Covid-19: the perfect storm for employee fraud

Busi­ness­es have long con­tend­ed with employ­ee fraud, from false expense claims to data theft. But for some experts, Covid-19 could deep­en the dan­ger.  

The pan­dem­ic has dri­ven a widescale move to remote work­ing. When com­bined with the sig­nif­i­cant eco­nom­ic and social impact of the virus, some believe this could boost the con­di­tions for inter­nal fraud. 

The risks were on stark dis­play in a June 2020 sur­vey by Cross­land Employ­ment Solic­i­tors, which found that more than a third (34%) of UK employ­ees had been asked by their boss to work while being fur­loughed by their com­pa­ny, an act of fraud under the Coro­n­avirus Job Reten­tion Scheme. 

The triggers of employee fraud

In its 2020 Report, the Asso­ci­a­tion of Cer­ti­fied Fraud Exam­in­ers esti­mat­ed that 5% of all rev­enue gen­er­at­ed by organ­i­sa­tions, or around £3.5 tril­lion glob­al­ly, is lost every year through employ­ee fraud. The “fraud tri­an­gle” the­o­ry out­lines the three com­po­nents that help dri­ve such behav­iour: pres­sure or incen­tive, oppor­tu­ni­ty, and ratio­nal­i­sa­tion. 

Covid-19 could have a dan­ger­ous impact in some or all of these areas. For exam­ple, per­son­al finan­cial pres­sure has been much in evi­dence as peo­ple grap­ple with an uncer­tain employ­ment land­scape, says Richard Hunt, founder and man­ag­ing direc­tor of Turnkey Con­sult­ing, a risk man­age­ment con­sul­tan­cy. “By Decem­ber 2020, near­ly 9 mil­lion peo­ple had to bor­row more mon­ey because of the pan­dem­ic,” Hunt says.

Work­ing from home also feeds the oppor­tu­ni­ty chan­nel, allow­ing unusu­al behav­iour pat­terns to go unno­ticed while remov­ing the sup­port that comes with reg­u­lar face-to-face con­tact and check-ins. Fur­loughs and redun­dan­cies put addi­tion­al pres­sure on remain­ing team mem­bers, not just in terms of work­load, but also in changes to organ­i­sa­tion­al roles and process­es. This can cre­ate poten­tial con­flicts in an employee’s respon­si­bil­i­ties. 

“It may be that instead of one per­son order­ing goods and anoth­er receiv­ing and pay­ing for them, the two tasks now fall to one indi­vid­ual,” says Hunt. “With the all-impor­tant seg­re­ga­tion of duties removed it’s an easy step for this per­son to process pay­ments for goods they might have ordered them­selves.” 

And for employ­ees who are real­ly strug­gling finan­cial­ly or fac­ing some large one-off expens­es, ratio­nal­i­sa­tion might come easy. It could be sim­ple enough to jus­ti­fy fraud­u­lent actions as short-term bor­row­ing from an employ­er that will be repaid the fol­low­ing month. But if the organ­i­sa­tion fails to detect the fraud, the employ­ee might bor­row more – with­out mak­ing a repay­ment. 

Prevention, not cure

Employ­ee fraud isn’t always the result of mali­cious intent. Some­times it stems from des­per­a­tion, incom­pe­tence, or even igno­rance. How­ev­er, it always requires sen­si­tive han­dling by busi­ness lead­ers. 

In the cur­rent eco­nom­ic cli­mate, employ­ers have shown greater sym­pa­thy to the pres­sures that employ­ees face in terms of mon­ey and well­be­ing. How­ev­er, these sym­pa­thies may not extend to those act­ing dis­hon­est­ly, irre­spec­tive of any per­son­al fac­tors behind the behav­iour. 

The most effec­tive approach is to focus on pre­ven­tion, rather than cure, says Cather­ine Kerr, employ­ment law part­ner at Pri­mas Law. For most employ­ees who feel dri­ven to behave in a way that is inap­pro­pri­ate and out of char­ac­ter, there will be a build-up lead­ing to a tip­ping point, she says. 

“Employ­ers who inter­act with their team and embrace men­tal well­be­ing as part of their cul­ture are more like­ly to iden­ti­fy these prob­lems before they get out of hand,” Kerr says. “And an employ­ee who feels sup­port­ed is less like­ly to be pushed to act in a way that runs con­trary to the employ­er’s best inter­ests.”

While employ­ee edu­ca­tion can help min­imise the risk of exter­nal fraud, it is less like­ly to deter inter­nal fraud; employ­ees who behave fraud­u­lent­ly will in most cas­es already under­stand the impact of their actions. “Organ­i­sa­tions should focus on cre­at­ing a sup­port­ive work­ing envi­ron­ment in which an employ­ee can look to their employ­er for help and under­stand­ing in chal­leng­ing times,” adds Kerr.

Measures to minimise internal fraud

Employ­ers can take steps to min­imise the risk of inter­nal fraud. For exam­ple, they could imple­ment robust anti-fraud poli­cies, rein­force a zero-tol­er­ance pol­i­cy and con­fer account­abil­i­ty on every­one in the organ­i­sa­tion. Reg­u­lar eval­u­a­tions and effec­tive per­for­mance reviews through appraisals should high­light a change in char­ac­ter, a decline in per­for­mance or evi­dence of finan­cial dif­fi­cul­ties, all of which can indi­cate poten­tial prob­lems. 

Some­times employ­ees are coerced into fraud by col­leagues or line man­agers. In some cas­es, they may be aware of fraud­u­lent activ­i­ties but fear to report them. It’s impor­tant to intro­duce a con­fi­den­tial com­mu­ni­ca­tion chan­nel for whis­tle-blow­ers, says Andrew Durant, senior man­ag­ing direc­tor at FTI Con­sult­ing.

“If they don’t feel safe they won’t step for­ward,” Durant says. “Most frauds are detect­ed by tip-offs. Employ­ee edu­ca­tion on the risk of fraud, and how fraud­sters may tar­get them or the busi­ness, is key to pre­vent­ing and detect­ing fraud.”

What should be done if inter­nal fraud comes to light? The first step is to mobilise HR, keep­ing the num­ber of indi­vid­u­als involved to a min­i­mum to avoid any unin­tend­ed ampli­fi­ca­tion of the issue. The rel­e­vant indi­vid­ual should then be inter­viewed, with the inten­tion of putting the alle­ga­tion to them and learn­ing why they may have com­mit­ted fraud.

This may result in the ter­mi­na­tion of the individual’s employ­ment. How­ev­er, the process will help the busi­ness under­stand the under­ly­ing issues that led to the fraud or may be present across the organ­i­sa­tion, “and put in place changes or con­trols to ensure that the sit­u­a­tion isn’t repeat­ed”, says Iskan­der Fer­nan­dez, part­ner and fraud expert at BLM.