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Handling Employee Fraud:101

Employee Fraud

What is Employee Fraud?

From a company perspective, employee fraud is commonly understood as a deliberate fabrication, which causes the victim (the employer) to suffer economic loss while allowing the perpetrator (the employee) to gain an illegitimate benefit. Common examples of employee fraud range from misappropriation of assets (e.g., stealing inventory, or obtaining fraudulent payments) to internal corruption (e.g., accepting kickbacks or engaging in conflicts of interest).

One of the challenges in addressing employee fraud is identifying when it occurs. In many cases, employee fraud may go undetected for months or even years, allowing the employee to continue their fraudulent activities unchecked. Therefore, to address this challenge, companies must establish effective internal controls and procedures to detect and prevent fraud. This includes implementing financial and accounting systems that provide transparency and accountability, conducting regular audits, and establishing strong ethical standards and codes of conduct. 

Furthermore, indiscriminately regardless of its size, industry, or location, any company can become a victim of employee fraud. In particular, companies with a large number of employees, complex financial transactions, or weak internal/compliance controls are more vulnerable to fraud. Moreover, employee fraud can occur at any level in the organization, from entry-level positions to top-level executives. In short, employee fraud is an extensive issue that affects all types and sizes of companies around the world, including Indonesia.

Under Indonesian law, employee fraud can be prosecuted under several different regulations, depending on the nature and modus of the offense. At first glance, the terminology of employee fraud may appear to be closely linked to an accusation of criminal activities, but factually it is certainly inseparable from industrial relations disputes. In other words, it can be considered as a series of actions that are very closely related to each other.

In dealing with employee fraud, from the Indonesian employment law perspective, there are distinctive behaviors that companies must organize to deal with employee fraud internally, starting from how to prevent, to stop, and to recover from such bad circumstances.

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Impact of Employee Fraud

It is crucial to identify employee fraud at the earliest occasion since it is one of the events that can cause fatal consequences for businesses, especially for small businesses as they simply cannot afford to fall victim to fraud.

Employee fraud can cause significant negative effects on a company, not only monetarily but also non-financially. The following are examples of the impact of the employee fraud backwashes to be anticipated:

  • Financial Losses
    Employee fraud is certainly very detrimental to any company from a financial perspective. Financial losses suffered by the company can make the company unable to carry out its business activities as usual. This is because employee fraud affects the financial condition and assets of the company. If the financial loss suffered by the company is so large, there is a possibility that the company will go bankrupt.
  • Reputation Damages
    If the public’s view is already negative due to fraud in the company, especially in Indonesia where the people’s power on social media is unstoppable, then the company may also experience several other losses such as a reduced number of customers or clients because public trust begins to diminish or even fade.
  • Decreased assurance
    Employee fraud can create a culture of distrust and suspicion among employees, leading to decreased assurance and productivity.

Employee Fraud
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How To Handle Employee Fraud

  1. How to Prevent
    Companies must act decisively against employees who are proven to have committed fraud because the fatal loss of fraud is the bankruptcy of the company. The following are some of the efforts that can be made by companies to prevent fraud:

    • Know Your Employees – Monitor Compliance
      Supervise employees by establishing clear and comprehensive guidelines and measures that outline the expectations for employees and the consequences of non-compliance, and monitor them closely. Always be alert of indicators of potential fraud, such as sudden changes to employees’ performance (for example, more frequent requests to leave work or, conversely, more frequent overtime without certain deadlines, moonlighting, change of lifestyle, etc).
    • Implement Proper Bookkeeping and Periodic Audit
      Control funds receipts and monitor compliance with purchasing and payment mechanisms. Prevention of employee fraud can also be carried out through reporting by conducting regular internal and external audits. This is done to correct the company’s financial statements in full and detail so that potential deception and embezzlement can be detected early.
    • Manage Inventories and Install Security System
      Managing inventories and installing security systems are important steps in preventing, avoiding, and stopping employee fraud. By monitoring access to inventory, preventing fraudulent behavior, enabling detection, and increasing accountability, companies can reduce the risk of losses from theft or other fraudulent activities.
    • Facilitate a Whistle-blowing Mechanism
      Facilitating a whistle-blowing mechanism can help prevent employee fraud by encouraging a culture of transparency, accountability, and ethical behavior. It is important to ensure that this mechanism is easily accessible, well-communicated, and supported by a clear policy and effective investigation procedure.
  2. How to Stop
    • Giving Warning Letters to Relevant Employees
      Companies can issue warning letters (“Surat Peringatan“) for employee fraud based on Article 161 of the Employment Law. It is crucial for the company to issue this letter at the earliest occasion once the company has successfully identified fraud because this indicates to the perpetrators that the company does take workplace compliance seriously, is aware of unlawful activity, and addresses compliance issues firmly. Then “hopefully” the perpetrators will stop the misconduct, seeing that the company will not take repeated offense lightly.
    • Suspension
      In several cases, giving a Warning Letter to the suspect of employee fraud is not enough to mitigate further risks to the employer. Hence, suspending an employee who is a suspect of employee fraud is another important step in protecting the company’s interests and maintaining a culture of integrity and trust.If the suspects still have access to financial records or other sensitive information, they can destroy evidence that may be needed for investigations. Therefore, suspending the suspects of employee fraud can help protect evidence from being destroyed by the suspects.
    •  Termination of Employment
      Terminating the employment of the fraud perpetrators can help protect the company from further financial losses and damage to its reputation, and set precedence for similar cases. Termination of employment would demonstrate and send a message to other employees that the company has a zero-tolerance policy towards fraud.Please also be aware that termination of employment must follow the applicable procedures under the employment laws and regulations.
  3. How to Recover
    • Enforcing Available Legal Actions
      Dealing with employee fraud may be harder and tougher than it seems. There are a number of challenges, either visible or even non-foreseeable, that the company may face in the process.Available legal actions for a company being the victim of employee fraud may vary depending on the circumstances of each case. One possible approach is to report the crime to the competent police precinct as per the Indonesian Criminal Code). As it relates to employment, pursuing an industrial relations dispute mechanism as per employment laws is one other route to deal with the misconduct.In fact, the variables for deciding suitable legal actions would depend not only on the circumstances of each case but also on what goals the company wants to achieve. Having a well-planned strategy would be one of the key requirements to smoothly settle the issue.


About ADCO Law:

ADCO Law is a firm that offers clients a wide range of integrated legal services, including in commercial transactions and corporate disputes in a variety of industry sectors. Over the course of more than a decade, we have grown to understand our client’s industry and business as well as the regulatory aspect. In dealing with business dynamics, we provide comprehensive solid legal advice and solutions to minimize legal and business risks.

From Upstream to Downstream, We Understand Your Industry. In complex transactions as well as in certain cases, we are actively engaged with financial, tax, and environmental specialists, accountants, and law firms from various jurisdictions to give added value to our clients. Having strong relationships with Government agencies, regulators, associations, and industry stakeholders ensures that our firm has a holistic view of legal matters.

ADCO Law is a Proud Member of the Alliott Global Alliance (AGA) in Indonesia. Founded in 1979, AGA is one of the largest and fastest-growing global multidisciplinary alliances, with 215 member firms in 95 countries.

As a law firm, we also believe in regeneration. To stay abreast of business changes and stay relevant, our formation of lawyers is comprised of the top graduates from Indonesian and international law schools.


Disclaimer: This article has been prepared for scientific reading and marketing purposes only from ADCO Law. Accordingly, all the writings contained herein do not constitute the formal legal opinion of ADCO Law. Therefore, ADCO Law should be held harmless of and/or cannot be held responsible for anything performed by entities who use this writing outside the purposes of ADCO Law.