Prevent your staff from committing fraud

According to Johan Klokman, senior consultant Fraud & Integrity, at Hoffmann in Almere, corporate fraud is becoming more and more common in the Netherlands. And it can cost your business dearly. For example, the hospitality and retail sectors annually suffer losses of over €200 million thanks to internal fraud. "Prevention is better than cure. Businesses need to put considerably more effort into preventing internal fraud."

What is internal fraud?

"Internal fraud is best described as stealing from the boss and cheating by employees," Klokman says. Examples include employees who:

• steal products, 'borrow' money from the cash register, or give discounts to friends and family
• sell or give confidential business knowledge to a competitor
• do business with non-existent suppliers and create fake invoices for them
• transfer money to their own bank account without permission
• submit incorrect claims for time or costs
• go absent without a valid reason, such as unauthorised sick leave: calling in sick when they are not.

Prevent internal fraud

Prevent internal fraud in your business. Klokman lists 7 measures businesses can take.

1. Screen your staff

Hire reliable staff. "Employers often look at suitability rather than reliability when applying for a job", says Klokman. "So screen new employees. That way, you will reduce the risk of hiring someone who cannot be trusted."

Screening might include asking for diplomas, checking references, and requesting a certificate of good behaviour. Or have a conversation with the candidate about reliability.

2. Draw up a code of conduct

House rules include a code of conduct for your employees. Examples include agreements on such topics as how to handle discrepancies in cash, returns, purchases by staff, and the management of keys. The code should also set out how people should treat each other within your business. Make clear what the desired behaviour is, as well as the consequences of breaking the rules. Get your employee to sign the house rules when they are joining the company. Always set a good example yourself as the employer.

3. Make it easy to talk about

Make it easy to talk about fraud. Bring up the topic regularly in work meetings and performance reviews. For example, go through the rules and procedures, and try to create an atmosphere where colleagues call each other to account for any unacceptable behaviour.

4. Do not lead them into temptation

Look at your business processes through the eyes of an employee. Are there a lot of temptations to commit fraud? Perhaps you are leaving a lot of items unattended in your warehouse or are not checking invoices. Opportunity often makes the thief. Try to mitigate your risks.

5. Committed employees

Klokman says committed employees are less likely to commit fraud. "Involve your employees in your business. Give them responsibilities, and show you value their work by giving them compliments. The more strongly an employee feels committed to their work, the higher the threshold for fraud."

6. Protect company details

Keep an eye on who has access to sensitive company information (in Dutch). To reduce the risk of leaks, it is wise to give staff or suppliers access only to information they really need for their work. Also, make sure temporary access to data really is temporary. And see if your IT system can provide notifications of unusual data traffic, such as emails with large attachments.

7. Keep an eye out for telltale signs of fraud

It is not easy to detect fraud committed by employees. Klokman lists a number of telltale signs to watch out for.

• An employee makes up excuses or leaves suddenly for no apparent reason.
• An employee always gets in to work first and is the last to leave.
• Failure to keep to rules and procedures.
• An employee's lifestyle does not match their income.
• An employee makes sure to work without colleagues around who can watch, or always works alongside the same colleague. An unwillingness to hand over any work to colleagues.
• Often ambiguities in hourly claims or administration.
• Items hidden in the staff room or lockers.

"An employee’s personal circumstances often play a role in their committing fraud. Examples include financial problems caused by divorce or addiction. You may also have to deal with resentment, for example, an argument between an employee and the employer over a bad review or a missed promotion", Klokman says. Identify personal problems early, and talk about them with the employee. Ensure a good working atmosphere, and engage with dissatisfied employees.

A dispute

Klokman tells of a director and major shareholder (directeur-grootaandeelhouder, DGA) who started a business together with an employee. "The DGA brought in the money; the employee, the know-how. The business turned out to be really successful. After a few years, the DGA was rich and had a nice house and a fancy car. The employee had seen only their salary grow with the business and now wanted shares in it. The DGA refused to give shares to the employee. The employee was angry about this and started engaging in fraud. They started selling goods from the business on the black market. The DGA discovered the fraud, and fired the employee."

Five steps to take if you suspect fraud

Do you suspect that an employee is engaging in fraud? Then follow these five steps:

1. Investigate

Do research first and look for evidence. "For instance, speak to colleagues, examine business emails, view camera footage, or examine company phones", Klokman says. The privacy of employees is an important issue here. You must comply with the privacy rules in the General Data Protection Regulation (GDPR). This is a European privacy law that requires that companies and organisations process personal data with care. "When conducting an investigation, always balance the employer's legitimate interest against the privacy of the employee concerned. So you must have a good reason for launching a fraud investigation. For example, you are not allowed to launch an investigation just because an employee is not doing well at their job." For an independent investigation, it is sometimes better to call in specialists, such as a detective agency or the police.

2. Suspend an employee

It may be necessary to suspend the employee concerned at the start of the investigation. But you cannot simply suspend them just like that. You have to be able to show that the employee’s presence would interfere with the investigation. The employee can ask a court to lift the suspension. An unjustified suspension can lead to damages and complicate a possible dismissal.

3. Issue a warning

For a minor offence, you can opt for an official warning. It is a good idea to put reactions, comments, agreements, or witness statements on paper, and to have them signed by the employee concerned.

4. Dismissal

If the employment relationship is so severely disrupted due to internal fraud that you cannot continue, you will move on to dismissal proceedings. "Always seek legal advice when you do this. Do you have enough evidence for dismissal, or do you need to investigate further? Has the employee had a chance to respond to your findings? Be careful: firing an employee too quickly can lead to hefty damages. And there is nothing more infuriating than having to pay compensation to a 'fraudster' as well", Klokman argues.

5. Criminal measures

If you have a penalty clause for corporate fraud in the employment contract (in Dutch), you can impose a fine. You can also seek damages through criminal proceedings (Dutch) or a civil claim (in Dutch).