Where an organisation uncovers evidence of fraud or theft by an employee, there are numerous factors that arise for consideration. Immediate consideration must be given to ending the fraud, preventing any reoccurrence, ascertaining the extent of the fraud and making any necessary disclosures to the ASX. Thereafter, attention needs to be given to termination of employment, reporting of criminal conduct to law enforcement authorities, investigation and rectification of any failures in internal systems and controls, and the possible commencement of civil recovery proceedings.
This article is concerned with reporting an employee’s potentially criminal conduct to law enforcement authorities, and the consequences that may flow from the decision to make a police report. As unlikely as this sort of misconduct might seem, it is prudent for all organisations to include employee fraud and theft in their risk registers, and have processes in place for dealing with such crimes in the event that they are discovered.
Reporting Crime
If the fraud or theft is material to the organisation’s financial position, publicly listed companies will need to disclose the occurrence and its impact to the market. Otherwise, in all Australian jurisdictions other than New South Wales, and putting aside reporting obligations in specific industries and regulatory regimes, there is no legal obligation to report crime. New South Wales is unique in imposing a statutory obligation to report serious indictable offences (Crimes Act 1900 (NSW) s 316), and unreasonable failure to do so is, itself, an offence.
Notwithstanding the absence of an equivalent obligation in other Australian jurisdictions, directors’ duties to act with care and diligence and in the best interests of the company may require that a crime be reported. Failure to report a crime may hinder an organisation’s ability to recover loss under a fidelity insurance policy.
Further, the ethical duties owed by in-house counsel to their client, and to the Court and the administration of justice, may also require careful navigation. Commissioner Finkelstein suggested in his report for the Royal Commission into the Casino Operator and Licence that in house counsel will have a duty to recommend that the organisation reports any serious criminal conduct or fraud to police or regulators. Further, fundamental ethical duties of integrity and professional independence, as well as the duty to the administration of justice, may require that in-house counsel themselves report the matter externally, regardless of the decision made by the board.
Regardless of whether a report is made to the authorities, the organisation will need to investigate the employee’s misconduct and the surrounding circumstances. This investigation should be done promptly and thoroughly, and be properly documented, using legal, technological, forensic or other assistance as required. The organisation’s own investigation will form the basis of any criminal proceedings and may (voluntarily or by seizure) be used by authorities to form the foundation of the criminal case against the employee. As demonstrated by the decision of the Supreme Court of New South Wales in Singapore Airlines v Sydney Airports Corporation [2004] NSWSC 380, an investigation undertaken for the purpose of identifying failures in internal systems and controls will be discoverable in any subsequent legal proceedings. In contrast, an investigation undertaken in contemplation of civil proceedings of the employee will be protected by legal professional privilege. Accordingly, it is advisable that external lawyers be engaged early in the investigation to ensure that the privileged aspect of the investigation is clearly delineated and protected.
Implications of the Decision to Report a Crime
Where a report to law enforcement authorities is made in respect of an employee’s crime, a police investigation will commence. This can lead to a range of advantages for the employer organisation:
- Police will have greater investigative powers than the organisation (for example, powers of search and seizure), which may result in otherwise unobtainable evidence being collected.
- Police will be able to interview the employee unencumbered by legal obligations, such as privacy and confidentiality, owed by the employer.
- If police press charges and the employee is found guilty of criminal conduct, that finding will assist the organisation in any subsequent civil proceedings brought against the employee, or other proceedings relating to the employee’s misconduct.
The process will, however, involve various risks and challenges for employer organisations:
- The organisation will lose control of the investigation of the employee’s conduct while a police investigation is underway.
- There is no guarantee that the police investigation will lead to charges being laid, or that, if charged, the employee will be found guilty.
- Criminal investigations and proceedings may well result in unwanted publicity and media attention for the organisation.
- The organisation may be compelled under police powers of search and seizure to produce documents and other evidence. Further, the legal representatives of the impugned employee may seek documents and information from the organisation.
- A civil recovery action being pursued by the organisation against the employee may be stayed if criminal proceedings are pending or have been commenced against the employee (McMahon v Gould (1982) 7 ACLR 202; Commissioner of the Australian Federal Police v Zhao (2015) 255 CLR 46). The stay will likely run until the criminal proceeding has been finally determined and any appeal periods have expired.
- The costs of defending criminal proceedings may erode the available assets of the employee, reducing the prospects of a successful recovery by the organisation in civil proceedings.
- The organisation is unlikely to recover from the State or the fraudster the costs incurred by the organisation in complying with requests for assistance from the police, regardless of the outcome of the proceedings.
Investigation and Trial
Where an organisation decides to report criminal conduct, the police investigation may take many months depending on the complexity of the case. This is particularly so at present with police resources heavily diverted towards managing the COVID-19 pandemic. The investigation process will involve police obtaining statements from the organisation, including its directors and other officers and employees. It is important that police statements are prepared with the same level of care and detail as affidavits in civil proceedings, and drafted with legal assistance before being provided to police. As with affidavits in civil proceedings, anyone making a police statement should expect to be vigorously cross-examined on that statement, and undertake preparation accordingly.
Sentencing
If the employee is convicted, the employer is entitled to submit a victim impact statement (VIS) to the Court. If the employer is a company, a director or other officer may submit a VIS on its behalf. The VIS sets out the effect of the offending on the victim, and may address matters such as the financial loss caused by the offending; costs incurred in investigating and responding to the offending; and the impact of the offending on other employees, creditors and customers. The VIS will be admissible in any subsequent civil proceedings, and should be carefully drafted and reviewed by the employer’s legal advisers.
As part of sentencing, the Court may order the employee to make restitution of property or pay compensation for loss and damage caused by the offending (see, for example, Sentencing Act 2017 (SA) ss 123 and 124). Any compensation paid under a sentencing order will reduce the amount of damages recoverable in subsequent civil proceedings. Criminal injuries compensation, which is separate from compensation ordered as part of sentencing, is generally only payable to victims who have suffered physical harm, not those who have suffered financial or property loss.
Relationship management
It is beneficial for the employer organisation and its legal advisers to maintain a good working relationship with the police and prosecutors. This may include assisting with reasonable enquiries and voluntarily providing non confidential documents and information. Where police request disclosure of confidential documents or information, the organisation is entitled to refuse the request, and require the police to exercise their formal powers of seizure. This is particularly important in the case of company directors, whose duties to the company will ordinarily prevent them from voluntarily disclosing confidential documents. Claims of legal professional privilege should be considered and asserted as required. Finally, the organisation ought to bear in mind that it is the police who are primarily responsible for the investigation, and the prosecution for the preparation and presentation of the trial, and avoid taking any steps that might interfere with the criminal proceedings.
Patrick Leader-Elliott, Special Counsel, LK Law