Employee fraud: recovering assets and seeking restitution

Half of the frauds committed in Australia are perpetrated by business “insiders”; either employees or management,[1] with the total value of frauds in Australia increasing to a value of $442m for the six month period ending in September 2016 (up by 19% compared with the previous six month period).[2] More than half of those frauds were committed in Queensland.[3]

The primary focus of a business owner is often the recovery of misappropriated assets or financial compensation. However, the damage caused by employee fraud can extend beyond financial loss to include risk to operational viability, reputational damage, and a negative effect on employee morale.[4]

We explore in brief below some of the strategies and relevant considerations when seeking to recover misappropriated assets or compensation (restitution) for cases involving employee fraud.

Where to start?

For many businesses, the initial response when discovering employee fraud is to:

confront the employee and/or terminate their employment; and/or
report the matter to police.

However, for any business that seeks to recover compensation, their first considerations should be:

obtaining information; and
protecting or preserving assets (including in the hands of the employee or third parties).

Speed is key (delay will weaken your ability to obtain urgent Court orders), and employers should involve their lawyers in the evidence gathering at the earliest possible stage to ensure that:

evidence is obtained is in a form that can be used in Court; and
the prospect of recovery is maximised.

Obtaining information

Before confronting an employee and alerting them to the fact that you are aware of the fraud, employers should seek legal advice to ensure that the evidence necessary to recover compensation has been properly obtained. Because employee fraud can carry serious criminal consequences, recovery proceedings are often defended, and there are a number of restrictions on alleging fraud in Court proceedings which means that evidence must be carefully obtained. For these reasons, an employer should take swift and careful steps to secure as much evidence as possible at an early stage.

Part of the information gathering process can include obtaining a forensic accounting report, which can be used to “freeze” assets of the employee (including in the hands of third parties) and ensure that they are not disposed of, or diminished in value, while Court proceedings are on foot.

Once sufficient evidence is obtained, an employer can apply to Court urgently (without notifying the employee) to seek:

“freezing orders”[5] (dealt with below);
“asset disclosure orders”,[6] which requires an employee to provide details of the value and location of their assets;
“search orders”,[7] which allow your solicitor to enter premises and seize evidence to prevent its destruction or disposal; and
“travel restrictions”,[8] to prevent the employee from leaving Australia.

Protecting assets

Freezing orders are an extremely useful tool which can be obtained urgently and prior to the commencement of recovery proceedings to:

“freeze” bank accounts;
prevent the sale of real property or assets; and
prevent the removal of assets out of Australia.

Such orders are of advantage to an employer because they prevent an employee from dissipating or disposing of assets which can later be used to satisfy a judgement obtained to recover compensation.[9]

Further considerations

Once criminal proceedings are commenced, it is often the case that recovery proceedings will be “stayed”, meaning that if the employee defends criminal proceedings, the business owner will be prevented from progressing civil proceedings to recover what has been stolen from them.

Defending a criminal proceeding can also be a costly exercise that can have the effect of depleting the employee’s assets, and further preventing recovery. For that reason, where recovery is possible, it is often recommended that this be pursued before reporting the matter to police.[10]

Recovering compensation

Freezing orders (and associated orders) are just one part of the recovery process; Court proceedings which seek an order for compensation must also be prosecuted.

Court proceedings can take many different forms, as there are a range of actions which can be taken against an employee (or third parties such as friends and family of the employee), to recover compensation.

The relief which can be sought includes damages and restitution for (among other things):

“fraud”;
“fraudulent misrepresentation”;
“money had and received”; and
the “tort of deceit”.

Ultimately, the relief that an employer should seek from the Court will depend upon the nature of the fraud, and what has happened to the assets, including whether the assets remain in the hands of the employee, have been mixed with other assets, and even whether the assets have increased or decreased in value.
Further action

While prevention is better than a cure, there are no foolproof methods of preventing employee fraud; even the most sophisticated internal controls can be circumvented. If faced with circumstances which cause you to suspect that your business has suffered from employee fraud, we recommend that you immediately seek legal advice.

If you wish to explore making a claim or seeking to recover assets as a consequence of employee fraud, contact Scott Taylor on (07) 3229 9800, or by email at [email protected].

While attempts have been made to ensure the currency of information contained in this publication, we do not guarantee its currency. This publication is intended to provide only general information on matters of interest. As such, this publication is not intended to be comprehensive and does not constitute and must not be relied upon as legal advice.You should seek legal or other professional advice which is specific to your circumstances.

[1] https://home.kpmg.com/au/en/home/insights/2017/01/fraud-barometer-april-september-2016.html.
[2] https://home.kpmg.com/au/en/home/insights/2017/01/fraud-barometer-april-september-2016.html.
[3] https://home.kpmg.com/au/en/home/insights/2017/01/fraud-barometer-april-september-2016.html.
[4] Chelan, David (1 May 2006) “The cost of corporate fraud”, Smart Business.
[5] Also known as “mareva orders”, Uniform Civil Procedure Rules 1999, r. 260A.
[6]Uniform Civil Procedure Rules 1999, r. 260B.
[7] Also known as an “anton pillar orders”, Uniform Civil Procedure Rules 1999, r. 261A.
[8] A write “ne exeat regno”, Uniform Civil Procedure Rules 1999, r. 259(2)(c).
[9] Supreme Court of Queensland, Practice Direction 1 of 2007, para. 3; http://www.courts.qld.gov.au/__data/assets/pdf_file/0020/86411/sc-pd-1of2007.pdf.
[10] It is important to note that in most states in Australia, if a person fails, without reasonable excuse, to report to the Police or other relevant authorities, conduct which amounts to a serious indictable offence, that person is liable to imprisonment for two years. A reasonable excuse may include steps taken to recover misappropriated assets.