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Based on a True Story: Small Businesses & Commercial Crime

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White-collar crime may sound straight out of Hollywood, and while it’s certainly a popular screenplay topic, it’s all too real for companies big and small—with the latter often not realizing they need it until it’s too late.

Even more sobering is that the primary cause of commercial crime losses is employee dishonesty, an issue that’s only been exacerbated with the pressure of the COVID-19 era.

Let’s look at why Commercial Crime coverage is vital to both protecting a client’s assets and preventing Leonardo DiCaprio from playing them in a movie.

Boiling Points: Causes of Commercial Crime

A business owner never wants to think that someone they hired is doing something dishonest. But circumstances can cause even the most trusted employee to make bad decisions. Whether it’s personal financial pressure, feeling overworked and underpaid, or numerous other reasons, employees can hit their breaking point—and the upheaval of the pandemic has only made things worse.

“One thing we notice in times of duress is that there's always an expectation that a crime or at least attempts on crime will increase,” says Hugh Sprowson, Senior Underwriter at The Argenta Group.

“When you have an environment in which there have been job losses and just a general feeling that maybe jobs aren't as secure as they once were...people might be tempted to commit an act of dishonesty. And employees tend to not only know how to best to extract money illegally from the business, but also how to cover it up.”

Not only that, but now more than ever employees are being asked to do more for less pay.

“A lot of agents will say those employees are just happy that they have a job,” says RPS’s Mike Henning. “I think that assumption has some truth to it, but there's also some inaccuracy.

“They also have contention for now doing more for less, and they think they should have gotten a raise. They have the ability, because they are able to control more of the process, to find out how to embezzle funds and how to cover it up. They sometimes can justify taking a small amount of money at first by thinking of it as just a part of their pay, and think that they're in the right doing that.”

In addition to employee dishonesty, 2020’s massive shift to remote working is also a factor, as following controls and procedures like check signing and payment instructions means handling things digitally versus walking down the hall—and fraudsters are well aware of the looser environment created by COVID-19.

“It's definitely a risk that I think businesses should be considering,” says Sprowson. “It's not one that they always place at the top of their agenda, but perhaps it should be.”

Commercial Crime Can Take Years to Discover

It can take years, even decades, for fraud to eventually come to light.

“Crime loss is death by a thousand cuts,” says Henning. “It usually starts off at a small amount at one occurrence, but then the amounts escalate over time. A crime loss can last between three, five, seven years, and that's why the losses typically are at six figures and can easily get into seven figures without anyone even knowing it.”

One way to shorten this window is to make sure employees are taking their vacation allowance every year. Why?

“The most common way these frauds are discovered is when somebody has to leave the business either for vacation or for other reasons, someone else has to take over their position and they find that there's been some suspicious activity going on,” says Sprowson.

How Common is Commercial Crime?

“It will never happen to us. We know the people we deal with. Our director signs every check."

It’s a common refrain. And most clients do know their employees and their vendors. But fraudsters are clever.

In a social engineering situation, “I have seen some of the email traffic between a business and the fraudster before the loss happens. And it's actually quite scary in some ways,” says Sprowson.

“They've clearly sat on the email for a time and watched conversations go on, so that when they actually forward the fraudulent email, there's some really personal stuff in there sometimes about maybe your football team, or your daughter's name, or did you go to that gig at the weekend?

“They put all this stuff in to make it look very genuine and people are duped all the time.”

“Every business out there, every organization whether it's public, private, non-profit, governmental, financial institution, everyone's susceptible to fraud,” says Henning. “The thing about fraud is, and especially with crime insurance, you’re covering against human behavior, and even with experts that's a very hard thing to calculate and figure out.”

Sprowson explains that small businesses still don't have the checks and balances to fight this in the same way that larger companies can throw resources behind it. And that’s a problem, because small businesses are very susceptible to fraud. With only one or two people in control of transactions and less eyes scrutinizing it when it goes through, it’s too easy.

“We see it happen all the time,” says Sprowson. “Maybe it's only $10,000, maybe it's only $15,000, which to a larger business would not be a lot, but to a small mom and pop type shop, that's a lot of money.”

How to Sell Commercial Crime Coverage

First off, agents need to build awareness of commercial crime, both the act and the fact that there’s coverage for it.

Yes, Commercial Crime coverage adds premium. But agents should emphasize what a fraud event could do to a client’s business and the devastating damage it may cause—and how much more cost-effective it is to obtain coverage before an event occurs.

“Sadly, what we see a lot of the time is people coming to us and applying for this insurance when the problem's already happened. And of course, as a buyer, that is the worst position you can possibly be in,” says Sprowson.

“A commercial crime policy significantly protects your assets,” he continues. “And at the end of the day, that is what generates value for your business.”

Next, give it to your clients straight.

“You first have to assess exposures within each risk and bring to light where they're vulnerable, and that's a big thing because a lot of companies don't understand where they're vulnerable,” says Henning, who emphasizes sharing examples.

“Turn on the news, and once you're aware of what white collar crime is and what kind of loss falls into crime insurance, every other day there's a story on the news that is related to, or something that would be covered by, crime insurance.”

Sprowson advises having the tough conversation about the prevalence of employee dishonesty.

“The number of times where we've seen longstanding and supposedly very loyal employees, who've turned out to be completely the opposite, is staggering,” he says.

“It's distressing for the businesses, it's distressing for the employer, and while you have to operate in an environment where you trust your employees to do a good job, you also have to have the controls around that to help them not be tempted.”

It’s an uncomfortable thing to think about, but in the end, businesses have to protect their assets from their people. Sprowson and Henning both estimate that 80% of fraud either emanates from an employee or is perpetrated by the employee himself.

“I just don't think you can ever assume you're immune from it, because at some point you won't be,” says Sprowson.

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