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Investigating Employee Theft and Fraud: A Guide for Malaysian Employers

Discovering that an employee you trusted may be stealing from your company is a deeply unsettling experience. Beyond the immediate financial loss, you are suddenly faced with a crisis that carries immense legal risk. A rushed accusation, a flawed investigation, or a poorly handled termination can easily boomerang into a costly unfair dismissal lawsuit, even if the employee is guilty.

Before you act, you must have a plan. This guide provides a calm, procedural roadmap for investigating allegations of employee theft and fraud correctly and legally in Malaysia. Following a methodical process is your best protection against both financial loss and legal trouble.

The First 24 Hours: Immediate Steps to Take (and Avoid)

Your actions in the first 24 hours after a suspicion arises are critical. The goal is to preserve evidence and control the situation without tipping off the suspect or violating their rights.

Step 1: Secure the Evidence, Not the Person

Your first priority is to secure any potential evidence. This could mean:

• Preserving relevant documents.
• Making a copy of CCTV footage.
• Suspending the employee’s access to accounting software or sensitive systems.
  Do this discreetly. Do not lock the employee out of their office or confiscate their personal belongings, as this could lead to other legal issues.

Step 2: Assemble a Small, Confidential Investigation Team

This is not a matter for office gossip. Form a small team, typically consisting of a senior HR manager, the employee’s department head, and possibly a legal advisor or a senior manager. Emphasize that all information must be kept strictly confidential.

Step 3: Resist the Urge to Accuse or Confront Immediately

A premature confrontation is the biggest mistake you can make. Without concrete proof, you risk a defamation suit or a constructive dismissal claim. Do not call the employee into a meeting to demand answers. Your job at this stage is to investigate, not to interrogate.

Common Red Flags of Employee Theft and Fraud

• An employee living a lifestyle that seems far beyond their means.
• Refusal to take annual leave (for fear of a replacement discovering their activities).
• Unusually close relationships with vendors or suppliers.
• Missing documents, petty cash discrepancies, or unusually high business expenses.

The Investigation Process: A 5-Step Guide to Gathering Facts

A fair and objective investigation is the foundation of any disciplinary action. Follow these steps methodically.

Step 1: Define the Scope and Create a Plan

What exactly are you investigating? Is it theft of petty cash, fraudulent expense claims, or a complex kickback scheme? Define the scope, create a timeline, and outline the steps you will take. A clear plan ensures your investigation stays focused.

Step 2: Gather Documentary and Digital Evidence

Collect all relevant physical and digital evidence. This can include:

• Financial records, invoices, and expense claims.
• Inventory logs and stock-take records.
• Email correspondence and server access logs.
• CCTV footage.
  Ensure you only review company property. Accessing an employee’s personal emails or personal phone without consent is a violation of privacy.

Step 3: Conduct Neutral Witness Interviews First

Before speaking to the accused, interview other employees who might have relevant information. For example, a colleague who works in the same department or an accounts person who processes their claims. Keep the questions neutral and fact-based. Do not mention the specific employee by name if possible; instead, ask about processes and procedures.

Step 4: Interview the Accused Employee

Once you have gathered preliminary evidence, you can interview the employee under investigation. This should be a formal, structured meeting.

• Have two company representatives present.
• Inform the employee of the general nature of the investigation.
• Present the evidence you have gathered and ask for their explanation.
• Document their responses carefully.
  This interview is for fact-finding, not for determining guilt.

Step 5: Initiate a Formal Domestic Inquiry (The Mandatory Step Before Dismissal)

If your investigation uncovers strong evidence of serious misconduct, you cannot proceed directly to dismissal. You must hold a formal Domestic Inquiry (DI). The DI is a formal hearing where the evidence is presented, and the employee is given a full and fair opportunity to defend themselves. This step is non-negotiable and is your primary defence against an unfair dismissal claim.

After the Investigation: Making Your Decision

The outcome of the Domestic Inquiry will guide your next steps. The panel will determine guilt, and management will decide on the punishment.

Based on the DI: Termination and Other Disciplinary Actions

If the employee is found guilty of serious misconduct like theft or fraud, dismissal is often the appropriate action. The dismissal letter should clearly state that the termination is a result of the findings of the Domestic Inquiry. Other potential actions for lesser offenses could include a final warning or demotion.

Lodging a Police Report: Pros and Cons

You are not legally obligated to file a police report, but it is a necessary step if you wish to pursue criminal charges or claim from insurance.

• Pros: Can lead to criminal prosecution and may be required by your insurance policy.
• Cons: Invites external parties into your business, can be time-consuming, and you lose control over the process.

Options for Recovering Your Losses

If the employee is terminated, you can make a civil claim against them in court to recover the stolen funds or property. You can also discuss a restitution plan with the employee, though this should be handled with legal advice.

Prevention is Better Than Cure: Strengthening Your Internal Controls

The best way to handle employee fraud is to prevent it from happening in the first place. Strong internal controls are your best deterrent.

Implementing Checks and Balances (Segregation of Duties)

Ensure that no single employee has sole control over a key financial process. For example, the person who approves payments should not be the same person who issues them. This simple separation of duties makes fraud much more difficult.

Conducting Regular Audits and Spot Checks

Conduct periodic, unannounced audits of petty cash, inventory, and expense reports. The knowledge that checks can happen at any time is a powerful deterrent against opportunistic theft.

How Worksy HRMS Helps Prevent Fraudulent Claims

Many workplace fraud cases begin with small, falsified expense claims. A modern HR system can significantly reduce this risk. Worksy HRMS streamlines and secures the claims process by:

• Requiring Digital Receipts: Employees must upload a photo or digital copy of a receipt for every claim, creating a clear evidence trail.
• Enforcing Policy Limits: The system can automatically enforce company policies, such as capping meal allowances or mileage claims.
• Creating a Transparent Approval Workflow: All claims are digitally routed to the correct manager for approval, ensuring every expense is reviewed before it is reimbursed.
  This digital-first approach makes it much harder for employees to submit duplicate or inflated claims, tackling fraud at its most common starting point.

Conclusion: A Methodical Process is Your Best Protection

Investigating employee theft or fraud is one of the most challenging tasks a manager can face. However, by resisting the urge to act on emotion and instead following a calm, methodical, and fair process, you protect your business from both the initial crime and the secondary danger of a legal battle. A fair investigation, culminating in a proper domestic inquiry, is always your best and safest course of action.