CBA Record

other background investigation. Employers should also scale background checks to the risk the particular position presents to the company and its customers. Many companies also overlook the risk that counterparties present. According to Global Profiles of the Fraudster , 32% of fraud events resulting in $1 million or more in losses was committed by employees col- luding with outsiders. These outsiders can include vendors, suppliers or customers. Yet these third-parties are seldom subject to the same background checks as employees. A thorough third-party diligence system is critical for businesses of all sizes. Insurance Most businesses are familiar with commer- cial liability, errors and omissions, director and officer liability, business interruption and hazard insurance. Fewer are familiar with “employee dishonesty” coverage, which helps alleviate losses in the event of employee fraud. For example, according to one Arthur J. Gallagher & Co. case study, this type of policy helped a large

public university recover losses when its treasury department employee fraudulently invested university funds in a Ponzi scheme in exchange for a kickback from the scheme. Such insurance would seem especially critical when the recipients of the ill-gotten gains have either squandered the money, sent it offshore, or otherwise made it impossible to recover. How Should a Fraud Be Investigated? When an employee fraud is detected, the company must take immediate steps to investigate and remediate. No single set of rules exists for investigations, but effec- tive investigations share many common characteristics. They are expeditious, but thorough and broad enough to capture the full extent of the employee fraud and its various components. The investigators who review documents and interview witnesses should be impartial and free of biases. Documents, hard drives and other electronic materials should be immediately preserved lest they be destroyed through routine policies or concealment by the

fraudsters and their cohorts. At the outset of an investigation, care must be taken to identify the precise client of the investigation team. Is it the company? The board? A special committee created by the board such as the audit com- mittee?This question is imperative because, at the end of the investigation, some type of report (verbal or written) will be made. To preserve the attorney-client privilege, the report should be made only to the client. Individuals conducting employee inter- views during the course of the investigation should give warnings to the employee fraudsters or coworkers in line with the seminal Supreme Court decision, Upjohn Co. v. United States , 449 U.S. 383 (1981). Upjohn established the corporate attorney- client privilege for employee interviews conducted during internal investigations. So-called “Upjohn Warnings” inform the interviewee that: the company (not the employee) is the client; the employee is not being represented by the person con- ducting the interview; the communication is subject to the attorney-client privilege;

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