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| Who Can You Trust?: Sentinels or Swindlers? |
Inside Jobs
11/01/2005
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Preventive Practices
Clearly, the many opportunities that family office
employees have to scam their employers requires you to focus on prevention,
rather than trying to close down every conceivable loophole. Initial screening
of anyone who applies for a job is crucial, whether or not that person will be
handling finances. Many families hire an investigator to conduct background
checks on all job applicants who are not longtime acquaintances. These checks
should include searching criminal and credit records. I strongly encourage my
clients to pick up the telephone and call previous employers; this is not a task
you should delegate. A wealthy individual with a high profile is more likely to
give a frank reference to a peer than to a family employee or advisor.
You
should also protect yourself by having your employees bonded. This can be done
at little cost through your liability insurer. The inability to secure a bond on
a prospective employee can be a valuable warning sign. If you have a bonded
employee who has committed a transgression, even if you do not intend to collect
on the bond, you should notify the bonding authority so that this person will be
rejected by the next bonding agency.
Everyone involved in a family office,
including outside advisors and vendors, should be required to sign a
nondisclosure agreement covering work with the family. The formality of sitting
someone down and making him focus on the fact that the family places the highest
premium on discretion and will take legal action against someone who violates
that credo sends a powerful message. However, this formality must be followed up
in practice. Issue clear, written instructions stating the family’s policy on
handling everything from anonymous phone inquiries to mentioning the family’s
name in public (families often use a pseudonym) and transmitting sensitive
information.
A diligent family member who, again, deals with the family
office on a day-to-day basis, can also catch warning signs of an employee who
might be betraying your trust. Look for signs of personal resentment, such as
sarcasm, or an employee who accidentally refers to your wealth as his own, as
in: “I want a copy of my statement sent over right away.” You might appreciate
dedication, but an employee who routinely works before and after hours and
refuses to take a vacation might be afraid of what others would discover in his
absence.
Insist that all family documents remain on premises. It also pays
to require company cell phones and email accounts and insist that employees use
computers you provide. Many families allow employees to work from their own
accounts to save money, but it pays in the long run to set up a family office
domain name and retain technical staff. If your employee is using a personal
email account, cell phone or computer to conduct your business, it is nearly
impossible to keep track of his activities—and doubly hard to recover if fraud
occurs or you part ways.
There is no substitute for signing your own
outgoing checks. If this is difficult, do this occasionally and at unpredictable
intervals. Where check writing is delegated, impose signing limits and dual
signature requirements—and work with a bank that will enforce them. A $5,000
limit for most signers is adequate. Two required signatures for larger amounts
is also prudent.
Make sure the person you assign to write checks is not the
person who receives and reconciles account statements. I often suggest that
clients ask their accountants to have their staff bookkeeper reconcile checking
accounts if there is no person in their employ available. Make sure the bank
statement goes directly to this person and is not first opened or reviewed by
the check writer. This practice facilitates a quicker year-end review and might
result in lower year-end tax preparation fees, as well. Look at actual
statements rather than relying on office-generated spreadsheets or summaries. If
you are not available to do this every time a statement comes in, at least do it
randomly. Also see that the person who receives your mail—which may include
checks—is someone other than the person making your deposits.
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