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The only thing worse than someone with selfish, blatant disregard for company policies is someone who behaves that way, yet masquerades as a good employee and hopes that their positive reputation will get them out of trouble.

Validate the rumors, then seek help from your employer to make sure you understand the proper methods to deal with the facts, once you actually have them. The accusations you've collected (lying about overtime, receiving personal financial benefit from business relationships with vendors) are very serious and could be putting him, you, and/or your employer in a bad legal position if they're not dealt with.

You say you want to do what's best for your organization, yet you also seem unwilling to enforce company policy. Consider that the company has put policies in place because it views them as the best way to handle certain situations. In other words: If you truly do want what's best for the company, enforce it's policies. Or, seek help/guidance from someone in a position to change or interpret them for you.

The first thing you should do is verify those complaints by whatever means is possible, and document carefully everything about them. You cannot accuse someone of things so serious without extensive backup. And you should do this no matter what you decide to do about him.

Are you sure he's indispensable to your organization? Can you make it a project to collect most of the knowledge he has that you really need? Consider that he is setting a bad example for the entire organization, and may be the source of a lot more you don't know about, from him directly or from the friends/followers who see what he's getting away with.

In my view the main point is that several of the things he supposedly does are not just "against company policies" but outright criminal on the personal level (Fraud, corruption etc) and place huge liabilities to your company (e.g. if the substandard products hurt/kill a customer).

I am assuming that these things turn out to be true (after investigating these by sufficient means, e.g. hiring an private investigator)

• Realize your losses: You have to fire him. His knowledge will be lost, and you have to replace him.




• Work on minimizing the damage - make sure that you find employees in his team who have been cut out by his favoritism and make sure they know that you are on their side, so that you have people available to take over the team who are not somehow depending on him




• Do not go to the police now. The offer on your behalf to the guy not to go to the police if he does as he is told may be a valuable bargaining chip. The same hold for all other employees who profited from the guy and looked the other way then he did what he did




• Figure out how good his connections to the customers are. Did he bribe customers? If so, you may have to prepare for loosing business (or paying up). Talk informally to the most important customers he worked directly with about his work - go to the next level, not the technical contact level. You can dress this as a management-managment follow up in the style of "what can we do better".




• Figure out if he managed to put liabilities for you or others into the books covering up his responsibility




• Once the person in question realizes that you investigate/plan to replace him, the gloves have to be taken off. In that moment you have be ready to hit him with everything you got, fair or unfair, honest or lying, treating civil+criminal lawsuits, disciplinary action, public destruction of his reputation, and potentially even thing on the border of legality (e.g. exposing things your PI found out accidentally), and that hast to happen visibly enough that everybody in the company knows that he has to choose sides. Those who do not choose sides with you have to be walked off the premises the next day.

How can I go through this issue effectively and in best interest of
the organization? I cannot afford to expel him out from our team, and
at the same time I do not want him to repeat these bad practices in
the future.

You have a manager/supervisor that you report to, let them know.

The employee is an insider threat. They do some great things and some things that are destructive to the organization. You are letting their strengths let them get away with destructive behavior.

Imagine that the person who reported them to you, goes over your head. When your company finds out that you protected somebody who was stealing from them, they might not accept excuses from you. Expect to be disciplined, but you might end-up fired - or charged.

Also letting them keep their job could cause the employee to shift how they are stealing, or they might accelerate their action.

"By virtue of his experience and knowledge, he is important for our organization"

Fix that problem immediately. Locate employees who are keen to learn the domain knowledge that he has, and work with them to get them trained up.

Then (or probably sooner), get concrete evidence of the employees activity - not just gossip - and then fire him. He is a thief, and his activities - and your acceptance of them - may reflect on you. Make sure that HR is involved at all stages, so that due process is followed.

This is an opportunity to show your mettle as a manager. Take it.

Fire him. Don't mince around. If you let things slide, he'll harm the company more. If you confront him, he's likely to leave anyway. You can't effectively bargain with him.

If your guy died in a traffic accident or got a fatal heart attack, you'd cope. If he ran off to Las Vegas with his ill-gotten gains, you'd cope. If he wound up serving prison time, you'd cope. You wouldn't like what you had to do, and it would cause serious problems, but your operation wouldn't just be shut down. Similarly, if you fired him, you'd cope.

He isn't working for you any more. He's working for himself. He's not going to cooperate in being made dispensable, because he'd realize that that would lead to you firing him. He's not going to do any knowledge transfer or get anyone else up to speed. You can fire him now and have serious problems, or fire him later and have serious problems in addition to the damage he does between now and then. There will never be a good time to fire the guy. Now is the best time.

Right now, he's getting overtime money he isn't due. That's not really such a big issue compared to the others. He's screwing up your supply chain, and that can have extremely serious consequences. He's demoralizing your staff. As time goes on, you're going to be using more and more substandard parts, jeopardizing your corporate reputation and laying yourselves open to potentially massive legal liability, and in addition your staff will get worse because of him.

If you investigate and find he's clean, fine. Then you need to figure out who was making such scurrilous reports. Otherwise, fire him.

The entire point of this answer is to tell you why you have to fire him and why the reasons for not firing him are unsound. For your best course of action, see Sascha's excellent answer.

I think George M's answer is good and I agree: you should do everything you can to investigate, substantiate and document these alleged violations by your subordinate.

I think violation number 2 is potentially very serious. If he has been taking 'back-handers' from vendors to accept poor quality product, then that is a conflict of interest. Many large organizations have very strict, zero-tolerance policies towards this and if you try to sweep it under the carpet, then it may have some serious implications for you.

Regarding that matter, I think you have a responsibility to bring it up with your superiors and probably your company's Legal department. If this conflict of interest is serious and has been going on for a long time, then he may simply need to be let go, regardless of his experience or value to the company. I would let the more senior Management and Legal guide you on that.

If your leadership and Legal team agree that his 'sins' can be forgiven, then at the very least I think you would need to call him into your office and have a private, face-to-face discussion about it. You should explain very clearly that these violations are in breach of company policy and unacceptable. In that scenario, you can say that, in light of his experience and service to the company, the company is willing to give him a second chance; however, if there is any repeat of these violations, then you will have no choice but to resort to disciplinary action or terminate his employment. If it is a private conversation, then there should be no risk in terms of harming his reputation within the company.

If you are his boss, then it is your responsibility to ensure he is complying with company policies and procedures, and it is your responsibility to discipline him, if necessary. If you try to avoid confronting him on this face-to-face, then I am afraid that is just going to make you come across as a weak Manager, and you may give him the impression that he will be able to get away with breaking the rules in future.

I see a few issues here, some are already mentioned above.

1. It is a management failure that you have such a low bus factor. You should deal with this immediately irrespective of the outcome of the ethics investigation. Having a high key person risk affects your organization, the employee (they are always "on call", and normally can't be moved within the organization).




2. Tolerating this behavior tells your staff that you are willing to accept ethics violations "if you are important enough". Is that really the kind of culture you want to promote? Hey, steal from me and as long as you are critical its okay. This leads to a toxic work environment.




3. Firing this person would set a great example for the rest of the staff, who undoubtedly are aware or have heard the same rumors you have and would lose their faith in management if nothing is done.

How can I address this issue effectively and in the best interest of
the organization? I cannot afford to expel him from our team, and at
the same time I do not want him to repeat these bad practices in the
future.

It is in the best interest of the organization not to bleed money. If any of your other staff (who I am sure have heard the same things as you) complain to an external body (a judge for example), you risk being charged as someone actively enabling this behavior. You and/or your company may also be held liable for all the illegal gains you enjoyed while knowing about the corruption.