high fidelity! corporate theft and recovery

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High Fidelity!Corporate Theft and Recovery

Geoff Harrold, The Gavilon GroupAlex Lathrop, Orrick, Herrington & Sutcliffe, LLP


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Section I

Introduction


Employee Crime Statistics• $50B stolen by employees of US businesses (2013)

An increase of 7% from 2011

• 75% of employees have stolen at least once from their employer• 5% of annual revenues are lost to theft or fraud• Theft is conducted by:

Men: 59.1% of the timeWomen: 40.9% of the time


Employee Crime Statistics

• Employee theft occurs most often at: Convenience storesTruck stopsApparel storesOffice supply/stationery stores

• Small businesses also are prone to employee theft as internal controls are not as established


Employee Theft Schemes

• As the usage of cash decreases, employees have shifted to stealing material/physical items (inventory)• Corporate credit cards make it easier for employees to

disguise charging personal expenses to the company• Employees often falsify time records and number of

hours worked in order to be paid more by the company


Detecting Employee Theft

• Tips are the most common method of initial detection• Top three sources of tips

Employee tips (51%)Customer tips (22%)Anonymous tips (12.4%)

• Organizations that use a hotline experience a 44.4% lower median fraud loss


Take Away

• Employee theft presents a substantial loss exposure to most companies

• Risk Managers must have effective loss control measures in place and be sure the Company is adequately insured


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Section II

The Case of the Stolen Grain


Background• Gavilon

Managing Essential Ag Commodities on a Global basisSecond largest grain handler based on licensed storage

• The Case Study locationStorage capacity of 7.5M tons of grainTrucks enter the facility, weigh in empty, truck is filled with

grain, weigh out full, and departo Entire process takes about 12 minutes per truck


The Case Study Facility


Discovery of the Loss

• First Evidence of the LossTip from customer

• Confirming the LossConducted Internal Audit of InventoryConfirmed missing stock


Investigating the Loss• Hired third-party surveillance company

Observed trucking operations for several nightsDuring certain periods, trucks would enter and exit with

full loads in less than four minutes

• Local Law Enforcement Interviewed night crewThefts took place when one employee went on breaks

o Remaining employee was colluding with truck drivers


Insurance Issues – Employee Requirement

• Must be an employee

• Insuring AgreementLoss must result from dishonest or fraudulent acts

“committed by an Employee acting alone or in collusion with others”

• Had to show that truck drivers were in collusion with storage facility employee


Insurance Issues – Inventory Computation Exclusion

• Missing inventory cannot be the sole evidence of the loss

• Evidence of loss included customer tip and surveillance

Inventory audit confirmed the quantity of the loss


Quantifying the Loss• Bulk Commodities

Challenge of bulk commoditiesPhysical Dimensions

o Size – Angle of Repose - Expertise

o Weight of Product

o The Storage Barn is Seldom Empty

• Accounting recordsScale Tickets Invoices


Quantifying the Loss• Accounting records

Historical throughput o Seasonal adjustments

Historical pricingo Traded on an exchange?

o Independent Verification

o Profit Margin

o Accounting systems


Insurance Issues – Proof of Loss• Describe all facts establishing that loss occurred, nature of

the theft, that employees participatedInterviews/testimony of employee in underlying matter may

include denials inherently in tension with coverage claim

• Provide an accounting of the loss—quantum, dollar value• Statement must be sworn• Deadline is condition precedent to coverage—but insurer

will grant extension on reasonable request• Important to involve professional support immediately


Insurance Issues – Documenting the Loss

• Forensic Investigation

• Interviews

• Law Enforcement and Prosecutorial Authorities

• Outside Evidence


Lessons Learned• An ounce of prevention

Frequent and unscheduled auditso Use of a third party for unscheduled audits

Rotate employees and shifts worked Manager present during all shifts Criminal Background Checks Engage a Forensic Accountant before a loss

o Endorse Crime Policy to include fees

Think like a criminal Contemplate the records and documents needed before a loss


Preventing a Loss• Physical Deterrents

Fencing, lighting, gates CCTV and Security Cameras Security Staff Restrict Access Vulnerability Assessment

• Metaphysical Deterrents Local Authorities – Fire and Law Enforcement Be a good neighbor


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Section III

Coverage for Employee Theft


Fidelity Bond Components

• Insuring AgreementEmployee Involvement“Manifest Intent”To Gain and/or Cause Loss

• Exclusions

• Conditions


Insuring Agreement

We will pay for loss resulting directly from dishonest or fraudulent acts . . . committed by an Employee acting alone or in collusion with others . . . with the manifest [or specific] intent to:

1) Cause you to sustain such loss; [and/or]2) Obtain an improper financial benefit for the

Employee or another person or entity.


Manifest Intent• Must be discernible intention (objective/subjective)• to cause Loss to Company and/or benefit to employee

or others• Does not include Employee Compensation (per

insuring agreement or by exclusion)• Loss must be direct result of employee acts


Some Common Exclusions• Inventory computation exclusion• Timing of loss and claim• Directors and officers • “Damages” or indirect or consequential losses• Losses resulting exclusively from acts of non-

employees


Limitations on Recovery

• Timing related limitations

• Variable limits/sublimits related to type of loss

• Non-cumulation provisions


Tendering and Supporting Your Claim• Deadlines

Policies are “claims made and reported”Provide prompt notice of claimProvide proof of loss

• Engage forensic accountant, investigator and/or counsel, if required, early!


Litigation Considerations• Documentation of claim (causation, participants,

quantum of loss) must be well developed• Supporting experts lined up• Witnesses lined up/credible• Anticipate and prepare responses to insurer coverage

arguments• What is the cost-benefit analysis for litigation?• Would compromise make sense?


Negotiated Settlements

• Insurers may dispute coverage because they do not agree with proof that (1) an employee was involved; (2) there was manifest intent; (3) that proof was consistent with conditions and exclusions; or (4) quantum of loss was proved• Such disputes often can be compromised in a direct meeting

with the insurer• Be prepared to (1) lay out the factual case for coverage;

(2) demonstrate quantum; (3) address legal issues head-on; and (4) compromise weaker points• Involve your forensic accountant, investigators, and counsel

high fidelity! corporate theft and recovery

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