How to safeguard against internal fraud on farms

Internal fraud is the official term for when employees – or even family members – are dishonest, usually with financial, and possibly reputational, consequences.

This might involve someone with access to payment systems setting up payments to themselves through fake invoices, or working with a third party, such as a contractor, to falsify records and claim payments for work that might not need to be done.

There is also the risk of the theft of cash and physical equipment, or expenses fraud.

See also: Common scams – how to protect your farm businesses against them

Fraud by employees working within a farming business is fortunately quite rare.

However, it is still worth putting in place policies and structures as a preventative measure, as many of them reflect wider good business practice.

Phil Draper, internal fraud specialist at NFU Mutual, says that employees can potentially be in a unique position to commit or facilitate fraud.

“The best way for agricultural businesses to avoid falling prey to internal fraud is to have a robust approach to financial crime with clear controls and documentation, which is communicated to all employees.”

Chloe Vernon-Shore, who works in the commercial team at law firm Michelmores, agrees that the focus needs to be on prevention.

This means thinking through where there may be particular risks – for example, around the placing of orders or payment of invoices – then ensuring everyone is trained in what is expected of them and appropriately monitored.

For example, there should be less opportunity for fraud if there are clear policies that set out who is authorised to spend money and process payments on behalf of a business.

She suggests setting a cap on spending, so that an employee has to seek approval if making a payment that exceeds a certain amount.

A similar approach can also be taken by the partners of a business, so that they agree that one can’t make a payment over a certain threshold without the approval of the others.

For larger farming businesses, an independent audit every year will help to pick up issues.

For smaller businesses, this would be prohibitively expensive, so instead consider regular spot checks looking at where payments are going, when they are being made and the bank account details they are being made to.

Tips on avoiding internal fraud

• Make sure there is a clear segregation of duties when it comes to purchasing and processing payments, and insist on management sign-off or approval
• Require documentary evidence to support expenses and costs (for example, invoices and receipts) with independent checks
• Verify changes of payment details independently with the payee
• Reconcile daily cash payments and implement independent verification of these  
• Put in place independent regular account reconciliations and audits, as well as independent regular inventory checks 
• Implement physical and system access restrictions to information and assets
• Screen and verify job applicant information
• Monitor accounts and information to identify new trends that may represent red flags – for example, a significant increase in expenses or payments to certain suppliers 
• Have a process for raising concerns about employee conduct
• Change passwords regularly, and remind staff not to share passwords

Source: NFU Mutual

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Suspicious activity

Although the temptation may be to confront an employee immediately, it is important not to tip them off that they are under suspicion as this may mean they can cover their tracks and make recovering any funds difficult, warns Alice Daniels, a partner in the litigation team at Michelmores.

“If substantial amounts of money have been taken then you don’t want the fraudster to know as they may well move it or spend it, so it is more difficult to recover,” she says.

“However, it may be the case that the person has been gambling with the proceeds, has debt problems or alcoholism and there will not be much to recover anyway.”

She advises businesses to gather as much evidence as possible by conducting an out-of-hours audit of payments.

It is crucial that only people who are known to be trustworthy are involved in this process.

Businesses can report their suspicions to the police, but are likely to need to pursue a separate civil claim against the individual if they are looking to recover any money, she says.

The reality is that the police may not be able to give such cases much attention because of a lack of people power and resources.

In cases where the sums involved are substantial, the business can seek an injunction to freeze the assets and bank accounts of the alleged fraudster.

However, the timing of this step is important as it needs to be done before the police alert the fraudster of their investigation, otherwise the employee may be able to hide the evidence.

Seeking an injunction through the High Court is an expensive process, which is why this step is only really feasible for cases where the sums involved are sizeable.

Disciplinary procedures

Instant dismissal of a staff member without carrying out an investigation and following the correct disciplinary process could open up the employer to potential litigation, warns Bethan Jones, a partner in the employment team at Michelmores.

Theft is an example of gross misconduct, but under employment law, a set process must be followed.

There must first be an investigation, followed by a disciplinary hearing during which the allegations would be put to the employee, and only after that has happened can a decision be made about the future of the employee.

If an incident has been reported to the police, take a steer from them as to whether they are happy for the internal investigation to run alongside theirs or whether it is better to wait.

Depending on the severity of the allegation, it might be appropriate to suspend someone on full pay.

However, suspension should not be an automatic step, as the courts will be concerned about the negative impact it has on the reputation of the employee if they are innocent.

The police have a higher burden of proof in that they need to prove an offence has been committed “beyond reasonable doubt.”

An employer is only required to prove “on the balance of probabilities” that an offence has been committed.

While a family farm is unlikely to have a specific anti-fraud policy, it should still have a clear disciplinary policy that includes any kind of fraud as gross misconduct and sets out the procedures which will be followed.

Businesses may choose to follow the guidelines set out by the Acas Code of Practice on disciplinary and grievance procedures rather than write their own policy.