuous houses, cars and mistresses, well known to their colleagues, but often hidden from senior management.  Line managers should not be coy about asking the impertinent question, if there is evidence that a staff member is apparently living well above his or her means.

At the same time, clear whistle-blowing policies should be in place in every firm, and employees’ attention drawn to them.  And they should be workable.  Too often, an employee is discouraged from blowing the whistle on corrupt, crooked or dangerous practices taking place in his or her workplace because the very person about whom they wish to complain is the designated recipient of the whistle-blowing information.

Companies should devise a policy statement on fraud, adapted to suit their own particular needs, which should:

  • Apply to everybody in the organisation, including directors and temporary staff;
  • Demonstrate the organisation’s commitment to combating fraud and corruption wherever it is found; and
  • Communicate the organisation’s attitude and approach to the threat of fraud.

The statement should cover:

  • Allocation of responsibilities for overall fraud management;
  • Formal procedures if fraud is discovered;
  • Staff training needs; and
  • Response plans to minimise fall-out.

The statement should be a short, precise document, covering all the points above.

Organisations should identify assets most at risk and undertake regular reviews of the robustness of existing systems and controls.

Lastly, the culture of the organisation itself should be assessed to make sure that the right values are emphasised and the lead is given from the top.

A radical approach is to instil a more highly developed code of moral standards in an organisation by making everyone responsible for upholding them. An ‘internal monitor’ setting moral boundaries for acceptable behaviour is the best defence against fraud and failure and ultimately more reliable than rules and structures, essential though these undoubtedly are. This approach is finding favour in the USA and an Association of Ethics Officers has been created. The World Bank inaugurated such a programme in 1998, using a British company to do so. One of the consultants, Tom Oxley, has said that “ethics are more powerful than rules which cannot cover every eventuality, let alone police them.”

The views expressed are the speaker’s own and should not be assumed to reflect the policy of the Fraud Advisory Panel or its Board.

Fraud Advisory Panel
PO Box 433, Chartered Accountants Hall
Moorgate Place
London EC2P 2BJ
Tel: 020 7920 8721
Website:  www.fraudadvisorypanel.org

Biography

Rosalind Wright Rosalind Wright CB QC is the Chairman of the Fraud Advisory Panel the independent fraud watchdog founded and supported by the Institute of Chartered Accountants in England and Wales. She is also a non-executive director of the Insolvency Service and is a member and formerly chaired the Supervisory Committee of OLAF, the European Anti-Fraud Office. She is a barrister and a Master of the Bench of Middle Temple and has also been called to the Bar of Northern Ireland. She was made a Companion of the Order of the Bath in the New Year Honours in 2001 and awarded QC honoris causa in 2006.

She was formerly the Director of the Serious Fraud Office, from 1997 to April 2003 and from 2003 - 2007 was an Independent Board member of the Office of Fair Trading.  She was previously general counsel and an executive director for 10 years at the Securities and Futures Authority, one of the principal City financial services regulators. Prior to taking up that appointment, she was an Assistant Director of Public Prosecutions at the DPP’s Department, where she worked for 18 years, after five years in practice at the Bar.

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