Law in practice: Employee fraud

Workplace fraud could increase as the economy slumps, which is why vetting key employees is so important. Ross Bentley reports. 

Protecting secure information
Criminal record checks
Workplace fraud case study.

Workplace fraud is at "worryingly high levels" according to leadership body the Chartered Institute of Management, which in a recent survey of its members found that 48% of organisations have fallen victim to fraud.

With the economy in such bad shape, experts say employers are now at greater risk from cash-strapped employees who might be desperate enough to try and swindle money to pay the bills.

"As we move into a downturn and employees find they are in negative equity or they've lost their bonus, employers must ensure they protect themselves," says Andrew Durant, managing director of Navigant Consulting.

Durant says, in his experience, the most widespread workplace scam is procurement fraud, where employees use their purchasing power to siphon off funds or generate kickbacks. The theft of intellectual property or confidential information, such as customer databases, is also common.

One way employers can reduce the risk of being ripped off is to establish employee vetting policies for people joining the company, or moving into a position where they have the potential to embezzle funds or jeopardise an organisation's operations.

When it comes to employee vetting, HR must consider the Data Protection Act. A main tenet of the Act is that any information sought on an individual - such as employer references, verification of qualifications or criminal checks - must be obtained with their consent, says Charles Thomas, a business development manager at risk consulting company Kroll. People also have the right, under the Act, to request to see any information employers hold on them.

Protecting secure information

The information must be kept secure and only for as long as necessary for the purpose for which it was obtained.

"Strictly speaking, that means the information should be destroyed as soon as a person is offered the job, but in practice employers tend to keep it for around six months," says Thomas.

Any employers unsure about the implications of the Data Protection Act should check the Data Protection Employment Practices Code, according to Stuart Craig, an associate at law firm Mills and Reeve. He says by following this guide, employers can ensure they comply with the Act.

Craig says the main message of the code is to make sure the extent of any employee vetting is in proportion to the potential risk to the organisation. He distinguishes between verification - such as standard references from former employers - and vetting, such as criminal record checks or deeper background searches.

"Don't vet every candidate for a job; vet as late into the recruitment process as you can," he advises.

Employers should also be wary of using any information they unearth in a way that may be discriminatory. Craig gives the example of an employer carrying out a Google search on a candidate, or looking them up on Facebook and finding out they are a single mother or from an ethnic background and then deciding not to offer them the vacancy.

"Employers must only give objective reasons why a person is not offered a job," adds Craig, who suggests keeping a summary of why certain decisions have been made in case a disgruntled candidate wants to know why they were rejected.

Criminal record checks

Criminal background checks can be sought from the Criminal Records Bureau, but the extent of that search will depend on the industry you work in. Everyone has the right to make an enquiry about any unspent convictions but in certain cases, organisations that register with the bureau can obtain information about both unspent and spent convictions - that is convictions that have been deemed rehabilitated because of the nature of the crime and the time that has elapsed.

According to David Whincup, a partner at law firm Hammonds, this information is available to employers working with children and vulnerable adults, the administration of the law, the firearms industry, the health and pharmaceutical industry and senior managers in the banking and finance industry.

Employers that are recruiting someone who has spent a length of time working abroad may also find they struggle to get information about their background.

"Discard the idea of criminal checks in places like sub-Saharan Africa, Russia and China - they just don't have the information infrastructure in place," says Thomas.

He suggests the best way to find out about a person coming from a less developed country is to speak to former colleagues. But while vetting may give an employer peace of mind that a new recruit can be trusted, Craig warns that a heavy-handed approach can be counterproductive.

"Employers may decide that to rely on the honesty of the candidate is the best policy. To ask for criminal background checks may seem a bit draconian in some cases and employers could run the risk of offending or even losing good candidates," he says.

Case study According to Andrew Durant at Navigant Consulting, one area where employers slip up on employee vetting is forgetting to check workers who come into an organisation on a short-term contract or via a temping agency. He recalls one case where he was called in to investigate a £1m fraud by an employee who had originally joined the company on a short-term contract before being made full-time. "The right checks weren’t made when he started on a contract – our client tried to get references from former employers but then settled for a reference from the temping agency," explains Durant. "By the time he was offered a full-time job everyone assumed they knew him and no checks were made." But within 12 months the employee had perpetrated a massive procurement fraud, for which he eventually went to jail. "In hindsight, all the signs were there," adds Durant, who believes the problem was exacerbated by a lack of supervision at the company. "Our investigations showed the individual had a criminal conviction and had gone through 10 jobs in the previous three years."