Irish firms fall victim to rise in corporate crime

Only half of Irish and UK firms hold insurance against fraud, writes Gabrielle Monaghan

The rise of white-collar crime in Ireland came under the spotlight when W&R Morrogh, a 114-year-old stockbroking firm in Cork, collapsed with losses of €7 million after a partner fraudulently used clients' money to play the stock market.

Experts say, however, that Irish companies are failing to protect themselves from corporate crime.

Only half of Irish and UK companies hold any form of insurance to protect themselves against fraud from employees or external third parties, according to Breege Lynn, vice-president of FinPro at Marsh Ireland, a unit of the world's largest risk specialist.

The number of companies worldwide that have been a victim of fraud climbed to 45 per cent last year from 37 per cent in 2003, according to a PricewaterhouseCoopers (PwC) survey released in November. Companies lost an average $1.7 million (€1.3 million) apiece from fraud conducted by asset misappropriation, counterfeiting and other methods, the biennial survey showed.

In Ireland, corporate crime is costing businesses an estimated €2.5 billion a year, a separate survey backed by the Dublin Chamber of Commerce found last year. Annual losses per company surveyed came to €450,000, while prevention cost each one a further €114,000. The offences included embezzlement and cheque and credit card fraud.

Because a high proportion of offences go unreported, amid concern about the impact it would have on suppliers, shareholders and customers, the survey was not able to calculate how widespread the problem might be, according to consultants RSM Robson Rhodes, which carried out the research.

Despite the damage caused by white-collar crime, only 51 per cent of Irish company boards even discuss the issue more than once a year, the survey found. No industry or company, though, is immune from embezzlement and fraud and, under the rules of corporate governance, senior management and directors can be held accountable by shareholders if the risk of white-collar crime is not managed within their organisations, Lynn says.

"With the emergence of the Celtic Tiger, there's a view amongst people that there's no such thing any more as a job for life, and that can create its own moral hazard because there's no loyalty to the company and employees may be prepared to take a chance," Lynn said.

Indeed, more than 80 per cent of white-collar crime perpetrators work for the company and 50 per cent are in the ranks of management, the Marsh executive said, citing international surveys. In the UK, the average fraudster was male, aged between 31 and 40, and held a position in middle management or below, PwC found.

Lynn gives the example of a company that lost €430,000, after a payroll supervisor who had access to all of the computerised payroll records, dealt with all queries from the Revenue Commissioners, the payroll company and every employee's bank, channelled tax refunds for an employee who had recently left into his own bank account.

The supervisor also manipulated the payroll database when other employees left the company so it appeared they were still on the payroll.

Payments continued to be made to former employees but were diverted into the supervisor's account. After two or three months, he altered the database to remove these payments so that the records would appear to be in order.

"Employees may only be embezzling small amounts but it starts to accumulate and it could be a couple of years before they are caught," Lynn said.

She warns companies to start asking questions if, for instance, an employee who is only paid €25,000 a year starts driving a Jaguar or is leading a very lavish lifestyle.

Problems with gambling or rising debt may also drive staff to embezzle from their employer.

Joyti De-Laurey, a former secretary with Goldman Sachs in London, had spent £300,000 (€431,773) on jewellery from Cartier, acquired 11 properties in the UK, bought clothes from Chanel and Louis Vuitton, and spent £750,000 on a seafront villa in Cyprus before she was caught stealing from three managing directors of the company. She is now into the second year of a seven-year prison sentence.

"The banking sector has an especially high exposure to employee theft or embezzlement through collaboration with an outside party because of the heavy volume of funds coming through electronically," Lynn said. "But the finance sector generally recognises that risk, whereas non-financial institutions are equally at high risk but don't recognise it."

In addition to getting comprehensive crime insurance, companies should put in place stringent controls that will take away from employees any temptation to steal from the firm, Marsh Ireland advises.

The organisation's recommendations include making employees take holidays of at least two continuous weeks, creating fraud awareness at all business units, rotating staff and jobs, getting staff to review their colleagues' performance, creating a senior anti-fraud position, and conducting regular reviews of the situation.

"The insistence on two weeks' holiday, for instance, means that the employee isn't constantly there to cover their tracks," Lynn said.

"Or if an employee is in charge of a small operation abroad, make sure they are not in charge of carrying out transactions from A to Z.

"Companies seeking insurance for this type of crime have to complete a proposal form, which will extract information from them about what kind of risk management they have in place.

"If it becomes apparent that they don't have good risk management, the insurance company will either not quote that risk or the company itself will agree to make improvements to their business over the following six months."