Top tips for handling rogue employees

July 16, 2013

The Rise of Employee Fraud

The last decade has seen increased reliance on information technology and growth in complex and sophisticated financial products and markets. These factors, coupled with the continuing pressure on businesses to cut costs and streamline their operations during the economic downturn, have increased the risk of employee fraud immensely. KPMG's fraud barometer reported in 2012 that fraud perpetrated by employees (including senior managers) accounted for a staggering 80% of the financial loss experienced by UK businesses as a result of fraud.

The media has been awash with stories of high-profile “rogue employees”; from the original rogue trader Nick Leeson through to the more recent cases of Jessica Harper (the head of fraud and security at Lloyds TSB who submitted false invoices to claim approximately £2.4 million for herself and her family) and Christopher Grierson (the senior and highly successful partner at law firm Hogan Lovells who submitted false expenses to the order of £1.27 million to fund his lavish lifestyle).

Whilst the issues that your firm are more likely to face will be less excessive, the long term financial and reputational consequences will be no less significant. Below are our top tips to help employers mitigate the risk of employee fraud.

A Step by Step Response Plan

On the discovery of a potential employee fraud, you must act immediately. To leave matters could have disastrous consequences including the loss of additional assets and destruction of crucial evidence. Here are the primary steps you should take upon discovering the potential fraud.

1.  Assemble your internal response team

Dependant upon the scale of the issue, these might include representatives from senior management, HR, accounts and IT, as well as legal counsel. The team must be independent and objective. Consider whether you need to instruct a forensic accountant or data security specialists to fill gaps in expertise or experience.

2.  Preliminary assessment

Immediately conduct a high level assessment to identify the relevant issues, the individuals involved and the affected business streams. Discuss also with your legal advisors whether any immediate action can be taken to preserve and/or recover the firm’s assets.

3.  Reporting

Consider whether and when to notify the relevant law enforcement agencies, regulators and other relevant parties such as your insurers.

4.  Employees

Suspend relevant employees in line with firm’s policies and procedures. Ensure suspended employees do not have access to the premises, IT systems or the firm’s finances. Protect and support any whistleblowers or witnesses that might have assisted in affirming the activity in issue.

5.  Communication

Determine your internal and external communication strategy. The key is to reassure whilst avoiding commenting on the misconduct under investigation.

6.  Building the picture: Documentation and Interviews

Identify and ring fence sources of relevant documentation and media devices, such as blackberries, mobiles and laptops. Consider the application of the firm’s data retention and destruction policies and how to collate electronic data whilst preserving its integrity. Together with your legal advisors, identify relevant employees that are able to provide further information to fill in the gaps in the document trail.

7.  Report findings

Agree how to report findings of the investigation, when and to whom. Avoid generating unnecessary documentation, which could later become disclosable to regulators and third parties.

8.  Dealing with the aftermath

Determine the most appropriate sanction for the employees in question in line with relevant policies and procedures, and devise and implement a remedial plan from the lessons learned.

Employee Fraud Prevention Strategies

Not even the most comprehensive systems and controls can prevent a rogue employee from perpetrating a fraud. Nevertheless, there are strategies that your firm can put in place in order to reduce the risk of employee misconduct:

  • Pre-employment checks

It is vital that you evaluate your potential employees (including temporary staff and consultants) in order to understand how their personal attributes, as well as skills, may impact their suitability for the position. You should consider enhanced background checks in order to ascertain whether they have a criminal record or have financial difficulties.

  • Training

Effective training is vital to minimising the risks of fraud. Ensure that your employees are subjected to clear and regular training so that they have a comprehensive understanding of what fraud is and what the potential “red flags” are for your firm.
Evaluating employee performance and compensation
Those that commit fraud often feel that their behaviour is justified because they "have earned it" or are "worth it" - Jessica Harper of Lloyds TSB certainly thought so. Employee performance reviews are a good opportunity for line managers to objectively assess employee behaviour and performance as well as identify potential issues from the outset. Also consider whether employees are being compensated appropriately and whether desired behaviour is being encouraged.

 

  • Authority limits

The risk of fraud is reduced when an employee’s level of authority is commensurate with his or her level of responsibility. You should establish appropriate levels of control across the firm, including thresholds for obtaining approval for expenses and the provision of gifts and hospitality, in order to ensure that employees can only operate within their level of authority.

 

  • Policies and procedures

Your firm should have clear policies and reporting procedures dealing with fraud, bribery and corruption and whistleblowing.

  • “Zero tolerance” culture

Regular internal communication to all levels of employees stressing that the firm takes a zero tolerance approach is vital to ensuring that employees understand that the firm does not simply pay “lip service” to fraud.


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James Carlton
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jcarlton@foxwilliams.com

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sganatra@foxwilliams.com

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