If you think employee referral fraud happens to only others, you might be in line to lose over 5% of your annual revenue.
And missing the detection of such frauds early on can harden the blow.
Therefore, it’s better to prepare beforehand for even the 1% of the minority who might try to pull off any unethical practice.
In this article, we’ll see different types of employee referral frauds and how to combat them effectively.
What is Employee Referral Fraud?
The word fraud is usually accompanied by unpleasant feelings and often reminds one of the financial losses. However, over time fraud has taken over different forms and meanings.
Almost all companies have a referral policy in place, hoping their existing employees would suggest their able friends to the company. And to appreciate the employee’s efforts, they are handed monetary or other benefits.
But, when employees start misusing the referral policy for their personal gains, it becomes employee referral fraud.
Though the capital loss may be one-time, the consequences of an incompetent hire have a lasting effect.
Types of Employee Referral Fraud
It’s common practice for an employee to refer their friends or family for a job and then share the details with the recruiter to proceed ahead. Apart from that, employees can even share the open position on their social channels to attract suitable candidates to apply.
But if the employees are bending the rules by doing any of the following, it can be considered referral fraud.
1) Referral Misuse: When an employee offers or splits the benefits with another person, who can be a hiring manager, candidate, or recruiter.
It might sound like, “Hey, can you get my referred candidate this job? I’ll split the employee referral bonus with you.”
2) Exploitation: Employees upload profiles of unknown people for referral benefits.
It might sound like, “My company has many open positions. If anyone is interested, please let me know, and I’ll ensure that you get the job.”
3) Impersonation: Employees apply for the job on behalf of someone else without their knowledge. It has become prevalent in the remote work culture where people impersonate a qualified candidate to get the job.
It might sound like, “I know someone who can clear the written round on your behalf if you agree to pay some money for it.”
Why do People Commit Frauds
There can be many reasons why people choose to follow unethical practices. But some of the common ones are:
1) Greed: When people consider referral programs as a way to make easy money, it can stem the desire to exploit the system.
2) Need: A severe problem like debt can make some employees desperate to find an immediate solution, even through unfair means.
3) Opportunity: If companies have a weak internal system that the employees can easily exploit, this might lead to frequent fraud.
4) Technical Ability: When an employee has the required means and ability to tamper with the system, that can also cause fraud.
5) Non-punitive Consequences: When there are no penalties or actions against unlawful practices, it can encourage the employees to abuse the referral policy.
Why Preventing Employee Referral Frauds is Necessary?
The effects of referral fraud are too significant to ignore.
1) Loss of Money: The obvious impact is the money lost due to each bogus referral. When you start adding the bonus, cost of hiring, and attrition, it can hit your revenue considerably.
2) Loss of Time: Hiring is a crucial operation of any business which can’t be done in haste. Think of how many extra hours of effort it will take for you to find a competent replacement for the phony reference.
3) Loss of Productivity: It can be a disaster when an unqualified candidate joins the team, tricking the system. It can lead to lower productivity and operational inefficiency when your team will spend hours training that person, and then also, the results might be unimpressive.
4) Loss of Reputation: Your clients doubting your potential due to fraud news is the last thing you want to hear. It raises serious questions about your credibility.
How to Deal with Employee Referral Fraud?
To deal with employee referral fraud, remember to prevent, detect, and respond to it at the right time.
How to Prevent Employee Referral Fraud?
1) Encourage Whistleblowers: Enable a whistleblowing mechanism in your organization so that employees can help you in busting any ongoing fraud. Assure employees of protected identities. Create an easily accessible channel for employees to reach out to you and share information anonymously.
2) Train & Raise Awareness: Train your team on the best practices for the referral program and educate them on company ethics and values. Share the monthly or annual data for fraud management with the whole organization to maintain transparency and awareness.
3) Introduce Fair Obstacles: One of the main reasons someone decides to manipulate the system is because it can get them more benefits in a shorter period. Break this circuit by introducing some reasonable policy changes. For example- limit the referrals per employee to 3 in a quarter. Or provide gift cards instead of cash to the employees as benefits. It can significantly deter the employees from rigging the system.
4) Establish Strict Corrective Measures: When employees know that the organization can take punitive measures against them, it will instill fear of doing the wrong thing. Ensure that these penalties are the same for everyone and followed firmly.
5) Verify Referred Candidate: It’s important to run thorough background checks before hiring a candidate. Use third-party services for an unbiased review and verify the candidate's credentials. Add an option for the candidate to confirm their application before proceeding ahead. Speak with a hired candidate at random to prove they are friends or know of the referring employee.
6) Install Secure Referral Systems: An insecure system will always attract fraudsters. So, implement a reliable referral tool that lets you manage your employee referrals while maintaining a complete database for audits. You can use RippleHire’s talent acquisition and employee referral systems for a secure process.
How to Detect Employee Referral Fraud?
1) Track & Monitor: Just assuming that all your employees will abide by the rules and ethics can be wishful thinking. That’s why it’s essential to ensure that the team uses the system as expected and that no one gets away with fraud.
Observe the referral activity and dig deeper where you see its aggressive use.
2) Use Technology: Referral technology can help you track the volume of activities by an employee and detect patterns between employee/hiring manager/interviewer/recruiter
3) Internal & External Audits: Random audits are the most effective method to detect suspicious activity. You can even outsource the auditing team for a fair analysis of your numbers.
How to Respond to Employee Referral Fraud?
A firm response to the detected fraud can set an example for the rest and prevent such cases in the future. You can follow the below steps to create a prompt and effective response cycle.
1) Set Clear Reporting Channel: Creating a proper plan for the responsive actions makes things smoother and avoids the loss of any critical proof. If a whistle-blower has brought an incident to light, then share a simple document with them to provide detailed information, keeping their anonymity if they wish so.
Create a formal channel for communicating the details regarding the case. Choosing a common channel will help manage the information and keep a record of the same.
2) Push the Investigation into Motion: It’s the essential stage of the response stage, where you can collect evidence and assign the investigation responsibility to a standalone team. It helps in ensuring a fair and unbiased investigation. You can even involve third-party services and ask them to gather information and provide a closure report.
3) Initiate Discussion: Contact the concerned employee and hear their side of the story. See if there are any other team members involved in the fraud. You can present the proofs in the forum and discuss the findings.
4) Make a Decision: After the discussion, you can analyze the extent of the fraud and the responsible team members.
5) Take Punitive Action: This is the stage of the response phase, where you convey the action against the culprits. It’s important to impose fair punishment on all involved, irrespective of the designation and seniority.
6) Improve the Employee Referral Policy: Once the case is closed, it’s time to reflect on the possible gaps and bridge them to avoid future instances. See where you need a stricter policy or require an advanced monitoring system.
The employee referral policy is a brilliant way to introduce great talent to your team while boosting employee loyalty and retention. And, 99% of your employees are using it responsibly for this purpose only. But ignoring the possibility of a few wrong-doers is an oversight you can’t afford.
Therefore, it’s better to prepare than waste time cleaning the mess later.
These best practices will help you build a secure system to enjoy the maximum benefits of the employee referral program without constantly worrying about possible fraud. And to make it easier, incorporate an employee referral tool like RippleHire into your existing process. Its gamified features allow employees to refer top talent quickly, and the upcoming referral fraud management updates are something you should look out for.