It is not uncommon for a sole employee to take up a managerial role in a satellite office. Local staff are often appointed as regional general managers or directors. While this can bring invaluable local insight and expertise, the physical distance from the headquarters (HQ) means that instances of misconduct, fraud and the like can occur undetected for significant periods of time, unless robust policies are put in place and adhered to. In fact, it has been reported that more than half of employee fraud cases occur due to lack of internal controls. Employee fraud or misconduct can take many different forms and can be uncovered in many different ways – usually following a tip-off, management change, or via internal or external audits. In this article we explore the potential risks to employers when engaging a single worker to manage and operate a satellite office, together with some key practical tips. 

A sole employee taking up a managerial role often plays a pivotal role in the success of overseas offices. However, the significant authority they tend to hold, including being the sole authorised signatory for bank transactions and approving expense reimbursements, can create risks. Without proper internal controls and governance even well-intentioned systems can be misused, leading to financial and reputational loss for the company.  

Without internal checks and balances in place, there are many ways in which  a worker may abuse their position. For example, an individual who has the authority to approve their own work expenses could commit expense fraud by: 

• requesting reimbursement for personal expenses that are not business related;  

• submitting bogus expense claims; or  

• inflating the cost of expenses claimed.  

Common examples of expense fraud include:  

• claiming dinner with friends as a business development expense;  

• claiming personal travel as a business trip; and  

• submitting fictitious invoices which are put through accounts and are paid without any verification of goods or services being received by the company.  

Where a worker oversees HR matters in a small office, they are expected to maintain their own annual leave records. However, it is not uncommon for such a worker to claim that they are owed an excess amount of untaken annual leave when exiting the organisation, which, if unverified, could lead to potential legal consequences for the employer.  

In Hong Kong, employers have a legal obligation to keep accurate annual leave records for their employees. Where an employee makes a claim for untaken or rolled-over annual leave, unless the employer can prove that leave was in fact taken during the course of employment, the employer will more often than not end up having to pay the claimed leave entitlement, especially where legal proceedings are issued to recover the alleged contractual entitlement.  

Furthermore, an employer may face legal consequences for not keeping proper records of its employee’s annual leave, sick leave, maternity/paternity leave, statutory and public holidays and wages paid. An employer who fails to keep these records is liable on conviction to a fine of HKD10,000. Where a worker tasked with managing the satellite office has failed to keep proper records, the company can still be held liable despite it being that worker’s omission. There is also a risk that some employees may seek to leverage their position based on their knowledge of these facts. 

The detection of misconduct is even harder to uncover where the worker has personally hired all the staff of the local office. In such situations staff may feel a sense of loyalty to their immediate supervisor and be less inclined to report any misconduct to HQ, especially where they have minimal interaction with overseas teams and their management.  
 
We have seen instances of local managers obstructing efforts from HQ to uncover fraud or misconduct by, for example, instructing local staff not to cooperate or communicate with HQ management or denying them entry to the office premises. In our experience, this misplaced sense of loyalty usually continues even after the manager has been dismissed. Remaining employees may send their ex-boss confidential information which can adversely affect any court proceedings that have been brought against them. 

To reduce these risks, employers should consider the following: 

Dos: 

• Implement strong internal controls: Establish robust internal controls to prevent abuse. This includes requiring two (or more) signatures for approvals, conducting regular audits, and implementing a separation of duties in financial processes.

• Encourage transparency: Foster a culture of transparency where all employees feel comfortable raising concerns. Implement anonymous reporting mechanisms for staff to report suspicious activities without fear of retaliation. 

• Provide training and resources: Offer training to ensure that all staff know what is acceptable conduct within the workplace. 

• Grow trust and relationships between offices: Ensure that there is continuous contact between HQ and local staff to strengthen communications, relationships and to build trust.  

Don’ts: 

• Don’t centralise power: Avoid placing too much authority in the hands of a single individual. Distribute responsibilities to ensure checks and balances are in place. 

• Don’t ignore warning signs: Be vigilant for signs of potential misconduct and address red flags proactively.

• Don’t neglect cultural differences: Understand cultural differences that may affect business practices in different regions and tailor the company’s approach to compliance and governance accordingly.  

The establishment of a satellite office presents unique challenges and opportunities for multinational corporations. Over-reliance on a single individual to manage an office can lead to significant risks, including potential misconduct and long-lasting effects even after the individual has left the organisation. Employers can mitigate some of the risks by having strong policies in place and ensuring proper corporate governance.