Law in action: responding to employee fraud

In this article we describe an interesting recent case, explaining the issues involved, how we handled it highlighting points of legal and practical interest.

Whilst many employers take steps to safeguard against fraud from outside sources, internal fraud monitoring procedures are not always as well considered. Employers place great trust and confidence in their employees, especially those responsible for administering company funds. When employees breach that trust, it can be difficult to know how best to respond to protect the business.

One of our clients recently discovered that an employee had embezzled around £70,000 from the company over a period of two years. The employee had raised false invoices, which he then authorised for payment. In addition, he authorised the payment of genuine invoices twice, sending the second payment to his own bank account. When our client discovered the fraud, the employee admitted everything.

By the time the employer had sought legal advice, it had already carried out an internal investigation into the employee’s actions and referred the matter to the police. Whilst the police may prosecute a theft of this nature, the decision to involve the police should be considered thoroughly. It may not always be in the best interests of the company to involve the police immediately or at all.

There are a number of factors to take into consideration upon the discovery of an employee fraud. We recommend employers take legal advice as soon as possible in order to put in place an appropriate strategy to, firstly, attempt to recover the stolen funds and, secondly, to manage the wider position. We will want to consider, amongst other things:

• the extent to which further investigation is required, including, for example, the potential instruction of a forensic accountant or investigator, and how best to secure evidence
• notifying insurers and, as appropriate, banks
• police involvement (as referenced above)
• the employer’s relations with customers – have they been implicated in the fraud and how do we reduce the likelihood of commercial damage
• whether press management is required

Quite often, we will not want to put the employee (or other employees) on notice of these initial steps as there is always a risk that an employee (or other employees involved in the theft unbeknownst to the employer at that time) will attempt to destroy evidence or dissipate assets. It is advisable to involve only those who are strictly necessary.

In terms of legal action against the employee, proceedings may be issued in an attempt to recover the stolen money. In the first instance, we will always consider whether the employer should make an application to court for a freezing injunction against the employee (and any implicated third parties). A freezing order is an interim injunction that restrains a party from disposing of or dealing with its assets. The purpose is to preserve the employee’s assets until judgment can be obtained or enforced. The court has power to freeze all types of assets, including bank accounts, shares, motor vehicles and land situated anywhere in the world. Other injunctions against the employee may also be appropriate.

We can also take steps to trace assets, for example, by making an application to court for what is known as a Norwich Pharmacal order (NPO). A NPO may be obtained where an employee has transferred money into the bank account of an unidentified third party. The bank of the third party may be ordered to disclose copy statements and account information to enable us to identify other participants to the fraud and the destination of the stolen funds.

As stated above, in the case in question our client had already carried out a preliminary investigation and confronted the employee. The client was satisfied that it had uncovered the full extent of the fraud and that its business was protected going forward. Its primary objective was to recover the stolen money. However, the police investigation discovered that there were very limited funds in the employee’s bank accounts. The employer’s money had been spent over the two year period. In addition, the employee owned no property and did not appear to own any other assets of value. In such circumstances, it was necessary for our client to consider the prospects of making a financial recovery against the employee. There was a real risk of ‘throwing good money after bad’. In the end, we were able to successfully petition for the employee’s bankruptcy and our client pursued criminal charges.

For further information about any of the issues raised above, please Kate Steele.