Theft, Fraud & Dishonest Employees An Employee Fraud Case Study Presented by Jon Coley, Partner, Employment
Case Study, Part 1 Brenda is a Deputy Finance Manager in the finance team covering holiday for the Finance Manager at Peel & Co, a large manufacturer of widgets. It's 10.00am on a Friday morning and Brenda comes to see you in HR. She has been asked to sign off on an invoice for the repair and replacement of a part relating to the company's production line. She has no knowledge of the repair ever having taken place and after asking around can find no evidence of any repair taking place at all on that production line in the last three months. On checking the records she finds 3 invoices from the same contractor (who is called Fudgit and Billem Ltd) dating back 3 months which have all been paid. They total 45,000. Concerned as to their validity, she refers the matter to you. What are your next steps?
Your next steps? Is there a fraud response plan? This will tell you who to escalate this enquiry to and in what circumstances. It will also indicate who should make up an investigation team, both internally and externally. Collate relevant documents: The Finance Manager s employment contract Disciplinary policy Any Data Protection and Email/IT policies Any procurement or invoicing processes and procedures Copies of the relevant invoices and purchase orders Unfortunately in this case there is no fraud response plan. You recall from a seminar you attended that it is important to ensure the response is right in the initial stages. You therefore decide to call your lawyers for guidance.
The initial advice received Your lawyers advise you that whilst you need to move quickly, to ensure the response is effective the most important first step is to decide what you want to achieve. Your lawyers discuss with you who may be included in a fraud response team e.g. Managing Director, HR manager, IT manager, CFO, solicitors, forensic accountants, public relations personnel Your lawyers discuss with you the various options available.
Some of your options Confront Fudgit and Billem Ltd and demand an explanation and repayment of the amounts paid on those invoices. Call the police Work out how this could have happened Establish who might be involved in your company Get your money back by litigation Suspend the Finance Manager and investigate his actions Sack the Finance Manager for gross misconduct Establish how large the losses are Check your company s insurance policies Consider whether you have any obligation to investigate. Consider whether you have any disclosure obligations e.g. to the FSA, SOCA or your auditors
Case Study, Part 2 You decide having discussed the matter with your lawyers and the Managing Director, that you need to find out a bit more about what has happened before you can make a properly informed decision about how to proceed. You are also mindful of your lawyer s advice that in order to keep your options open you must be careful to keep the discovery confidential. You do some further research into the company s records, and find out that as far back as you keep records the Finance Manager (who has been with Peel & Co for 8 years) has been both booking jobs with Fudgit and Billem Ltd and signing them off as having been completed. Other staff members have been involved in dealing with Fudgit and Billem Ltd, but the jobs are generally booked and signed off by different people. The jobs you can quickly identify as having been both booked and signed off as completed by the Finance Manager total 800,000. What do you do next?
Deciding on your objectives Now that you have discovered the fraud could be very substantial, you need to decide what you want to achieve. This could include: Recovering the losses. Making a report to the police. Disciplining and dismissing the employee Doing nothing in an attempt to limit perceived reputational damage. It is important to decide what you want to achieve as this will inform how you proceed, and the strategy you devise.
Suspend the Finance Manager or not? You will have to make a decision as to whether to allow the Finance Manager to remain in work or not. Consider: Do you have enough evidence to constitute reasonable grounds for suspension? Do you have the right to suspend under contract or the Disciplinary Policy? Is there a risk further wrongdoing could take place if the Finance Manager is not immediately removed? What is the likelihood the Finance Manager could find out about any investigation while it is taking place? Could the Finance Manager destroy any evidence if he continues working? If the Finance Manager is suspended could he tip off Fudgit and Billem Ltd and move his own assets prior to Peel & Co commencing action? Does any regulatory authority require his suspension?
Suspend the Finance Manager or not? If you suspend the Finance Manager do you: Require the return of all company property e.g. laptop, mobile, security pass? Stop his email account and ability to access company systems? Block remote IT access? Revoke all authorities and permissions? Remember the suspension must be on full pay unless there is a contractual right to suspend pay
Criminal considerations as to whether to report to the police NB Different position in Northern Ireland where there may be an obligation to report, but otherwise Be careful what you wish for It might be tempting to report a suspected fraud to the Police, but you will have no influence over how the investigation is conducted; and you will be expected to disclose even the most commercially sensitive data to the Authorities and to the Defendants.
Case Study, Part 3 You decide that you will not at the moment make a report to the police because of the loss of control over the process and the potential for the criminal proceedings to hinder any civil proceedings (although this will be something that you keep under review). You also decide not to suspend the Finance Manager yet as you are concerned he will tip off Fudgit and Billem Ltd. You decide that you want to try and recover the assets and your solicitors advise you that you may well have grounds to obtain without notice freezing injunctions and search orders against both the Finance Manager and Fudgit and Billem Ltd. You instruct your solicitors to undertake a quick and discreet investigation with a view to recovering as much money as possible from the Finance Manager and Fudgit and Billem Ltd.
Things to consider in the investigation Evidence gathering Need for secrecy to preserve evidence ensure the fraudster cannot cover his tracks to ensure assets are not put out of your reach (or at least made more difficult to locate) You need to find the assets which the Finance Manager and Fudgit and Billem Ltd have. You may need an investigator for this. Additionally there may be Court Orders you will need to obtain in relation to third party disclosure from parties such as banks, in order to follow the money.
Things to consider in the investigation Monitoring communications Effect of Article 8 of the ECHR, which states that everyone has a right to respect for his private and family life, his home and his correspondence Any limitations as a consequence of the Data Protection Act 1998? Impact assessment What do the company policies and contracts say - has the employee been warned in advance that emails / phone calls may be reviewed? Key concept of proportionality Interviewing suspects and/or witnesses Consider and keep under review whether conducting any internal interviews with the Finance Manager and any other employees should be compliant with the Police & Criminal Evidence Act 1984 ( PACE ).
Things to consider in the investigation Forensic Technology vs IT department Privilege issues Information / reports from your IT department may not be privileged A report from 3 rd party forensic technology experts instructed by solicitors will be privileged Integrity of evidence Forensic technology experts can ensure evidence is PACE compliant Technical ability e.g. location of deleted document fragments Discreet investigation Forensic technology experts take a mirror image so no detectable manipulation Cost
Case Study, Part 4 The forensic IT company image the Finance Manager s computer which shows a large volume of email traffic between the Managing Director of Fudgit and Billem Ltd and your Finance Manager. They also find various fragments of deleted files. This all suggests that Fudgit and Billem Ltd and your Finance Manager have been conspiring together to defraud Peel & Co by falsifying works orders and signing them off as having been completed. In addition, you find evidence of fairly lavish hospitality having been given by Fudgit and Billem Ltd to your Finance Manager. You ask your lawyers to make whatever applications are necessary against your Finance Manager, Fudgit and Billem Ltd, and the Managing Director of Fudgit and Billem Ltd to recover as much as possible.
Case Study, Part 5 You discover through information obtained pursuant to disclosure orders against the bank accounts of Fudgit and Billem Ltd and the Finance Manager, that large cash withdrawals are made from Fudgit and Billem Ltd s bank account, which roughly correspond with cash deposits to your Finance Manger s bank account. The timing of the cash payments is around the time Peel & Co pay the invoices for the apparently false works orders. Your investigators identify assets of the Finance Manager, the Managing Director of Fudgit and Billem Ltd, and Fudgit and Billem Ltd. You obtain freezing and search orders, the service of which is planned to ensure that the Finance Manager and Fudgit and Billem Ltd are served simultaneously. A Claim for the total losses Peel & Co have suffered is also served. On the same day you suspend the Finance Manager and invite him to a disciplinary meeting.
Disciplinary proceedings Ensure that any disciplinary proceedings still follow the ACAS Code Set out in writing the alleged conduct which has led to disciplinary procedures. Invite the employee to a meeting and allow them to bring a work colleague or Union official. Provide relevant evidence to the employee. Conduct a meeting. Provide the employee with a right of appeal.
What happens next? Settlement discussions In practice, many cases settle once interim orders have been obtained. Civil Court proceedings Recovery of losses suffered Costs (approximately 70% unless obtain indemnity costs)
Conclusion: Top tips for keeping on the right side of the Law Take steps to preserve privilege at the very outset, and consult solicitors Don t create unnecessary records particularly expressing views/opinions on an investigation or its subject matter Do not use threat of reporting to Police (or other prosecuting authorities) as a lever in civil proceedings Do not overstep the mark or overstate allegations of fraud Bear in mind privacy and data protection issues Secure evidence lawfully If criminal prosecution sought, increase prospects by presenting evidence clearly. Avoid impugning their independence to avoid allegation of abuse of process Notifying police may be pre-condition of insurance cover but consider off the record meeting Check own Disciplinary Procedures. Follow ACAS Code. Avoid knee jerk reactions. NB Remember Truth vs Proof
THANK YOU Jonathan Coley, Partner, Employment Tel: 0121 335 2910 Email: jonathan.coley@pinsentmasons.com
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