- A 10-year employee accounting manager systematically transfers amounts via ACH to her personal checking account.
- A high-ranking director takes thousands of dollars in insurance proceeds over a period of several years.
- An escrow officer creates false invoices and cuts checks from escrow funds payable to herself.
These situations are common employee embezzlement examples. Each year companies lose millions of dollars to employee embezzlers. The sad truth is that white-collar embezzlement DOES pay.
Unfortunately, the overburdened state and federal criminal justice systems provide little relief to businesses victimized by thieving employees. In most circumstances, district attorneys will not prosecute embezzlement under $100,000 simply because of the amount of time these cases take to pursue and the number of cases burdening major fraud divisions. Many district attorney offices prefer that the victim provide most of the evidence needed to prosecute, rather than depend on a police department or DA investigators to gather evidence. Federal prosecution is even more difficult. Most cases taken by the U.S. Attorney's Office involve embezzlement over $1 million. Even multi-million dollar embezzlement federal cases can take several years to develop. As a result, companies must often wait years for relief from the criminal courts.
Immediately upon discovering embezzlement, a company's initial actions can be critical in the outcome of both whether criminal charges are ever brought and whether the company can recover any of the funds.
Gardere attorneys have significant experience in guiding clients through this initial moment of crisis. We can assist in forming a strategy, which may include instituting a civil lawsuit to 1) obtain a judgment against the embezzler and recover any funds that have not been spent; and/or 2) gather evidence to be used by a prosecuting authority, thereby expediting the criminal proceeding. Depending on the size of the loss, a publicly held corporation's audit committee or chief financial officer may need to be advised of the loss to ensure compliance with the mandatory disclosure requirements of the Sarbanes-Oxley Act. Also, if applicable, the company should contact its risk manager or insurance agent to determine its rights under any insurance policies that it may have. Most policies require that a notice of claim be filed within a short time after discovery of a loss.
What to Do When Current Employees Are Caught Stealing?
A company should proceed cautiously upon discovering a current employee is embezzling money. In most circumstances the employee has spent most of the stolen funds; however, it is sometimes recoverable. Below are important steps to take in recovering some of the misappropriated funds and in gathering evidence to provide to the prosecutorial authority.
1. Consider waiting to fire the employee until legal action can be taken. Although the initial instinct might be to have the employee escorted off the property, there may be significant benefit in not letting the embezzler know you are on to them. Additionally, there may be multiple persons acting in concert. Firing one person could tip off the others.
2. Start ex-parte civil proceedings immediately … and quietly. If the money can be easily traced to the employee's own bank account or assets, civil law provides companies with an opportunity to obtain Temporary Restraining Orders and Writs of Garnishment without notice to the employee. These orders will ensure that any property or monies available are "held" and not immediately spent or hidden once the employee is exposed.
3. Investigate. Keep the investigation as confidential as possible. Search the employee's computers and office for documentation or external drives containing data regarding their personal spending. The company may consider engaging forensic accountant computer data retrieval specialists or other experts to assist in the investigation. It is crucial that the company consult with counsel regarding the investigation. If a goal is to compile evidence to give to the DA's office or the FBI, there are certain evidentiary guidelines that must be adhered to in order to preserve chain-of-custody protocols and ensure the admissibility of the evidence.
4. Confront the employee with several witnesses in attendance. Attempt to obtain a confession or any type of written admission.
5. Have the employee's office searched during the final meeting. Pack up his/her personal belongings and escort the employee out of the building.
What to Do When You Discover Embezzlement by a Former Employee?
A company's steps following the discovery of embezzlement by a former employee will be similar to those taken when the embezzler is a current employer. However, there are additional considerations to keep in mind when dealing with the criminal activity of a prior employee.
1. Be aware that the employee may have continued relationships with your current employees. Minimize water-cooler talk by keeping things on a need-to-know basis whenever possible.
2. As with a current employee, the company should take immediate steps to secure all devices, documents, and items used during the employee's tenure. If any of the former employee's electronic devices are being used by other employees, maintain discretion when confiscating the items.
3. If the former employee is job searching, be careful how you respond to requests for a reference, as negative comments may trigger a defamation suit. If you wish to provide the potential employer with more information than the former employee's dates of employment and job responsibilities, report only the facts that have been documented and avoid giving commentary or opinion.
What Can You Do to Prevent Employee Embezzlement?
1. Have clear accounting procedures, good supervision of employees and a strict policy about employee dishonesty.
2. Require employees to sign authorizations allowing the company to search personal items, computers, email and Internet on company property.
3. Train employees how to recognize fraud.
4. Offer an anonymous fraud hotline so that employees can report suspected fraudulent activity.
5. Be on the lookout for dramatic changes in spending or gambling habits, or other signs of new wealth among employees. The employee may claim to have a rich new boyfriend or a sizeable divorce settlement but, in reality, be embezzling from the company.
6. Have information on all employee bank accounts.
7. Maintain adequate insurance coverage to cover employee embezzlement cases.
8. Schedule surprise audits by third parties.
9. Segregate accounting and invoicing functions.
Employee embezzlement is a serious and, in recent years, growing threat to all companies. The likelihood that a company can recover embezzled funds — and deter other employees from engaging in similar behavior — depends in large part on the swiftness and appropriateness of a company's actions immediately following the discovery of the theft.