Internal fraud is a hidden cancer in any organization. It can sap a company’s financial reserves, jeopardize ongoing operations and impact its profitability. If the fraud becomes public knowledge, the company’s reputation can be seriously damaged, leading to loss of credibility with customers and key stakeholders.
Therefore, it’s essential for businesses to understand how to handle suspected internal fraud from initial detection and investigation, to criminal and civil prosecution. Here is a step-by-step strategy for tackling these difficult matters:
Put systems in place to detect internal fraud. This should include a establishing a whistle-blowing procedure, monitoring high-risk jobs and conducting regular internal reviews and audits. Employees who point out suspected criminal fraud or file whistleblowing reports should be protected from victimization, harassment, discrimination, and threats of disciplinary action.
Record all allegations of fraud. This can be done with a simple spreadsheet, a reporting database, or a full-blown case management system.
Assign independent in-house investigators to probe the allegation of fraud. The team investigating the situation should be carefully selected to avoid potential conflicts of interest and typically include a senior auditor, a corporate security representative and in-house counsel.
Secure the evidence. It’s important for the investigative team to move quickly to obtain the electronic and paper evidence.
Conduct a through investigation and document each step. The investigators should pursue all leads to determine the extent of the wrongdoing. That includes gathering and reviewing documents, and interviewing employees and outside vendors, if necessary. All investigative material, including evidence, opinions and conclusions, should be labeled as confidential and kept in a separate file.
Plan carefully before confronting the suspect employee. After gathering the facts and obtaining solid evidence, the investigative should confront the suspect in a carefully planned, witnessed, and documented manner, following the advice of in-house counsel.
Document the employee’s response, including any admissions or concessions. This may involve asking the employee to sign a written statement with the account provided – evidence that could be invaluable in later civil or criminal proceedings. Be aware of applicable privacy laws and be sure not to violate those rules.
Take action. After determining that fraud has been committed, the appropriate action must be taken. An employment lawyer should review any communications to the employee. The decision should also be communicated to company officers, the board, the audit committee, and any key supervisors.
Be prepared to handle negative publicity. Since news of an internal fraud or employee termination may become public knowledge, the company should formulate a consistent message and be prepared to respond to questions from the media, customers and other external audiences.
Finally, it’s essential to review the matter, identify mistakes and take steps to reduce the likelihood of a similar problem in the future.
Arti Sangar, Michael Diaz Jr. and Carlos F. Gonzalez are attorneys with Diaz Reus & Targ, LLP, a Miami based international law firm serving the U. S., Latin America, Asia, Europe, and the Middle East. To reach the authors, visit www.diazreus.com.