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.

Damage Management
If you suspect a problem, investigate discretely and swiftly. Mere forgers have been known to turn to arson in order to cover their tracks. Thieves sometimes resort to blackmail to try to escape their misdeeds.

The first step is to have a CPA or financial consultant make a proper assessment of the actual scope of the situation and the amount of the loss involved. You may want to use your existing accountant, so as not to raise any alarms among your employees. Next, a specialist security firm (the same type used to perform background checks and employee screening) can provide guidance on how to control the potential outcome that results from confronting an employee or advisor.

Depending on the scope and severity of the situation you may also want to obtain legal counsel on the proper involvement of law enforcement. Almost every family in this difficult situation struggles with the implications of calling the police. Many choose not to, primarily to keep the matter out of the press and to avoid the potential for counterlitigation. The sad result is that this may leave the perpetrator free to move on to the next victim, using their work history with your family to help secure their next job.

If you have reservations about how to change your current situation, consider engaging a professional to perform a thorough review of your family’s wealth management procedures, and then implement those recommendations. Wealth has many rewards but it also carries heavy responsibilities, and a family office requires that family members be vigilant and involved.

Mary K. Duke is head of Wealth Advisory Service-Americas, HSBC Private Bank.

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