Liability Risk

Internal Crime Prevention

Background checks and monitoring property — like laptops lent by the company — can deter and prevent crimes committed by employees.
By: | April 9, 2018 • 5 min read

Given the steady drumbeat of school shootings and other horrors, risk managers can’t afford the outrage fatigue that numbs Americans, especially given the unsettling fact that their companies’ resources — human, electronic, automotive — could be used to commit a crime.

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Economic crimes — fraud, espionage, embezzlement — are commonplace. PwC’s 2018 Global Economic Crime and Fraud Survey reports 49 percent of global organizations have experienced economic crime in the past two years, and 51 percent of frauds were inside jobs.

As different as violent and economic crimes are, risks of both can be mitigated through management practices: careful hiring, background checks, on-the-job monitoring and probing exit interviews, industry experts agree.

Ounce of Prevention

A background check on a prospective employee is not an off-the-shelf affair, said Richard G. Hudak, managing partner, Resort Security Consulting Inc., but a thoughtful, detailed inquiry by a reputable organization appropriate to the applicant’s prospective duties.

“A $25 computer ‘background check’ isn’t a background check,” he said. “Real ones look at sex crimes, drunk driving, serious debt, mismanaged credit, multiple divorces and bankruptcy.”

A veteran consultant to the hotel industry, Hudak said, “Bankruptcy isn’t a big deal for guys moving banquet tables around, because they don’t have access to guest data.”

Heidi Li Feldman, professor of law, Georgetown University Law Center

However, bellmen and housekeepers with access to property should get a more thorough check, and front desk clerks, who have access to credit cards, should undergo even greater scrutiny.

For pilots, he said, any domestic violence, DUI, or dishonesty about employment or education should be a disqualifying event.

Exit interviews can deter theft of intellectual property, said David Taylor, managing director, Protiviti, by employees who leave on good terms of their own volition and by disgruntled or laid-off workers.

“When people leave, they can release their research, proprietary information, network and customer information into the wild.”

Employers have limited tools to “prevent them from downloading that intellectual property to their new employer,” Taylor said, and exit interviews are an important reminder not to do it.

For example, Waymo sued Uber last year, alleging departing employees gave the ride-hailing company access to Waymo’s trade secrets covering technologies needed to build autonomous cars. The suit ended in a settlement.

Because debt, divorce, addictions and despair can turn good employees bad over time, periodic checks after hire are a good idea, said John Farley, vice president, cyber risk practice leader, HUB International.

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So are controls on access to information.

“Limit access to information on a need-to-know basis,” he said. Classify all data, monitor it in real time, block thumb drives and other exit points for information and set up immediate notifications if certain information is emailed. Block file-sharing websites.

Background check best practices also apply to contractors, said Scott Moritz, managing director, Protiviti. Even with the best controls, employees can go rogue.

For example, Edward Snowden, a government contractor, infamously leaked a veritable trove of National Security Agency secrets in 2013.

An investigation afterward showed his background check was incomplete, but it’s unclear whether a properly conducted check would have thwarted his leak anyway, said Moritz. Snowden considered himself a righteous whistleblower, an attitude cursory background checks wouldn’t detect.

Although out of step with current employment practices, the availability of mental health counseling might suss out the state of mind of employees with access to potentially weaponized information — as well as actual, literal weapons such as guns, said Heidi Li Feldman, professor of law, associate professor of philosophy, Georgetown University Law Center.

“A $25 computer ‘background check’ isn’t a background check. Real ones look at sex crimes, drunk driving, serious debt, mismanaged credit, multiple divorces and bankruptcy.” — Richard G. Hudak, managing partner, Resort Security Consulting Inc.

Employers should find out whether counselors can be helpful in identifying when an employee might be under pressures that could lead them to disclose classified information, Feldman said.

A single employer is unlikely to impose mandatory counseling or psychological testing on its employees, she said, but collectively they might, if sufficiently motivated, move the needle.

“Social change happens when people, like employers, bear excessive or unfair costs of a problem,” at which time they may seek help from a trade association or state chamber of commerce to nudge social change, Feldman said. It would be similar to the series of events that ultimately produced smoke-free workplaces.

Supervisors should also monitor employees’ work habits and stressors, Hudak said. His wife, a nurse, observed one of her staff members was “getting hammered” every night at a local bar.

His wife watched closely and offered help. She also documented her observations and made sure the employee didn’t have access to the hospital’s drug closet.

To Be or Not To Be Liable

In general, said Feldman, an employer can be held liable for its employees’ criminal acts when it is in a good position to influence the criminal actor’s actions, and they’re responsible for the torts of their employees when acting in the course of employment.

The exception could be where the employee is a senior executive and the conduct is imputed to the organization, said John Denton, JD, managing director, Marsh.

Liability laws aren’t as draconian as they may sound, Feldman said.

“People get very anxious when they think the law says, ‘You have to prevent all crimes of parties other than yourself.’ ”

In fact, the law requires employers to be “a reasonable person of ordinary prudence.” But what is “ordinary prudence?”

A court may consider different metrics, said Hudak, such as a CAP index, which assigns a number from 0 (lowest) to 2,000 (highest), predicting the chance of a certain kind of crime, such as homicide or auto theft, at a particular address.

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When considered with incident reports on the property and 911 calls, the index suggests which types of crime are likely and which precautionary steps are prudent.

“A CAP index would tell the court that you’ve done homework, that you know foreseeability,” said Feldman.

A crime committed using, say, a company computer while the employee is off the clock is a defensible position, said Farley. Written policies and procedures about what employees may and may not do will bolster a case, as will formal training.

A strong anti-corruption tone at the top may also mitigate liability risk, said Mark W. Jenkins, senior managing director, Glassratner Advisory & Capital Group LLC. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2018 Most Dangerous Emerging Risks

Emerging Multipliers

It’s not that these risks are new; it’s that they’re coming at you at a volume and rate you never imagined before.
By: | April 9, 2018 • 3 min read

Underwriters have plenty to worry about, but there is one word that perhaps rattles them more than any other word. That word is aggregation.

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Aggregation, in the transferred or covered risk usage, represents the multiplying potential of a risk. For examples, we can look back to the asbestos claims that did so much damage to Lloyds’ of London names and syndicates in the mid-1990s.

More recently, underwriters expressed fears about the aggregation of risk from lawsuits by football players at various levels of the sport. Players, from Pee Wee on up to the NFL, claim to have suffered irreversible brain damage from hits to the head.

That risk scenario has yet to fully play out — it will be decades in doing so — but it is already producing claims in the billions.

This year’s edition of our national-award winning coverage of the Most Dangerous Emerging Risks focuses on risks that have always existed. The emergent — and more dangerous — piece to the puzzle is that these risks are now super-charged with risk multipliers.

Take reputational risk, for example. Businesses and individuals that were sharply managed have always protected their reputations fiercely. In days past, a lapse in ethics or morals could be extremely damaging to one’s reputation, but it might take days, weeks, even years of work by newspaper reporters, idle gossips or political enemies to dig it out and make it public.

Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

These days, the speed at which Internet connectedness and social media can spread information makes reputational risk an existential threat. Information that can stop a glittering career dead in its tracks can be shared by millions with a casual, thoughtless tap or swipe on their smartphones.

Aggregation of uninsured risk is another area of focus of our Most Dangerous Emerging Risks (MDER) coverage.

The beauty of the insurance model is that the business expands to cover personal and commercial risks as the world expands. The more cars on the planet, the more car insurance to sell.

The more people, the more life insurance. Brand new technologies, brand new commercial covers. It all works well; until it doesn’t.

As Risk & Insurance® associate editor Michelle Kerr and her sources point out, growing populations and rising property values, combined with an increase in high-severity catastrophes, threaten to push the insurance coverage gap to critical levels.

This aggregation of uninsured value got a recent proof in CAT-filled 2017. The global tally for natural disaster losses in 2017 was $330 billion; 60 percent of it was uninsured.

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This uninsured gap threatens to place unsustainable pressure on public resources and hamstring society’s ability to respond to natural disasters, which show no sign of slowing down or tempering.

A related threat, the combination of a failing infrastructure and increasing storm severity, marks our third MDER. This MDER looks at the largely uninsurable risk of business interruption that results not from damage to your property or your suppliers’ property, but to publicly maintained infrastructure that provides ingress and egress to your property. It’s a danger coming into shape more and more frequently.

As always, our goal in writing about these threats is not to engage in fear mongering. It’s to initiate and expand a dialogue that can hopefully result in better planning and mitigation, saving the lives and limbs of businesses here and around the world.

2018 Most Dangerous Emerging Risks

Critical Coverage Gap

Growing populations and rising property values, combined with an increase in high-severity catastrophes, are pushing the insurance protection gap to a critical level.

Climate Change as a Business Interruption Multiplier

Crumbling roads and bridges isolate companies and trigger business interruption losses.

 

Reputation’s Existential Threat

Social media — the very tool used to connect people in an instant — can threaten a business’s reputation just as quickly.

 

AI as a Risk Multiplier

AI has potential, but it comes with risks. Mitigating these risks helps insurers and insureds alike, enabling advances in almost every field.

 

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]