Quite recently, top to mid-level executives of a renowned IT firm subcontracted the work of their premier client to an organisation which comprised of former employees of the firm. As no approvals or authorisations were sought by them to do so, the executives were booked for corporate fraud. As a result, the client withdrew 2/3rd of its revenue from the firm. This incident not only cost the firm a huge share of the moolah from its premier client, but also its credibility.
Out of all corporate frauds committed worldwide, 72% are committed by an insider, of which 32% are top to mid-level executives and 42% junior. However, it is noteworthy that even so, the tendency to commit fraud is statistically more prevalent in top to mid-level executives as they are fewer in number than the juniors.
With their diverse company experience and composed appearance, it becomes very difficult to tackle the fraud done by executives in high risk positions but it is extremely important that these executives are duly checked. Any discrepancy found as early as possible, would only help prevent a disastrous impact on the company later on.
A scandal involving a senior executive of the company, professional or otherwise, affects the entire organisation and even the clients. It also severely impacts the livelihood of all the other employees in the company and makes the corporate communications or advertising team (or agency) lose confidence in the organisation. These are but the impending signs of doom for the business. With the reputation shot, the business will shrink and eventually kaput. 92% organisations agree that loss of reputation is the most challenging risk they face. A rogue executive will make this risk a very imposing reality in the blink of an eye.
High Risk positions are the posts in an organisation with an elevated chance of fraud, owing to their proximity to the key elements of the company. It could also mean the position with the higher probability of the temptation to commit fraud.
These positions may involve:
- Company data (employee information, ownership information, asset control etc.)
- Client information (Client data shared with the company, key client representatives, monetary exchange information etc.)
- Finance (Company funds, invoices from the client, accounts etc.)
- Vendor information
- Transcripts from confidential meetings
- Internal communications
- People involved in sensitive projects
Studies reveal that about $289mn worth of the worldwide market is not secured with background screening. It is effortless to not suspect a senior level executive. They have vast industry knowledge, have worked with the crème de crème of the corporate world, and have a collection of important industry contacts….what would they lie about? It is an established fact that the propensity for fraud for an employee is at its peak after 6-7 years of service in an organisation.
The CEO of Yahoo was found to have faked his education credentials. One needs no guesses to know the power his position offered. No one would have imagined in their wildest dreams that the CEO of a global giant could be a fraudster. But that doesn’t change the fact that he was.
Following this example, we can easily see why it is so important to properly check into the background of all employees, including the top level executives.
When an organisation hires a professional from outside its employee base, generally from a long list of references or via consultancy specialising in headhunting senior level executives, it seldom thinks of checking into their basic details such as educational qualifications, criminal history etc. which makes the organisation vulnerable to corporate fraud.
Studies show that 20% of the executives do not clear their thorough background checks. Imagine the situation if 20% of the senior level executives are fraudsters with an impressive history of past employments (unless those are fabricated too)! You are about to hire someone who managed to fool a lot of organisations and has mastered the tricks of the trade. By doing just one little thing differently, you save your organisation from a major financial or reputational loss.
Here are a few entailments of corporate fraud at the hands of an executive:
- Insider Trading
- Redirection of clients
- Employee theft
- Data Leakage
- Falsification of education/employment credentials
- Possible criminal history
- White-collar crime
- Money Laundering
- Commissions or “cuts” for appointing vendors
- Bribery (taken or given)
- Suspicious financial statements
- Personal scandals
To counteract these, an executive should be screened for the following:
- Highest educational credentials
- Previous employment credentials
- Present residence verification
- Previous residence verification
- Juvenile Criminal & Court Record History
- Drug Testing
- Criminal History (Local, National & Global)
- Court Record History (Local, National & Global)
- Financial & Credit Record Verification
- Asset Tracing (Local, National & Global)
- References & Recommendations
- Lifestyle Check
- Media & Internet Searches
- Possible Conflicts of Interests
- Associations & Affiliations (Personal, Familial & Political)
The Lavish Lifestyle: A Red Alert
The way an individual spends his days is a general, if not exact, indicator of his earning capability and personality. With accurate financial and asset verification in hand, one can look into the spending habits or personal habits to assess the possibility of fraud.
Demonstrating with an example here. Imagine a senior executive working at an income of say, INR 3 lac per month. After about 3 months of appointment with that income bracket, he is seen to dine at a five-star restaurant every other day. He bought a new apartment and a shiny sports car way out of his potential, after ruling out his savings and ancestral/secondary income. Your annual audit shows unusual and unexplained activity not much later than his joining date. It is an easy assumption to make that the individual is laundering company funds.
This check is quite helpful if you are highly suspicious that the person concerned is committing fraud but you want to be absolutely certain before you start taking action against him.
Online Reputation Due Diligence
A detailed internet search can reveal a lot of information about the individual. However, it is safer to appoint this task to a third party vendor as doing it internally may make the organisation vulnerable to lawsuits from the employee. Also, outsourcing this helps tackle the instinctive or perceptive biases and prejudices; making the activity free of judgement. From their social media profiles to news stories about them or their previous organisation, media & internet search can prove very helpful.
Compliance vs Privacy: How to Approach the Matter
Many claim that senior and top-level executives do not take it in a good spirit to be screened as they see it as a disrespect for their long and fruitful careers. However, it is the foremost responsibility of the organisation to make it into a clear and crisp policy addressing the entire process to protect the company’s interests that is made apparent to the executive when he/she is approached for the position. With this you ensure that the executive is on the same page and knows what the organisation expects of him. It is advised that this is done very formally and professionally, spelling out for the executive the specific areas in which he will be screened and adopting a complete white-glove approach to the matter. It is recommended that the details of the screening remain with a limited number of people within the organisation, in order to protect the privacy of the executive.
An organisation, much like an armed force, comprises of troops and generals. The employees, under the able direction of the leader positions (senior executives) achieve breakthrough results and success. It is hardwired into the corporate brain that senior executives are less likely to commit fraud than an employee. However, that is not true. There is an urgent need for conducting strenuous background investigations on your senior most employees, even if they have been in your company forever.