Fidelity Guarantee: Insurance against employee theft

Gail Carver, head of Commercial Crime and Willie Jansen van Rensburg, head of Specialist Liabilities Claims at Etana Insurance unpack the risks and challenges around employee crime.

Financial difficulty among employees – including gambling - often ‘force’ normal law abiding employees to steal from their employers. According to Stats SA’s 2009 figures, commercial crime has increased by 16%.

The recession has also impacted the Fidelity Guarantee insurance sector. Some companies are claiming for financial or stock losses that they wouldn’t have normally claimed for in the past, as evidenced by the increase in the number of smaller claims (R50 000 - R350 000). In addition, the value of the average claim has doubled over the past five years from about R400 000 to around R900 000. The average number of possible Fidelity Guarantee claims has also increased drastically, but the full effect of the recession will only be evident towards the end of 2010.

Modus operandi

Just some examples of employee financial theft methods include rolling of the creditor’s book; adding of fictitious employees to the payroll; setting up shop in competition to the company; and committing EFT fraud by temporarily changing the payee’s name or account number.

Who are the main culprits?

These crimes are often committed by trusted, long serving employees, who have the intimate knowledge of the company necessary to manipulate systems and procedures, and who are often trusted with a broad range of responsibilities.

In addition, syndicate-driven fraud is not only increasing, it is also becoming more sophisticated and internal staff are often bribed or threatened to assist these syndicates.

Managing the risk

Due to the current economic climate, risk management is often reduced to cut costs. This creates opportunities to be exploited by employees. Don’t scale down on risk management, rather get professional advice.

Independent professional risk surveys for businesses, which are offered to clients by companies such as Etana as part of their service, will analyse the client’s systems and procedures to identify any weaknesses. If the improvements suggested are implemented, the client has not only reduced the potential of a loss, but will benefit from lower premiums.

Firstly, it is crucial that employees are properly screened before employment, and on an ongoing basis. Implement the basic checks when recruiting new staff, including credit, criminal and ID checks, as well as verification of previous employment. Look out for sudden and unaccountable lifestyle changes. Proper contracts with employment agencies will improve the possibility of a recovery after a claim.

Secondly, the duties and responsibilities within a company should be segregated among employees. No matter how well-trusted, an employee’s scope of unchecked authority must be limited, especially in accounting and HR positions. Internal auditing should be conducted frequently.

Thirdly, every staff member should take at least two consecutive weeks leave every year. Many losses are only picked up when an employee takes time off work and someone else is overseeing their tasks and duties. Accounting passwords should be kept safe and secure at all times and changed at least every 30 days.

Finally, guard against syndicated crime by making sure risk prevention systems and procedures are in place at all times. Security companies and/or individuals should be rotated periodically.

Best advice

Many companies, especially small and medium-sized companies, believe they have tight enough controls and procedures, and employee theft will never take place in their company. As a result, the Fidelity Guarantee sums insured are often inadequate, a discovery made only after a loss occurs.

Fidelity Guarantee insurance is catastrophe cover and companies are well advised to increase their sums insured and rather manage costs through sizable deductibles.