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Articles
Occupational Fraud: the most costly form of financial crime in the world
Stock market fraud and crypto scams dominate the headlines, so it is easy to understand why organizations may not be focusing on fraud caused by their employees, but occupational fraud1 is regarded by the Association of Certified Fraud Examiners (ACFE) as very likely the most costly, and most common, financial crime in the world.
The ACFE’s report on 2,110 fraud cases from 133 countries2 identifies how badly businesses globally are affected by occupational fraud, and also highlights regional differences. A link to the ACRE report is here: 2022 ACFE Report to the Nations.
The ACFE report is compelling reading for companies around the world, and Thai organizations will benefit from implementing some of the ACFE’s recommendations to prevent and detect fraud. Thailand’s laws on employment and fraud don’t define occupational fraud extensively, or provide complete protection against occupational fraud; organizations should top-up their protection by preparing effective anti-fraud wording in their work rules and policies.
The high cost of occupational fraud: USD 4.7 trillion internationally
The ACFE estimates that organizations globally lose 5% of their revenue to occupational fraud every year, with an average loss of US $1,783,000 per case. Projected against the 2021 gross world product, an estimated US $4.7 trillion is lost to occupational fraud on a global basis.
The median loss for organizations in the Asia Pacific region was higher than the global median, driving home the message that there is no room for complacency in the Asia Pacific region when it comes to occupational fraud.
Fraud is under-publicized, and defeats background checks
Occupational fraud doesn’t receive much front-page publicity. This might be due to a sense of embarrassment that fraud has been permitted to occur, and companies may prefer to explain away occupational fraud as isolated, unfortunate cases rather than publicizing it. This fatalistic approach is unfortunate, because occupational fraud is a widespread problem, and there are steps companies can take to reduce and deter it.
If you conduct background checks on your employees, and wonder why those checks failed to identify previous incidents involving fraud, you are not alone. The ACRE study shows that more than 80% of fraudsters had not been previously charged with or convicted of fraud, and had not been punished or terminated by previous employers for fraud. This is because many companies do not refer fraud to criminal or civil law enforcement.
Cases involving corruption are least likely to be referred to criminal law enforcement, and only 29% of global cases proceeded to civil litigation. In the Asia Pacific, 49% of organizations recovered none of the money lost to fraud; only 17% of organizations recovered the amount in full.
This reflects our experience with companies in Thailand. Quite often, the proceeds of fraud have been spent by the time the fraud is detected, and the employee has insufficient assets to justify commencing civil proceedings. It is not uncommon for an employer to enter into a separation agreement with the relevant employee, rather than terminating the employment relationship directly, in order to prevent the employee tying up the employer’s resources in a wrongful termination case in the labor courts that could run for years.
If companies continue to terminate fraudsters without commencing legal proceedings, the number of fraudsters free to return to the labor market quickly, ready to perpetrate fraud against the next employer, will only increase.
Detecting fraud
Companies that rely on external audits to detect fraud will be surprised to learn that they are particularly vulnerable to occupational fraud. For organizations in the Asia Pacific, external audits, surveillance, and account reconciliations were among the least effective methods of detecting occupational fraud: combined, they detected only 6% of occupational fraud cases.
The three most effective methods for detecting occupational fraud in the Asia Pacific region were:
- Tips (58%)
- Internal audits (11%)
- Management reviews (10%)
The single most effective action a company can take to detect fraud is enabling individuals to tip the company off to cases of fraud. The largest group of people identified by the ACFE as providers of useful tips was employees, followed by customers, vendors, and competitors. Email and web-based channels were more effective methods for employees to report fraud than telephone hotlines, but making all three available may be advantageous if resources permit.
Companies in Thailand should accommodate anonymous reporting, given that whistleblowers potentially run the risk of civil defamation for reporting suspected occupational fraud, if no fraud is proven. Even if occupational fraud is proven, whistleblowers may be exposed to liability for criminal defamation, as the truth of a statement is not an absolute defense against an allegation of criminal defamation in Thailand, and actions for criminal defamation in Thai courts are not rare.
Companies also should ensure that tips and other relevant information are processed securely, in accordance with Thailand’s Personal Data Protection Act (PDPA).
Steps to take once fraud is detected
Once a company suspects or detects a case of fraud, it should act quickly to (i) prevent the loss from increasing, (ii) measure the loss caused by the fraud, and (iii) decide what actions should be taken against the persons or entities involved in the fraud.
Although these steps might appear straightforward, Thailand’s labor law framework can complicate the situation if a company does not have appropriate work rules and regulations (Policies) in place to address the situation effectively.
(i) Employee suspension
Often, the most effective way to prevent loss from increasing is to suspend the employees suspected of fraud, pending an investigation of the relevant conduct, in order to reduce the employees’ opportunity to continue to engage in fraud, to hide or destroy evidence of the fraud, or to interfere with the investigation.
However, the Labor Protection Act (LPA) prohibits companies from suspending an employee in these circumstances unless the company’s work rules or conditions of employment empower it to do so; otherwise, a company may prevent an employee from entering the company’s premises only if it continues to pay full wages to the employee. If suspension for or during an investigation is permitted by the company’s work rules or conditions of employment, a company can pay only 50% of the employee’s wages during a suspension period, not to exceed 7 days; however, if an investigation concludes that the employee is not guilty, the company must pay the employee the remaining, outstanding amount of his/her wages (i.e., the other 50%), with interest at the rate of 15 percent per annum.
Thai companies should review their work rules and employment contracts to make sure they can suspend employees during an investigation without breaching the LPA.
(ii) Measuring the loss
Measurement of the losses caused by the fraud is best performed by forensic accountants, who can access and back-up computer records needed for the investigation, and preserve evidence to ensure the strongest evidentiary value if the matter goes to court. Employees are less likely to challenge allegations of fraud when presented with an investigation report prepared by external forensic accountants.
If a company finds itself unable to suspend an employee suspected of fraud, forensic accountants may be able to access and copy vital information without letting the employee know that an investigation has commenced.
(iii) Actions against fraudsters
If an investigation shows that occupational fraud has occurred, instant dismissal of the employee might seem an obvious approach; however, this can be challenging for companies that do not have Policies in place to define and manage occupational fraud effectively. One advantage of having Policies to address occupational fraud is that if an employee commits a serious breach of the Policies, the LPA enables the company to terminate the employee immediately, without paying severance pay.
Companies without Policies to address occupational fraud will need to identify whether the category of occupational fraud entitles the company to terminate employment of the responsible parties immediately. If the company terminates an employee improperly, the employee can claim severance pay (up to 400 days’ wages, depending on length of service) plus additional damages for wrongful/unfair termination.
The LPA enables Thai companies to dismiss employees instantly if they: (i) perform their duties dishonestly or (ii) intentionally commit a criminal offence against the company without paying severance pay. Situation (ii) will not always apply to the following three types of occupational fraud, because they do not always meet the requirements for the criminal offense of fraud, as defined in Thailand’s Criminal Code. In situation (ii), companies also need to examine whether the following types of occupational fraud fall within any other grounds for termination without severance pay under the LPA, (e.g., the employee deliberately causes damage to the employer or commits serious misconduct); however, to rely on those grounds successfully, it will be necessary to prove the intent of the employee and/or the extent of the damages the employer suffered (or could have suffered) as a result of the employee’s act(s).
The Civil and Commercial Code enables employers to terminate employees immediately if they fail to discharge their employment duties faithfully; however, employers that rely merely on this “Section 583” right to immediate termination need to be careful, as they might still be required to pay severance pay (which can exceed one year’s wages, for senior employees).
Organizations in Thailand that do not have effective Policies in place but wish to terminate an employee immediately without paying severance pay need to identify whether the employee’s conduct meets any of the grounds specified in the LPA (e.g., the employee performing his or her duty dishonestly)3.
The following three categories of occupational fraud account for 57% of the cases in the Asia Pacific, so Thai companies should be very careful when terminating an employee for these types of fraud.
▶ Conflicts of interest
If the procurement manager of a company recommends selection of a supplier owned by the manager’s relatives, or in which the procurement manager is a shareholder, without declaring the connection with the supplier, the procurement manager potentially could benefit financially from future payments made to the related supplier under the supply contract. The procurement manager’s personal interest in the supplier potentially conflicts with his or her duties to the company.
Thai law does not expressly obligate employees to notify employers of a conflict of interest, and it is not clear whether entering into a related-party contract without notifying the company of the relationship would qualify as fraud under the Thai Criminal Code.
If the procurement manager acted dishonestly in selecting the supplier, the LPA would enable the company to terminate the procurement manager immediately. This might be easy to prove if the procurement manager was the sole shareholder of the supplier; however, in some cases it will be difficult to prove dishonesty.
For example, if the supplier was a listed company and the procurement manager held a very small number of shares in the supplier, and if the chosen supplier was objectively the best choice, it may be difficult to prove that the procurement manager acted dishonestly or used his or her position dishonestly to obtain a personal benefit.
By preparing a conflicts of interest policy that requires employees to disclose potential and actual conflicts of interest, Thai companies can more reliably prevent, identify, and act on conflicts of interest. By setting out what employees are required to do, companies have a clearer path to immediate termination without severance pay, by demonstrating the seriousness of a breach of the Policy.
▶ Secret commissions, kickbacks
If a potential supplier offers a company procurement manager a commission or cash bonus as an incentive to recommend the supplier in preference to other competitors, the procurement manager can benefit financially by recommending the supplier, without notifying the company of the payment being offered by or received from the supplier.
In many countries, this would be regarded as an illegal bribe, in the form of a secret commission or kickback; however, Thailand’s Bribery Act focusses on interactions with government officials, and does not criminalize bribes paid to the individuals in the private sector.
Previous Supreme Court cases have ruled that a procurement manager who performs his/her duty dishonestly by personally seeking or demanding payments from suppliers can be terminated without being entitled to severance pay, but there is no clear judicial view on the situation where a supplier offers or makes a payment without the employee having asked for the payment (e.g., as a reward for selecting the supplier ). If the supplier was objectively the best choice, and there was no departure from procurement guidelines, it is not 100% certain that receiving an unrequested payment from the supplier constitutes dishonest performance of duty.
Thai companies can reduce the risk of procurement processes being influenced by bribes by making sure that their policies require employees to declare, seek approval for, or decline commissions and gifts from suppliers (or potential suppliers) that have values above specified thresholds.
▶ Bid-rigging
An employee responsible for preparing bids or proposals in response to tenders may collude with other companies from time to time, to submit a bid with a very high price or not to bid at all, to enable other companies to win a specified tender.
In many countries this would be regarded as illegal bid-rigging; however, Thailand’s Bid Rigging Act4 focuses on bids submitted to government agencies, and does not criminalize bid rigging if the bids are made in the private sector. The Trade Competition Act 5criminalizes bid-rigging in a hardcore-cartel context, but not a soft-cartel context. The result is that a certain spectrum of bid-rigging does not violate either the Government Bidding Act or the Trade Competition Act.
In some cases, bid rigging is performed without the intent to obtain a personal benefit, but with the expectation that a company will win a specified bid at a later date by abstaining from a different bid where the project is better suited to other bidders. It is not clear whether bid rigging in these cases will be deemed to meet the Supreme Court’s “seeking undue benefits” category for dishonesty. Normally, without effective Policies, a company may terminate an employee immediately, without severance pay, only when it is clear that the employee intentionally caused damage to the company (e.g., where the company pays more than necessary as a result of bid-rigging), which usually is difficult to prove in practice.
Companies can protect against lost opportunities due to bid-rigging by putting Policies in place that require employees to abstain from collusive conduct in bidding scenarios
Prevention
It may not be possible to prevent fraud entirely, but companies can reduce the likelihood and frequency of fraud by taking action to ensure that employees understand what is required of them with regard to occupational fraud.
Companies can do this by establishing effective Policies concerning occupational fraud, ensuring that the terms of employment accurately reflect each employee’s duty, giving employees a clear understanding of their respective duties, and providing training to all employees, to ensure that the underlying Policies are understood clearly by all employees.
Checklist: Take control by making sure your organization’s policies provide effective protection against occupational fraud
- ☑ Work Rules - Do your work rules permit you to suspend employees during an investigation?
- ☑ Policies Do your work rules and regulations address:
- Circumstances that constitute conflicts of interest, bribery, and bid-rigging?
- Employees’ responsibilities if they discover any of these circumstances?
- Examples of what employees should and should not do?
- Details of who employees should contact if they have any inquiries?
- ☑ Employment Contracts
- Do you have written employment contracts with each employee?
- Do employment contracts set out each employee’s duties in detail?
- ☑ Training – Do your employee training programs include occupational fraud training?
- ☑ Hotline
- Do you have an easy-to-access procedure for people inside and outside your organization to report fraud anonymously?
- Is your hotline PDPA compliant?
1The ACFE formally defines “occupational fraud” as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
2Occupational Fraud 2022: A Report to the Nations. Copyright 2022 by the Association of Certified Fraud Examiners
3The term “performing … duty dishonestly” is not defined in the LPA. The Supreme Court previously held that an employee must work in accordance with the law and good morals, and shall not use his or her authority or position to seek undue benefits in violation of the law, for the employee’s own benefit or that of others, in a manner characterized by unethical behavior, deceit, and dishonesty toward an employer. While this provides guidance, it does not constitute binding law, and does not provide definitive guidance on what qualifies as dishonesty.
4Offences Concerning Price Offers to State Agencies Act, BE 2542 (1999)
5Trade Competition Act, BE 2560 (2017)
Chris has been based in Thailand since 2001 and has more than two decades of experience working alongside Thai lawyers on cross-border M&A and regulatory matters, providing international-level solutions to companies entering the Thai market. His clients include global companies investing or acquiring assets in Thailand and Thai companies engaging in cross-border transactions. He advises international and Thai companies on the development, sale, and acquisition of renewable energy projects in Thailand and across Asia.
His M&A practice has included private M&A, advising institutional and activist investors on SEC/SET reporting requirements and acquisition thresholds, and strategic shareholders on synergistic de-layering of listed group structures. His sector expertise for M&A includes manufacturing, TMT, logistics, renewable energy projects, and the service sector for both buy-side and sell-side, share and asset sale transaction structures. He has advised overseas law firms on the acquisition of Thai law firms.
With a focus on renewables (including transition), Chris’ energy practice has more than 1 GW’s experience in onshore wind, solar (PV, thermal, ground mount utility scale, and C&I rooftop), and waste-to-energy projects. His experience has a broad reach, from due diligence of early-stage projects, advising on EPC/O&M, corporate PPAs, equity funding, and project finance, to pre- and post-commissioning exits and acquisitions.