Investigating Internal Theft in a Small Business

By Paul J Ciolino
Corporate Investigations, Chapter 18 - 2002

Synopsis
18.1 Introduction
18.2 The Initial Conference with the Client
18.3 Initial Investigative Steps
18.4 Undercover Operations
18.5 Electronic Surveillance
18.6 Surveillance
18.7 Interviews and Interrogations
18.8 Summary

18.1 Introduction

“Outraged,” “shocked,” and “stunned” are the words most commonly heard from an owner or comptroller of a small business who has just discovered that their company has been victimized by a loyal employee(s). The initial steps taken in gaining control of the theft problem will determine the successful or catastrophic outcome of the investigation.

Everyday, in every city, there is an employee in a company or service organization either planning the theft of goods, or involved in a continuing criminal enterprise that is victimizing the small or medium-sized business. In a world where profit margins are slim, and the competition cut-throat, an enterprising thief can bankrupt a business. The private investigator's role in stopping the theft is critical to that business remaining viable.

Literally billions of dollars are stolen every year in every imaginable industry that produces, ships, or brokers goods of any kind. The vast majority of the people who commit these crimes go undetected and unpunished. Most of them, when caught, or detected, are simply terminated, and let go without punishment. The merits of whether or not to seek retribution or criminal punishment of the perpetrators are the basis of the chapter.

The author would recommend that prosecution be sought, to the fullest extent allowed by law, in all but the most unusual circumstances. The way the investigator builds the criminal case will determine whether that is possible.

Recently a business owner in an urban area who had just completed the first computerized product inventory contacted our firm. What the owners of this family-run, third-generation company discovered was that they were one fiscal quarter away from bankruptcy, and personal ruin. This company specialized in brokering and transporting food products, in a specialized industry.

What began as a simple theft investigation turned into a three-month marathon that saw eleven employees arrested for felony theft. All eventually plead guilty in separate trials. In addition, the company's insurance carrier was eventually sued, and the company recovered over $450,000 and $50,000 that had been written off as a loss. This enabled the small business owner to at least recover investigative and legal fees in this matter.

18.2 The Initial Conference with the Client

One of the most critical aspects of the internal theft investigation is the initial meeting with the client. It is in this meeting that all of the critical details need to be worked out. Very seldom will the business owner, security director or comptroller realize the depth of the problem. The investigator's role in this meeting is to lay out a basic investigative plan that will stop the hemorrhaging and identify the thieves. As with most clients, they will want a quick and painless (cheap) solution – but problems of this type are neither simple, nor inexpensive.

So, in addition to being a brilliant investigator, one has to be able to articulate the complex nature of this type of investigation. The best way to accomplish this is to be brutally honest about the costs.

Cost will vary from region to region; they are very seldom the same. The single biggest obstacle that occurs in investigator/client relations is usually related to money or, even more importantly, the shock bill. The shock bill is one that is presented to clients at the end of a case, and the clients are so shocked by the amount that they generally refuse to pay it or they insist upon a substantial discount. The way to avoid this very problematic issue is to establish parameters in the initial conference.

Ask the clients exactly what they want done. If they don't know, then it is up to the manager of the investigation to propose a budget that is in line with the job's requirements. In the case on which this chapter is based, the following was the initial investigative plan:

Type of Service

Hours Required

Estimated Cost

Body Guard for Ex. V.P.

60

$6000.00

Undercover employee

120

7,500.00

Undercover employee

120

7,500.00

Bkgrnd. Inv. On 26 Employees

-

5,000.00

Surveillance team

100

10,000.00

Hidden cameras & assc. Costs

-

6,500.00

General investigative & supervisory

250

30,000.00

Polygraph examination fees

-

3,000.00

Preliminary initial costs

 

$75,500.00

By having a frank discussion about the preliminary costs, and being as honest as you can about what the investigation is going to entail, you will have eliminated many of the problems that seem to crop up as a result of poor communication. Of course, any discussions regarding billing should be spelled out in the initial engagement letter or contract so that, in the event of any dispute that occurs at a later date, this part of the conversation will have been adequately documented without the usual “he said/she said” rhetoric.

18.3 Initial Investigative Steps

All too frequently you will come into a situation of this type and discover that the firm has never done a background investigation on its employees. In this particular case, the employees were largely hired on the recommendation of other employees. This led to a situation where many of the employees were, in fact, related to each other, or from the same neighborhood and, in this instance, members of the same street gang.

We immediately pulled all of the employees' personnel files and started verifying information. We also started running local criminal and civil background investigation checks. What we discovered was that at least one third of the employees were convicted felons. Almost all of them had numerous civil suits filed against them, in some cases going back ten years. Civil cases are important because they show how financially desperate one might be. All of the civil suits dealt exclusively with employees who were clearly living beyond their means, thus giving the motive for “going into business for themselves.” The clients were incredulous. How could this happen? They felt as if they were running a halfway house for convicted felons, not a viable business.

Simple and inexpensive background investigations would likely have prevented any major theft problems. However, as security and investigative professionals from around the world are aware, most employers forego the basic cost of employee background checks in the foolish hope of cutting costs and saving money. This employer found out that failure to conduct these minimum efforts cost the business hundreds of thousands of dollars.

The initial paper investigation will help you to obtain a list of potential and often well-motivated thieves. As in any investigation undertaken, history is our best teacher. This review also will show you “who's who in the zoo.” In other words, who is related to whom, who referred the employee for the job? These are excellent investigative tools for figuring out who may be conspiring with whom.

In addition, you will want to do database searches on your more likely suspects. This will show property records, vehicles, and luxury items such as boats, motorcycles, and jet skis. When you have an employee making $40,000 a year, and his lifestyle looks like something out of the Rich and Famous, you may assume that he is not a lottery winner, but a potential unknown silent partner of the business.

18.4 Undercover Operations

In this particular investigation, we recommend that we place an undercover operative (UC) on the afternoon and midnight shifts. As there were many supervisors about during the day shift, we felt that we could forego an undercover investigator during the day shift. Generally, you will want your undercover operatives to possess the minimum basic qualifications.

The single biggest potential problem for a UC is being discovered or “burned.” The only personnel who should be involved with the undercover process are the investigative supervisor, the company owner and, occasionally, the personnel manager. Remember that the more people involved in this process, the higher the likelihood that the UC will be discovered and the entire investigation short-circuited.

The main role of the UC is to discover how the thefts are occurring, when they are occurring, and who is involved. Just by listening and observing, these issues are usually quickly discovered. At some point the UC may be asked to participate in these deeds. The UC will also be a big asset in helping the employer discover what supervisors are doing their jobs, and which ones are turning their back on any potential problems.

No matter what the case, the UC's work must be documented in explicit detail on a daily basis. The key to any successful UC operation is close supervision.

18.5 Electronic Surveillance

After you have done the preliminary work and have your undercover operatives in place, it is time to start thinking about how to prove these thefts to the satisfaction of a court of law. The quickest and most effective way is, without question, hidden cameras and recording equipment—but the problems are numerous. Placement, installation, monitoring, retrieving and changing tapes are all land-mine problems, which can jeopardize the entire investigation at any phase.

The first issue is cost. None of this is inexpensive. The smaller the device, the more sophisticated the lens, the higher the costs. Placing a camera in a forty-foot warehouse ceiling that will overlook the loading dock area is great, but will it be able to identify personnel who all wear the same uniform and are from the same ethnic group? Will the picture be clear enough to see serial numbers and identify particular brands that are all shipped in the same packaging, and same shape box? These issues need to be worked out in advance. It does not help the investigation if this evidence is ruled inadmissible due to clarity issues.

When dealing with the electronic issues, be creative. Utilize Global Positioning System (GPS) monitors on delivery trucks. Put hidden cameras on the back of semi's. Place cameras on the exterior of the buildings, near unguarded or loosely watched alleys or exits. Hire specialists. Do not attempt to be the expert on everything. You will come out ahead, in the long run, if you subcontract other experts in matters in which you are not experienced. So long as you plan ahead, and don't surprise the client with that “shock bill,” everyone should be happy.

18.6 Surveillance

Once you have identified the key suspects, catching them stealing is nice – but finding out who they are selling the stolen goods to is better. In this particular instance, surveillance of the company truck drivers showed who was making these unauthorized deliveries, and who was helping themselves to produce off the back of the truck. One truck driver who had been employed for twenty-three years was caught delivering product to his home on a daily basis. After work, he would return home and start delivering stolen product to local convenience stores where he would be paid cash for the product. Search warrants were obtained for his residence and over $25,000 worth of product were recovered. In addition to being arrested and convicted, he lost his pension.

Surveillance was also maintained on the loading dock every night. Employees were filmed dumping product into the dumpsters. When their shift was over, they were filmed recovering the dumped product and placing it into their personal vehicles.

The undercover operatives were also able to notify the surveillance teams of what was occurring inside the facility and out of their line of sight, thus enabling them to be ready to film or follow the more likely suspects.

18.7 Interviews and Interrogations

Once your firm has documented and identified the ringleaders and thieves through the use of human and electronic surveillance, there should be enough evidence to confront the suspects. Hopefully, the thieves are unaware of your efforts to date, and you still have the element of surprise. However, in all likelihood, “rumors” have begun to spread, and the suspect employees realize that “something is in the air.”

How the confrontations with the suspect employees are handled will often determine the success of the entire operation. In this particular case, all of the employees were members of the Teamsters union and, as members of a union, they had certain rights. One of the most important rights was that the union steward had a right to be present when an employee was being accused of any misconduct. In this instance the union steward was a suspect, so management asked a senior union representative to represent the employees.

By now, the investigator should have very carefully thought out how to reach the established goals. This only can be accomplished by involving members of management, their lawyers, the insurance adjuster and any internal security personnel. The goals in this case were to terminate and prosecute the suspect employees, ensure the safety and security of the plant operation and non-involved employees, remove the undercover personnel, and coordinate the arrest and any subsequent search warrants with the local police department and prosecutors office. Management also had to have replacement personnel standing by and ready to work. Sometimes, management personnel can fill in for the terminated employees, but in this case the theft was so rampant and far-ranging that replacements had to be hired, trained and ready to replace the suspect employees on the day of the confrontations.

Many hours and days were required to coordinate all of these efforts. As the investigation progressed, more of management had to be made aware of what was occurring within the company. Maintaining secrecy during this phase is difficult. Secretaries start getting calls from strangers who refuse to say why they are calling. You and your staff are spending an inordinate amount of time with the client's management, and the daily activity of the operation has suddenly charged with electricity. Employees do and will talk. Office gossip is unavoidable. A plausible cover story must be in place – an IRS audit, and EPA inspection – whatever the reason given for the influx of new people and the increased activity, the story needs to be credible.

Careful planning can help avoid alerting the suspects prior to the investigator wanting them to know that the game is over. However, detailed planning is a must. You have to insist upon complete control at this point in the investigation.

The day arrives when all of these plans are to be implemented. The first order of business is to make sure that adequate security is in place. Generally, a substantial show of armed and uniform security is required. This accomplishes a number of goals. Number one this is no time for a work-place violence incident. Remember, employees who are about to lose their jobs, pensions, and potentially their freedom, may feel that they have nothing to lose.

In addition to armed and uniform security, the interrogation personnel must have private rooms in which to work. Also required are one or two court reporters to take sworn statements and confessions. The interrogation personnel must be extremely competent and professional in both appearance and demeanor. This is no time for training new or inexperienced people. This is where the case is made or lost.

All potential suspects must be separated from one another during this phase. Coordinate this with the client's personnel manager. Get them separated and out of the building, but available for interviews as soon as you need them. A plan must be in place as to who will be interviewing whom. Photographs, videos and physical evidence gathered during the investigation must be ready so that the suspects can be confronted with the apparently overwhelming amount of evidence you have gathered.

Often you will want to use props such as a large four-inch binder with the suspect's name and “Theft Investigation Report” plainly visible in large bold lettering on the front. The book may contain empty paper, but the suspect doesn't know that. Surveillance photos can be blown up and taped to the wall. The more props, the more intimidated that suspect-and the union rep-will be. Remember that this is more a psychological battle than a physical one.

The order in which you start interviewing is critical. Remember that the goal is to learn how long the theft problem has existed, who has been involved (both past and current employees), who has witnessed what, and who may be involved that you have not identified.

Employees who are not involved in the thefts should be interviewed first. Honest employees want to help. They want to work in a safe and drug-free environment. Although they may at first be reluctant, they will normally become more comfortable and wind up supplying much-needed intelligence. Never fail to ask every person interviewed whom he or she believes is responsible for the thefts. This question is perhaps the most critical one you will ask. They will almost always supply an answer. In addition, they will also help you learn a number of things that were not picked up in your previous endeavors.

After speaking with the non-involved parties, it is now time to turn the spotlight onto the real thieves. Remember that you are operating from a position of the moral superior. The suspects know it, and you should never relinquish that position. The goal is to get the guilty employee to confess, confirm previous bad acts, implicate other guilty employees and lead you to the stolen product. All of this must be done with the guilty party believing that the more he or she cooperates the less severe the penalties – but never guarantee anything to the guilty party. The only guarantee you will ever make is that, if he or she cooperates fully, you will attempt to minimize the damage to them.

After you have gotten all you are going to get, it is time to bring in the court reporter and take a formal statement. This is essential because it will be used later in union hearings, court proceedings and the like.

After you have secured the confession in a formal setting, it is time to decide of a criminal arrest and prosecution are necessary. We would almost always say “yes” because it sends a message to all future employees that dishonest acts will not be tolerated. It also helps shield the employer from potential costly civil litigation brought on by the discharged employees' legal counsel and union. A government-led prosecution help insulate the employer from all kinds of potential legal mine fields.

We would suggest that the police and the local prosecutor not be brought in until the investigation is almost completely finished. Our experience is that although the police are helpful, they are not necessarily very experienced in running these types or operations. They are also not usually too concerned about the potential civil liabilities that the employer could face if these matters are civilly litigated at a later date. As the investigative firm that is primarily responsible, you must be very concerned because the employer's attorneys will not hesitate to “third party” you in any litigation that comes down on his or her client.

18.8 Summary

The mark of a qualified professional firm is not only the results it obtains, but also how well its investigators document their work. Reports and all subsequent attachments must be laid out in a formal, well thought out, and planned manner. All of your firm's hard work will fall by the wayside if this most critical aspect is ignored, or is done improperly. Personal opinions, theories and “I think, I believe” have no place in your final report.

Your final report will reflect the professionalism of your company. It may be reviewed by dozens of individuals in the years to come. Always be conscious of the fact that at some point you investigation will be reviewed and critiqued. Remember what Dirty Harry said: “A man has to know his limitations.”