The Threat From Within: Employee Theft and Embezzlement in Law Firms

Lawyers must be constantly vigilant to guard against fraud schemes being perpetrated by third party bad actors. Lawyers face a variety of threats, including counterfeit check scams, wire fraud, phishing scams to access confidential information, ransomware attacks, and real estate seller impersonation fraud. But sometimes the threat comes from within the law firm. Often, it is a firm employee who is perpetrating the criminal act. Law firms may be so busy trying to protect against threats from third parties that they forget to pay attention to their own employees. Often, it is a long-term trusted employee who is stealing from the firm and/or its clients. Because of this relationship of trust, the firm might let its guard down.

When a nonlawyer employee steals money from the trust account, this creates certain ethical obligations for the firm attorneys. Doug and Deanna Brocker explain that, under Rule 5.3 of the Rules of Professional Conduct, lawyers have a duty to supervise nonlawyers. Therefore, if a nonlawyer employee steals from the trust account, the lawyer responsible for supervising that employee must replace the funds. 

Employee theft costs United States businesses approximately $50 billion every year. Most of this theft is avoidable. One of the ways that a firm can reduce the risk of loss is to know the red flags to watch for.

• Employees who suddenly begin living an extravagant lifestyle that is disproportionate to their income could be using stolen funds to make purchases.  Examples might include high-end vehicles, expensive jewelry, or luxury vacations.
• Employees who stay late or come in at odd times might be trying to hide something.
• Employees who insist on working alone and who refuse offers of assistance from management or co-workers could be trying to avoid being discovered.
• Employees who refuse to take vacations, especially vacations for several days or more, might be afraid that their fraud will be discovered in their absence.
• Employees who begin to act strangely for no apparent reason might be exhibiting symptoms of shame or guilt. 

Nobody wants to think the worst of a long-term employee who may have also become a trusted friend over time. But these are exactly the kind of people who perpetrate most of the theft that occurs in small businesses, including law firms. These employees use a variety of methods to take money from the firm’s operating and trust accounts. Here are a few of ways in which employees steal money:

• Forging partners’ signatures on checks.
• Creating fake vendors and then making firm payments to those fake vendors.
• Forging signatures of executors, trustees and other fiduciaries to take money out of fiduciary bank accounts.
• Using the firm’s credit card to pay for personal expenses.

These are some simple measures that you can implement right now to reduce the risk of employee theft:

• Conduct random audits of accounts payable and receivable to look for irregularities or discrepancies.
• Conduct background checks before hiring employees.
• Implement a mandatory vacation policy.
• Require dual signatures on all checks over a certain amount. 
• Follow the rule found in Rule 1.15-2(s)(1).   “Every trust account check must be signed by a lawyer, or by an employee who is not responsible for performing monthly or quarterly reconciliations and who is supervised by a lawyer.”
• Cross-train employees so that you can rotate employee responsibilities periodically.

By putting some basic safeguards in place, you can substantially reduce the risk of loss for your firm. You can also purchase a crime policy for your firm. Kelly Gold or Adam Pierce at Lawyers Insurance Agency can find the policy that is right for your firm.