Nelson Bennett – April 7, 2015, Law & Politics
When Open Connection owner Bruce Lloyd discovered that one of his employees might have fraudulently obtained equipment and commissions from his company – a Telus (TSX:T) retailer – he did what most people would be inclined to do: he went to the police.
Lloyd discovered it would take several days to get a warrant to search the former employee’s home for the evidence he would need to prove the fraud – long enough for that evidence to disappear. He ended up dropping the case and writing off the fraud, which he estimated at between $60,000 and $80,000.
Corporate fraud is a form of theft, but that doesn’t mean pursuing it as a criminal matter is the best route, Sean Boyle, a lawyer with Blake, Cassels & Graydon LLP, told a group of businessmen and -women at a recent workshop on corporate fraud sponsored by Business in Vancouver.
“With the police, you lose control,” he said. “With the regulators, you lose control.”
Although some cases might warrant a criminal investigation, Boyle said corporate fraud is often best handled through a civil action.
Through the civil courts, a company’s lawyer can present evidence and apply for a Mareva injunction, allowing for assets and evidence to be frozen until the matter can go to court.
“We can go into his house and order the police to come with us, and we can seize all that material,” Boyle said. “We can seize the documents. We have them held in safekeeping in a lawyer’s office until our claim is prosecuted through the courts.”
According to a 2014 Canadian Federation of Independent Business survey, the average annual cost of fraud for small and medium-sized businesses is $7,500. Only one out of 10 fraud cases resulted in criminal charges.
Corporate fraud generally takes two forms: internal and external. Technology has exposed businesses to increased threats of fraud from external sources such as phishing scams and ransomware.
The best defence against fraud is to establish the proper corporate controls and safeguards to prevent it.
Jacklyn Davies, who leads the investigative and forensic services group at MNP LLP, said any business with cash operations, for example, should have duplicate sign-off policies so that no single person is in charge.
But even when a business does have proper policies in place, they only work if everyone in the organization follows them.
Lloyd admits his company would probably have identified red flags earlier if it had followed its own policies, which included requiring salespeople to file all their paperwork weekly – something that was sometimes overlooked.
“We didn’t stick to our own rules,” he said, adding the company has since tightened its procedures.
Internal fraud is sometimes committed by an otherwise trustworthy employee who may develop an addiction. But career criminals can also find their way into businesses that don’t do a thorough background check.
“Do your due diligence in your hiring process,” Davies said.
Equally, she said, non-employees, like outside suppliers, also need to be properly checked out.
“How do you know that that supplier is actually legitimate, given that you can make up invoices now on any accounting program and put anybody’s logo on it?”
Joe Fidilio, vice-president at AIG Canada, said business owners and managers should not be afraid to ask questions when they’re signing off on purchases and payments.
“I’m big into asking questions, looking for red flags, having that open corporate culture where you can ask questions, where it isn’t a personal attack to say, “What’s this cheque for?”
He cited an example of a small company that put too much trust in a “fantastic” accountant who never took holidays. Had the company been forced to replace her with a temporary accountant when she did take a holiday, it might have discovered that she had been cooking the books.
To avoid compounding the loss from fraud with a wrongful dismissal suit, businesses that suspect an employee of having committed fraud need to ensure they gather evidence in a dispassionate and professional way before they make allegations or fire the employee.
They should also contact their lawyer and insurance company immediately and bring in their accountant and banker before taking any steps.
“Take those steps, ensure that you’re protected legally,” Davies said, “because – a wrongful dismissal suit could cost you more than the fraud itself.”