The tale of Joyti De-Laurey, who worked as a secretary at Goldman Sachs’ London office back in the early 2000s, is a cautionary one for a group like a family office linked to large sums of money. De-Laurey was convicted of stealing millions from her boss's personal accounts without him noticing for a very long time.
De-Laurey was a trusted employee and didn’t raise any suspicions until the fraud had become so big that it was almost impossible not to notice it. Family offices, where employees might have access to large sums of money, should take special heed of the De-Laurey story and be extra vigilant towards the possibility of fraud. And a new report from the professional services group Deloitte has highlighted the problem for family offices, which it says are prime targets for fraud.
Family offices are more likely to have long-term and loyal employees, which helps to build trust. But trust in itself might not be enough to thwart fraud, as the De-Laurey case proves. “A family office with trusted employees might not have the proper checks and balances in place for financial transactions,” says the Deloitte report. “It can be challenging for a family to impose proper checks and balances when most employees are honest. However, one individual with too much control and access can cause an enormous amount of financial or reputational damage.”
Fraud, adds Deloitte, is often perpetrated by trusted individuals. “Even the most honest and trustworthy employee may at times be under financial pressure and can find it challenging to resist taking advantage of such a situation.” And it is much easier to embezzle businesses with few staff, where checks and balances aren’t as developed and sophisticated as might be expected in bigger businesses. Many employees at family offices are likely to have access to large sums of money, which again might increase the temptation to defraud their employer.
Another issue, which the Deloitte report didn’t mention, is what is described as the King Ludwig Syndrome. The syndrome was coined to describe the psychiatrist for the 19th-century German king who drowned with his patient on a boat trip. After years treating the mad king, he is said to have become just like his patient. If the principal of your family office is worth $1 billion, it’s easy to start believing that you are too. And that belief can often lead to fraud.
Deloitte says family offices need to accept that fraud occurs and to make a decision to prevent it. The report says family offices, if they haven’t already, should consider separating the individuals who handle cash from those who record cash on the ledger, which should then be reconciled by another party.
The report adds that family offices should be trained to detect fraud. It says the hallmarks of embezzlers tend to be working long hours, often arriving before and leaving after other employees. “Embezzlers also tend to work weekends and generally do not take long vacations. These are all signs of employees working hard to ‘cover their tracks’. The challenge is that these traits can also be characteristics of dedicated employees and are not in any way proof of a fraud,” says the report.
One possible way of stopping or uncovering fraud is to require at least two weeks of consecutive holiday for all employees above a certain level or with access to cash. “It is very challenging for an employee to keep a fraud hidden during a two-week absence from the office when another employee assumes their duties. Another technique that can limit fraud is periodic unannounced job rotations that require employees to switch job responsibilities,” says the report.
Further best practices to avoid fraud is to perform a periodic test of the entire operating environment of the family offices, says Deloitte. Areas like payroll, expense accounts, accounts payable, etc, can be examined during data analytics that will flag suspicious activity, such as an “abundance of checks being written just under a control level or invoices to a single vendor that have been split to avoid the additional oversight of higher check amounts”.