Do you know your clients’ biggest exposure to fraud? 4th April 2018They do! Sadly, it’s their own employees.UK workplace fraud is at a 15 year high, with £2.11 billion of recorded fraud in 2017, according to a BDO study.The facts:There are 3 common types of workplace fraud:Employee fraudTax fraudMoney launderingEmployee fraud is up a startling 570% from 2016.Financial Services tops the table where the total value of workplace fraud was circa £900m, compared to £215m in 2016.Retail increased by 81% from 2016’s figures, and management fraud accounted for most of this increase.London and the South East remain the biggest hotspots.Mark Smith, Senior Management Liability Underwriter at Probitas, shares his thoughts on employee fraud.“The facts are quite disturbing, but it’s unclear if these significant increases are due to more cases of fraud, or improvements in detection and reporting. Either way, workplace fraud is costing businesses and the wider UK economy over £8 million every working day.”It’s generally recognised that employees who steal from their employers are not career criminals. Most are, in fact, trusted employees with no criminal record.Mark points out, “there’s usually three key factors in play when an employee theft takes place. Pressure, Opportunity and Rationalisation.”“Pressure is normally the driving force. The pressure to enhance their social standing or improve their standards of living. And, it’s these societal pressures that enable employees to rationalise their behaviour. We hear reasoning such as, ‘I don’t get paid enough’ or ‘I was just borrowing the money’ when handling staff theft claims.”“Pressure can also result in a manipulation of accounts or orders, particularly for sales staff who have aggressive targets. They may fraudulently enhance an order to support their performance metrics which results in bonuses which are obtained dishonestly.”“In pretty much all of the claims I’ve seen, opportunity has been presented.” Mark explains, “Employees can often spot an opportunity to abuse their position, simply because they know the business and processes. They can identify a weak spot, which makes exploitation much easier – in both the act and the rationalisation. They simply don’t associate their behaviour with the act of a criminal, and therefore, they have a low perception of getting caught.”“However, employers are also to blame. Often, they are too trusting of their employees and don’t want to believe their employees would disrespect them. Particularly in small businesses, where employers see their staff as an extension of their own family. Whilst employees are helping small business owners to realise their dream – sadly fraudulent employees could be helping many small businesses fail.”“In larger businesses, it may be less of a financial death sentence, but it can still have a seismic impact on profits and shareholder dividends.”So, what can your clients do?It can be difficult to mitigate the risk entirely. Deterrents, such as punishments are shown to have little effect because of the lack of anticipation of being caught in the act. Instead, it’s often simple processes and internal procedures that play a role. “Something as simple as a countercheck and second signature on accounts and invoices can reduce some fraudulent activity” Mark suggests.“The overall ‘tone at the top’ and how a company communicates their internal policies is essential for fraud awareness. It provides a clear signal to employees and can play a crucial part. in the prevention of employee fraud in the first place.”Of course, a Crime Insurance policy is important. But, cannot be relied on as ‘THE’ answer.“Insurance is not a substitute but is merely there to reduce the impact of a fraudulent activity on the business” Mark explains.“Businesses need to also consider how to manage reputational damage that can be a result of an internal crime. Particularly for larger businesses and charities, who are more likely to receive unwanted press attention. Although, a standalone Crime policy will not provide direct cover for reputational damage, there are ways that insurance can lessen its impact.”“When it comes to underwriting Crime risks, we generally start by looking at the size of the risk, business activities, geographical spread, audit processes, internal controls etc” Mark reveals. “By looking into the detail and evaluating the information provided, we can calculate a premium that’s based on adequate limits and deductibles for that particular client.”“At Probitas, we also like to take the time to meet with the client, alongside the broker. Building a relationship and having face to face conversations about the company, their internal processes and their employees enables us to see the bigger picture.”“Spending time with a business is beneficial to all parties, insured, broker and the insurer. It allows the business to convey their risk profile and activities in a lot more detail. An open discussion means it’s easier to communicate the specifics and, we generally find the information is much more accurate.”The knock-on effect is that the insured gets an even better understanding of their own risk exposure, and therefore the need for insurance. Plus, this approach can alleviate the need for a generic proposal form.“We find that many companies decide they don’t need to purchase insurance for Crime, opting instead to self-insure. The lack of understanding of the threat is the biggest force at play here. And, that’s often the biggest downfall of a business that’s too trusting of it’s employees.”“The lack of awareness, presents an easy conversation for brokers. You only have to look at the facts to realise that every company has an exposure to fraud. Crime Insurance should therefore, be on the agenda for every commercial insurance programme” Mark concludes.