Before you start considering your options about how to deal with your co-worker, it's important for you to understand the management stance and your workplace's policies. Some companies have detailed instructions on how to handle problems in the work environment. Unfortunately, some do not have clear instructions.
If your workplace has an employee manual, check to see what it says about ethical behaviour in the workplace. Your first responsibility is to do your best to follow those rules, if you want to address the problem without getting yourself into trouble.
If your workplace doesn't have an official policy or the instructions are meant to deal with serious cases of fraud, embezzlement or other major crimes, you'll need to use your own judgement. Sometimes you can correct a problem through a simple face to face discussion or an intervention at co-worker level. Try to engage the support of your other co-workers without turning it into a lynch-mob mentality or oppressive atmosphere and do record the 'proceedings', to avoid a later backlash and accusations from the 'accused.'
If all your efforts fail to provide the correct result, you may need to go to your manager, your co-worker's manager or a human relations (HR) representative.
One option you might have if the co-worker's behaviour doesn't directly impact your job or the way the workplace functions is to limit your interaction with the other employee as much as possible. You shouldn't ignore any behaviour that could lead to bigger problems, but if it's just a matter of hearing one dubious story after another, removing yourself from the conversation may be your best option.
You can't ignore or avoid the dishonest coworker, you have a responsibility to decide upon a course of action.
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