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Crime insurance can help protect against employee fraud

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A former employee of San Francisco's Tenderloin Housing Clinic recently was arrested and charged with embezzling $29,000 in tenant rent money from the nonprofit organization, which operates the city's largest housing program for homeless adults.

The clinic, which has 250 employees, fired James Eugene Holland, 41, two years ago after the theft was discovered. In one instance, Mr. Holland placed a tenant in clinic-managed housing without notifying his employer and arranged for the rent money to be sent to his personal post office box, according to police reports.

The housing organization has not recovered any of the stolen funds.

This type of employee-perpetrated fraud has been increasing since the beginning of the recession and is likely to continue unless employers implement better controls to detect and prevent it, experts warn.

Fortunately, low-cost crime insurance is widely available to help employers victimized by such scams to recoup at least a portion of any losses they incur (see related story).

According to a survey of more than 500 fraud examiners conducted by the Assn. of Certified Fraud Examiners in March 2009, more than half indicated that employee theft had increased in frequency in early 2009 from early 2008. Additionally, 49% reported that the sums lost also grew over the prior-year period.

Moreover, such fraudulent activity could proliferate, because many employers have cut their workforces, leading to reduced internal controls and fewer fraud prevention measures, and leaving them more vulnerable, suggests ACFE's report, “Occupational Fraud: A Study of the Impact of an Economic Recession.”

Another report by Boston-based investigators Marquet International Ltd. dubbed 2010 “a banner year for employee theft in the United States.” The “2010 Marquet Report on Embezzlement” cited a 17% increase in employee-perpetrated fraud cases over 2009. “Employee misconduct and internal corporate fraud will continue to be problems as the U.S. economy struggles and unemployment hovers at levels nearing 10%,” the report predicted.

“Unscrupulous employees have been biting the hand that feeds them for a very long time,” said Richard Plansky, senior managing director at security firm Kroll Inc. in New York. “But the combination of tough economic times and increased access that technology gives employees is making it easier for them to steal.”

Kroll's “Global Fraud Report” found that in fraud cases where the perpetrator was identified, 55% were “an inside job.”

“If you look at all frauds—where perpetrators are known or unknown—it's reasonable to assume that percentage is actually much higher,” said Mr. Plansky, who pointed out that in many cases the culprit is never positively identified.

“We expect to see more of this in all companies, especially middle-market companies that can be more vulnerable because they have fewer resources than large companies” to prevent and detect such activity, Mr. Plansky said.

Matthew Crooks, assistant vp at Willis Executive Risks in Pittsburgh, said he saw a 40% surge in crime losses among Willis North America clients in the last six months of 2008 as the economy headed downhill. “They went up another 60% in the first six months of 2009,” he added.

“When people start to worry about where their next paycheck is going to come from, they are more than willing to set up some sort of a scheme,” Mr. Crooks said. “They run the gamut from expense-report fraud, depositing company checks into their own accounts, vendor schemes.”

“It can happen to people who are otherwise good-intentioned; maybe they are trying to make a mortgage payment or put food on the table,” added Dave Recker, a marketing specialist at Willis Executive Risks, also in Pittsburgh. “These aren't hardened or overly sophisticated criminals.”

The incidence of employee fraud is generally higher in small and midsize businesses, according to experts, because such firms often don't have adequate internal controls in place.

“Mid-market companies are more vulnerable to employee theft,” said Mr. Crooks. “A lot of times smaller companies don't have the number of employees needed to put controls in place.”

The recession also has exacerbated the situation for many mid-market companies, Mr. Crooks said.

“With layoffs, people have been wearing multiple hats, and controls have become even more lax. Maybe there were five people that were doing it and now there are only three, so things tend to slip through the cracks,” he said.