Managing your company’s fidelity or employee dishonesty claim isa challenge. The process can be part insurance claim, partinvestigation and part financial audit. Most claims also involvehuman resources (HR) and legal considerations surrounding employeerights and termination, and they may necessitate referral to lawenforcement or legal proceedings for civil recovery. For even themost experienced risk management teams, proper and timely claimsubmission requires careful deliberation and technicalknow-how.

How do you effectively manage fraud claims to substantiateallegations, recoup your losses and prevent future wrongdoing? Theinsured’s claim process begins with an allegation that must beinvestigated. Subject or witness interviews and evidence gatheringplay a key role in accurately documenting and corroborating theProof of Loss—the detailed claim filed with your insurer. As youinvestigate, consider the following steps and best practices:

Step 1: Preserve and gather the evidence

The starting foundation of most claims is an allegation orcomplaint. It may originate from a whistleblower hotline call, aformal complaint from a witness, an observation from the year-endauditors or even a confession. Most often, the allegation occurswithout the bad actor’s knowledge. The ensuing steps in the claimprocess involve establishing facts, and corroborating those factsand timeline with evidence.

The most important first step is understanding what is allegedand preserving the records that prove or disprove the allegations.If the hotline caller says the head of procurement is steeringcontracts, then preserve vendor applications, bids and emails. Ifthe complaint alleges that the controller is running customerpayments through a personal account, retain cash receipt journalentries and bank statements. You will need this evidence later andavoid a situation in which the suspect has the opportunity todestroy or alter records before you retrieve them. If necessary,postpone scheduled document destruction or archive dates.

Related: They’re robbing you blind

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Review company records carefully. (Photo:Shutterstock)

Most claims require the use of records to substantiate the loss.Records can include company documents or external documents fromthird-party service providers. When gathering evidence, considerthe completeness and accuracy of such documents. Also recognizethat to your insurer, external records are valuable and bolsteryour claim. For example, if you have accounts payable transactionsthat are important to demonstrate payments made to an entity,corroborate the transaction dates and amounts with bank statementsproduced from your bank. Claim preparers should also consider theproper dating of records to fully address the timeline of thealleged acts.

Another key consideration: Document the chain of custody andimplement safeguards to protect the integrity of the records. Forexample, if the investigating party decides to re-image a subject’scomputer, do so in a way that makes certain the evidence staysintact without any edits or inappropriate access by others.

Step 2: Interpret the evidence

Most employee frauds are carried out by an individual withdirect knowledge of a control weakness that can be exploited. Afraud involving the override of controls within the AccountsPayable authorization process likely involves a person involved inthat process. Follow the evidence to particular suspects and digdeeper. Find individuals you can trust and that can help youunderstand the following:

• How can these documents be interpreted?
• How are these documents prepared in the ordinary course ofbusiness? What are they used for?
• What is the business process owner’s interpretation of thedocuments, and how do those interpretations relate to my own?
• Do other primary records better respond to the allegations orquestions posed?

A common mistake is relying on evidence that is believed tooffer proof, but in fact is not responsive to the investigationtheory or allegations. For example, a check disbursement maycontain an electronic signature, but if it was automaticallyprinted on the check it may not indicate that the signature’s ownerhad knowledge of the transaction.

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Insurers want to know that you've been thorough in yourinvestigation. (Photo: Shutterstock)

Step 3: Exhaust the search

Exhaust the search of records by reviewing those additionaldocuments that may complete the narrative—even if those documentsdo not corroborate the claim. Such exculpatory records showinsurers you have considered everything. They can even be used torefute statements. For example, does the subject employee’semployment timeline fit with the allegations? What about his or herIT user access and footprint? Are absentee or employee vacationrecords consistent with the allegation?

The complete Proof of Loss should evaluate these documents andaddress inconsistencies or substantiate claims.

Step 4: Interview the witnesses

An important early step in the Proof of Loss is conductinginterviews. Interviews are crucial. Standard company documents likebank statements can speak for themselves in fact finding, butinterviews can explain the who, why and howcritical details whendescribing the claim.

Typically, the first interview is with someone other than thesuspect, such as a co-worker. You will likely only have one shot atasking the suspect questions to address the full scope of theclaim, so you will want to first gather enough information to makea credible allegation against the employee in question. A properinterview will help you get a statement, establish facts orvalidate allegations, and decide where to go next in terms ofadditional interviews or evidence.

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It's important to interview witnesses as well asthe employee you suspect. (Photo: Shutterstock)

When conducting interviews, keep the following in mind:

• Ditch the recorder and bring a note taker. A recorder may costyou the openness and conversation-like flow that the interviewshould have. Designate another person to sit in and take notes.That way, you won’t be slowing things down by documenting theconversation yourself. In addition, this provides for two people tocorroborate the statements made.
• Tell the witness your objective ahead of time. This will loweranxiety, increase trust and get to the point more directly than ifthe subject is responding vaguely or defensively while trying tounderstand your motives. Say, “I’d like to meet with you tomorrowto ask you some questions and get a better understanding of theprocurement process. You’ll be helping me respond to an inquiryfrom executive management.”
• Bring relevant documents. Most fraud claims are establishedthrough documents and supporting evidence. Often, documents likecompany procurement or payment approval forms must beexplained.
• Keep things open. Ask open-ended questions, and let yourinterviewee tell the story. Allow for silences between answers.Silences are uncomfortable, and many people fill them by answeringunasked questions or revealing additional information.
• Be direct. You should ask direct questions around the mainallegations. The most important question: Did you do it? Mostinterviewers aren’t so upfront with their line of questioning,either because they feel it may be rude, they want to give thesubject the benefit of the doubt or they don’t feel they haveenough evidence pieced together. Avoid this mistake. Asking thisquestion accomplishes much:
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  • If guilty, it will make most interview subjects noticeablyuncomfortable,
  • It locks the subject into providing a statement, and
  • It can quickly give you new information.

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You may need to call law enforcement. (Photo:Shutterstock)

Step 5: Take appropriate action

Decide whether to terminate or suspend the suspectedemployee(s), and consider referring the matter to law enforcement.This is a sensitive part of the claims process that should beconsidered from the beginning.

Terminating the employee can immediately stop the fraud and helppreserve records. Taking quick action against the suspect can alsosend a message that acts as a deterrent: Employee fraud matters aredealt with swiftly by the company. Termination can also promptothers to volunteer information. On the other hand, a wrongfultermination can bring its own legal headache. Some companies findthat suspension with pay is the best course until the investigationis complete.

Referring matters to law enforcement may be advantageous if thecompany aims to leverage outside investigation results to helpestablish the subject’s assets or collusion with outside parties.Involvement from law enforcement may also be an advantage if thecompany seeks to freeze the ill-gotten assets of the fraud forpotential recovery in a criminal or civil matter. However,claimants should bear in mind that law enforcement may not sharethe same objective or have the same investigation timeline, nor arethey obligated to file charges or discuss the investigationresults.

Insured companies are advised to retain counsel at the onset ofan investigation to determine the most appropriate course ofaction.

Related: How to insure against employee dishonesty

Step 6: Prepare for the adjustment process

Document everything to a level of detail that enablesre-performance. This makes the insurers’ job easier; if the claimadjusters can review the Proof of Loss and follow the sameinvestigative steps, they are more likely to draw similarconclusions. Providing comprehensive details on your processupfront will cut down on the stress, the number of follow-uprequests and the amount of time to receive your recovery.

Matt Hanson is a Senior Manager in BDO Consulting's ForensicInsurance & Recover Practice. He can be reached at [email protected].

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