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Preventing Fraud Through Background Checking

There are many ways to prevent fraud and 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.

The recent ‘PwC Global Economic Crime Survey 2011’ reported that 54 per cent of fraud was committed by employees. Intent plus opportunity equals fraud, and in an unstable economic environment where companies are “cutting costs” to make ends meet and satisfy shareholders, intent often finds opportunity.

There are three key areas where background checking can help minimise the risk of fraud, by screening:

  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 PwC survey records that almost 50 per cent of Australian businesses reported at least one incident of economic crime over the past 12 months, with 16 per cent of respondents suffering losses over $5 million.

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 potential employers should be aware of.

Background checks that are key in this regard are:

  • National Criminal History Record Checks;
  • Financial Checks (bankruptcy, credit history);
  • Employment Validations;
  • Litigation Checks;
  • Media Searches;
  • Watch Lists Checks; and
  • Banned Person Lists.

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 by their customers. This means that, whilst National Criminal History Record 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 should 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 December 2011, Queensland Health was rocked by a fraud that could cost the organisation over $16m! Hohepa Morehu-Barlow (aka Joel Barlow) was arrested for allegedly siphoning funds over 3 years, with $11m disappearing over just two weeks. Mr Morehu-Barlow was recruited in 2005 despite his reported 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. As 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”.

Case Study 2

In a background check undertaken for a PeopleCheck utilities client, we spoke to the CEO of the candidate’s previous employer. We were advised that the candidate was terminated from the company as he started his own company in direct competition to the organisation, whilst still working with their organisation with full access to intellectual property. The candidate then went on to sue the company for unfair dismissal, and when the case was heard in court and the candidate realised the organisation held evidence against them, the charges were dropped.

This case is an example of where employment validation can highlight undesirable behaviour of a candidate that a criminal history check would not identify.

Avoiding Potential Employees That Present a Falsified or Embellished Employment Application

Some candidates effectively commit a fraud before they are even employed by an organisation, by presenting a qualification or employment history that is untrue or embellished. Qualification validation 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.

Case Study 3

A recent background check for one of PeopleCheck’s clients in recruitment involved validation of a candidate’s degree from the UK. The candidate advised that they completed their studies externally and the university had since closed. The candidate provided both a certified degree certificate and transcript.

When our Research Team undertook enquiries, they were unable to locate any evidence of a webpage for this university, except for memorabilia. Extensive internet research indicated the university was a degree mill offering qualifications based on employment history and life experience.

This candidate misrepresented themselves by claiming a qualification they did not have. Particularly if required to undertake a role, this type of deception can be very harmful to an employer. This case study indicates the benefits of actually validating qualifications and not simply viewing a certificate or accepting certified copies!

It is not enough to view a certificate, as this can be very easy to fabricate. There is no additional assurance should this certificate have been certified by a Justice of the Peace or equivalent. This individual has done nothing more than confirm that they were provided with a copy of an original document, which can be a falsified original!


PwC Global Economic Crime Survey 2011

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