Tackling Internal Fraud: Weeding Out The Enemy Within

by Michael Diaz Jr. - Diaz Reus International Law Firm

[authors: Michael Diaz, Jr., Carlos F. Gonzalez, and Arti Sangar]

Advancements in technology have made fraudulent schemes easier to perpetrate, and have allowed criminal activity to expand in both quantity and nature. Today, corporate fraud is limited only by the creativity of the perpetrator.   The most obvious effect of internal fraud is damage to a company’s financial bottom line. Another significant impact is that the company’s reputation takes a nosedive, the practical implications of which are extremely destructive.

This article spells out the steps that in-house counsel can undertake in handling a case of internal fraud—from initial detection and internal investigation, to criminal and civil prosecution, through implementation of better controls and remedial safeguards.

Initial Detection

There are a number of ways in which internal fraud may be detected – for example, by monitoring high risk jobs, receiving tips or complaints from someone, or conducting reviews and internal audits. Regardless of how fraudulent activities are detected, it is important that the confidentiality of those reporting suspected fraud is protected. Employees who make whistleblowing reports regarding suspected fraud should be protected from victimization, harassment, discrimination, and threats of disciplinary action. In this regard, companies can establish their own whistleblower policies and procedures.

All allegations of fraud should be recorded.  This need not be a costly or unnecessarily complicated procedure. Depending on the size of the company and the type of fraud, this might entail a simple spreadsheet, a reporting database, or a full blown case management system.

Internal Investigation

In-house counsel should make sure that appropriate persons are assigned to investigate an allegation of fraud.  Investigators must be objective and not have an interest in the outcome of the matter. The team investigating the situation should be carefully selected and may include a senior auditor of the company, someone from corporate security, in-house counsel, and other trusted individuals.

Whenever a serious allegation of wrongdoing is made, the investigation team should quickly move to secure evidence with all investigative steps documented. They should gather documents and evidence, interview employees and outside vendors, if necessary.  The investigators must pursue all leads to determine the extent of the wrongdoing. It is important that the investigative team maintain an open mind and not let preconceived notions of what the facts might be dictate the conclusions reached. Additionally, all investigative material, including opinions and conclusions prepared by the team, must be labeled as confidential and separate files should be maintained to segregate the confidential material.

Suspected Employee’s Interview

Confrontation of the suspected employee needs to be carefully planned, witnessed, and documented and should occur at the end of the investigation when all other available facts are gathered. The fact of the matter is that, before it gets to the confrontation point, the in-house counsel needs to have hard evidence.

At the interview, the employee’s response or “story,” including any admissions or concessions, must be documented. This may involve asking the employee to sign a written statement with the account provided. Depending on how the situation develops, this evidence can prove invaluable in later civil or criminal proceedings. In-house counsel should also watch for applicable privacy laws to ensure the company does not run afoul of them.

Action Post Investigative Findings

Once the investigation is complete, and if the investigative team has reached the conclusion that fraud has been committed, action must be taken. Before communicating the decision to the employee, make sure that an employment lawyer reviews the basis for it. The decision and the basis for it should also be communicated to company officers, the board, the audit committee, and any key supervisors.

Until now, things should have been handled with great confidentiality. But news of the employee discipline or termination cannot be contained and the company is wise to consider the nature of any response to questions that arise. At this point, the company must decide how to handle the public relations aspect of the situation, at least internally. A consistent message must be formulated and used by management.


The company can start civil proceedings to claim damages if, following an investigation, it is clear that the company is the victim of fraud and the persons responsible for the fraud have been identified.  At the core of most internal fraud cases are claims for fraud, conversion, and breach of fiduciary duty. Obviously, the company will also be expected to vigorously pursue the recovery of stolen property or location of other assets.  In appropriate circumstances, it can be necessary to obtain provisional remedies such as orders of attachment, or accelerated motions for other preliminary injunctive relief. This will allow assets to be frozen and important evidence to be preserved. It goes without saying that an in-house counsel should consider all options and do everything within its power to recover stolen property or right other wrongs.


Much can be learned from managing an internal fraud investigation, no matter how painful such an experience can be and lessons can be learned that can substantially improve the operations of a business. For example, establishing a formal code of ethics is considered a hallmark of a well managed company. Such a code should include examples of business ethics dilemmas, ethical tests used by staff to facilitate decision-making and best practices. A working and effective compliance program is also critical. Adopting systems for routine auditing, establishing mechanisms for reporting suspicious information, and creating a top-down atmosphere of strict ethical behavior so it becomes part of the company’s core culture are all at the heart of a good compliance program. By implementing appropriate controls and preventive measures, companies can make dramatic progress to weed out the enemy within.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Diaz Jr. - Diaz Reus International Law Firm | Attorney Advertising

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Michael Diaz Jr. - Diaz Reus International Law Firm

Michael Diaz Jr. - Diaz Reus International Law Firm on:

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