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Lessons on Work-Related Fraud and Abuse

The Association of Certified Fraud Examiners recently released its 2014 Report to the Nations on Occupational Fraud and Abuse (the “Report”), which provides interesting statistics and insights for HR professionals hoping to better understand and combat occupational fraud.

The Report is based on a global study of 1,483 cases of occupational fraud, which occurred in over 100 countries, including Canada. First published in 1996 and biennially since 2002, similar reports reveal fairly consistent patterns about how fraud is prevented, committed and detected – useful information for HR professionals and their lawyers.

At the front-line of fraud prevention efforts, HR professionals often create anti-fraud policies, investigate fraud allegations and discipline/terminate fraudsters. Labour and employment lawyers often assist with any wrongful termination or human rights claims that may ensue in the aftermath of investigations or terminations.

Useful and interesting statistics and insight from the Report include the following:

  • The impact of fraud is very significant: Estimates are that a typical organization loses as much as 5% its annual revenue to fraud. The Canadian companies in the study experienced a median loss of US $250,000. This is in addition to other losses, including reputational losses and damage to the morale of other employees.
  • A whistleblower policy is one of the most effective tools in combating fraud: Globally, “tips” continued to be the most common method of initially detecting fraud, accounting for 42.2% of frauds detected. Its relative effectiveness is evident in the fact that the second most common initial detection method was management review, which trailed at 16%. Over half of the tips were provided by employees and the tips were more effective in organizations with a hotline.

Despite the benefits of whistleblower policies and hotlines, according to the Report, of the organizations victimised by fraud, only 54% had a hotline mechanism and less than 11% provided rewards for whistleblowers. Based on the Report, employers should give careful consideration to implementing an effective whistleblower policy. Among other features, an effective whistleblower policy should include a hotline mechanism and should assure employees that they can speak up if something seems amiss without fear of reprisals.

  • It may be hard to see it coming: Only 5% of fraudsters in the study had been convicted of a previous fraud-related offence. 85.6% of all fraudsters in the study had never been criminally charged. Of the organizations that were able to provide data from past employment history, 81.7% of all fraudsters had never been previously punished or terminated because of a fraud. This means that the effectiveness of screening methods like criminal background checks and employment history screenings, while still useful best practices for many other reasons, may not be particularly effective for screening out fraudsters during the hiring process.
  • On the other hand, it may be easy to see it coming: Fraudsters in the study exhibited several behavioural clues which are “red flags” to the trained eye. Approximately 44% of fraudsters were living beyond their means while the fraud was ongoing, and 33% were experiencing known financial difficulties. The ability to identify these red flags may provide an early warning to victim organizations, and this in turn will limit the duration and impact of frauds.

This finding in particular indicates that there is solid business justification in HR strategies and training for promoting organizational cultures like “knowing one’s people” or “management by walking around”, because among other good reasons for these philosophies, they provide excellent opportunities to identify red flags.

  • Investigations and disciplinary procedures cannot be carried out in silos or in isolation: The Report seems to confirm what many experienced lawyers and HR professionals know anecdotally – one disciplinary issue is often the tip of the proverbial iceberg. If for example an employee has significant attendance issues, it is not uncommon to also find shoddy work and slippages in the employee’s record-keeping. The latter is often associated in one form or another with expense claim frauds or unintentional errors, for example. Where study participants were able to provide this type of data, 38% of fraudsters also engaged in at least one other type of misbehaviour, for example bullying, intimidation or excessive absenteeism – behaviours which are generally on HR’s radar. In addition, from the responses received, 25% of fraudsters had experienced one of several HR-related events immediately before or during the commission of fraud. The most common was a poor performance appraisal, which occurred in 11% of all cases.

The lesson for HR professionals and lawyers is that it is generally important that investigations be comprehensive, and this can be particularly important where fraud is alleged or suspected. A siloed approach to investigations can lead to late-in-the-game evidentiary surprises during investigations, disciplinary procedures or any ensuing legal proceedings.

Overall the Report provides insight which can help lawyers and HR professionals avoid some of the challenges associated with combatting occupational fraud and abuse.

Lessons on Work-Related Fraud and Abuse

Not Quite an Eye for an Eye – Judge rules that Employee’s “Kick in the Butt” Excuses Co-Worker’s Punch in the Mouth

Does a “kick in the butt” excuse a punch in the mouth? That was the question facing the Court in the recent case of Li v Furguson, 2013 CanLII 91746 (Ont. Sm. Cl. Ct.).

Peng Li and Winston Furguson worked in the shipping and receiving department of a furniture company. Li and Furguson’s coexistence was initially uneventful; however, their relationship had begun to disintegrate following allegations by Li that Furguson was stealing from the company.

On April 19, 2011, things between Li and Furguson reached a boiling point. After searching for Furguson throughout the warehouse, Li finally found his target and confronted him. What happened next was a source of disagreement between the parties, although the judge adopted the following facts. Li began speaking very closely to Furguson; so close that spit was transferred to Furguson’s face, albeit unintentionally. As Furguson tried to break free, Li kicked Furguson in the “butt” with his steel-toe boots. Furguson then wheeled and punched Li twice – one blow was inconsequential, the other was not as it resulted in Li incurring over $7,000.00 in costs for restorative dental services.

At trial, Li argued that he was entitled to damages from Furguson for the tort of battery. However, in the judge’s view, Li’s actions amounted to implied consent to the battery:

Having insulted, berated and confined a person at close quarters, then scuffled with them and kicked them I cannot see how a reasonable person could maintain that a punch or two in return was beyond their reasonable contemplation as being with the scope of what they had implicitly consented to.

 

In addition, the judge held that Li had provoked Furguson by kicking him. Although provocation was not a complete answer to Li’s claim of battery, it nonetheless operated to mitigate the damages that Li had in turn claimed.

In light of these facts, the judge dismissed Li’s claim in its entirety.

It is important to note that while Li had originally brought an action against his employer in which he made a number of claims, including one for “wrongful dismissal”, this action was discontinued before trial. Regardless, apart from the civil liability above, the altercation between Li and Furguson would certainly attract the attention of any employer’s workplace violence policy and potentially lead to discipline.

Li v Furguson, 2013 CanLII 91746 (Ont. Sm. Cl. Ct.)

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Not Quite an Eye for an Eye – Judge rules that Employee’s “Kick in the Butt” Excuses Co-Worker’s Punch in the Mouth

Criminal Sentence for Unauthorized Access of Former Co-Worker’s E-mail Reduced on Appeal

A terminated employee was convicted of “Mischief to Data” and “Unauthorized use of a Computer” contrary to the Criminal Code after he remotely accessed a former co-worker’s e-mail without her authorization and forwarded several e-mails to his personal account. In this recent appeal decision, the Summary Conviction Appeal Court reduced the terminated employee’s sentence to a conditional discharge after taking into consideration, among other things, the potential impact of a criminal conviction on his current and potential employment opportunities.

In R. v. Charania, the appellant was terminated from his employment as the Director of Care at a nursing home. Later that same evening, the appellant used the username and password of Ms. Caven, the Human Resources Coordinator at the nursing home, to remotely access her e-mail. Once in her e-mail, the appellant forwarded several e-mails relating to their meeting and his employment to his personal e-mail account. At the same time, Ms. Caven was also attempting to remotely access her e-mail using her username and password. She was repeatedly denied access and eventually locked out of the system, which led to a complaint to IT, and subsequently, to an investigation by the nursing home and the police.

Contrary to the appellant’s claim, Ms. Caven denied providing the appellant with her username and password. Based on the totality of the evidence, the trial judge found the appellant guilty of the offences charged. She conditionally stayed one count and on the other count sentenced the employee to a fine of $1,300.00 and placed him on probation for 18 months with terms including restitution. The appellant appealed his sentence.

The Summary Conviction Appeal Court found that the trial judge committed an error by considering the appellant’s defence as an aggravating factor and again when considering the viability of a conditional discharge. In considering whether to vary the sentence imposed by the trial judge, the court stated that the potential impact of a criminal conviction on the offender’s current and potential employment opportunities is a relevant consideration in deciding between a criminal conviction and a conditional discharge. The court went on to consider that the appellant was a first time offender with no prior criminal record. He had a Bachelor of Science in Nursing, with a minor in healthcare administration and was studying for his Master’s degree. Prior to these offences he had a solid employment history and had contributed to the community through volunteer work. Further, as a registered nurse the appellant was facing additional consequences for his conduct as a result of disciplinary proceedings by the College of Nurses of Ontario.

Ultimately, the Summary Conviction Appeal Court held that, in these particular circumstances, a conditional discharge would neither be contrary to the public interest nor would be inconsistent with the fundamental purpose and principles of sentencing in the Criminal Code.

R. v. Charania, 2014 ONSC 1695

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Criminal Sentence for Unauthorized Access of Former Co-Worker’s E-mail Reduced on Appeal

Don’t be “Convicted” of Discriminating based on Criminal Convictions

Picture it: you have the perfect person to hire. You run the background check, and discover a criminal conviction. You are inclined to withdraw the offer, but suddenly you are faced with the question: can I do it?

The answer will depend on which province you are in. Below is a summary of the human rights implications of asking about criminal convictions in Ontario, BC, Quebec, Alberta and Saskatchewan. In addition to the human rights implications, an employer will also have to consider privacy rights in proceeding.

Ontario

In Ontario, there is no protection for applicants for employment against differential treatment based on a conviction, unless the conviction is for (i) a provincial offence or, (ii) in the event of a criminal offence, a pardon has been obtained. This occurs because although the Ontario Human Rights Code does provide protection from differential treatment based on a “record of offences”, it defines “record of offences” as follows:

“a conviction for,

(a) an offence in respect of which a pardon has been granted under the Criminal Records Act (Canada) and has not been revoked, or

(b) an offence in respect of any provincial enactment.”

Given this definition, there is no protection against differential treatment based on a criminal offence (which is a federal statute), unless a pardon has been obtained. Accordingly, an employer can treat a person differently based on an unpardoned criminal conviction in Ontario.

British Columbia

The B.C. Human Rights Code prohibits discrimination in employment on the basis of a summary or criminal conviction where the offence is “unrelated to the employment or to the intended employment of that person”. As such, an employer may not treat a person differently on account of a criminal record unless it is related to the employment. In this respect, the B.C. Code protects a broader range of situations than the legislation in Ontario. The B.C. Human Rights Tribunal and courts have consistently held that whether a conviction is related to employment must be considered in every case with respect a series of factors, including:

  1. whether the behaviour for which the charge is laid, if repeated, would pose a threat to the employer’s ability to carry on business safely;
  2. the circumstances and particulars of the offence, including the individual’s age and other extenuating circumstances; and
  3. the amount of time elapsed since the charge and the individual’s activities or rehabilitation efforts since that time.

Given these provisions, employers in BC must be cautious in asking for information concerning a criminal record; depending on the type of job for which the person is being hired, even asking for this information may expose an employer to a human rights or privacy complaint.

In B.C., if an employer asks a job applicant whether he or she has a criminal record, and the applicant answers “yes” to the question, the employer may not disqualify the person simply on that basis without exposing itself to a human rights complaint. From a practical perspective, it may be difficult to defend such a complaint if the person is otherwise qualified for the position. An employer would have to demonstrate that the particular offence is related to the person’s employment by obtaining more information about the offence and the circumstances surrounding it, including considering the above factors. If it can demonstrate that the conviction is related to the person’s employment – for example, an applicant for a controller position has a fraud conviction from six months ago – then it may be able to disqualify the applicant on that basis.

Quebec

The Quebec Charter of Human Rights and Freedoms (the “Charter”) prohibits discrimination in employment on the basis of a penal or criminal conviction where the offence is “in no way connected with the employment or if the person has obtained a pardon for the offence”.

Accordingly, in Quebec, if an employer refuses to hire an applicant because of his/her criminal record or dismisses an employee for the same reason, it must be able to demonstrate that there is a connection between the criminal record and the employment. The question of the connection to the employment is examined on a case-by-case basis, considering factors similar to those outlined in respect of the B.C. legislation above. In general terms, the greater the degree of integrity and trust that the position requires, the easier the connection may be to establish because the expectations of an employer in such a position will be higher.

 Alberta

Alberta does not have “criminal convictions” or something similar as one of the prohibited grounds in its Human Rights legislation. There is therefore always an argument that a refusal to hire someone due to a criminal record is not discriminatory in Alberta with respect to human rights. That said, employers should be careful when making a hiring decision based on information or a conviction that is not related to the position for which the person is being hired. The employer should also obtain consent to conduct these searches and procedures should be put in place to satisfy any privacy obligations with respect to the disclosure of this personal information (i.e. only limited personnel in Human Resources should view the results and the information should be kept in a secure location, etc.). Alberta’s Personal Information Protection Act may also place restrictions on what personal information an employer may gather in the course of background-checking a job applicant.  B.C. and Quebec also have their own provincial personal information protection legislation that should be considered in those provinces.

Saskatchewan

Similar to Alberta’s legislation, The Saskatchewan Human Rights Code does not list “criminal convictions” or anything similar as one of its prohibited grounds. It appears that the Saskatchewan Human Rights Commission conducted an extensive review of its Code in 1996 and recommended that the list of prohibited grounds be expanded to protect people from discrimination if they have been charged with or found guilty of a criminal or summary conviction offence that is unrelated to their employment or intended employment. However, this recommendation still does not appear to have made its way into the current version of the Saskatchewan Code. As a result, asking this type of question should not be considered discriminatory in Saskatchewan because it is not a protected ground. Nevertheless, similar to Alberta, employers should be cautious in proceeding with such checks and in relying on such information.

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Don’t be “Convicted” of Discriminating based on Criminal Convictions

Settling With a Fraudulent Employee: Will you be the next Defendant?

A recent Ontario decision dealt with the issue of liability as between two defrauded employers: is a past (former) employer liable to a new employer when a fraudulent employee steals money from the latter to satisfy its debt to the former?

In the recent Ontario Superior Court of Justice decision in Healthy Body Services Inc. v. 1261679 Ontario Ltd., 2013 ONSC 6396, the defrauded employer, Healthy Body Services, attempted to recover from the former employer, Raytek, on the basis that the fraudulent employee, Mr. Patel, paid Raytek a settlement with funds stolen from Healthy Body Services. As is the case with many fraudsters, Mr. Patel appeared to have a history of fraud, and had similarly defrauded his prior employer, Raytek. Using funds stolen from Healthy Body Services, Mr. Patel paid significant amounts to satisfy the claims of Raytek.

Healthy Body Services based its claim against Raytek in the causes of action of knowing receipt and unjust enrichment. The claim of knowing receipt requires the plaintiff to establish that the defendant received trust property, with knowledge that the property was transferred to that defendant in breach of a trust. If the funds can be traced, the only issue for the Court is whether or not the defendant “had knowledge of facts that would have put a reasonable person on notice or inquiry as to the source of the funds.” If so, the claim will succeed, and the plaintiff is entitled to the return of its money.

The claim of unjust enrichment has 3 necessary elements: an enrichment, a corresponding deprivation, and the absence of a juristic reason for the enrichment. Assuming that tracing can be established, the central issue is whether or not a juristic reason exists for the payments. In the Healthy Body Services case, the Court noted several factors to support a juristic reason; namely that the first employer acted in “commercial good conscience” when making the settlement agreement, the employer had a civil judgment on same issue, and the funds the employer received were applied for commercial purposes.

The Healthy Body Services decision provides useful direction for settlements with a former employee. The key point is that the former employer must take care to shield itself from future liability concerning the source of settlement payments in case their source is a subsequent fraud. These steps should include:

  • Carefully assessing the circumstances regarding payment of the funds. Are there any facts which may put the employer “on notice” to make reasonable inquiries as to the source of the funds? While the employer does not need to be “unduly suspicious”, the employer cannot turn a blind eye to facts that reasonably require investigation.
  • Entering into a settlement agreement, obtaining a judgment or otherwise documenting the obligation of the fraudster.

Please feel free to contact Jordan Deering of our Fraud, Corruption & Asset Recovery Group directly if you would like to discuss the application of this decision to your particular circumstances.

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Settling With a Fraudulent Employee: Will you be the next Defendant?

Employee Jailed for Accepting Bribe

An employee of a drive test centre has been jailed for accepting a bribe from a driving instructor, who has also been jailed.

Harvey Aitchison worked as a driving examiner for DriveTest Centre, the agency that tests Ontario drivers, in Oakville. He accepted bribes from Cyril Julius Marques, who was the owner and driver instructor of a driving school, to guarantee that that Marques’ driving students passed their Ministry of Transportation road examination.

Marques would charge $450.00 to his driver students, $300.00 of which he would give to Aitchison.  Marques would keep the remaining $150.00.  The bribing came to light after Marques offered a DriveTest coordinator a pack of cigarettes if she assigned Aitchison to test his student.  The coordinator blew the whistle.  Aitchison resigned from his job.

Both Aitchison and Marques pleaded quilty to accepting a bribe, contrary to section 426(1)(a) of the Criminal Code. That section provides:

426 (1) Every one commits an offence who

(a) directly or indirectly, corruptly gives, offers or agrees to give or offer to an agent or to anyone for the benefit of the agent — or, being an agent, directly or indirectly, corruptly demands, accepts or offers or agrees to accept from any person, for themselves or another person — any reward, advantage or benefit of any kind as consideration for doing or not doing, or for having done or not done, any act relating to the affairs or business of the agent’s principal, or for showing or not showing favour or disfavour to any person with relation to the affairs or business of the agent’s principal

Aitchison claimed the he accepted the bribes out of frustration towards his employer; Marques said that his actions were caused by his financial problems and his wife’s health problems.

The court sentenced Aitchison, a 64-year-old man with no criminal record, to a jail term of 4 months to be followed by 2 years of probation. The court sentenced Marques, a 58-year-old man who also did not have a criminal record, to a jail term of 90 days, which he was permitted to serve intermittently given his employment status and his wife’s medical needs.  The court stated that their corrupt scheme was a breach of trust offence that put the public at real risk of harm: sending unqualified drivers onto the roads.  The court pointed out that, “Public corruption is of significant concern to the citizens of Canada and general deterrents and denunciation must be the dominant sentencing factors.”

While there is no indication in this decision that the employer was charged or implicated in this case, employers that knowingly permit employees to accept bribes could also be subject to prosecution under the Criminal Code: subsection 426(2) of the Criminal Code provides that, “Every one commits an offence who is knowingly privy to the commission of an offence under subsection (1)”.

R. v. Aitchison, 2013 ONCJ 74 (CanLII)

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Employee Jailed for Accepting Bribe