Helen Ruelle Rachel DeSanges Charlotte Ward March 26 2020 Five steps to avoid insider fraud Ogier | Private Client & Offshore Services - Jersey Helen Ruelle, Rachel DeSanges, Charlotte Ward Private Client & Offshore Services IntroductionCheck your structureEnsure financial controls are in placeImplement adequate internal code of conduct and ethicsImplement adequate process for reporting suspicionsTake reports seriously and investigateIntroductionThe Jersey Society for the Prevention of Cruelty to Animals' former CEO was recently jailed for seven years after he was found to have embezzled £405,000 from the animal charity. Jersey Charity Commissioner John Mills CBE has since warned that "having weak internal financial controls and procedures can make charities susceptible to insider fraud. By strengthening these procedures and processes, governors can reduce the risk of it happening".Charities are as susceptible to insider fraud as public and private companies. It is a problem that persists at all levels of society, irrespective of whether the entity has commercial or altruistic motives. However, insider fraud within the charitable sector tends to be reported more often and in a more critical light due to the 'public purse' element of missing funds and the fact that a charity's employees or volunteers are usually perceived as having good codes of ethics.This begs the question of what internal controls and procedures employers in any sector can implement to reduce the risk of insider fraud. Here are five steps which could significantly reduce the risk for businesses of any size or type.Check your structureThe structure of an organisation, including the chain of command, should be considered early on in any review process. A UK Charity Commission Report from April 2018 identified that nearly 70% of insider frauds result from excessive trust being placed in an individual or a lack of challenge to or oversight of such an individual's actions.Ensure financial controls are in placeThere are numerous financial controls that can be put in place by companies and charities alike to help make insider fraud less opportunistic. These include:having more than one signatory for bank transactions;having more than one person count cash collections;regularly reconciling transactions and bank statements; orhaving adequate transparency of financial management processes.Implement adequate internal code of conduct and ethicsMost insider frauds are identified by co-workers because they work with each other daily and can identify unusual behaviour or deviations from procedure.Employees should understand the ethical standards expected from them from the outset of their employment. One of the easiest ways to achieve this is by having an adequate code of conduct and ethics in place. Such a code should be enforced and reinforced through regular training, which will remind staff of what to look out for and the negative repercussions of insider fraud for all involved.Implement adequate process for reporting suspicions A good code of conduct and ethics will also outline the process for how, when and to whom suspicious activity should be reported. Reporting is a complicated area in itself – for example, there are rules against alerting offending employees that may apply, depending on the nature of the business and the type of fraud suspected. Depending on the size and nature of the business, an anonymous hotline may need to be made available for employees to notify management of suspicions.Take reports seriously and investigate For most employees, the decision to report a suspicion that a co-worker might be guilty of insider fraud will be difficult and may give rise to the following questions:Will the reporting employee be believed?What if the accused employee discovers who reported the suspicion and becomes angry?Therefore, it is vital that senior management take any report seriously and commit to investigating it fully. Any management team dealing with a suspicion of insider fraud should have a fair and lawful investigation procedure already in place which outlines:who will investigate the issue;which measures will be used;the investigation timeframe; andthe possible outcomes of an investigation.For further information on this topic please contact Helen Ruelle, Rachel Richardson or Charlotte Ward at Ogier by telephone (+44 1481 721 672) or email ([email protected], [email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.