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other background investigation. Employers
should also scale background checks to the
risk the particular position presents to the
company and its customers.
Many companies also overlook the risk
that counterparties present. According to
Global Profiles of the Fraudster
, 32% of
fraud events resulting in $1 million or more
in losses was committed by employees col-
luding with outsiders. These outsiders can
include vendors, suppliers or customers.
Yet these third-parties are seldom subject to
the same background checks as employees.
A thorough third-party diligence system is
critical for businesses of all sizes.
Insurance
Most businesses are familiar with commer-
cial liability, errors and omissions, director
and officer liability, business interruption
and hazard insurance. Fewer are familiar
with “employee dishonesty” coverage,
which helps alleviate losses in the event of
employee fraud. For example, according
to one Arthur J. Gallagher & Co. case
study, this type of policy helped a large
public university recover losses when its
treasury department employee fraudulently
invested university funds in a Ponzi
scheme in exchange for a kickback from
the scheme. Such insurance would seem
especially critical when the recipients of the
ill-gotten gains have either squandered the
money, sent it offshore, or otherwise made
it impossible to recover.
How Should a Fraud Be Investigated?
When an employee fraud is detected, the
company must take immediate steps to
investigate and remediate. No single set
of rules exists for investigations, but effec-
tive investigations share many common
characteristics. They are expeditious, but
thorough and broad enough to capture
the full extent of the employee fraud and
its various components. The investigators
who review documents and interview
witnesses should be impartial and free of
biases. Documents, hard drives and other
electronic materials should be immediately
preserved lest they be destroyed through
routine policies or concealment by the
fraudsters and their cohorts.
At the outset of an investigation, care
must be taken to identify the precise
client of the investigation team. Is it the
company? The board? A special committee
created by the board such as the audit com-
mittee?This question is imperative because,
at the end of the investigation, some type of
report (verbal or written) will be made. To
preserve the attorney-client privilege, the
report should be made only to the client.
Individuals conducting employee inter-
views during the course of the investigation
should give warnings to the employee
fraudsters or coworkers in line with the
seminal Supreme Court decision,
Upjohn
Co. v. United States
, 449 U.S. 383 (1981).
Upjohn
established the corporate attorney-
client privilege for employee interviews
conducted during internal investigations.
So-called “Upjohn Warnings” inform the
interviewee that: the company (not the
employee) is the client; the employee is
not being represented by the person con-
ducting the interview; the communication
is subject to the attorney-client privilege;
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