Investigating Employee Embezzlement
Recent studies indicate that employee embezzlement has become so rampant that it accounts for the majority of ordinary business losses suffered by employers. Some estimates indicate that more than $400 billion is stolen annually by employees in the United States. Our experience has shown that incidents of employee embezzlement are common regardless of a particular company's size or sophistication.
In certain ways, investigating suspected embezzlement is similar to investigating other employee misconduct. The scope and manner of the investigation will depend in part on the size and complexity of the theft. Of course, as with any investigation, the employer's right and ability to investigate facts and circumstances surrounding the incident are intertwined with the myriad of rights and protections conferred upon employees by federal and state laws. The employer's use of polygraph tests, honesty tests, outside investigators, credit and background checks, and monitoring devices is expressly conditioned upon complying with one or more federal or state laws such as the Employee Polygraph Protection Act and the Fair Credit Reporting Act.
When an employer is first confronted with suspected embezzlement, the employer generally has four objectives: (1) to determine whether there was an actual theft; (2) to determine the total amount and method(s) of the theft; (3) to remove the wrongdoers from the workplace and take remedial actions to prevent such conduct and losses from occurring in the future; and (4) to recover the money or property lost. This article addresses some steps that every employer should take to determine whether one or more of its employees were involved in a particular incident of workplace embezzlement, none of which are hampered by the myriad of federal or state laws that protect employees rights (so long as these steps are consistently taken without regard to a legally protected status).
Conducting the Investigation
It is rare for an embezzler to be caught by direct observation. More often, suspected embezzlement is first detected based on circumstantial evidence, such as another employee's report or through an audit. In such cases, the employer should move quickly to investigate and discipline the employees involved.
One of the first things an employer should do is talk with those managers who are directly impacted by the loss or involved in the investigation and reinforce the need for privacy and confidentiality to the extent possible. The reason for this is twofold: to avoid exposure to defamation claims and to avoid premature disclosure of information to the wrong party, especially when the employer may not yet know the extent of the wrongdoing, or who else may be involved.
The next step is to identify those employees (at every level of the company) who had both access and opportunity to commit the theft, as well as those who may have known of the theft but failed to disclose it. All employees with access and opportunity should be included in the investigation, regardless of their job record, length of employment, or stature within the company. Identifying such employees allows the employer to focus the investigation on as small a group of employees as possible with as little disclosure as possible. Not only does this help maintain confidentiality but it also permits the employer to obtain statements before employees start talking with each other and comparing notes.
If the loss is potentially large, or the theft appears complex, the employer should always seek the advice of legal counsel. In such cases, the employer also often should retain a forensic accountant, computer data retrieval specialists or other experts to assist in the investigation. It may be appropriate for such experts to be hired by outside legal counsel both to maintain privilege in communications with these experts and to avoid any appearance of a conflict of interest. Depending on the materiality of the loss, a publicly-held corporation's audit committee and chief financial officer may need to be advised of the loss to ensure compliance with the mandatory disclosure requirements of the Sarbanes-Oxley Act of 2002. The use of outside legal counsel should help promote proper oversight and compliance with applicable securities laws and fiduciary obligations arising from embezzlement of material sums in publicly-held companies.
At the early stages, the employer is also advised to contact its risk manager or insurance agent to determine its rights under any fidelity bond, crime loss or employee dishonestly insurance policies that it may have. Most policies require that a notice of claim be filed within a specified and sometimes relatively short time after discovery of a loss. For substantial losses, legal counsel should assist in evaluating the company's rights under its insurance policies to determine whether the loss is a covered loss under one or more of the policies and each policy's exclusions and deductibles. In order to avoid impairing any available insurance coverage, it is critical that the employer do nothing that would compromise an insurer's rights against a third party, including the wrongdoers. The insurer generally should be kept informed of the status and material developments in the investigation.
The next step often is to interview employees, and if possible, obtain signed written statements. The employer must ensure that the interviews are conducted with appropriate regard for confidentiality and without undue coercion or duress, to avoid false imprisonment and other state law tort claims. The interviews should be documented in detail regardless of whether a written statement is obtained. Ideally, the interview and gathering of a written statement should be witnessed by a neutral and trusted member of management, other than the person who first noticed or reported the suspected theft.
As the investigation proceeds, it may be necessary to follow-up with certain employees, especially those whose statements are inconsistent in material respects. A guilty employee sometimes may confess to wrongdoing when his or her initial account is shown to be belied by other employees' observations or statements regarding the events, or with documentary or other physical evidence relating to the loss.
Appropriate Disciplinary Action
Once the investigation is complete, and if the employer has determined that a loss occurred, the employer must decide what action should be taken concerning the wrongdoers. Termination is often appropriate discipline, since employees who commit theft usually do not alter their future behavior and tend to think they can get away with it again. However, should the company seek to recoup some or all of the loss from the wrongdoer, it may be appropriate to place the employee on leave until all avenues of recoupment have been exhausted. In order to limit the potential for claims against the company by the wrongdoer, and to preserve the company's available options, the employer generally should not make any promises as to the wrongdoer's future employment nor make any threats about civil or criminal prosecution, even if the employee offers to make full or partial restitution. In addition, no "deals" should be offered or made promising not to report the theft in return for restitution or anything else.
Recovering the Losses
Depending on whether the loss is insured, and if so, the amount of the deductible, the employer may wish to file a civil action to recover its losses. However, the prospects of recovery (depending on the wrongdoer's assets) may not justify the costs of litigating. Another avenue to consider is criminal prosecution. This can be a slow process, but without the costs associated with a civil action. It is important to note that both the civil action and criminal prosecution options are matters of public record and the employer must weigh the consequences that any adverse publicity could cause, including the impact on its customers. Similarly, the employer should consider whether the absence of civil or criminal prosecution against the wrongdoer will convey an inappropriate message to other employees.
Recently, many employers have asked whether a dishonest employee's pension and profit-sharing benefits could be seized to repay amounts that were embezzled. The Employee Retirement Income Security Act ("ERISA"), as construed by the courts, prohibits any type of garnishment, attachment, or constructive trust remedy by an employer with respect to pension and profit-sharing plans covered by ERISA, even in cases involving a terminated employee's embezzlement against the employer. However, should the employee voluntarily request distribution of his or her benefits, upon receipt of the monies, the employee can voluntarily give the money to the employer. Care must be taken, however, to avoid any appearance of undue coercion or duress by the employer as to any distribution request and turnover of monies from an employee's ERISA accounts.
Wildman Harrold has significant expertise and experience in assisting employers with the various investigation, disclosure, insurance, and recovery issues arising from losses due to employee dishonesty. If you would like to discuss any of the matters covered by this memorandum further, please contact David Weinstein at 312.201.2685 or Brian Carnie at 312.201.2297.