Brian Lennon specializes in criminal defense, corporate internal investigations and compliance matters. Brian was a federal prosecutor in Michigan and Virginia and a trial attorney for the U.S. Department of Justice. Brian also was Deputy Chief of the Criminal Division for the U.S. Attorney’s Office in the Western District of Michigan. In 2011, Brian was honored with the prestigious “Superior Performance as a Criminal Prosecutor” award from the U.S. Attorney General.
What is your experience with employee theft and embezzlement?
I have seen it from all sides: as a prosecutor, as a defense attorney and as counsel to an employer who has been the victim.
How big is this problem?
Estimates range from $20 to $50 billion per year in the U.S. There is some thought that the typical organization loses 5% of its revenues to internal theft.
You talk about the Fraud Triangle. What is that?
Pressure, Opportunity and Rationalization. The employee feels some pressure to steal. This might be the result of greed, a substance abuse problem or a gambling addiction. Next is opportunity. There is the 10-10-80 rule. 10% of your employees will steal no matter what. 10% will never steal. And 80% will steal if given the right opportunity. Finally, the employee rationalizes the behavior. Maybe the employee tells himself that he will pay it back someday. A high percentage of employees who steal from their employers have no prior criminal history.
How do employees do it?
Most start off small. Maybe they steal from petty cash. Maybe they lie on the expense report. When they don’t get caught, they get increasingly greedy. If they see weak internal controls, this gives them an opportunity.
We live in trusting communities in Michigan. Small businesses often hire people who are known and trusted. The fact is that we have a relatively high incidence of financial crime for the size of our area.
What can employers do to prevent it?
Look closely at how cash, accounts receivables and payables are handled. Are checks being paid to fictitious vendors? Are all the paychecks going to legitimate employees?
Organizations need internal controls. Make sure employees know you have internal controls. This alone will deter some theft.
Leading by example is very important. If owners play fast and loose, they shouldn’t be surprised when their employees do the same. Make sure employees who handle key financial matters take two consecutive weeks of vacation each year. You need these folks to be gone long enough for others to see what they are doing.
How do employers find out if embezzlement is happening?
Period audits, whistleblowers and employees living above their means are three common triggers. Sometimes organizations find out too late, like when the bank account has been drained or the company is being sold and an audit is conducted.
Is this a risk that can be insured? What should employers think about when buying insurance?
It can be insured. Organizations should look closely at the deductible and limits. A low deductible and low coverage policy probably isn’t all that helpful.
Trust but verify—have strong internal controls. Know your organization and where you are vulnerable. Know your employees and have the right kind of insurance for your kind of organization.
How can you help?
I have helped clients by looking at their internal controls. I have conducted internal investigations which are subject to the attorney-client privilege. I have helped clients put together the information needed to go to the prosecutor. And I have helped clients put the information together to make a claim to an insurance carrier.