Key compliance points when disciplining employees for fraud

By Leo Yu and Duan Lingna, Jingtian & Gongcheng
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Companies often spare no effort in investigating, dealing with and pursuing fraudulent practices. Unfortunately, due to the complexity of transactions and the granularity of the division of labour and co-operation, they are often unable to quickly and effectively detect corrupt practices within their organisation. Even when these are found, they may be unable to deal with the issue effectively because of the difficulty in producing evidence, or for other reasons.

喻鑫, Leo Yu, Partner, Jingtian & Gongcheng.
Leo Yu
Partner
Jingtian & Gongcheng

This article aims to help companies understand some of the factors that cause dismissals to be ruled unlawful, and offer advice on how to create a more effective culture of compliance among employees. Fraud and fraudulent practice here refers to employees’ misconduct, including but not limited to corruption, bribery and embezzlement.

Setting out disciplinary grounds. As fraudulent practices themselves are concrete and intimately connected with both the dynamic business model of the employer and the job duties of employees, the employer usually finds it impossible to list each prohibited act in its rules and regulations. Many employers eventually opt for principle-based provisions on breach of integrity, fraud, breach of good faith, etc., as the basis for dismissal.

However, where a fraudulent act is insufficient to cross the threshold into a criminal act, the grounds for dismissal mentioned above are unlikely to allow a company to make a lawful dismissal.

In practice, judges hold that employers have the right to treat breach of the principle of good faith, etc., as a circumstance that can result in dismissal in their rules and regulations, but, due to asymmetry in resources and information between the parties in an employment relationship, the employer is required to inform employees of substantive matters of the principle of good faith, etc., and apply different penalties depending on the severity of a specific violation of the regulations.

Where breach of the principle is directly applied in dismissing an employee in a situation where the severity of the circumstances and the methods of penalisation have not been defined, it is difficult to evade the appearance of arbitrariness in the employer’s decision to dismiss.

Taking into account the burden of proof in labour disputes involving dismissal, employers should pay attention to fix as far as possible the specific acts that underpin fraudulent practices, the severity of the circumstances, and the different consequences in terms of penalties in such forms as rules and regulations or integrity agreements. This is prudent as a guard against the risk of illegal dismissal due to excessive vagueness of the grounds for discipline.

段灵娜, Duan Lingna, Associate, Jingtian & Gongcheng
Duan Lingna
Associate
Jingtian & Gongcheng

Collecting and retaining evidence of actual losses. In a dispute where dismissal is caused by fraudulent practices, the need to show how actual losses were incurred is a headache for many employers. Many employers think that the company’s burden of proof lies in merely demonstrating the objective existence of the employee’s fraudulent practices.

Take the example where a company’s rules expressly state that a supervisor is not eligible to receive a bonus for recommending internal talent for a position. That supervisor circumvents the rule by introducing their favoured candidate to a subordinate, who in terms recommends the person in order to receive the bonus, but that bonus is then used for team building purposes. The supervisor violated the original intent of the rules.

However, if the actual existence of the objective act is the only criterion used to dismiss him or her, there is a strong likelihood of the risk of illegal dismissal arising. This is for two reasons:

. The employer did not enumerate such an act as one of the grounds for direct dismissal; and

. Even if the act was enumerated as grounds for dismissal, neither the aim nor result of the employee’s act was to personally benefit,

In other words, the supervisor did not, as a result, actually benefit personally from the act, and whether the act caused the company to incur an actual loss is also open to doubt.

Based on the authors’ experience and case research, adjudicating institutions tend to consider the actual loss (which is not necessarily monetary in nature) incurred by the employer as one of the key criteria in determining whether a dismissal is lawful.

In the case of Vanguard v He (2017), the company accused an employee of fraud, but the judge held that the employer could not exclude the possibility that the employee carried out technical processing of objective data only after reporting to his superior, which is fundamentally different from intentionally modifying data for personal gain. In addition, the employer failed to provide valid evidence showing that the modification of the data by the employee caused the company to incur an actual loss. The judge ruled against the employer.

When trying to demonstrate the compliance and viability of dismissing an employee who engaged in fraud, employers should adopt an act-oriented and result-oriented dual-track review standard to ensure that they genuinely have the evidence showing the existence of the fraudulent practices and the loss incurred as a result. Also, that the relevant evidence is solid and reliable.

If such a standard is not met, consideration should be given to resolving the issue by circulating a warning notice, requiring the employee to return any money, etc., as a second-best option to achieve the effect of reprimand, education, demonstration, etc.

Be sure to discipline joint actors. It is difficult for a single employee to pull off a fraud alone. More often than not, several employees are aware or involved in the practice. Dealing with the other participants depending on their actions, circumstances and the extent of their involvement will not only have a deterrent effect, but also help demonstrate the reasonableness of the original dismissal.

Conclusion

Whether at the level of the law or morality, fraudulent practices and the values that underpin them are repudiated and disavowed. Even so, this does not mean that an employer can arbitrarily dismiss an employee for fraudulent practices. In the course of dealing with such an issue, an employer needs to pay particular attention to clarifying what constitutes such practices, bring greater granularity to its internal oversight system, strengthen awareness of evidence collection, and fix the evidence of fraudulent practices and their consequences, so as to ultimately achieve the objective of compliant discipline.

Leo Yu is a partner and Duan Lingna is an associate at Jingtian & Gongcheng

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Jingtian & Gongcheng

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Tel: +86 10 5809 1368
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