By Chris Giovino, Partner, Dempsey Partners LLC

Please give us a brief description of your practice. ccupational fraud and crime is a significant and caused $3.5 trillion in losses. The typical fraud lasted growing exposure for all industries, including two years. The median loss was $140,000 and one in hospitality. In recent years, the challenging economy five involved losses was $1 million or more. has helped to drive the incidence of these crimes. However, the good news is that anti-fraud controls, A study by the Association of Certified Fraud including hotlines, surprise audits and anti-fraud Examiners (Association of Certified Fraud Examiners: training can significantly reduce a companys 2012 Report to the Nations) found occupational fraud exposure to loss.

With these crimes, literally anyone in an organization is a potential perpetrator. Criminals range from hourly employees all the way up to senior management, including the CEO. The size of loss correlates with annual income level, tenure, age, education, and the level of collusion involved in the crime. Among perpetrators, 87% were first-time offenders; 36% were considered living beyond their means, and 27% had been experiencing financial difficulties. However, more often than not, the perpetrator has done the same thing at one or more former employers. Perhaps the most significant potential financial remedy for occupational crime and fraud is crime insurance. If your company has insurance, review the adequacy of coverage and limits. In addition, see if you have cost/fee coverage, which can pay for the use of outside providers to help investigate a crime. Until they are victims, many businesses dont realize they are woefully under-insured and lack cost/fee coverage.

FRAUD RISK FACTORS

To help organizations assess their potential exposure to occupational crime or fraud, the Association of Fraud Examiners has identified some key considerations, often called the triangle or three legs of fraud. First, consider the impetus to perpetrate a fraud. The business driver having to make a number might lead one to manipulate transactions. And theres the personal motivation, usually financial gain or desperation, to engage in theft against the employer. Another factor is opportunity: Does a potential perpetrator have access to assets? Are controls inadequate or non-existent? Corporate culture plays a part as well. Even in a strong outward culture of integrity, the feeling may be different within specific departments or functions. Is financial aggressiveness or risk-taking part of the organizations culture or a desired attribute for a certain class of employees?

WHAT TO DO IF FRAUD IS SUSPECTED

If occupational fraud is suspected, absent any exigent or life-threatening issues, you might take the following measures:

1. Locate and read the companys crime or fidelity insurance policy. 2. Conduct an investigation before notifying your insurer. 3. Give proper notice to your crime and property insurers. 4. Note the time on your insurance policy to file Proof of Loss. 5. Note the time to file suit against your insurer for non-payment of a loss. 6. Conduct a thorough internal investigation. 7. Work with your human resources, communications, operations, finance and other functions, employment attorneys and outside counsel to address potential employee issues. 8. Consider cviil litigation against the perpetrators. 9. Consider criminal prosecution.

THE LOSS ADJUSTMENT PROCESS

Crime claims are unlike other claims for property damage loss or business interruption loss, or simple accidental liability matters like car damage. They are conducted within guideline time restrictions. There is a frequently exercised provision for an extension, so, theres no reason to rush. While claims may be paid as submitted, the norm is to be challenged and receive the carriers offer and negotiate. Heres the typical sequence of events involved in filing an insurance claim:

1. Your company and its support team conduct a preliminary investigation. 2. You file a notice of a potential claim with your insurance company. 3. Establish the facts (liability) and the amount of damages. 4. File a sworn Proof of Loss with your insurer. 5. The insurer conducts its own investigation and audit. 6. Your team meets with that of your insurers to reconcile potential issues and differences that may arise with respect to your claim. 7. These elements are negotiated and ultimately settled. While some points of difference between you and your insurer are inevitable, it generally makes the most sense to pick spots carefully for arguing with your insurer. You may not want to stall the overall negotiation and potential settlement by disputing smaller points. 8. Understand potential subrogation, which typically takes place among insurers in situations involving overlapping coverages.

MANAGING THE INTERNAL INVESTIGATION: WHO DOES WHAT?

In an internal investigation, the principal leadership roles include: The risk manager, who oversees the process and communicates directly with the firms insurance broker and/or insurance carrier(s). The in-house counsel, who manages the internal audit, investigation, litigation, law enforcement activities, and controls costs. The investigator and forensic accountant, who conduct the investigation under external counsel (privilege) umbrella, working with in-house resources, such as internal audit.

WORKING WITH LAW ENFORCEMENT

If there is any potential danger surrounding the circumstances of your loss, call the local police. In this context police refers to the appropriate law enforcement agency for the specificities of your loss. While some members of your firm may feel the police should investigate, it is not always in your best interest to call too soon. Nonetheless, your insurance policy may contain a provision that dictates notifying law enforcement. Pay attention to whether it is simple notice or whether you must file a report and refer the matter. They are very different. Remember: Once you refer your case, even though you may be the victim with certain rights, the investigators likely will make communication a oneway street. If the matter goes to a grand jury, you will be precluded from learning anything from law enforcement. Understand the complexity and reach of your loss. Consider that any investigation or search for assets may be outside the local jurisdiction. If all is in-state and you have a state police division with strong investigative acumen, they may be perfect. Some county sheriffs have excellent investigators. You need to know. Often, the complexity and need to reach across state lines or outside the country will dictate that you seek federal assistance. The FBI, IRS, Secret Service, ICE, Marshal Service and the Postal Inspectors have different priorities, skill sets, thresholds and capacity. For example, the U.S. Attorneys Offices have different thresholds and priorities throughout the country. Know which agency best fits your loss.

Your forensic accounting and internal investigation will be important to law enforcement; it provides them with quantum of loss, witnesses, statements, evidence and a road map. A symbiotic rapport may develop between the investigators and your forensic A crucial decision is when to call and, more importantly, whom to call. Mistakes in referring your team. A solid forensic investigation can also provide law enforcement with leads towards assets which investigation to the wrong agency or prosecutorial may be vital towards alternative restitution. office can lead to significant frustration.

MANAGING CIVIL LITIGATION

As a practical matter, investigative firms and risk advisors generally do not advocate law suits. However, there may come a time when those investigating the crime will need bank records and other financial information. Law enforcement will likely get them from search warrants and grand jury subpoenas. You will not be able to share in their good fortune. The civil subpoena and civil discovery can be valuable tools used to establish the existence and amount of loss, including an examination of vendor business records, employee bank accounts, and shell company documents. Typically, civil litigation follows the investigation in the form of a subrogation action by the carrier. If litigation is inevitable, getting the process started

SWORN PROOF OF LOSS

The proof of loss is a series of documents that will include a detailed narrative flow of what happened and who did what to whom. That is followed by a well-documented calculation of the loss. You will need to provide all source documents. This is a standard insurance policy requirement. Note the time requirements for filing the proof of loss, as well as any possible suit against the insurance carrier. Also consider how much evidence is sufficient: Insurers will go to great lengths to validate and develop the facts. When a loss occurs, insurance coverage attorney, David P. Bender, shareholder, Anderson Kill, Ventura, California, advises businesses to construct a team consisting of forensic accountants with experience in these cases; an insurance coverage lawyer and other technical experts as necessary to prove proof of loss. Any insured that relies solely on the insurance company or even law enforcement to prove their loss will not get the full benefits due them under their insurance policy, he warns.

DAMAGES AND QUANTIFICATION OF PROOF

Keep in mind, proof of damages must be actual calculations and not estimates: Insurers have no incentive to pay estimates. You can use a variety of approaches to quantify damages, including historical trends or any statistical anomalies that you might be able to identify. In filing your claim, be prepared to defend any assumptions.

CONCLUSION
The hospitality industry finds itself constantly in the cross-hairs of employees and others who covet and criminally target the high volume of goods, foodstuff, liquor, valuables, and cash. The industry has incredible internal resources, such as security and audit, to fight fraud and theft. In spite of best practices, those who want to take and who have been in position to exploit flaws or openings or soft spots in the best controls will do so and you will sustain losses. Preparation is at least as important as prevention. Those responsible for risk management should recognize the potential for a loss due to employee malfeasance and external forces alike. There should be an exercise to quantify worst-case scenarios as is done typically for physical damage and business interruption losses. Then, spend the time to cultivate relationships within the organization and create a go to SWAT team for that moment when fraud is suspected or in fact substantiated. Be well read, provide proper notice, and recover your loss to the fullest extent.

Chris Giovino, Partner-in-charge

P: (203) 762-5052 E: chrisgiovino@dempseypartners.com