Are you on top of employee fraud?

When it comes to types of fraud, we’re all familiar with insurance fraud, tax fraud and even identity theft but what about employee fraud?

According to a 2020 survey undertaken by NatWest, fraud costs UK business more than £190million a year. More disturbingly, about 40% of that figure relates to employee fraud. Businesses of all sizes are vulnerable to employee fraud and it’s estimated two thirds of employee fraud is committed by workers with at least 5 years’ service with one in five fraudsters having over 10 years' service.

Once recruited there is a duty of mutual trust and confidence implied into the contract of employment, this includes a duty of trust placed on the employee that they will not involve themselves in fraudulent activity in the workplace. Nevertheless, sadly it is common for employees committing fraud to not even think they are doing anything illegal.

Types of employee fraud

Employee fraud can be wide ranging and essentially comes down to any act of dishonesty on the part of the employee.  Most commonly it can be split into the following non-exhaustive categories:

Payroll fraud:
  • self-authorising payments
  • creating a ‘ghost’ employee or supplier record and paying them
  • creating fake information to support a fraudulent claim
  • time sheet fraud
  • altering a payment detail and then attempting to cash it
  • processing false claims/pay rate falsification
  • fraudulently claiming sick leave
  • false expenses fraud, whether it’s a mild exaggeration of an otherwise legitimate expense, or an entire fabrication using fake invoices
  • commission and bonus fraud

In October 2020, an employee at a Sheffield recruitment agency was jailed when he falsely claimed wages of over £200,000 after submitting timesheets for seven different people.  The employee had set up ghost employees on the company's payroll system and had put his own bank details down next to their names. He was caught out when a client of the agency flagged the timesheets as suspicious.

Personnel fraud:
  • false references or false qualifications used to secure employment
  • working a second job during contracted employee hours
  • abuses of flexible working time systems
  • misuse of work time such as abusing the company’s computer misuse policy

A senior NHS manager employed on a salary of £130,000 per year, falsely claimed on his CV that he had a Classics degree when he was being recruited. An anonymous tip-off two years later, followed by a review of his qualifications, resulted in him being charged with the criminal offence of fraud on the basis that the proceeds of his crime were the two years’ salary he had earned so far in the job.  He was given a two-year suspended prison sentence. 

Procurement fraud:
  • creating documents and/or invoices to purchase items or services dishonestly from fictitious sources
  • suppliers working together to price fix
  • a staff member's bias towards a supplier

In 2018, a managing director of a construction company and a developer were involved with bribes being paid for information about a prime London commercial development.  The information was used to help the construction company gain contracts through the developer worth in excess of £6 million.  Both the developer and managing director pleaded guilty to bribery and were convicted.

Data fraud:
  • stealing of company and client data
  • stealing intellectual property for example algorithms

Unsurprisingly, this is the fastest-growing category of employee fraud with UK courts experiencing a 25% rise in this type of fraud.

In 2018, a BUPA employee was caught after trying to sell over 500,000 customer records on the black market having accessed the information from the company's customer relationship management system. The Information Commissioner’s Office fined the insurer for failing to have effective security measures in place to protect customers’ personal information.

Misappropriation of assets:
  • Stealing cash and inventory
  • Credit card abuse (using a company card for personal purchases)
  • Vehicle abuse (using a company vehicle for personal use)
  • Providing discounted or free goods or services to friends/family

Why does employee fraud happen?

US criminologist Donald R Cressey developed the 'Fraud Triangle' framework for understanding the circumstances behind the temptation for employees to commit fraud.

There are three necessary conditions:

  1. pressure/motivation (an emotion felt by the employee);
  2. opportunity (lack of internal controls); and
  3. rationalisation (the ability to justify one’s actions).

What can you do to about it?

Pre-employment checks

Take the time to check CV facts, use psychometrics and behavioural interviewing questions; take up references including verbal references where possible; demand certificate copies, and conduct a six-month review.

Internal processes and controls

Identify where your valuable assets are. Once identified consider how to reduce the chances of those assets being defrauded or stolen by employees. Build controls into your routine business processes to control how much somebody can do without triggering some form of oversight or due diligence check.  These policies and practices should be regularly reviewed to take account of the growing sophistication of fraud.

Legal advice should be sought before putting in place any kind of covert or overt surveillance/monitoring of employees.

Staff behaviour

Fraudsters’ behaviours can often betray their crimes so it is essential that managers really get to know their team in order that they can easily spot something out of character for example a sudden change of lifestyle, unexplained wealth or a reluctance to take a holiday.  More often than not there are simple explanations for these behaviours, but it is sensible managerial practice to be alert to the possibility that those acting out of character could be up to no good.

Anti-fraud policy statement / Fraud response plan

Adopting an anti-fraud policy statement is one way of communicating a strong fraud prevention message to your staff. Such a statement provides clear guidelines for preventing, detecting and dealing with fraud, and can help to establish a zero-tolerance culture.

Consider implementing a ‘fraud response plan’ so that everyone knows how a potential fraud should be dealt with in your business and who is responsible for investigating it. This also means that employees know that your organisation is serious about fraud.

Encourage whistleblowing 

Expectations of employee conduct should be very clear, with an emphasis on accountability and reporting any unusual behaviour or activities exhibited by colleagues.  A system whereby employees can communicate their concerns anonymously and securely, without having to fear any negative consequences is often.

What should you do when employee fraud is detected?

Following the discovery of employee fraud, the action taken by the employer can make or break the situation. If you do not follow a fair process you risk providing the individual an opportunity to pursue a claim for unfair dismissal on the grounds of procedural unfairness, regardless of the potentially cast-iron case against them. 

If you would like more information on issues covered in this article please get in touch with Lisa Wallis or a member of the employment team below.

Key Contacts

Related