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Preventing Fraud Through Background Checking

 

There are many fraud prevention strategies to minimise the risks of fraud in business. Understanding your business and the types of fraud that can affect it are key to implementing prevention and early detection strategies.

KPMG’s recent Fraud, Bribery and Corruption Survey (Australia & New Zealand) reported that 75% of major frauds were committed by insiders, which was up 10% on the previous survey.

Similarly, PricewaterhouseCoopers Global Economic Crime Survey 2014 collected information from 5,128 respondents across 99 countries and reported that frauds committed by internal perpetrators accounted for as high as 71% of frauds, depending on the industry.

There are three key areas where background checking can aid in minimising the risk of fraud, by revealing:

1) potential employees that may have a history of fraudulent or undesirable behaviour;
2) potential employees that present a falsified or embellished employment application; and/or
3) employees where a change of role or circumstance could present an increasing risk to a business.

This UpClose looks at the ways background checking potential and existing employees can assist in protecting your organisation from employee fraud, as well as taking a look at some recent case studies that illustrate this.

The Cost of Fraud to Business

The KPMG survey records that the total value of fraud experienced across respondents was $372.7m, the average loss per organisation a staggering $3.08m.

However, financial loss to a business is only the starting point of a ripple-effect of impacts that can be felt by an organisation as a result of fraud. These can include:

• Damage to industry/community reputation;
• Decreasing share price;
• Statutory non-compliance resulting in litigation;
• Negligent hiring litigation;
• Embezzlement of company/client funds;
• Misuse of confidential information;
• Disruptive and dangerous staff;
• Theft of goods and equipment;
• Low employee morale/productivity/workplace culture; and
• Terrorist threats.

Avoiding Potential Employees with a History of Fraudulent or Undesirable Behaviour

Background checking can prove a useful tool in identifying individuals that have a history of fraudulent or undesirable behaviour. From criminal convictions and bankruptcies to stealing company funds and being terminated from employment, background checks can highlight areas in a candidate’s past that are useful for potential employers to be aware of.

Background checks that are key in this regard are:

• National Police History Checks;
• Financial Checks (bankruptcy/basic credit);
• Employment Validations;
• Litigation Checks;
• Watch Lists Checks;
• Banned Person Lists; and
• Media Searches.

In some cases, fraud and inappropriate employee behaviour is not reported to authorities due to an aversion to paperwork, possible complications and even the threat of litigation. This means that, whilst National Police History Checks are a key part of background checking, the results of this check are just one part of a bigger picture. Organisations undertaking a search of disclosable criminal convictions only and believing this will effectively mitigate fraud risks may find that certain aspects of a candidate’s history are left hidden!

A thorough background check including a variety of relevant searches should be undertaken for candidates. Additionally, a candidate’s background shoud be assessed for aspects such as alias names and overseas residency that may mean undesirable behaviour can be masked and only be uncovered by searches on multiple names and in some cases, in international locations.

Case Study 1

In March 2014, Fake Tahitian Prince Hohepa Morehu-Barlow (aka Joel Barlow) appealed to Australia’s highest court in relation to his 14 year jail term handed down for fleecing taxpayers almost $17million.

In December 2011, The former QLD Health employee was arrested for allegedly siphoning funds over 3 years, with $11m disappearing in just two weeks. Mr Morehu-Barlow was recruited in 2005 despite his criminal conviction for fraud in NZ. Although background checks were undertaken, a criminal history check was only conducted in Australia and his NZ conviction was not identified.

This case illustrates the importance of undertaking international background checks for candidates who have resided overseas. The then Premier Bligh stated with regards to this case, “When people come here from a different nationality and who have lived in another country for a period of time, it may be that at the very least we should be extending those checks to those countries”. 2013 saw Bligh’s recommendations becoming a reality, as the case prompted a criminal data-sharing trial involving the NZ and QLD Governments. In 2014, the decision was made to expand the trial to all Australian states.

Case Study 2

YMCA child care worker Jonathan Lord is serving a minimum six year sentence for alleged child abuse. A previous incident may have been flagged, had a US summer camp been contacted for a reference, as Lord was previously dismissed from working at the camp for “questionable behaviour” with a child.

It was released in October 2013 that Lord’s Child Care Manager, Jacqui Barnat, allegedly did not follow correct hiring protocols by conducting a minimum of three reference checks and failing to contact the most recent employer that may have revealed the “red flag”.

This case reveals the risks of failing to undertake employment validations or following established processes in this regard.

Avoiding Potential Employees That Present a Falsified or Embellished Employment Application

Some individuals commit a fraud before they are even employed by an organisation, by presenting a qualification or employment history that is untrue or embellished. Qualification validations and employment validations seek to confirm these details as provided by the candidate, in order that an employer can be assured the candidate’s background is legitimate and as represented by the candidate.

Case Study 3

Walmart’s chief spokesperson resigned in September 2014 after the company caught him with an incomplete qualification included in his corporate biography.

Background checking undertaken prior to promotion to a senior role revealed that David Tovar never completed his Bachelor of Arts degree. Despite participating in the graduation ceremony, soon after he commenced his first job Tovar learned that he had not completed the required coursework and did not return to finalise his degree.

Although Walmart had established background checking processes for senior roles, it appears this was the first time Tovar’s degree had been validated by the company.

This case illustrates the risks that occur when a candidate progresses through an organisation into a position for which they have potentially not been adequately checked, or when background checking is isolated to senior roles.

Case Study 4

Andrew Flanagan was sacked as Group General Manager of Strategy and Business Development from Australian department store Myer in early June 2014 for allegations of a falsified CV.

Flanagan’s colourful CV boasted experience as General Manager and Vice-President of Inditex Group (Spanish owner of fashion brand, Zara). When a media leak exposed that Myer’s new Executive was in fact never employed by Zara, it was also revealed that other previous roles held by Flanagan could also not be verified.

The mystery lies in how Flanagan managed to get through extensive background checks. The recruitment company provided Myer with an interview transcript with a person claiming to be the Senior Executive at Inditex.

This case highlights the importance of verifying a candidate’s previous employment history and being vigilant when it comes to reference checking. How do you know whether a candidate is tailoring their experience to fit a particular role? And how can you be sure that the listed name and mobile number is a legitimate referee?

PeopleCheck recommends full employment validation including contacting former supervisors via the company land-line where possible and verification with the HR department that this person was in fact the candidate’s supervisor.

Organisations should also never assume a person has the requisite previous experience just because they hold or have held a senior role.

Employees Where a Change of Role or Circumstances Could Present an Increasing Risk to Business

The PwC survey stated that the typical Australian Fraudster has been with the business for between three and five years. Often these employees have the necessary opportunity to commit fraud, as they know internal controls well.

Additionally, the KPMG survey revealed that there was growing evidence of fraud being committed by Senior Executives/Directors, with figures doubling since 2006.

Case Study 5

Michael Williamson was sentenced in early 2014 after defrauding millions from the union protecting some of the state’s lowest paid workers to ensure his children did not suffer from “financial hardship”.

The disgraced former ALP National President filed for bankruptcy the day after entering guilty pleas in October 2013 to four charges of cheat or defraud as a director, fabricating invoices and recruiting someone to hinder a police investigation.

In court, Williamson recalled a time in his childhood when his family could not even afford a movie ticket, and as a result, wanted to ensure his children never went without.

This “motivation of greed” highlights the damage an employee can cause in a high risk role (in this case, a presidency role), especially when they have been with the organisation for several years.

Employees are people and circumstances will often change during the career lifecycle. Pressures to sustain a family with an opportunistic upbringing may lead a usually law-abiding employee to desperate measures. A thorough background checking program that screens employees on a regular basis (every one to two years) or on role change can assist in reducing the risk of long-term employees that suddenly cannot resist opportunity.

References

KPMG Fraud, Bribery and Corruption Survey 2012 -http://www.kpmg.com/au/en/issuesandinsights/articlespublications/fraud-survey/pages/fraud-bribery-corruption-survey-2012.aspx

PwC Global Economic Crime Survey 2014 – www.pwc.com/gx/en/economic-crime-survey/

The information contained in this publication is the opinion of PeopleCheck Pty Ltd and does not form the basis of legal advice. 

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