BUSINESS TRENDS - July 2000 Feature Article
by Bob Carter

Protecting Business
Private investigators introduce security measures that can save a company’s profit margin

Fictional detectives like Kinsey Millhone, the Louisville-based character created by Sue Grafton, do a lot of work for lawyers and insurance companies. Real private investigators do too. But they also work for corporations uncovering issues pertaining to the bottom line.

And unlike their literary counterparts, genuine private investigators are careful not to violate the law while carrying out their assignments.

Tim Wilcox and Scott McCorkle are genuine private investigators. They are the president and local managing director, respectively, for International Investigations, Inc. (III), a firm that has long specialized in corporate security. III is a 40-year-old Indianapolis-based firm that, earlier this year, opened its Louisville offices.

McCorkle, a second-generation III investigator, has worked for the firm since high school. He heads the three-person Louisville bureau that focuses on corporate investigations.

Wilcox, the principal, bought III in 1970 from the last of its three founders. He oversees operations that include 22 employees in the Indianapolis headquarters, including his wife and three daughters, and 200 associates in 70 countries. He estimates that 40 percent of the company’s business comes from corporations (including insurance companies), with the balance from attorneys or private individuals.

Regardless of the source, private investigations fall into two broad categories – research and surveillance.

Research is conducted primarily through public records searches, many available in on-line data bases. (III subscribes to 6,800 such sources, many of them proprietary to the industry.) Research includes asset and property searches, due diligence and personnel and background investigations.

While most of this work is computer-based, some involves the use of controversial equipment to uncover falsehoods – the polygraph and the voice stress analyzer. Wilcox and McCorkle are more emphatic in their support for these devices than many psychologists or defense attorneys. Both say that the devices are used primarily to confirm information from other sources.

Surveillance includes electronic countermeasures, vehicle tracking, surreptitious and video recordings and undercover investigations. Because federal and state laws vary concerning who can and cannot be recorded without consent, III is careful to obey the precise requirements of each jurisdiction so that its reports are both documented and admissible in a court of law.

To conduct effective surveillance, III maintains a $400,000 inventory of recording devices disguised as something else – usually something ordinary and expected, such as a lamp or VCR. Panning and zooming and digital recording present vivid images, sometimes in real color and often in real time.

Some miniature devices can be worn by the undercover operative, "wired like a fish," as Tony Soprano would say. These devices are either rented or sold to clients.

Both insurance companies and corporations, the firm’s core customers, use both techniques in their contracted investigations.

While insurers do use private investigators to verify the reliability of their own and potential agents, they are primarily concerned with false claims. The nature of these claims, and the techniques employed to uncover them, depends upon the business of the insurance company itself.

Life insurance companies face the fewest false claims. A staple of detective fiction, the faked death in this country is an exceedingly difficult fraud to perpetuate, although it may be commonplace in others, notably India, Korea and Nigeria. Life insurance claims investigations focus on policies that have been issued for two years or less, the "contestable period," when material representations or suicide may cause the company to refuse to pay the claim.

Misrepresentations usually involve the failure to disclose serious medical conditions and hazardous occupations or activities, issues that, if known, could result in declined coverage or a greatly increased premium.

Companies that issue health and disability insurance also are concerned with material misrepresentations on applications but their principal worries are faked or inflated claims. Again, they can institute procedures to reduce the potential but soft-tissue injuries and pain, especially, are very difficult conditions to disprove. Consequently, III will be called in to demonstrate that the claimant is not as incapacitated as asserted, often through surveillance techniques.

With property and casualty insurance, the effect is very different because insurable interest is not established until the event occurs, meaning that all claims are investigated. The most common fraudulent claims feature "cappers," which are faked auto accidents, often involving innocent victims and "slip and fall" artists, some of whom are so busy filing claims that they no longer have time to visit the places where their alleged injuries take place. Investigative firms use databases to search for suspicious concentrations of claims, often turning over their results to local police for prosecution. However, as Wilcox admits, it is often impossible to disprove a single incident of inflated claim, if an accident actually occurred but there were no witnesses.

Wilcox urges his corporate clients to purchase fidelity bonds to protect themselves against employee embezzlement, thus transferring the risk to a property and casualty insurer. And while the theft may eventually be revealed, as three highly publicized cases in Kentucky demonstrate, the money itself is rarely recovered in full.

Employee theft is the number one concern of his corporate clients, Wilcox stresses, adding that employee "shrinkage" greatly exceeds losses to shoplifting or robbery. The FBI and the U.S. Chamber of Commerce estimate employee theft accounts for 4.2 percent dent in gross revenues, a crippling loss in low-margin industries.

Wilcox believes that shrinkage exceeds shoplifting by a five to one ratio, although violations are rarely prosecuted. Losses occur equally through thefts of raw materials, finished goods and cash. The first two categories, involving material goods, can be uncovered with surveillance and lie detection techniques, as well as background investigations of suspects. Wilcox recommends his clients rotate the duties of employees who handle cash or billings and receipts. "Mandatory vacations will catch more embezzlers than an audit," he maintains. His firm does retain a forensic CPA, however, to reconstruct evidence for criminal investigations or civil recovery suits.

Not all "employee" theft involves actual employees. Temporary workers, contract personnel such as cleaning services and on-site vendors are often perpetrators because they have no loyalty to the employer and very little risk of dismissal if caught doing something suspicious.

Furthermore, corporate security experts believe most job-related theft could be prevented if employers regularly utilized pre-employment background checks and drug screening and permanently utilized visible surveillance techniques at vulnerable points. Most don’t, however. "Very few companies are proactive," Wilcox concedes, stressing that 90 percent of employee theft can be traced to financial pressures caused by drug use, gambling or legal problems outside the workplace.

Security experts conclude that the best defense against internal theft is the active participation in security measures by good employees. III has established "Straightline," a confidential "honesty reporting hotline" to cull incidents of drug abuse and malingering, as well as cases of incompetent or abusive supervision. Wilcox says his firm is often retained by conscientious employers to uncover violations of workplace health and safety laws or sexual harassment laws by mid-level supervisors against their own workers.

So what would you do if you discovered your client, the employer, was deliberately committing violations as a matter of policy? "That would be a dilemma," Wilcox agrees, "but it’s a problem we’ve never encountered. I don’t know what we’d do," he continues, "except follow the law."
After all, isn’t that what you would expect of Kinsey Millhone... or genuine private investigators?

Robert Carter (robertcarter@lanereport.com) is the Louisville-based associate editor of The Lane Report.

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