What Should an Employer Do If an Employee Commits Fraud in India?

If an employer suspects that an employee committed fraud, it should secure the evidence in order to prevent additional losses and investigate the matter to take appropriate action. The employer could suspend, discipline, or terminate the employee in accordance with applicable procedures, recover any losses, pursue civil remedies or report the crime to the relevant authorities depending on the circumstances. The response would depend on the type of fraud, employee conduct, evidential base and terms of employment.

What Is Employee Fraud in the Workplace?

Employee fraud is any deliberate dishonest act by an employee that results in obtaining an illegal or unwarranted financial or other benefit for themselves or causing losses to the employer. Fraudulent acts by employees could include:

• Theft or misappropriation of company money
• Fake invoices or other expenses
• Payroll manipulation
• Misuse of company assets
• Vendor fraud involving an employee
• Manipulation or falsification of financial records
• Misappropriation of company funds
• False reimbursement claims

A workplace mistake, negligence, or poor performance is not necessarily fraud. Fraud generally involves an intentional dishonest act, and the evidence should be reviewed to identify such conduct.

What Should an Employer Do Immediately After Discovering Possible Fraud?

The steps to be taken immediately after discovering possible fraud are:

• Secure the business
• Preserve the evidence
• Prevent additional losses
• Investigate the matter
• Allow an appropriate response
• Take action

When investigating employee fraud, an employer should:

• Secure relevant financial systems and company accounts
• Check the employee's system access and permissions in scope, if applicable
• Preserve any documents, emails, transaction records or other digital evidence
• Prevent any additional suspicious transactions or unauthorised access
• Notify internal stakeholders on a need-to-know basis
• Ensure confidentiality during the initial review

When reviewing the matter, an employer should avoid deleting or destroying any records that may be needed as evidence. In the scope of digital evidence, access and preservation should be handled carefully to maintain the integrity of relevant records.

How Should an Employer Investigate Employee Fraud?

An investigation of employee fraud should generally follow these steps:

• Identify the allegation
• Collect the evidence
• Review the transactions
• Interview relevant people
• Give the employee an opportunity to respond
• Document any findings

An employer could examine relevant financial records, invoices, expense claims, vendor records, emails, workplace communications, system access logs, and other witness evidence, if applicable. The investigation should identify the events, determine what happened, when, who was involved and what damage or loss was caused, if any. The findings should be based on documented evidence rather than speculation or accusations.

An employer should avoid taking any action against the employee without an appropriate investigation and an employee's response where applicable to avoid additional employment or legal disputes.

Can an Employer Suspend or Terminate an Employee for Fraud?

Serious allegations of fraud could amount to misconduct, which depending on the employment terms and applicable law, may be a ground for disciplinary action, including termination. An employer should review the employee's agreement, applicable disciplinary rules, standing orders or other requirements before taking any action. Suspension may also be considered if appropriate in the circumstances.

For serious allegations, employers should follow the applicable disciplinary procedure and provide the employee an appropriate opportunity to respond. If a formal domestic inquiry or other procedure is required, it should be conducted appropriately and documented. An alleged fraud by itself is not necessarily a ground for immediate termination in every case.

What Legal Remedies Can an Employer Consider Against an Employee?

Depending on the circumstances, an employer could consider several remedies:

• Internal disciplinary action: Initiate proceedings for misconduct in accordance with applicable rules.
• Employment-related action: Discipline, suspend or terminate as permissible by law or contract.
• Loss recovery: Pursue appropriate remedies to recover any losses where applicable contract or civil remedies may be available, and the employer can establish a recoverable loss.
• Civil proceedings: Take an appropriate claim where the facts and evidence support it.
• Criminal complaint: Report the alleged crime to the relevant authorities where the evidence supports criminal liability.
• Action against third parties: Take an appropriate action against vendors, intermediaries or other relevant persons where applicable.

The appropriate remedy would depend on the nature of the alleged fraud, financial loss, available evidence, employee's role, employment contracts and policies, and whether any other third parties were involved. Employers should also consider if multiple remedies could be pursued and obtain appropriate legal advice before taking any action that may affect an investigation or legal proceedings.

How Can Employers Recover Money Lost Through Employee Fraud?

An employer should calculate and document the actual loss before attempting to recover the amount and identify the transactions or conduct that caused it. The relevant bank statements, invoices, expense records, audit and other financial evidence should be preserved. An employer should also review the employment agreement, policies and any applicable contractual requirements before attempting to recover the amount.

Depending on the circumstances, the available remedies to recover the amount could include an agreed-upon recovery arrangement, civil proceedings or other appropriate legal remedies. Employers should not automatically deduct the alleged losses from an employee's salary without reviewing the applicable legal and contractual requirements. For significant losses, obtaining legal and professional advice could help in recovering the amount in an appropriate manner.

What Evidence Should Employers Keep in Employee Fraud Cases?

An employer in employee fraud cases should keep an evidence trail demonstrating the alleged conduct, loss, and steps taken. Some of the relevant records could include:

• Financial records and bank transactions
• Invoices and payment records
• Expense and reimbursement claims
• Payroll records
• Emails and workplace communications
• System and access logs
• Audit reports
• Employment agreements
• Relevant company policies
• Investigation reports and interview records

The records should be preserved in their original or reliable form wherever possible. Maintaining a solid evidence trail can help to establish the facts and the losses, if any, and support any disciplinary, civil or criminal proceedings, if applicable.

What Are the Biggest Mistakes Employers Make When Handling Employee Fraud?

An employer could expose themselves to additional legal and operational risks when handling suspected fraud without an appropriate procedure. The common mistakes in handling employee fraud are:

• Publicly accusing the employee before completing an investigation: Fraud allegations should not be treated as established facts before investigating.
• Delaying the action: Failing to secure accounts, systems, or records in a timely manner could lead to additional losses.
• Destroying or changing evidence: Altering or deleting evidence could undermine the investigation.
• Conducting an unfair investigation: Applicable workplace procedures should be followed in accordance with relevant evidence.
• Not giving the employee an appropriate opportunity to respond: Serious allegations should generally be addressed in accordance with applicable disciplinary process.
• Treating suspicion as proof: Investigators should distinguish an allegation, evidence and established facts.
• Making unlawful salary deductions: Employers should ensure legal and contractual requirements are met before recovering any alleged losses from wages.
• Ignoring possible third-party involvement: Vendors, contractors or other employees may also need to be examined where evidence supports.

Failing to strengthen internal controls: Appropriate access permissions, approvals, financial controls and monitoring should be reviewed after an incident to reduce the risks of similar incidents

Employee Fraud Response Checklist for Employers

How Can Employers Prevent Employee Fraud in the Workplace?

Employers can prevent and deter workplace fraud by introducing stringent internal control processes and regularly reviewing the systems that deal with finances, information and company assets. Key measures include segregation of duties, approvals, maker-checker systems, auditing of finances, verification of vendors, expense controls, restricted system access, reconciliations, whistleblower or reporting systems and fraud-awareness training. Effective safeguards and controls can prevent most fraudulent acts and enable earlier identification of irregularities that could lead to significant financial loss.

When Should an Employer Seek Legal or Professional Advice?

An employer should seek professional advice where the matter involves large sums of money, managers, multiple employees or vendors, criminal activity, complex financial matters, cross-border elements or where the allegation is disputable. In addition, professional assistance should be obtained where an employer intends to hold the employee accountable, for example, for reimbursement of any misappropriated funds. In all these cases, timely professional legal advice will guide the employer on the best course of action and help to protect the business, for example, by preserving evidence that may later be needed to prove the case.

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Conclusion

Employee fraud can have a significant adverse impact, including causing a financial loss to the business, undermining internal controls and exposing the business to employment and legal liability. To deal with fraud, an employer should first gather evidence, prevent further loss, investigate the fraud, and take disciplinary action. Disciplinary measures depend on the type of fraud and include lawful ways that the business can recover the losses sustained, such as deducting them from the defaulter’s salary if allowed by law, withholding commission or other civil remedies.

The business may also report the employee to the relevant authority where the fraud constitutes criminal conduct, for example, embezzlement. The key ways of preventing fraud include ensuring there are strong internal controls, segregation of duties and approvals, regular audits and whistleblowing systems, restricted access to financial and sensitive information and fraud awareness training, among others.

Disclaimer: This blog is for general informational and educational purposes only and does not constitute legal or professional advice. Laws may change, so readers should consult a qualified Corporate Lawyer for advice specific to their business and circumstances.