How to Avoid Ghost Employee Fraud in 2024 | INS Global

How to Avoid Ghost Employee Fraud in 2024

How to Avoid Ghost Employee Fraud in 2024

December 7, 2023

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Key Takeaways

  1. Payroll frauds is often difficult to spot and may cost you thousands per year, it can also lead to tax or social security issues that can delay projects or cause criminal problems
  2. Establishing robust controls is crucial in preventing ghost employee fraud
  3. Outsourcing your worldwide payroll to INS Global gives you a partner dedicated to risk avoidance and legal guidance
Summary

 

 

In 2022, the AFCE found that “ghost employee fraud” accounted for 9% of payroll fraud globally. The allure of international expansion is an exciting prospect for companies seeking new markets and growth opportunities. However, in 2024, the complexities of managing payroll across borders bring various challenges, with “ghost employee fraud” being a considerable threat.

 

Navigating Legal Complications

 

This problem can affect companies of all sizes and in all industries. But it can be especially easy to lose track of small details when expanding your payroll network to cover multiple countries. With a larger staff, there’s always an increased risk of intentional fraud, too, however unfortunate it might be to admit it. Company payroll managers and Human Resources (HR) professionals must navigate the delicate balance between expansion and risk mitigation.

This article aims to provide insights into the detection and prevention of ghost employee fraud, the consequences it carries, and how outsourcing international payroll services to INS Global can be a strategic move to enhance accuracy, security, and compliance.

 

What is Ghost Employee Fraud, and How Do You Detect It? Understanding Ghost Employee Fraud

 

Ghost employee fraud is a form of financial crime where fictitious employees are created and maintained in a company’s payroll system, typically to embezzle funds. This problem is most common in companies going through international expansion. This is because, during a period of expansion, payroll is often more decentralized, leading to gaps in the system. These ghost employees, who exist only on paper, receive regular salary disbursements, thus creating an avenue for siphoning off resources without detection.

For companies working with partners who provide large-scale staffing or temporary employees, there’s also a heightened risk of ghost employee fraud as service providers may try to take advantage of geographic distance to increase service charges or create false time sheets without providing the agreed-upon labor. One contractor manager in Florida, for example, charged their clients more than $900,000 for fictional work before being caught, and this was happening in the same location as their clients.

At the same time, mistakes can happen, especially during growth. In cases where companies expand internationally, even minor errors can lead to big problems like data duplication. This can appear as ghost employee fraud, and should these problems not be noticed, they may cause legal issues later in managing tax payments or social security contributions in some countries.

 

Consequences of Ghost Employee Fraud

 

Financial Losses

 

The primary consequence of ghost employee fraud is financial loss. False salary payments to non-existent employees drain company resources, hindering growth and profit.

For companies embarking on international expansion, these financial losses can be particularly damaging, affecting the overall success of the venture.

 

Reputation Damage

 

Beyond financial implications, ghost employee fraud significantly threatens a company’s reputation. Discovering fraudulent activities can erode trust among employees, clients, and stakeholders.

The negative publicity can tarnish the brand image and deter potential business partners, clients, and investors.

 

Legal Effects

 

Engaging in ghost employee fraud is not just an ethical violation; the resulting tax errors may be a criminal offense. Companies found guilty of such activities may face legal consequences, including fines and legal proceedings.

Not being familiar with local processes or employee actions is typically not enough of an excuse for a company to avoid problems. As a result, the legal effects can extend to indirectly connected individuals within the organization, adding a layer of increased liability, leading to serious fines, delays to an expansion strategy, or even criminal charges.

 

 

7 Tips to Detect Ghost Employees

 

Detecting ghost employee fraud requires a careful approach to employee management, as the matter must be handled delicately. Fraudsters often exploit the complexities of international payroll, making manual checks and audits less effective.

Because of this, companies need to adopt advanced detection methods, which may involve tech-forward or innovative solutions.

 

Digital Security

 

Giving the payroll system digital security or adding extra layers of checks such as biometric identifiers like fingerprints, retina scans, or facial recognition can help to ensure that only legitimate employees and contractors can access and modify payroll and HR information.

The right security makes it significantly more challenging for fraudsters to create and manipulate ghost employees undetected. Increased security checks may also help to limit innocent errors too.

 

Regular Audits

 

Regular and thorough audits are crucial for detecting ghost employee fraud. Most companies perform an audit once per year to meet minimum requirements, but companies going through periods of transition or expansion are encouraged to do an audit more often, as many as 3-4 times per year.

Payroll records should be routinely reviewed and cross-referenced with HR and other relevant documentation. Look for discrepancies such as duplicate bank accounts, addresses, or identification numbers.

For international payroll, employing the services of external auditors who specialize in navigating diverse regulatory environments can be the best way to ensure compliance and avoid gaps in the system due to their in-depth knowledge of local and international requirements.

 

Data Analytics

 

Embrace the power of data analytic tools to identify patterns and anomalies in payroll data. The right software can flag unusual payment patterns, identify duplicate entries, and pinpoint discrepancies that may indicate the presence of ghost employees.

Investing in state-of-the-art analytics tools can significantly enhance a company’s ability to detect and prevent fraudulent activities, especially when managing payroll on a global scale.

 

Strengthen Checks and Balances

 

Establishing robust controls is crucial in preventing ghost employee fraud. Integrate multiple layers of responsibility or outsource it to third parties to ensure no single individual has unchecked control over the payroll process.

Implement a dual-authorization system for payroll transactions, requiring approval from multiple individuals before disbursing salaries. These measures create obstacles for fraudsters attempting to manipulate the system.

 

Educate Employees

 

Promote employee awareness about the risks and consequences of payroll errors and ghost employee fraud. You can also encourage reporting suspicious activities or individuals to the appropriate channels.

Internationally transferred employees may be especially susceptible to the risks of these issues, so make sure that any employees being sent overseas understand how their payroll will change, and also make them aware of the security systems you are putting in place. By fostering a culture of vigilance, employees become integral contributors to the company’s defense against fraudulent practices.

 

Engage with Employees

 

Regularly verify the existence of all employees, especially in the context of international expansion. This can be done in proactive and positive way through employee engagement initiatives or meetups.

These engagement boosting events will also provide data that you can cross-reference with HR and other relevant departments and establish communication channels. If this creates any doubts, managers and supervisors can promptly address discrepancies in the employee roster.

 

Consider Outsourcing International Payroll

 

Outsourcing international payroll to specialized service providers like INS Global can be a strategic move to mitigate the risks associated with ghost employee fraud. An Employer of Record (EOR) or Professional Employer Organization (PEO) provides a range of HR services specifically designed to help companies with multi country payroll during international expansion.

These take charge of essential HR functions, helping streamline your processes and adding professional expertise and security. 

These outsourcing services bring expertise in navigating the complexities of diverse global payroll regulations, ensuring compliance and accuracy.