Employee Fraud Seen on the Rise
Employee Fraud Seen on the Rise

It seems that tough economic conditions are conductive to employee fraud. Selling trade secrets is on the rise, and it is the most prevalent type of employee fraud besides embezzlement, according to reports.

Embezzlement cost firms an average of more than $2.2 million in 2008, with 25 percent of the losses experienced by lenders. Almost 50 percent of the losses are committed by employees in the financial and accounting sector, according to a recently published report by Boston, Mass.-based security consulting firm Marquet International.

According to Marquet International’s 2008 report, on the average, discovery of white-collar crime takes four years. States where embezzlement was found to be most rampant were California, with losses of $141 million, Florida ($41 million), and New York ($38 million).

One fifth of all cases were perpetrated by a group of collaborators, which accounted for 42 percent of all losses in monetary terms.

Employee fraud “is always around in both good and bad economic times,” claims Sam E. Antar, a former CPA and perpetrator of one of the largest securities frauds in the 1980s, on his blog “White Collar Fraud.”

“Such crimes are either less noticed during a good economic climate or more noticed during a bad economic climate, like the situation we face right now,” he said.

Dishonesty on the Rise

Economic upheaval leads to an increase in occupational fraud, according to a recent survey by the Association of Certified Fraud Examiners (ACFE). The Austin, Texas-based organization is an anti-fraud association with close to 50,000 members.

Employee dishonesty represents one of the greatest threats to the survival of a company, especially during economic turmoil, ACFE says.

Close to half of those surveyed said that losses due to employee fraud in monetary terms increased over the past year, with 21.7 percent claiming a “significant increase” and the remainder noticing a “slight increase.”

Embezzlement was cited by 48 percent of the survey respondents to be by far the most lethal threat to a company’s financial viability.

Financial burden was the most prevalent motive for perpetrating fraud against one’s employer, according to almost half of those surveyed.

“The message to Corporate America is simple: Desperate people do desperate things,” claims James D. Ratley, president at ACFE and a certified fraud examiner.

“Loyal employees have bills to pay and families to feed. In a good economy, they would never think of committing fraud against their employers. But especially now, organizations must be vigilant during these turbulent times by ensuring [that] proper fraud prevention procedures are in place.”

Close to 90 percent of fraud prevention and discovery professionals interviewed for the survey saw a dramatic increase in fraud committed by employees.

Layoffs have led to relaxed fraud prevention measures and internal monitoring procedures, limiting the company’s ability to prevent fraudulent behavior.

People facing possible loss of jobs or financial pressures are also more likely to rationalize and devise self-satisfying reasons for their criminal behavior.

Putting the Hand in the Tiller

ACFE defines employee fraud as “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.”

Discovery of employee fraud could take years depending on the complexity and ability of the employee committing the crime. Even so, employee fraud is mostly discovered through a “tip” from a whistleblower, and not as previously thought, through audits or internal controls.

“The most commonly cited behavioral red flags were perpetrators living beyond their apparent means (39 percent of cases) or experiencing financial difficulties at the time of the frauds (34 percent),” suggested the 2008 ACFE report.

Recent Cases Under Litigation

Ausaf Umar Siddiqui, a former vice president at Fry’s Electronics Inc., was charged earlier this year by the U.S. Northern District Court of California Magistrate Judge Patricia V. Trumbull with nine felonies. Siddiqui faces a 30-year prison term for embezzling $65 million over a three year period from his former employer.

EOD Technology Inc. recently filed a lawsuit against Critical Mission Support Services, which was formed by former employees. The lawsuit charged the former employees of stealing company secrets.

Starwood Hotels & Resorts Worldwide Inc., operators of Sheraton, Westin, and other hotel chains, filed a lawsuit against former manager Ross Klein, competitor Hilton Hotels Corporation, among others, for stealing and accepting 100,000 electronic documents detailing a “lifestyle lodging” concept under development by Starwood.

Yan Zhu, a Chinese national, was recently arrested for stealing software source code and other company secrets from an unnamed former employer, according to a FBI news release. He is being tried in the District Court in Trenton, N. J., and if found guilty, could face up to 20 years of imprisonment.

Terry Davis, a former human resource administrator for the city of Arlington, Wash., was sentenced in March for embezzling more than $1.3 million over an eight year period.

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