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Page 1 Recording of this session via any media type is strictly prohibited. Page 1 High Fidelity! Corporate Theft and Recovery Geoff Harrold, The Gavilon.

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Presentation on theme: "Page 1 Recording of this session via any media type is strictly prohibited. Page 1 High Fidelity! Corporate Theft and Recovery Geoff Harrold, The Gavilon."— Presentation transcript:

1 Page 1 Recording of this session via any media type is strictly prohibited. Page 1 High Fidelity! Corporate Theft and Recovery Geoff Harrold, The Gavilon Group Alex Lathrop, Orrick, Herrington & Sutcliffe, LLP

2 Page 2 Recording of this session via any media type is strictly prohibited. Page 2 Section I Introduction

3 Page 3 Recording of this session via any media type is strictly prohibited. Employee Crime Statistics $50B stolen by employees of US businesses (2013)  An increase of 7% from % of employees have stolen at least once from their employer 5% of annual revenues are lost to theft or fraud Theft is conducted by:  Men: 59.1% of the time  Women: 40.9% of the time

4 Page 4 Recording of this session via any media type is strictly prohibited.

5 Page 5 Recording of this session via any media type is strictly prohibited. Employee Crime Statistics Employee theft occurs most often at:  Convenience stores  Truck stops  Apparel stores  Office supply/stationery stores Small businesses also are prone to employee theft as internal controls are not as establish ed

6 Page 6 Recording of this session via any media type is strictly prohibited. Employee Theft Schemes As the usage of cash decreases, employees have shifted to stealing material/physical items (inventory) Corporate credit cards make it easier for employees to disguise charging personal expenses to the company Employees often falsify time records and number of hours worked in order to be paid more by the company

7 Page 7 Recording of this session via any media type is strictly prohibited. Detecting Employee Theft Tips are the most common method of initial detection Top three sources of tips  Employee tips (51%)  Customer tips (22%)  Anonymous tips (12.4%) Organizations that use a hotline experience a 44.4% lower median fraud loss

8 Page 8 Recording of this session via any media type is strictly prohibited. Take Away Employee theft presents a substantial loss exposure to most companies Risk Managers must have effective loss control measures in place and be sure the Company is adequately insured

9 Page 9 Recording of this session via any media type is strictly prohibited. Page 9 Section II The Case of the Stolen Grain

10 Page 10 Recording of this session via any media type is strictly prohibited. Background Gavilon  Managing Essential Ag Commodities on a Global basis  Second largest grain handler based on licensed storage The Case Study location  Storage capacity of 7.5M tons of grain  Trucks enter the facility, weigh in empty, truck is filled with grain, weigh out full, and depart o Entire process takes about 12 minutes per truck

11 Page 11 Recording of this session via any media type is strictly prohibited. The Case Study Facility

12 Page 12 Recording of this session via any media type is strictly prohibited. Discovery of the Loss First Evidence of the Loss  Tip from customer Confirming the Loss  Conducted Internal Audit of Inventory  Confirmed missing stock

13 Page 13 Recording of this session via any media type is strictly prohibited. Investigating the Loss Hired third-party surveillance company  Observed trucking operations for several nights  During certain periods, trucks would enter and exit with full loads in less than four minutes Local Law Enforcement  Interviewed night crew  Thefts took place when one employee went on breaks o Remaining employee was colluding with truck drivers

14 Page 14 Recording of this session via any media type is strictly prohibited. Insurance Issues – Employee Requirement Must be an employee Insuring Agreement  Loss must result from dishonest or fraudulent acts “committed by an Employee acting alone or in collusion with others” Had to show that truck drivers were in collusion with storage facility employee

15 Page 15 Recording of this session via any media type is strictly prohibited. Insurance Issues – Inventory Computation Exclusion Missing inventory cannot be the sole evidence of the loss Evidence of loss included customer tip and surveillance  Inventory audit confirmed the quantity of the loss

16 Page 16 Recording of this session via any media type is strictly prohibited. Quantifying the Loss Bulk Commodities  Challenge of bulk commodities Challenge of bulk commodities  Physical Dimensions o Size – Angle of Repose - Expertise o Weight of Product o The Storage Barn is Seldom Empty Accounting records  Scale Tickets  Invoices

17 Page 17 Recording of this session via any media type is strictly prohibited. Quantifying the Loss Accounting records  Historical throughput o Seasonal adjustments  Historical pricing o Traded on an exchange? o Independent Verification o Profit Margin o Accounting systems

18 Page 18 Recording of this session via any media type is strictly prohibited. Insurance Issues – Proof of Loss Describe all facts establishing that loss occurred, nature of the theft, that employees participated  Interviews/testimony of employee in underlying matter may include denials inherently in tension with coverage claim Provide an accounting of the loss—quantum, dollar value Statement must be sworn Deadline is condition precedent to coverage—but insurer will grant extension on reasonable request Important to involve professional support immediately

19 Page 19 Recording of this session via any media type is strictly prohibited. Insurance Issues – Documenting the Loss Forensic Investigation Interviews Law Enforcement and Prosecutorial Authorities Outside Evidence

20 Page 20 Recording of this session via any media type is strictly prohibited. Lessons Learned An ounce of prevention  Frequent and unscheduled audits o Use of a third party for unscheduled audits  Rotate employees and shifts worked  Manager present during all shifts  Criminal Background Checks  Engage a Forensic Accountant before a loss o Endorse Crime Policy to include fees  Think like a criminal  Contemplate the records and documents needed before a loss

21 Page 21 Recording of this session via any media type is strictly prohibited. Preventing a Loss Physical Deterrents  Fencing, lighting, gates  CCTV and Security Cameras  Security Staff  Restrict Access  Vulnerability Assessment Metaphysical Deterrents  Local Authorities – Fire and Law Enforcement  Be a good neighbor

22 Page 22 Recording of this session via any media type is strictly prohibited. Page 22 Section III Coverage for Employee Theft

23 Page 23 Recording of this session via any media type is strictly prohibited. Fidelity Bond Components Insuring Agreement  Employee Involvement  “Manifest Intent”  To Gain and/or Cause Loss Exclusions Conditions

24 Page 24 Recording of this session via any media type is strictly prohibited. Insuring Agreement We will pay for loss resulting directly from dishonest or fraudulent acts... committed by an Employee acting alone or in collusion with others... with the manifest [or specific] intent to: 1)Cause you to sustain such loss; [and/or] 2)Obtain an improper financial benefit for the Employee or another person or entity.

25 Page 25 Recording of this session via any media type is strictly prohibited. Manifest Intent Must be discernible intention (objective/subjective) to cause Loss to Company and/or benefit to employee or others Does not include Employee Compensation (per insuring agreement or by exclusion) Loss must be direct result of employee acts

26 Page 26 Recording of this session via any media type is strictly prohibited. Some Common Exclusions Inventory computation exclusion Timing of loss and claim Directors and officers “Damages” or indirect or consequential losses Losses resulting exclusively from acts of non- employees

27 Page 27 Recording of this session via any media type is strictly prohibited. Limitations on Recovery Timing related limitations Variable limits/sublimits related to type of loss Non-cumulation provisions

28 Page 28 Recording of this session via any media type is strictly prohibited. Tendering and Supporting Your Claim Deadlines  Policies are “claims made and reported”  Provide prompt notice of claim  Provide proof of loss Engage forensic accountant, investigator and/or counsel, if required, early!

29 Page 29 Recording of this session via any media type is strictly prohibited. Litigation Considerations Documentation of claim (causation, participants, quantum of loss) must be well developed Supporting experts lined up Witnesses lined up/credible Anticipate and prepare responses to insurer coverage arguments What is the cost-benefit analysis for litigation? Would compromise make sense?

30 Page 30 Recording of this session via any media type is strictly prohibited. Negotiated Settlements Insurers may dispute coverage because they do not agree with proof that (1) an employee was involved; (2) there was manifest intent; (3) that proof was consistent with conditions and exclusions; or (4) quantum of loss was proved Such disputes often can be compromised in a direct meeting with the insurer Be prepared to (1) lay out the factual case for coverage; (2) demonstrate quantum; (3) address legal issues head-on; and (4) compromise weaker points Involve your forensic accountant, investigators, and counsel


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