Summary of Issue:
A business owner called asking for Arxis Financial to do a fraud investigation. The relevant law enforcement agency referred the business owner to our firm to conduct an investigation, and prepare a report.
Why the Referral?
A cursory review of documents indicated that company income had been diverted, there were numerous and material unauthorized checks and ATM withdrawals, and the former employee had developed a scheme where the company records were manipulated to indicate that he was owed substantial sums. The sophistication of the fraud indicated this was a targeted takedown of this business and that the “employee” had done this before – he was very good at it! The local police department acknowledged several crimes had been committed but did not have the resources to build the case on the financial crimes. By all appearances, they were not interested in doing so.
There are three paths of recourse in a fraud matter. The first is an insurance claim. The initial question is always whether the business was insured for such a loss and, if so, what is required to make that claim. Most policies that cover this type of loss also cover the cost of the investigation which makes the fees for a forensic investigation much easier to contemplate. Sadly, in this case, there was no insurance coverage. This is true in many cases. The failure to cover employee embezzlement, malfeasance, and error means less insurance premiums but, when fraud happens, is a devastating blow to any chances of recovery.
The second path after a suspected fraud is contacting law enforcement and initiating a criminal investigation. This is a path that results in possible moral satisfaction, but it is not designed to recover any money. A successful prosecution for fraud usually results in consequences for the perpetrator (jail time, public notice, etc.) but rarely financial restitution for the victim.
The third path is a civil prosecution (lawsuit) against the employee. This involves hiring an attorney and moving a case (i.e., developing evidence, etc.) towards a trial where the legal threshold for proving the case in most jurisdictions is much lower than a criminal case. If a favorable verdict is obtained and money is awarded, then begins an entirely new legal process of collecting on that judgment. There is a public record of the verdict thus possibly preventing a repeat crime by the former employee. All too often that, and a lot of legal bills, is the only real result of civil litigation.
It is a hard conversation to accurately describe the above choices to a business owner that did not insure for such a loss, and who is dealing with the financial and emotional devastation of theft and other malfeasance by a trusted employee. The criminal process results in some satisfaction but no restitution. It is hard to recommend spending money on that process when law enforcement isn’t willing to engage and assist with their resources. The civil litigation route is also difficult to recommend due to the cost and the very long timeline of getting to a trial and financial restitution.
We likely talked ourselves out of business. However, the client is better served to consider hard facts before the investment of fees, rather than after significant funds have been spent with unexpected results. We recommended that the business owner consult with a civil litigation attorney before retaining us. We also asked the potential client to think long and hard about paying for a forensic investigation at the request of law enforcement. While they may be unable or unwilling to do the investigation, the best result (criminal conviction) will provide no financial return on the investment. The consideration must be whether the moral or other satisfaction of a favorable outcome is sufficient to justify an expensive undertaking. Also, there is no guarantee that the elements of fraud could be proven, that our report would be persuasive, or that even with an ironclad case documented in a report a criminal or civil court would secure at minimum a hearing of the matter. Finally, we recommended they call their insurance agent and add appropriate coverage to protect the business should this happen again. Remarkably, of all our recommendations, this is the one likely to be ignored. It happens all the time!