Watch out for an epidemic of petty fraud

The economist J.K. Galbraith asserted that fraud rose in a bull market and shrank in a slump. As he put it, the "bezzle" rises in a boom because of lax controls and fades in a bust.

The discovery of Bernard Madoff's Ponzi scheme suggests Galbraith may be right about large-scale embezzlement, but my experience is the opposite when it comes to petty larceny. In other words, I suspect industry is enduring an epidemic of crime right now, as integrity becomes a casualty of the recession.

At one of our restaurant companies, we have suffered a disturbing rise in insurance claims. This is not because we are careless: we take health and safety seriously. Several of these actions relate to apparent falls by suppliers' workers, for example. The curious thing is that in more than one case the victim appears to have waited more than 15 months before notifying us of the injury.

After talking to other operators, it seems the hospitality trade is suffering a plague of legal letters from claimants looking for free money. No doubt some are genuine; but others are trying it on, I am sure, because they are feeling the pinch, and think negligence claims are easy money.

Last year, the Association of British Insurers reported a 17 per cent rise in fraudulent insurance claims. I fear the increase this year will be even greater. Unfortunately, insurers often settle small claims even if they are doubtful, simply to save legal fees and administrative bother. But this policy of expediency only encourages others to try the same con.

Similarly, at another retail business we have had trouble with several thefts of large sums of cash from branches this year, all carried out by insiders. In each case those responsible have been caught.

It is very depressing to have to deal with employee dishonesty. One feels a despairing sense of betrayal, especially if senior staff are involved, and too often all that happens to the perpetrators is that they lose their job - even if they are reported to the police.

As with all such lawless behaviour, these incidents can destroy trust in the workplace, and lead to unhealthy suspicion between owners and staff. The answer is to have excellent systems and thorough checks and balances. But no method of prevention is perfect, and crooks are ingenious at inventing ways round what appears to be foolproof security.

Meanwhile, I have been reading about the rapid rise of "friendly fraud". These are cases in which online or mail-order customers falsely claim that goods were never sent, or recipients return the wrong items for a refund. The customer obtains a credit card chargeback and the vendor is out of pocket.

Euphemisms for deliberate theft are a bad idea. They somehow legitimise misconduct and illegal behaviour - just as "stock shrinkage" as a description for staff theft somehow minimises the crime.

In Britain at least, fiddling expenses will never be seen in the same forgiving light after the past month of political exposés in Westminster. In the wake of the parliamentary scandal, now is the perfect time for organisations to review their staff expense account procedures and stop all abuse in its tracks. Those who cheat on their expenses will find it harder to rationalise their corruption.

I suppose the motivation behind the spike in fraud is obvious. Normally trustworthy people are desperate because they have been living beyond their means, and their income has fallen with the economy. The downturn has also revealed extensive mortgage fraud, which blossomed in a rising market and an era of lax lending standards. I suspect banks will be referring many situations to the authorities for prosecution in the coming years, where developers, valuers, borrowers and perhaps even loan officers participated in scams together.

The heightened threat of wrongdoing means business as normal is harder than ever. Vigilance and a proportionate response are required of leaders. Perhaps the most important thing is to avoid slipping into a sense of paranoia, and hope that the vast majority of people are honest, whatever the conditions.