UK: A FERTILE BREEDING GROUND FOR FRAUDSTERS? - Failure to prosecute employee fraud only leads to its increase.

Last Updated: 31 Aug 2010

Failure to prosecute employee fraud only leads to its increase.

Employees who commit fraud are seldom prosecuted in Britain. Most dishonest staff escape with dismissal rather than criminal proceedings.

However the incidence of employee fraud (which one expert defines as any deception that aims to move value away from the company) is very much on the increase. So should businesses take a tougher line with fraudsters?

Companies have three possible courses of action towards an employee when a fraud is discovered: dismissal, civil action or criminal action. Or they could proceed on all three fronts. But many businesses believe there are good reasons for not initiating criminal prosecution, says Simon Bevan, head of Arthur Andersen's fraud services unit. 'How companies react depends on their objective,' he explains. 'Civil courts are by far the best route for organisations if their main objective is to make financial recovery, rather than make an example of a fraudster.

The aim of a criminal prosecution is to punish the wrongdoer and will not of itself result in recovery of missing funds or assets.' Indeed criminal procedure can impede recovery of assets since defendants may claim the right to silence. Only some 15% of the cases that Bevan deals with result in criminal proceedings.

The difficulty of obtaining convictions encountered by the Serious Fraud Office has only helped to deter businesses from pursuing fraudsters in court, believes Dr Peter Harrop, director of cheque printers Kalamazoo Security Print and an authority on counterfeiting. 'Prosecution can be very costly, and if conviction seems doubtful companies ask whether it's worth it. More important, financial service companies such as banks don't want confidence shaken. In the past banks argued that their cash-point machines were foolproof. This was patently untrue since bank employees had devised systems to tap into customer accounts or fill the cash dispensers with counterfeit notes. Their employers chose not to prosecute rather than admit that their foolproof system had faults.'

Former corporate fraud consultant Andy Farrall believes that two factors underpin the decision of major corporations not to pursue prosecutions.

'First, the embarrassment factor. Is any company going to admit publicly that its employees have done them over? Second, the damage to their reputation or even their share price. It's simply not professional to be seen as a company which can be ripped off. I have experience of large multinationals that are hit for £100,000-plus and don't bat an eyelid. They believe it's cheaper to take the hit, and dismiss the employee, than risk publicity which may worry shareholders.'

For obvious reasons, retailers may be more likely to take a tough stance towards fraudulent employees, despite the publicity. The sums involved are often fairly small, and it could be wise pour encourager les autres.

'It's important that employees know they cannot steal or commit fraudulent acts against the company and that, if discovered, prosecution is a strong possibility,' says a spokeswoman at Marks & Spencer.

Ian Huntington, KPMG's partner in forensic accounting, argues that companies which turn a blind eye to fraud are doing nothing to curb a growing social problem. Farrall agrees strongly. More than half the business fraud in Britain is committed by a company's own employees and all offenders should be prosecuted, Farrall maintains. 'Prosecution sends a clear message that the company takes fraud seriously, and may lead fraudsters to think twice.' Most fraud, he says, is not the result of professional scams. It happens when ordinary employees spot a gap in organisational systems, and companies could do more simple checks which bring fraud to light. 'Provided checks are taken fairly and at all levels, then employees have little cause to complain. Fraud breeds fraud, and companies can fail as the result of unchecked theft.'

Andersen's Bevan counters that calling in the police is not always the best step. 'Managers must remember that if their company is the victim of fraud, the money will simply disappear if they don't act immediately.

For the police, complex frauds where the victim is the company, often take lower priority than, for example, frauds involving individuals where there is a greater level of public interest. Rather management must set out, from the start, with the aim of recovering as much money as quickly as possible, by all means at its disposal.'.

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