10 Tips to Protect Your Business from Embezzlement
Mar 18, 2022
From an international lawyer specializing in risk management
Managers are no strangers to international embezzlement cases. I have been seeing international embezzlement cases in my legal practice for a while now and I have seen a few dozen cases already. I thought it was about time to make a few comments on this topic since I consider that I have become a specialist in this area, at least when it comes to cases in English and French-speaking countries.
(1) Were you careful enough?
Many people think that victims of embezzlement are “stupid”. In my opinion, that is not constructive thinking. It is surprisingly easy to find cases of embezzlement when you look closely at a business. I think it is easier to do business if you are aware that such things are common, both in Japan and overseas.
10 years ago, I thought a lot about if I was being careful enough with my business, but I now think that everyone has blind spots. For example, if I couldn’t monitor my child 24 hours a day, I wouldn’t say I wasn’t careful enough. If they misbehaved or got into trouble, you could say that this would happen whether I trusted them or not, maybe even that it was unavoidable.
What I want you to realize from this is that time spent blaming yourself for the damage that is already done is a waste of time. Don’t spend time thinking it over too much, at least until the case is over and you have had a break. It will be mentally painful and there are many things that need to be done.
In our firm, we often start with mental support when embezzlement or something similar occurs. It’s pointless for a lawyer to be hard on you when you are already blaming yourself.
(2) Creating a task sheet of what needs to be done
If you become aware of embezzlement, do not make rash decisions such as immediate dismissal or immediate liquidation. The most important thing to do is to contact a thoughtful and experienced attorney. There are many cases in which people try to solve the problem on their own and end up in a deeper hole than they started with. Similarly, I have no comment on lawyers who insist on immediate dismissal or liquidation.
You will eventually have to decide on a certain day regarding termination, etc., and see what needs to be done, if there are any omissions, etc. What sometimes happens is that in worrying only about legal matters at these times, we forget about preserving substantial evidence, recovering damages, recovering valuables, and other important matters. We think of this as a kind of bias, the effect of only seeing what you care about. Removing one’s personal bias has its benefits, such allowing you to see the situation like a chess board.
It is better to have an experienced person work with you because inexperienced people can overlook or forget such things. Especially in the online age, there are many things left out, and I don’t think that book smarts alone will be able to solve this problem.
It is important to think backwards from the day on which you’ve decided to proceed with termination, etc. and also to separate what needs to be done before that day from what needs to be done afterwards. I recommend that you prepare such a list in Excel rather than Word because you can easily categorize various items in Excel.
(3) Remember: the eyes of the other employees are on you
People in top management are always solitary. And unfortunately, understanding loneliness, perpetrators of embezzlement and the like come close to them. Top management is more often than not unaware of this. I hope you realize that there is no point in blaming yourself if you are victimized, and that it is better to follow a certain method in order to avoid systematic issues. There are people who state things like “This would never happen to me, because I’m properly suspicious of people and don’t trust them,” but my long-standing conclusion is that it is better to admit “no, that’s my blind spot, and I’m easily fooled on that point.” This applies doesn’t only apply to me, not recognizing one’s blind spots makes the probability of damage higher.
The amount of damage and psychological pressure can be reduced if the potential victim of embezzlement is aware of their blind spots. However, being aware is not enough: one should also consider implementing a system to reduce the risk of embezzlement in order to avoid creating a situation ripe for embezzlement, and thereby being partly responsible for creating a criminal! We have a number of such schemes at our firm, but we never thought that they would eliminate all risks of embezzlement. Zero risk is also zero business potential.
If you are victimized…
If you are victimized, the first thing to keep in mind is not your own feelings of victimization, but that your employees are watching your reaction. They will be assessing your response. Managing the situation reasonably, honest conversations and allowing pent-up frustration to be expressed will ultimately eliminate embezzlement, etc. and create a culture of peace of mind. For example, in one case, we had problems with things going missing in the workplace. Because I was a union representative, I was unable to fire people or get them out of trouble. The only way to deal with such situations is to point out resolutely that what is wrong is wrong and to punish it without hesitation. Making claims that the law is bad or such will not change anything.
The objective should be to create an open culture that other members will imitate, and it is enough if the rest of the members can simply earn money.
When that objective is set, the option of liquidating the company will be chosen if about 50% of the employees are involved in crimes, etc., and the situation is recognized as no longer being manageable. Therefore, it is necessary to confirm the facts anyway.
(4) Decide in advance what the purpose is and what the criteria will be.
As mentioned above, it is important to think in terms of purpose in order to clarify the criteria to be used for making decisions. Deciding strictly based on cost is undesirable, as it leads to uneven decisions. One should try to imagine how other employees would feel and perform if one’s purpose were achieved. It is also important to be positive enough to take this opportunity to change the company.
Once the objective has been determined, one should envision the means (measures) that will be taken to achieve it.
The context that leads to embezzlement is simple. The following matters are done step by step:
- Getting chummy with the experts
- Failure to report to HQ
- Do not allow anyone to contact the parent company
- Mix company property with personal property (unintentional at first)
- Concealment and getting accomplices (gradually expanding)
If you think about this process, you can usually come up with a way to deal with embezzlement. If you have difficulty thinking of your next move, please contact our office. After meeting with us, you will generally feel clear-headed and refreshed. For some reason, some people go home with the impression that their case has been resolved, even though it has not yet begun. At that time, we say to them, “Let’s tighten up from now on; we have a lot of responsibility. This is just the beginning.” After that, we make a task sheet together.
(5) Fact-finding phase
Fact-finding is done through a variety of methods. Asking suspects directly is the last step in the process. There are many things to do first, such as gathering evidence. If you skip this part, you will have a lot of problems, so please be careful. The only way to collect evidence in this area is to imagine the evidence to be presented at the court (criminal or civil), which may be complicated, but you have to do it. Most laymen may not be good at this.
If you feel emotional, you may get in trouble for acting out of anger. Please contact a lawyer as soon as possible to calm down.
(6) Arrangement of facts and determination of countermeasures
Measures must be developed for both criminal and civil cases, and decisions will be made on a cost-benefit basis. By that time, a lot of evidence must be gathered. Making a decision without evidence is a gamble, and it leaves you in a weak position. Please avoid that.
(7) The way you speak
It is a given that the way you say something gives a certain impression. When fighting a war, saying “I’m going to beat you” without preparation is honestly elementary school fighting and disqualifies you as a manager. A fight should begin with 70% to 80% preparation to win, and there must be logic in every part of the arrangement, the way you speak, and the way you write.
There must be logic in every word, and you must be at a level where you can explain the logic. It is important that what you say doesn’t come from intuition or anything like that, but that it is in line with the objectives set above. No one likes methods that make people angry or create unnecessary enemies. We can also foresee those things happening and prepare for them, by creating a talk script for example. It seems that it is rare for a lawyer to prepare this much. Occasionally, the lawyer will lead the conversation and the manager will remain silent. In the case of a manager who tends to slip up, we have him stay quiet.
(8) Immediately come up with a solution
There is an expression in Japanese (that originally comes from Sun Tzu) that goes like this: as fast as the wind, as quiet as the forest, as daring as fire, and as immovable as the mountain. It is an ironclad rule that one should solve a problem as soon as the time is ripe. Being prepared for this is fundamental. However, that is not always easy and some people are not prepared enough. This happens even to lawyers.
It is important to be prepared for such a situation, to sign a written agreement, and to keep evidence.
(9) In the end, employees want a quick resolution
Sometimes managers are emotional and unable to make a decision. I understand the feeling. But the employees want to resolve the issue quickly and focus on the business. They will spend a year or two in civil litigation and be called in for witness interviews, etc. In some cases, only the lawyer wants to be the one to do this. So, 8) is sometimes surprisingly important.
(10) The most important thing above all is…
Prevention of recurrence. In some cases, surprisingly little effort is put into preventing recurrence. My comments above actually show other employees a variety of ways to prevent recurrence. Resoluteness, rationality, and openness.
This recurrence prevention should be addressed even if other tasks are skipped. That is the foundation for creating a culture where honesty is profitable. So, we will show a resolute attitude, evidence of punishment, and disposition. However, not wasting too much time, etc. ← It is almost impossible to decide these things alone.
Many people think that preventing recurrence = setting rules, but it is not. Setting rules is important. Without rules, there is no basis for penalties, etc., and I do not deny the importance of setting rules. However, it is also important to see the reality that rules are a formality and can be avoided. In the case of heavy penalties, it will be zero-sum, and just like with the Qin Dynasty in China, there will be a rebellion and it will not work. That is not the only solution.
First of all, there should be oversight of important positions, etc., and at the same time, make sure that the system is open and transparent. We need to make sure that power is not concentrated, etc. We should create an environment where it is easy to make a correction when injustice occurs. It is natural that where there is money, there will be injustice, etc.
If this is a situation where fraud is likely to occur, then (1) make the information accessible to the parent company at all times, with rules and assistants who do not mix it with property. (2) Ask immediately if there is no report, and (3) Do the obvious things solemnly, such as making sure that the supervisor does not have a romantic relationship with a subordinate. The high road is to do the obvious, but that obviousness is often blindsided and unnoticed by management. You should work with experts to take care of that area.
The next step is to build a proper team and design incentives to promote honesty. In addition, we should focus on succession planning and human resource development to create a sustainable organization. It is better to discuss these matters with experts to ensure that nothing is left out.
Omissions in (11) and above
The blind spot in the above is to send new management if the store is located in a foreign country. In that case, one person should be a supervisor and one person should be a practitioner. It sounds bad to say “watchdog,” but from the practitioner’s point of view, he or she is a thankful person who can make reports to the head office. What is also important is to find and send one of them to the head office, and it may be necessary to use an executive search firm. It is necessary to select them based on proper criteria. We may be able to assist you in this selection process.
I have written the above with a light touch. Frankly, there is more that I cannot disclose because of the heaviness of the topic (dealing with inappropriate relationships in the workplace, evidence collection, handling large assets, etc. There are many things that are generally common, but if you want to hear them, please contact me. I will be happy to explain more when we do a light due diligence and check for fraud and risk of fraud. Golf courses, mansions…. It’s a long story, so I won’t go into it here, nor will I say it over drinks, etc. All of our experience will be used in the following ways
(1) Light due diligence, checking and responding to fraud
(2) Rule making
(3) Establishing internal facts
(4) Theory of personnel training
For large companies, there may be little fear of (1) and (2), and we will work together to create a system that prevents major corruption and embezzlement, as well as a system that brings profit, through (3) and (4).
For small and medium-sized enterprises, there is often a fear of sloppy and unfair transactions with regard to (1) and (2), and we can help you with this.
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