Following a number of recent high profile cases of employee fraud, including cases in FÁS and Iarnrod Eireann, Joanne Hyde, Head of Employment Law at Eversheds O’Donnell Sweeney describes how more employers are trying to understand how to prevent similar occurrences in their workplaces and identify how they should deal with the unexpected discovery of a fraud.

It is unclear whether there has been an increase recently in the levels of employee fraud or whether it is simply the case that employers’ increased scrutiny of expenditure is leading to higher levels of detection.  Either way, these recent cases have provided a warning of the organisational turmoil caused by the discovery of fraud and the cost from a reputational, a financial and a legal perspective.

First, it is important to understand what fraud is and the ways in which it commonly manifests itself in a workplace.  Fraud is an intentional act of deceit, committed with the express purpose of obtaining an unjust or illegal advantage.  The key element in fraud is the element of “intent”, making fraud different from other types of employee misconduct such as poor accountancy practices or failure to follow an ethics policy.

Fraud in the workplace can take a multiplicity of forms, ranging from clocking offences and falsifying expenses through to intricate, well planned deceptions involving multi-millions of euro and criminal charges as observed in some recent cases.  However, there are some common themes in the reasons why fraud tends to occur. The management of fraud investigations in the workplace also indicates some recurring issues.

In almost all cases involving fraud, there is a confluence of pressure and opportunity.  In that context, it is probably not a coincidence that we are seeing an increase in cases at a time of economic downturn.  Clearly many employees are under greater personal financial pressure.  However, business pressures also contribute.  Redundancies in the workplace mean that those employees who are left have more work to do with fewer resources.  There can also be a blurring in roles and responsibilities as well as a lack of focus on normal procedures and policies, creating opportunities for fraud that were not previously present.  Businesses in turmoil and employees under pressure create the perfect storm for a fraudulent employee to flourish.

Most employers when faced with a potential fraud hesitate about where to start.  There are inevitably a number of competing practical and legal issues.  At the outset, it is rarely clear how extensive the potential fraud might be and how many employees it might involve.  Employers struggle to balance the gathering of evidence with removing the possibility of the employee doing further damage if left in the workplace.  In the early stages after uncovering a potential fraud, many employers are unclear about their overall goal.  Typical objectives range from simply removing the corrupt employee from the workplace to bringing a civil claim to recover losses or even securing sufficient evidence to mount a criminal prosecution.  Each of these legal claims has a different standard of proof and operates to different timelines.

Often the best place to start is by dealing with the employment issues. In any subsequent unfair dismissal case, it is not necessary to satisfy a tribunal that the employee was, in fact, engaged in fraud.  The employer must simply establish that he formed a view based on reasonable grounds that the employee was involved in gross misconduct.  This is clearly a less onerous burden of proof than that of beyond reasonable doubt in the case of a criminal case or even on the balance of probabilities in a civil case.

Most cases of fraud involve the untangling of a mass of evidence which can take a long time.  There will usually be a difference in the quality of the evidence in relation to different allegations.  For example, there may be solid documentary evidence to support a particular allegation, while other allegations may be capable of different interpretations on the basis of the documentation or even dependent on evidence from other employees.

While a civil or criminal prosecution will require very strict proofs as to liability on each and every allegation, it is worth considering in an employment context if it is possible to limit the allegations to a number of sample allegations involving those that appear strongest.  This may enable an employer to move more quickly and also to limit the number of other employees who need to be involved in this phase of the investigation.

Prior to beginning any formal disciplinary investigation, it is important to check the presence and adequacy of a number of key documents.  First, it should be confirmed that the employee has an employment contract and also that it contains the necessary clauses.  For example, a senior executive may have the same contract he was given twenty years ago when he joined the company and therefore it may have no reference to critical policies or to the ability to suspend the employee.  It may even be the case that there is no contract in place, immediately giving the employee an opportunity to raise a query to which there is no satisfactory answer.  In the context of potential cases of fraud, employers should review the contracts of all key personnel, ensuring that they are up to date and reflect the seniority or sensitivity of the employee’s current position.

An employer in a fraud investigation will also be in a much stronger position if the appropriate policies are in place.  These include not just the standard disciplinary policy but also policies on expenses, fraud, ethics/business practices and whistle blowing.  Having the right policies in place may not prevent a fraud, but they should enable earlier detection and will certainly make it easier to frame allegations of unacceptable behavior.

Once an employee is faced with having committed a potential fraud, a number of different things can happen.  It is important for an employer to pre-empt and prepare for those different eventualities.  A common reaction of an employee facing such a serious allegation is to offer to resign immediately on the basis that there will be no further action by the employer, including no claim to recover damages and no reporting to the Gardai.  The correct response to such a proposal will vary from case to case depending on the seriousness of the matter and the quality of the evidence.  Other employees react by submitting an illness certificate, typically citing stress.  Again, circumstances will determine the appropriate response to such a development and whether it needs to impact on the progress of the investigation.

Given that the business will, hopefully, survive the fraud, an employer also needs to focus on practical handover issues and how the issue will be communicated to customers and other employees.  Incidents of fraud trigger huge levels of concern amongst co-workers who fear, justifiably or not, what role they may be suspected of playing in the fraud.  If it is necessary to interview other employees in the context of any investigation, it is important to be clear on their status in the investigation and whether they are being interviewed as part of fact finding, or they themselves are under investigation.

The unearthing of a fraud is one of the most traumatic events that can happen to an organisation.  It has reputational impact as well as potential financial impact for a company.  Having the appropriate polices and training in place in advance may reduce the risk of the fraud occurring.  However, the possibility of a corrupt employee can never be entirely removed and the manner in which an organisation reacts and manages the fraud investigation can significantly reduce its negative impact.

For further information, please contact your usual Eversheds O’Donnell Sweeney contact or:

Joanne Hyde
Partner
Telephone: +353 1 6644 252
Email: jhyde@eversheds.ie
Website: www.eversheds.ie