Employee Theft, Fraud and How Hotels Can Gallagher

Manage the Risks Hospitality

Practice
 Employee Theft, Fraud and How Hotels Can
Manage the Risks
The United States economy remains fragile after the • One client, undergoing a renovation, had
worst economic period since the Great Depression. over $50,000 in FF&E stolen from a locked
The hospitality industry has been hit particularly storeroom by two long-time employees. This
hard, experiencing decreasing occupancy and steeply storage room was a catch-all for unused items
declining REVPAR. Capital projects are being at the property and was poorly organized.
deferred, staffing levels and staff hours reduced, Additionally, the room was adjacent to a

When confronted with these financial pressures and job insecurities, employees may
disconnect from the organization’s culture and philosophies. In addition, staffing has been
reduced, impacting oversight and separation of duties, which gives a dishonest employee
opportunity.

and employees are being asked to forgo pay raises service elevator which opened just steps from
while their workloads are increasing. According to the back dock. These factors combined with
Bill McShane, President of WJM Enterprises, these two disgruntled employees, led to the perfect
factors are creating “the perfect storm.” Indeed, circumstances for theft.
with continuing industry layoffs (and the threats
• A client employed a trusted controller, who
of more to come) hotel employees are apprehensive
embezzled $150,000 over the course of a few
and concerned about their job security, according to
months. This long-time, seemingly dedicated
McShane. This uncertainty, coupled with personal
employee (rarely took any time off, worked
financial strains such as high credit card balances,
numerous weekends) worked at an upscale
rising mortgage rates and the overall weak labor
resort property which generated large amounts
market, is resulting in the prevalence of numerous
of cash in the spa, restaurants, and retail outlets
fraud triangles.
on property. The controller was responsible for
When confronted with these financial pressures and placing the change orders and picked up the cash
job insecurities, employees may disconnect from the himself and also reconciled the bank account.
organization’s culture and philosophies. In addition, This mix of responsibilities with no real checks or
staffing has been reduced, impacting oversight and balances left the hotel vulnerable. The controller
separation of duties, which gives a dishonest employee was carrying the cash deposit as a receivable and
opportunity. Employees encountering these mounting floated it for a period of time. He was using
pressures and perhaps believing that management “new” money to pay for “old” money, and then
does not care about them may rationalize their illegal rolling it over, for a period of 60 days. There
behavior. were always deposits outstanding, but it appeared
through corporate’s reconciliation, even during
There has been a sharp uptick recently in employee an audit, that those reconciliations were fairly
fraud and theft, using different methods to steal, for current. The theft was only discovered after the
example: controller left the company and the country.
As a result, the hotel company implemented
procedures requiring strict separation of
duties, and now also conducts monthly bank

2 Employee Theft, Fraud and How Hotels Can Manage the Risks
 reconciliations. New measures were also • Ensure your property management systems do
implemented that require management review not display the entire credit card number.
of all reconciliations and every open transaction Displaying the last four digits of the credit card
is investigated. All cashiers must submit a daily number, is adequate for all routine transactions.
shift audit and are subject to random audits.
• Establish procedures for monitoring credits,
The audit standard is once per month, but the
chargebacks, etc.
employee is unaware of when during the month
One of the main reasons for a chargeback is
it may occur.
fraud. It is important to monitor chargebacks,
and the reason codes, and implement procedures
Identity Theft to reduce the number of chargebacks occurring.

Another concerning trend, not only affecting the • Centralize records storage.
hospitality industry, is a surge in credit card theft Store all guest credit card data in one secure
among our clients. One well-known upscale resort location. This site be monitored by closed circuit
estimates its fraud from the theft of credit card television system and have an electronic lock to
information to be over $500,000 in the past year. provide an audit trail.
What once used to be primarily a guest services issue • Eliminate using fax machines for credit card
has now grown into a big financial problem. With the data.
adoption of the new Payment Card Industry security Use efax programs that can only be accessed via
standards (PCI), hotels not in compliance with these secure, password-protected computer.
security standards risk processing fee surcharges that
can amount to thousands of dollars in additional • Reduce the number of people who have access
expenses. to guest data.
Restrict access to guest data to a limited number
In order to reduce the occurrence of theft of credit of trusted employees will help reduce employee
card data, the following best practices should be theft of this information.
reviewed and implemented:
• Ensure all employees who handle credit cards,
• Purge excess/unneeded credit card data. checks, and cash undergo credit checks at least
Previous guest folios with credit card information twice per year.
should be placed in secure, offsite storage or As discussed earlier in this article, an employee
shredded. 30 days after an event, shred BEO’s pressured by personal financial situation may feel
etc. Never put guest credit card information on pressure to steal. This is not to assume that all
internal documents. employees with poor credit will steal from their
employer, but it is important to be proactive and
• Do not imprint credit cards.
be aware of which employees are experiencing
Swiping the credit card will transfer the required
financial troubles, especially those handling your
data to the property management system.
money.
Unnecessary risk is assumed with the imprint of
credit cards.
3
 • Post the federal penalty for identity theft at the Title 18—crimes and criminal procedure
property.
The penalties for identity theft under federal law Part I—crimes
are severe. For a first-time offender, there is no Chapter 47—fraud and false statements
probation and the mandatory minimum sentence Sec. 1028A. Aggravated identity theft
is two years in prison for each case of identity (a) Offenses.—
theft. While these laws were initially promulgated
as anti-terrorism measures, federal prosecutors (1) In general.—Whoever, during and in relation to
will pursue credit card theft via this statute if all any felony violation enumerated in subsection (c),
the evidence is presented to them. knowingly transfers, possesses, or uses, without lawful
authority, a means of identification of another person
shall, in addition to the punishment provided for
such felony, be sentenced to a term of imprisonment
of 2 years.

Fraud, identity theft and other financial crimes

by employees are always a concern to employers.
Implementing procedures and safeguards will help
to reduce the instance of employee theft at your
property and protect your hotel from the liability
resulting from the theft of guest information.

4 Employee Theft, Fraud and How Hotels Can Manage the Risks
Notes

5
Notes

6 Employee Theft, Fraud and How Hotels Can Manage the Risks
Notes

7
 Gallagher
Two Pierce Place Hospitality
Itasca, IL 60143-3141 Practice

About the author

Jim Stover is a veteran hospitality loss control expert who was formerly the Vice President
of Loss Prevention for Bristol Hotels & Resorts. A principal in the Loss Prevention Practice
Group, he also manages loss control for Gallagher’s Hospitality Niche.

Q:\2014\BSD\28\24925