Employee Fraud: 6 Steps to Substantiating Your Claim and Recovering Losses
By: Matt Hanson (Property Casualty 360) April 2016
Managing your company’s fidelity or employee dishonesty claim is a challenge. The process can be part insurance claim, part investigation and part financial audit. Most claims also involve human resources (HR) and legal considerations surrounding employee rights and termination, and they may necessitate referral to law enforcement or legal proceedings for civil recovery. For even the most experienced risk management teams, proper and timely claim submission requires careful deliberation and technical know-how.
How do you effectively manage fraud claims to substantiate allegations, recoup your losses and prevent future wrongdoing? The insured’s claim process begins with an allegation that must be investigated. Subject or witness interviews and evidence gathering play a key role in accurately documenting and corroborating the Proof of Loss—the detailed claim filed with your insurer. As you investigate, consider the following steps and best practices:
Step 1: Preserve and gather the evidence
The starting foundation of most claims is an allegation or complaint. It may originate from a whistleblower hotline call, a formal complaint from a witness, an observation from the year-end auditors or even a confession. Most often, the allegation occurs without the bad actor’s knowledge. The ensuing steps in the claim process involve establishing facts, and corroborating those facts and timeline with evidence.
The most important first step is understanding what is alleged and preserving the records that prove or disprove the allegations. If the hotline caller says the head of procurement is steering contracts, then preserve vendor applications, bids and emails. If the complaint alleges that the controller is running customer payments through a personal account, retain cash receipt journal entries and bank statements. You will need this evidence later and avoid a situation in which the suspect has the opportunity to destroy or alter records before you retrieve them. If necessary, postpone scheduled document destruction or archive dates.
Most claims require the use of records to substantiate the loss. Records can include company documents or external documents from third-party service providers. When gathering evidence, consider the completeness and accuracy of such documents. Also recognize that to your insurer, external records are valuable and bolster your claim. For example, if you have accounts payable transactions that are important to demonstrate payments made to an entity, corroborate the transaction dates and amounts with bank statements produced from your bank. Claim preparers should also consider the proper dating of records to fully address the timeline of the alleged acts.
Another key consideration: Document the chain of custody and implement safeguards to protect the integrity of the records. For example, if the investigating party decides to re-image a subject’s computer, do so in a way that makes certain the evidence stays intact without any edits or inappropriate access by others.
Step 2: Interpret the evidence
Most employee frauds are carried out by an individual with direct knowledge of a control weakness that can be exploited. A fraud involving the override of controls within the Accounts Payable authorization process likely involves a person involved in that process. Follow the evidence to particular suspects and dig deeper. Find individuals you can trust and that can help you understand the following:
– How can these documents be interpreted?
– How are these documents prepared in the ordinary course of business? What are they used for?
– What is the business process owner’s interpretation of the documents, and how do those interpretations relate to my own?
– Do other primary records better respond to the allegations or questions posed?
A common mistake is relying on evidence that is believed to offer proof, but in fact is not responsive to the investigation theory or allegations. For example, a check disbursement may contain an electronic signature, but if it was automatically printed on the check it may not indicate that the signature’s owner had knowledge of the transaction.
Step 3: Exhaust the search
Exhaust the search of records by reviewing those additional documents that may complete the narrative—even if those documents do not corroborate the claim. Such exculpatory records show insurers you have considered everything. They can even be used to refute statements. For example, does the subject employee’s employment timeline fit with the allegations? What about his or her IT user access and footprint? Are absentee or employee vacation records consistent with the allegation?
The complete Proof of Loss should evaluate these documents and address inconsistencies or substantiate claims.
Step 4: Interview the witnesses
An important early step in the Proof of Loss is conducting interviews. Interviews are crucial. Standard company documents like bank statements can speak for themselves in fact finding, but interviews can explain the who, why and how―critical details when describing the claim.
Typically, the first interview is with someone other than the suspect, such as a co-worker. You will likely only have one shot at asking the suspect questions to address the full scope of the claim, so you will want to first gather enough information to make a credible allegation against the employee in question. A proper interview will help you get a statement, establish facts or validate allegations, and decide where to go next in terms of additional interviews or evidence.
When conducting interviews, keep the following in mind:
– Ditch the recorder and bring a note taker. A recorder may cost you the openness and conversation-like flow that the interview should have. Designate another person to sit in and take notes. That way, you won’t be slowing things down by documenting the conversation yourself. In addition, this provides for two people to corroborate the statements made.
– Tell the witness your objective ahead of time. This will lower anxiety, increase trust and get to the point more directly than if the subject is responding vaguely or defensively while trying to understand your motives. Say, “I’d like to meet with you tomorrow to ask you some questions and get a better understanding of the procurement process. You’ll be helping me respond to an inquiry from executive management.”
– Bring relevant documents. Most fraud claims are established through documents and supporting evidence. Often, documents like company procurement or payment approval forms must be explained.
-Keep things open. Ask open-ended questions, and let your interviewee tell the story. Allow for silences between answers. Silences are uncomfortable, and many people fill them by answering unasked questions or revealing additional information.
– Be direct. You should ask direct questions around the main allegations. The most important question: Did you do it? Most interviewers aren’t so upfront with their line of questioning, either because they feel it may be rude, they want to give the subject the benefit of the doubt or they don’t feel they have enough evidence pieced together. Avoid this mistake. Asking this question accomplishes much:
– If guilty, it will make most interview subjects noticeably uncomfortable,
– It locks the subject into providing a statement, and
– It can quickly give you new information.
Step 5: Take appropriate action
Decide whether to terminate or suspend the suspected employee(s), and consider referring the matter to law enforcement. This is a sensitive part of the claims process that should be considered from the beginning.
Terminating the employee can immediately stop the fraud and help preserve records. Taking quick action against the suspect can also send a message that acts as a deterrent: Employee fraud matters are dealt with swiftly by the company. Termination can also prompt others to volunteer information. On the other hand, a wrongful termination can bring its own legal headache. Some companies find that suspension with pay is the best course until the investigation is complete.
Referring matters to law enforcement may be advantageous if the company aims to leverage outside investigation results to help establish the subject’s assets or collusion with outside parties. Involvement from law enforcement may also be an advantage if the company seeks to freeze the ill-gotten assets of the fraud for potential recovery in a criminal or civil matter. However, claimants should bear in mind that law enforcement may not share the same objective or have the same investigation timeline, nor are they obligated to file charges or discuss the investigation results.
Insured companies are advised to retain counsel at the onset of an investigation to determine the most appropriate course of action.
Step 6: Prepare for the adjustment process
Document everything to a level of detail that enables re-performance. This makes the insurers’ job easier; if the claim adjusters can review the Proof of Loss and follow the same investigative steps, they are more likely to draw similar conclusions. Providing comprehensive details on your process upfront will cut down on the stress, the number of follow-up requests and the amount of time to receive your recovery.
