indice manual de certificación acfe

Fraud Examiners Manual

� Main Table of Contents

� Preface and Introduction

� Financial Transactions & Fraud Schemes

� Law

� Investigation

� Fraud Prevention & Deterrence

� Copyright and Bibliography

©2011 Association of Certified Fraud Examiners. All rIghTs rEsErvEd. The ACFE logo is a trademark owned by the Association of Certified Fraud Examiners, Inc.

2011 International Edition

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financial transactions & fraud schemes

� Table of Contents

� Accounting Concepts

� Management’s and Auditors’ responsibilities

� Financial statement Fraud

� Asset Misappropriation: Cash receipts

� Asset Misappropriation: Fraudulent disbursements

� Asset Misappropriation: Inventory and Other Assets

� Bribery and Corruption

� Theft of Intellectual Property

� Financial Institution Fraud

� Cheque and Credit Card Fraud

� Insurance Fraud

� health Care Fraud

� Consumer Fraud

� Computer and Internet Fraud

� Public sector Fraud

HOME | FINANCIAL TRANSACTIONS & FRAUD SCHEMES | LAW | INVESTIGATION | FRAUD PREVENTION & DETERRENCE | SEARCH




law


� Overview of the legal system

� The law related to Fraud

� Bankruptcy (Insolvency) Fraud

� securities Fraud

� Money laundering

� Individual rights

� The Civil Justice system

� The Criminal Justice system

� Evidence

� Testifying as a Witness

HOME | FINANCIAL TRANSACTIONS & FRAUD SCHEMES | LAW | INVESTIGATION | FRAUD PREVENTION & DETERRENCE | SEARCH





� Analysing documents

� Interview Theory and Application

� Covert Examinations

� sources of Information

� Accessing Information Online

� data Analysis and reporting Tools

� digital Forensics

� Tracing Illicit Transactions

� reporting standards

� Fraud Examination Checklist

� sample reports

� Engagement Contracts and Opinion letters

investigationHOME | FINANCIAL TRANSACTIONS & FRAUD SCHEMES | LAW | INVESTIGATION | FRAUD PREVENTION & DETERRENCE | SEARCH





� Understanding human Behaviour

� Theories of Crime Causation

� White-Collar Crime

� Organisational Crime

� Occupational Fraud

� Fraud Prevention Programs

� Fraud risk Assessment

� Ethics for Fraud Examiners

� ACFE Code of Professional Ethics

� CFE Code of Professional standards

fraud prevention & deterrenceHOME | FINANCIAL TRANSACTIONS & FRAUD SCHEMES | LAW | INVESTIGATION | FRAUD PREVENTION & DETERRENCE | SEARCH

FINANCIAL TRANSACTIONS AND FRAUD SCHEMES

2011 Fraud Examiners Manual (International) 1.i

FRAUD EXAMINERS MANUAL INTERNATIONAL VERSION

TABLE OF CONTENTS

OCCUPATIONAL FRAUDS

ACCOUNTING CONCEPTS Accounting Basics ........................................................................................................................ 1.101

Accounts and the Accounting Cycle .................................................................................. 1.102 Journal Entries ....................................................................................................................... 1.104 Accounting Methods ............................................................................................................ 1.104

Financial Statements .................................................................................................................... 1.105 Balance Sheet ......................................................................................................................... 1.106 Income Statement ................................................................................................................. 1.108 Statement of Owners’ Equity .............................................................................................. 1.110 Statement of Cash Flows ..................................................................................................... 1.112

Cash Flows from Operations ....................................................................................... 1.113 Cash Flows from Investing Activities ......................................................................... 1.114 Cash Flows from Financing Activities ........................................................................ 1.114

Users of Financial Statements ............................................................................................. 1.114 MANAGEMENT'S AND AUDITORS' RESPONSIBILITIES Management .................................................................................................................................. 1.201

The Treadway Commission ................................................................................................. 1.201 Mandatory Independent Audit Committee ................................................................ 1.202 Written Charter ............................................................................................................... 1.202 Resources and Authority ............................................................................................... 1.202 Informed, Vigilant, and Effective Audit Committees ............................................... 1.202

The COSO Reports .............................................................................................................. 1.202 Internal Control—Integrated Framework .................................................................. 1.202 Enterprise Risk Management—Integrated Framework ............................................ 1.203 COSO Guidance for Smaller Public Companies ....................................................... 1.204

Document Retention Policies .............................................................................................. 1.205 What Documents Should Be Kept? ............................................................................ 1.206 Document Storage .......................................................................................................... 1.206 Document Destruction .................................................................................................. 1.207 DRP Managers ................................................................................................................ 1.207

Fraud Prevention Programs ................................................................................................. 1.207 Corporate Governance ................................................................................................................ 1.208

The Importance of Corporate Governance ...................................................................... 1.208 The Organisation for Economic Cooperation and Development ................................. 1.208

Propietario

Resaltado


1.ii 2011 Fraud Examiners Manual (International)

MANAGEMENT'S AND AUDITORS' RESPONSIBILITIES (CONT.) The OECD Principles of Corporate Governance ..................................................... 1.209

External Auditors ......................................................................................................................... 1.220 International Standard on Auditing (ISA) 240, The Auditor’s Responsibility to Consider Fraud in the Audit of Financial Statements ........................................................ 1.220

Purpose of the Standard ................................................................................................ 1.220 Characteristics of Fraud ................................................................................................. 1.220 Responsibility for the Prevention and Detection of Fraud ...................................... 1.223 Responsibilities of the Auditor ..................................................................................... 1.223 Objectives ........................................................................................................................ 1.224 Definitions ....................................................................................................................... 1.224 Professional Scepticism ................................................................................................. 1.225 Discussion Among the Engagement Team ................................................................ 1.225 Risk Assessment Procedures and Related Activities ................................................. 1.225 Identification and Assessment of the Risks of Material Misstatement Due to Fraud ............................................................................................................... 1.228 Responses to the Assessed Risks of Material Misstatement Due to Fraud ........... 1.229 Evaluation of Audit Evidence ...................................................................................... 1.230 Auditor Unable to Continue the Engagement ........................................................... 1.231 Management Representations ....................................................................................... 1.232 Communications to Management and with Those Charged with Governance .... 1.232 Communications to Regulatory and Enforcement Authorities ............................... 1.233 Documentation ............................................................................................................... 1.233 Appendix ......................................................................................................................... 1.234

International Principles for Auditor Oversight ................................................................ 1.236 The International Organisation of Securities Commissions’ Principles for Auditor Oversight ............................................................................................... 1.237 The Public Interest Oversight Board ......................................................................... 1.244

International Standards for Government Auditing .......................................................... 1.245 The International Organisation of Supreme Audit Institutions ............................. 1.245 Professional Framework ................................................................................................ 1.245

Internal Auditors .......................................................................................................................... 1.254 Standard 1210—Proficiency ................................................................................................ 1.254

1210.A2 ............................................................................................................................ 1.254 Standard 1220—Due Professional Care ............................................................................ 1.254

1220.A1 ............................................................................................................................ 1.255 1220.A3 ............................................................................................................................ 1.255

Standard 2110—Governance .............................................................................................. 1.255 2110.A1 ............................................................................................................................ 1.255

Standard 2120—Risk Management .................................................................................... 1.256 2120.A1 ............................................................................................................................ 1.256 2120.A2 ............................................................................................................................ 1.256

Standard 2130—Control ...................................................................................................... 1.256


2011 Fraud Examiners Manual (International) 1.iii

MANAGEMENT'S AND AUDITORS' RESPONSIBILITIES (CONT.) 2130.A1 ............................................................................................................................ 1.256

Standard 2210—Engagement Objectives .......................................................................... 1.256 2110.A1 ............................................................................................................................ 1.256 2110.A2 ............................................................................................................................ 1.257

IIA's IPPF—Practice Guide: Internal Auditing and Fraud ..................................................... 1.257 Internal Audit's Role in Fighting Fraud ...................................................................... 1.257 Other Roles and Responsibilities for Fraud Prevention and Detection................. 1.258

Certified Fraud Examiners .......................................................................................................... 1.259 Help Resolve Allegations of Fraud ..................................................................................... 1.259 Obtain Evidence .................................................................................................................... 1.259 Take Statements ..................................................................................................................... 1.260 Write Reports ......................................................................................................................... 1.260 Testify to Findings ................................................................................................................ 1.260 Assist in the Detection and Prevention of Fraud ............................................................. 1.260

FINANCIAL STATEMENT FRAUD What Is Financial Statement Fraud? ......................................................................................... 1.303 Why Financial Statement Fraud Is Committed ....................................................................... 1.303 Trends in Financial Statement Fraud ........................................................................................ 1.305 Financial Statement Fraud Schemes .......................................................................................... 1.305

Fictitious Revenues ............................................................................................................... 1.306 Sales with Conditions ..................................................................................................... 1.307 What Red Flags Are Associated with Fictitious Revenues? ..................................... 1.307

Timing Differences (Including Premature Revenue Recognition) ................................ 1.308 Premature Revenue Recognition .................................................................................. 1.308 Long-Term Contracts .................................................................................................... 1.310 Channel Stuffing ............................................................................................................. 1.310 Recording Expenses in the Wrong Period ................................................................. 1.311 What Red Flags Are Associated with Timing Differences (Including Premature Revenue Recognition)? ........................................................................... 1.311

Improper Asset Valuation .................................................................................................... 1.312 Inventory Valuation ....................................................................................................... 1.312 Accounts Receivable ...................................................................................................... 1.313 Business Combinations.................................................................................................. 1.314 Fixed Assets ..................................................................................................................... 1.314 Understating Assets ........................................................................................................ 1.316 Misclassifying Assets ...................................................................................................... 1.316 What Red Flags Are Associated with Improper Asset Valuation? .......................... 1.316

Concealed Liabilities and Expenses .................................................................................... 1.316 Liability/Expense Omissions ....................................................................................... 1.317 Capitalised Expenses ...................................................................................................... 1.319


1.iv 2011 Fraud Examiners Manual (International)

FINANCIAL STATEMENT FRAUD (CONT.) What Red Flags Are Associated with Concealed Liabilities and Expenses? .......... 1.320

Improper Disclosures ........................................................................................................... 1.321 Liability Omissions ......................................................................................................... 1.321 Subsequent Events ......................................................................................................... 1.321 Related-Party Transactions ........................................................................................... 1.322 Accounting Changes ...................................................................................................... 1.323 What Red Flags Are Associated with Improper Disclosures? ................................. 1.323

What Red Flags Are Associated with Financial Statement Fraud Generally? ..................... 1.324 Detection of Fraudulent Financial Statement Schemes ......................................................... 1.325 Financial Statement Analysis ...................................................................................................... 1.327

Percentage Analysis—Horizontal and Vertical ................................................................. 1.328 Vertical Analysis Discussion ......................................................................................... 1.329 Horizontal Analysis Discussion .................................................................................... 1.330

Ratio Analysis ......................................................................................................................... 1.330 Common Financial Ratios ............................................................................................. 1.331

Tax Return Review ................................................................................................................ 1.334 Interviews in Fraudulent Financial Statement Cases .............................................................. 1.334

Interviewing Techniques ...................................................................................................... 1.335 The Interview .................................................................................................................. 1.337

Prevention of Financial Statement Fraud ................................................................................. 1.343 Internal Auditors ................................................................................................................... 1.343 Management ........................................................................................................................... 1.343

Reduce the Situational Pressures that Encourage Financial Statement Fraud ...... 1.343 Reduce the Opportunity to Commit Fraud ................................................................ 1.344 Reduce the Rationalisation of Fraud—Strengthen Employee Personal Integrity ........................................................................................................ 1.344

ASSET MISAPPROPRIATION: CASH RECEIPTS Skimming ....................................................................................................................................... 1.401

Sales Skimming ...................................................................................................................... 1.402 Register Manipulation .................................................................................................... 1.404 Skimming During Nonbusiness Hours ....................................................................... 1.405 Skimming of Off-Site Sales ........................................................................................... 1.405 Poor Collection Procedures .......................................................................................... 1.406 Understated Sales ........................................................................................................... 1.407 Theft of Cheques Received Through the Mail ........................................................... 1.409

Cheque for Currency Substitutions .................................................................................... 1.411 Skimming Receivables .......................................................................................................... 1.412

Forcing Account Balances or Destroying Transaction Records ............................. 1.412 Lapping ............................................................................................................................ 1.413 Stolen Statements ........................................................................................................... 1.414


2011 Fraud Examiners Manual (International) 1.v

ASSET MISAPPROPRIATION: CASH RECEIPTS (CONT.) False Account Entries .................................................................................................... 1.415

Inventory Padding ................................................................................................................. 1.416 Detection of Skimming Schemes ........................................................................................ 1.417

Receipt or Sales Level Detection.................................................................................. 1.417 Journal Entry Review ..................................................................................................... 1.417 Detecting Lapping of Sales or Receivables ................................................................. 1.417

Prevention of Skimming Schemes ...................................................................................... 1.418 Receipt or Sales Level Control ..................................................................................... 1.418 General Controls ............................................................................................................ 1.418 Skimming Controls......................................................................................................... 1.418

Cash Larceny ................................................................................................................................. 1.419 Incoming Cash ....................................................................................................................... 1.420

Theft of Cash from the Register .................................................................................. 1.420 Other Larceny of Sales and Receivables ..................................................................... 1.423

Cash Larceny from the Deposit .......................................................................................... 1.424 Deposit Lapping ............................................................................................................. 1.428 Deposits in Transit ......................................................................................................... 1.428

Detection of Cash Larceny .................................................................................................. 1.428 Receipt Recording .......................................................................................................... 1.428 Control Objectives ......................................................................................................... 1.429 Analytical Review ........................................................................................................... 1.429 Detection at the Register ............................................................................................... 1.430 Cash Account Analysis .................................................................................................. 1.430

Prevention of Cash Larceny ................................................................................................ 1.430 Segregation of Duties ..................................................................................................... 1.430 Assignment Rotation and Mandatory Vacations ....................................................... 1.431 Surprise Cash Counts and Procedure Supervision .................................................... 1.431 Physical Security of Cash ............................................................................................... 1.431

ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS Register Disbursement Schemes ................................................................................................ 1.501

False Refunds ......................................................................................................................... 1.501 Fictitious Refunds ........................................................................................................... 1.503 Overstated Refunds ........................................................................................................ 1.503 Credit Card Refunds ...................................................................................................... 1.503

False Voids ............................................................................................................................. 1.504 Concealing Register Disbursement Schemes .................................................................... 1.507

Small Disbursements ...................................................................................................... 1.508 Destroying Records ........................................................................................................ 1.508

Detection of Register Disbursement Schemes ................................................................. 1.508 Fictitious Refunds or Voided Sales .............................................................................. 1.508


1.vi 2011 Fraud Examiners Manual (International)

ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS (CONT.) Review and Analysis of Decreases in Gross Sales and/or Increases in Returns and Allowances ............................................................................................. 1.509 Register Disbursement Scheme Red Flags ................................................................. 1.509

Prevention of Register Disbursement Schemes ................................................................ 1.510 Cheque Tampering Schemes ...................................................................................................... 1.510

Forged Maker Schemes ........................................................................................................ 1.511 Obtaining the Cheque .................................................................................................... 1.511 To Whom Is the Cheque Made Payable? .................................................................... 1.512 Forging the Signature ..................................................................................................... 1.514 Converting the Cheque .................................................................................................. 1.516

Forged Endorsement Schemes ........................................................................................... 1.516 Intercepting Cheques Before Delivery ........................................................................ 1.516 Theft of Returned Cheques .......................................................................................... 1.518 Re-Routing the Delivery of Cheques ........................................................................... 1.519 Converting the Stolen Cheque ...................................................................................... 1.519

Altered Payee Schemes ......................................................................................................... 1.520 Altering Cheques Prepared by Others: Inserting a New Payee ............................... 1.520 Altering Cheques Prepared by Others: “Tacking On” ............................................. 1.522 Altering Cheques Prepared by the Fraudster: Erasable Ink ..................................... 1.522 Altering Cheques Prepared by the Fraudster: Blank Cheques ................................. 1.523 Converting Altered Cheques ......................................................................................... 1.523

Authorised Maker Schemes ................................................................................................. 1.523 Overriding Controls Through Intimidation ............................................................... 1.524 Poor Controls .................................................................................................................. 1.526

Concealing Cheque Tampering Schemes ........................................................................... 1.526 The Fraudster Reconciling the Bank Statement ........................................................ 1.527 Re-Alteration of Cheques .............................................................................................. 1.528 Miscoding Fraudulent Cheques .................................................................................... 1.528 Re-Issuing Intercepted Cheques .................................................................................. 1.529 Bogus Supporting Documents ..................................................................................... 1.530

Detection of Cheque Tampering Schemes ........................................................................ 1.530 Account Analysis Through Cut-Off Statements ....................................................... 1.530 Bank Reconciliations ...................................................................................................... 1.530 Bank Confirmation ......................................................................................................... 1.531 Cheque-Tampering Red Flags ...................................................................................... 1.531

Prevention of Cheque Tampering Schemes ...................................................................... 1.532 Cheque Disbursement Controls ................................................................................... 1.532 Bank-Assisted Controls ................................................................................................. 1.533 Physical Tampering Prevention .................................................................................... 1.533 Cheque Theft Control Procedures ............................................................................... 1.534

Billing Schemes ............................................................................................................................. 1.534 Invoicing Via Shell Companies ........................................................................................... 1.535


2011 Fraud Examiners Manual (International) 1.vii

ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS (CONT.) Forming a Shell Company ............................................................................................. 1.535 Submitting False Invoices ............................................................................................. 1.537 Self-Approval of Fraudulent Invoices ......................................................................... 1.538 “Rubber Stamp” Supervisors ........................................................................................ 1.538 Reliance on False Documents ...................................................................................... 1.539 Collusion .......................................................................................................................... 1.539 Purchases of Services Rather than Goods .................................................................. 1.539 Pass-Through Schemes .................................................................................................. 1.540

Invoicing Via Nonaccomplice Vendors ............................................................................. 1.540 Pay-and-Return Schemes ............................................................................................... 1.540 Overbilling with a Nonaccomplice Vendor’s Invoices ............................................. 1.542

Personal Purchases With Company Funds........................................................................ 1.542 Personal Purchases Through False Invoicing ............................................................ 1.542 Personal Purchases on Credit Cards or Other Company Accounts ....................... 1.545

Detection ................................................................................................................................ 1.549 Analytical Review ........................................................................................................... 1.549 Computer-Assisted Analytical Review ........................................................................ 1.549 Statistical Sampling ......................................................................................................... 1.550 Vendor or Outsider Complaints .................................................................................. 1.550 Site Visits—Observation ............................................................................................... 1.550 Sample Audit Program .................................................................................................. 1.550

Prevention of Billing Schemes ............................................................................................ 1.552 Education (Training) ...................................................................................................... 1.553 Compensation ................................................................................................................. 1.553 Proper Documentation .................................................................................................. 1.553 Proper Approvals ........................................................................................................... 1.553 Segregation of Duties ..................................................................................................... 1.553 Hotlines ............................................................................................................................ 1.553 Competitive Bidding ...................................................................................................... 1.553 Prevention Checklist ...................................................................................................... 1.554

Payroll Fraud Schemes ................................................................................................................ 1.554 Ghost Employees .................................................................................................................. 1.555

Adding the Ghost to the Payroll .................................................................................. 1.555 Collecting Timekeeping Information .......................................................................... 1.558 Issuing the Ghost’s Paycheque ..................................................................................... 1.559 Delivery of the Paycheque ............................................................................................ 1.559

Falsified Hours and Salary ................................................................................................... 1.560 Manually Prepared Timecards ...................................................................................... 1.561 Time Clocks and Other Automated Timekeeping Systems ..................................... 1.565 Rates of Pay ..................................................................................................................... 1.565

Commission Schemes ........................................................................................................... 1.565 Fictitious Sales ................................................................................................................. 1.565


1.viii 2011 Fraud Examiners Manual (International)

ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS (CONT.) Altered Sales .................................................................................................................... 1.567 Altering Commission Rates .......................................................................................... 1.568

Detection of Payroll Schemes ............................................................................................. 1.568 Independent Payroll Distribution ................................................................................ 1.568 Analysis of Payee Address or Accounts ...................................................................... 1.568 Duplicate Identification Numbers ............................................................................... 1.568 Overtime Authorisation ................................................................................................ 1.568 Commissions ................................................................................................................... 1.568 Analysis of Deductions from Payroll Cheques .......................................................... 1.569 Other Detection Methods ............................................................................................. 1.569

Prevention of Payroll Schemes ............................................................................................ 1.569 Segregation of Duties ..................................................................................................... 1.570 Periodic Review and Analysis of Payroll ..................................................................... 1.570 Indicators of Payroll Fraud ........................................................................................... 1.571

Expense Reimbursement Schemes ............................................................................................ 1.572 Mischaracterised Expense Reimbursements ..................................................................... 1.573 Overstated Expense Reimbursements ............................................................................... 1.576

Altered Receipts .............................................................................................................. 1.576 Overpurchasing ............................................................................................................... 1.578 Overstating Another Employee’s Expenses ............................................................... 1.578 Orders to Overstate Expenses ..................................................................................... 1.578

Fictitious Expense Reimbursements .................................................................................. 1.579 Producing Fictitious Receipts ....................................................................................... 1.579 Obtaining Blank Receipts from Vendors .................................................................... 1.579 Claiming the Expenses of Others ................................................................................ 1.581

Multiple Reimbursements .................................................................................................... 1.581 Detection of Expense Reimbursement Schemes ............................................................. 1.582

Review and Analysis of Expense Accounts ................................................................ 1.582 Detailed Review of Expense Reports .......................................................................... 1.582

Prevention of Expense Reimbursement Schemes ............................................................ 1.582 Detailed Expense Reports: Submission and Review ................................................. 1.582

ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS Misuse of Inventory and Other Assets ..................................................................................... 1.601

The Costs of Inventory Misuse ........................................................................................... 1.601 Theft of Inventory and Other Assets ........................................................................................ 1.602

Larceny Schemes ................................................................................................................... 1.602 The False Sale .................................................................................................................. 1.605

Asset Requisitions and Transfers ........................................................................................ 1.605 Purchasing and Receiving Schemes .................................................................................... 1.606

Falsifying Incoming Shipments .................................................................................... 1.607


2011 Fraud Examiners Manual (International) 1.ix

ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS (CONT.) False Shipments of Inventory and Other Assets .............................................................. 1.607 Concealing Inventory Shrinkage ......................................................................................... 1.609

Altered Inventory Records ............................................................................................ 1.612 Fictitious Sales and Accounts Receivable ................................................................... 1.612 Write-Off of Inventory and Other Assets .................................................................. 1.613 Physical Padding ............................................................................................................. 1.613

Detection of Inventory Schemes ........................................................................................ 1.613 Statistical Sampling ......................................................................................................... 1.613 Perpetual Inventory Records ........................................................................................ 1.613 Shipping Documents ..................................................................................................... 1.614 Physical Inventory Counts ............................................................................................ 1.614 Analytical Review ........................................................................................................... 1.614 Computer-Generated Trend Analysis ......................................................................... 1.615 Detailed Audit Program ................................................................................................ 1.616

Prevention of Inventory Schemes ...................................................................................... 1.617 Proper Documentation .................................................................................................. 1.617 Segregation of Duties ..................................................................................................... 1.618 Independent Checks ...................................................................................................... 1.618 Physical Safeguards ........................................................................................................ 1.618

BRIBERY AND CORRUPTION Bribery ........................................................................................................................................... 1.701

Kickback Schemes................................................................................................................. 1.702 Diverting Business to Vendors ..................................................................................... 1.704 Overbilling Schemes ...................................................................................................... 1.704 Other Kickback Schemes .............................................................................................. 1.706 Kickback Payments ........................................................................................................ 1.706

Bid-Rigging Schemes ............................................................................................................ 1.707 The Presolicitation Phase .............................................................................................. 1.707 The Solicitation Phase .................................................................................................... 1.711 The Submission Phase ................................................................................................... 1.712

Economic Extortion ............................................................................................................. 1.713 Illegal Gratuities ..................................................................................................................... 1.713 Methods of Making Illegal Payments ................................................................................. 1.714

Gifts, Travel, and Entertainment ................................................................................. 1.714 Cash Payments ................................................................................................................ 1.714 Checks and Other Financial Instruments ................................................................... 1.715 Hidden Interests ............................................................................................................. 1.715 Loans ................................................................................................................................ 1.715 Payment of Credit Card Bills ........................................................................................ 1.715 Transfers at Other than Fair Market Value ................................................................ 1.715


1.x 2011 Fraud Examiners Manual (International)

BRIBERY AND CORRUPTION (CONT.) Promises of Favourable Treatment ............................................................................. 1.715

Detection of Bribery Schemes ................................................................................................... 1.716 Red Flags of Bribery Schemes ............................................................................................. 1.716

The Corrupt Recipient ................................................................................................... 1.716 The Corrupt Payer .......................................................................................................... 1.717 General Purchasing ........................................................................................................ 1.717 Presolicitation .................................................................................................................. 1.717 Bid Solicitation ................................................................................................................ 1.718 Bid Submission or Contract Acceptance .................................................................... 1.719

Methods of Proving Corrupt Payments ............................................................................. 1.720 The Business Profile—Analysis ................................................................................... 1.720 Sources of Information for the Business Profile ....................................................... 1.722

Proving On-Book Payments ................................................................................................ 1.722 Fictitious Disbursement Schemes ................................................................................ 1.722 Ghost Employee Schemes ............................................................................................ 1.726 Overbilling Schemes ...................................................................................................... 1.726

Proving Off-Book Payments ............................................................................................... 1.727 Indirect Evidence of Unrecorded Sales on the Suspect Company’s Books and Records ..................................................................................................... 1.727 Unbalanced Ratios of Costs to Sales ........................................................................... 1.727 Investigation in the Marketplace .................................................................................. 1.728 Proving Payments in Cash ............................................................................................ 1.728

Conflicts of Interest ..................................................................................................................... 1.730 Purchase Schemes ................................................................................................................. 1.732

Unique Assets ................................................................................................................. 1.734 Turnaround Sales ............................................................................................................ 1.735

Sales Schemes......................................................................................................................... 1.735 Underbillings ................................................................................................................... 1.735 Writing Off Sales ............................................................................................................ 1.736

Other Schemes ....................................................................................................................... 1.736 Business Diversions ....................................................................................................... 1.736 Resource Diversions ...................................................................................................... 1.736 Financial Interest in Companies Under Perpetrator’s Supervision ......................... 1.737 Financial Disclosure ....................................................................................................... 1.737 Appearance of Conflict of Interest .............................................................................. 1.737

Detection of Conflicts of Interest ...................................................................................... 1.738 Tips and Complaints ...................................................................................................... 1.738 Comparison of Vendor Addresses with Employee Addresses ................................ 1.738 Review of Vendor Ownership Files ............................................................................ 1.738 Review of Exit Interviews and Comparisons of Vendor Addresses to Addresses of Subsequent Employers ....................................................................... 1.738


2011 Fraud Examiners Manual (International) 1.xi

BRIBERY AND CORRUPTION (CONT.) Interviews of Purchasing Personnel for Favourable Treatment of One or More Vendors .............................................................................................................. 1.739 Policies Requiring Certain Employees to Provide the Names and Employers of Immediate Family Members ............................................................. 1.739

Prevention of Conflicts of Interest ..................................................................................... 1.739 THEFT OF INTELLECTUAL PROPERTY Competitive Intelligence (CI) Versus Espionage .................................................................... 1.802 Open Sources of Information .................................................................................................... 1.803

Why Do Companies Resort to Corporate Espionage? .................................................... 1.804 The Bootstrap Effect ............................................................................................................ 1.806

The Intelligence Pyramid ............................................................................................................ 1.807 Fundamental Intelligence Techniques ................................................................................ 1.807 Basic Sources .......................................................................................................................... 1.807

Industry Analyst Reports ............................................................................................... 1.808 Electronic Sources .......................................................................................................... 1.808

Creative Sources .................................................................................................................... 1.809 Classified Ads .................................................................................................................. 1.809 Environmental Impact Statements .............................................................................. 1.810 Proxies .............................................................................................................................. 1.810 Posing as a Customer ..................................................................................................... 1.810

Building Financial Statements .................................................................................................... 1.811 How Income Statements Are Calculated ........................................................................... 1.812

Revenue Estimates ......................................................................................................... 1.812 Costs of Goods Sold ...................................................................................................... 1.812 Overhead ......................................................................................................................... 1.813

How Balance Sheets Are Calculated ................................................................................... 1.813 Nontraditional Sources ................................................................................................................ 1.814 A Corporate Spy Uses Open Sources: What of It? ................................................................. 1.815 Favourite Targets ......................................................................................................................... 1.816

Research and Development ................................................................................................. 1.816 Marketing ................................................................................................................................ 1.817 Manufacturing and Production ........................................................................................... 1.817 Human Resources ................................................................................................................. 1.817

How Information Is Lost ........................................................................................................... 1.817 Accident .................................................................................................................................. 1.818 Poor Information Security Procedures .............................................................................. 1.818

On-site Materials That Are Targeted ........................................................................... 1.818 Guarding Manual Systems ............................................................................................. 1.820 Guarding Information Stored in Electronic Format ................................................. 1.821

Basic Principles of Spying ........................................................................................................... 1.823


1.xii 2011 Fraud Examiners Manual (International)

THEFT OF INTELLECTUAL PROPERTY (CONT.) Recruited Spies ...................................................................................................................... 1.823

False Flag Recruitment .................................................................................................. 1.823 Recruiting by Justification ............................................................................................. 1.824 Trapping Recruits ........................................................................................................... 1.824

Counter-Recruitment Training ............................................................................................ 1.824 After Recruitment ................................................................................................................. 1.825

Targeted Information .................................................................................................... 1.825 Methods for Safely Collecting Data ............................................................................. 1.826 Communications Between the Employee and the Control ...................................... 1.826 Security Measures for the Recruit ................................................................................ 1.827 Planting Bugs .................................................................................................................. 1.827

Deception Techniques .......................................................................................................... 1.827 Employment Advertisements ....................................................................................... 1.828 Headhunter Scams.......................................................................................................... 1.828 Market Research Scams ................................................................................................. 1.828 Phoney Contract Bids .................................................................................................... 1.828

Infiltration Techniques ................................................................................................................ 1.829 Posing as an Employee or Contract Labourer .................................................................. 1.829 Stealing Badges ...................................................................................................................... 1.830 Moles and Sleepers ................................................................................................................ 1.831 Places Where Spies Snoop ................................................................................................... 1.831

Mailroom ......................................................................................................................... 1.832 Loading Docks ................................................................................................................ 1.832 Storage Areas ................................................................................................................... 1.832 Hotels ............................................................................................................................... 1.833

Warning Signs of Infiltrations ............................................................................................. 1.834 Countermeasures ................................................................................................................... 1.836

Transactional Intelligence ........................................................................................................... 1.837 Informants .............................................................................................................................. 1.837 Decoy Websites ..................................................................................................................... 1.838

Telling Good Lies ........................................................................................................................ 1.839 Visual Surveillance Against People ............................................................................................ 1.840

Pre-Recruitment Surveillance .............................................................................................. 1.840 Briefing Files on the Subject ................................................................................................ 1.841 Moving Surveillance .............................................................................................................. 1.841 Fixed Surveillance .................................................................................................................. 1.842

E-Mail ............................................................................................................................................ 1.842 Social Engineering ........................................................................................................................ 1.843

The Neophyte ........................................................................................................................ 1.843 The Power Broker ................................................................................................................. 1.843 The Systems Administrator ................................................................................................. 1.844 Fraudulent Surveys ................................................................................................................ 1.844


2011 Fraud Examiners Manual (International) 1.xiii

THEFT OF INTELLECTUAL PROPERTY (CONT.) Fake Prizes ............................................................................................................................. 1.844 Reverse Social Engineering .................................................................................................. 1.844 Countering Social Engineering ............................................................................................ 1.845

Cloaking and Misdirection .......................................................................................................... 1.846 Intelligence Needs ................................................................................................................. 1.846

Print Media ...................................................................................................................... 1.846 Database Searches .......................................................................................................... 1.847 Existing Staffing ............................................................................................................. 1.847 Security Surveys .............................................................................................................. 1.848

Cloaking Operations ............................................................................................................. 1.849 Trash and Waste Disposal ............................................................................................. 1.850 Deliveries and Shipments .............................................................................................. 1.850 Hours of Operation and Power Consumption .......................................................... 1.850 Emissions ......................................................................................................................... 1.850 Food Deliveries ............................................................................................................... 1.851 Computer Emanations .................................................................................................. 1.851 Travel Plans ..................................................................................................................... 1.851

Misdirection ........................................................................................................................... 1.852 Spotting False Suitors .................................................................................................... 1.852 Vendors and Suppliers ................................................................................................... 1.854 Technical Articles and Publications ............................................................................. 1.854 Consultants ...................................................................................................................... 1.854 Dealing with Employees Who Are Leaving ............................................................... 1.855 Hackers ............................................................................................................................ 1.855

Technical Surveillance ................................................................................................................. 1.856 Aerial Photography ............................................................................................................... 1.858 Bugging and Wiretapping ..................................................................................................... 1.858

The Insertion Point ........................................................................................................ 1.858 The Technology .............................................................................................................. 1.859 Warning Signs of Bugging ............................................................................................. 1.861 Preliminary Search Procedures ..................................................................................... 1.864

Video Surveillance ................................................................................................................. 1.867 Photographic Cameras.......................................................................................................... 1.868

Minicameras .................................................................................................................... 1.868 Digital Cameras ............................................................................................................... 1.868 Infrared Film ................................................................................................................... 1.869 Digital Cameras ............................................................................................................... 1.869

Cellular Telephones ............................................................................................................... 1.870 Monitoring Computer Emanations .................................................................................... 1.870 Tape Recorders ...................................................................................................................... 1.871 Computer System Penetrations ........................................................................................... 1.871

Investigating an Information Theft Case ................................................................................. 1.871


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THEFT OF INTELLECTUAL PROPERTY (CONT.) Program for Safeguarding Proprietary Information (SPI) ..................................................... 1.873

Task Force .............................................................................................................................. 1.873 Employee Awareness ............................................................................................................ 1.874 Nondisclosure Agreements .................................................................................................. 1.874 Document Classification ...................................................................................................... 1.875 Visitors .................................................................................................................................... 1.875 Offices ..................................................................................................................................... 1.875 Maintenance Workers ........................................................................................................... 1.876 Meeting Rooms ...................................................................................................................... 1.876 Quiet Rooms .......................................................................................................................... 1.876 Communications Equipment .............................................................................................. 1.876 Electronic Mail and Voice Mail ........................................................................................... 1.876 Computer Systems ................................................................................................................ 1.877 Faxing Documents ................................................................................................................ 1.878 Video Encryption .................................................................................................................. 1.878 Corporate Telephone Exchanges ........................................................................................ 1.878 Trade Shows and Public Events ......................................................................................... 1.879 Foreign Travel ........................................................................................................................ 1.879

Technical Surveillance Countermeasures (TSCM) Survey ..................................................... 1.879 Preventing Employee Theft of Proprietary Information ....................................................... 1.881

Employee Awareness ............................................................................................................ 1.881 Nondisclosure and Noncompetition Agreements ............................................................ 1.882 Make Sure Employees Know When Not to Speak .......................................................... 1.883 Exit Interviews ....................................................................................................................... 1.883

Protecting the Trade Secrets of Others .................................................................................... 1.884 FINANCIAL INSTITUTION FRAUD Embezzlement Schemes ............................................................................................................. 1.901

Types of Embezzlement Schemes ...................................................................................... 1.901 False Accounting Entries .............................................................................................. 1.901 Unauthorised Withdrawals ............................................................................................ 1.901 Unauthorised Disbursement of Funds to Outsiders ................................................. 1.901 Paying Personal Expenses from Bank Funds ............................................................. 1.902 Theft of Physical Property ............................................................................................ 1.902 Moving Money from Customers’ Dormant or Inactive Accounts ......................... 1.902 Unauthorised, Unrecorded Cash Payments ................................................................ 1.902 Theft and Other Unauthorised Use of Collateral ...................................................... 1.902

Detection Methods ............................................................................................................... 1.902 Loan Fraud .................................................................................................................................... 1.903

Financial Institution Failures as a Result of Real Estate Loan Fraud ............................ 1.903 Common Loan Fraud Schemes .......................................................................................... 1.903


2011 Fraud Examiners Manual (International) 1.xv

FINANCIAL INSTITUTION FRAUD (CONT.) Loans to Nonexistent Borrowers ................................................................................. 1.903 Sham Loans with Kickbacks and Diversion ............................................................... 1.903 Double-Pledging Collateral ........................................................................................... 1.904 Reciprocal Loan Arrangements .................................................................................... 1.904 Swapping Bad Loans—Daisy Chains .......................................................................... 1.904 Linked Financing ............................................................................................................ 1.904 False Applications with False Credit Information ..................................................... 1.904 Single-Family Housing Loan Fraud ............................................................................. 1.904 Construction Loans ........................................................................................................ 1.904

Red Flags of Loan Fraud ...................................................................................................... 1.908 Nonperforming Loans ................................................................................................... 1.908 High Turnover in Developer’s Personnel ................................................................... 1.909 High Turnover in Tenant Mix ...................................................................................... 1.909 Increased Change Orders .............................................................................................. 1.909 Missing Documentation ................................................................................................ 1.909 Loan Increases or Extensions, Replacement Loans .................................................. 1.911 Funds Transformation ................................................................................................... 1.912 Cash Flow Deficiencies ................................................................................................. 1.912 Change in Ownership Makeup ..................................................................................... 1.912

Disguised Transactions ......................................................................................................... 1.912 Real Estate Fraud ......................................................................................................................... 1.913

Appraisal Fraud ..................................................................................................................... 1.914 The Role of the Appraiser ............................................................................................. 1.914 Fundamentals of Real Estate Appraisals ..................................................................... 1.914 Determining “Value” ..................................................................................................... 1.914 Valuation Methods ......................................................................................................... 1.915 Fraudulent Appraisals .................................................................................................... 1.916 Uses for Fraudulent Appraisals .................................................................................... 1.916 Red Flags of “Made-as-Instructed” Appraisals .......................................................... 1.917 Detecting Fraudulent Appraisals .................................................................................. 1.917

Equity Skimming ................................................................................................................... 1.918 Property Flipping .................................................................................................................. 1.918 Nominee or Strawman Loans .............................................................................................. 1.919 Mortgage Pulling ................................................................................................................... 1.919

New Account Fraud Schemes .................................................................................................... 1.919 False Identification ................................................................................................................ 1.919 Business Accounts Using Stolen Cheques ......................................................................... 1.919 Personal Accounts Using Fraudulent Cheques ................................................................. 1.920 Prevention .............................................................................................................................. 1.920

Personal Accounts .......................................................................................................... 1.920 Business Accounts .......................................................................................................... 1.921

Detection ................................................................................................................................ 1.922


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FINANCIAL INSTITUTION FRAUD (CONT.) Money Transfer (Wire) Fraud Schemes .................................................................................... 1.922

Instantaneous Transfer ......................................................................................................... 1.922 Common Schemes ................................................................................................................ 1.923

Dishonest Bank Employees .......................................................................................... 1.923 Misrepresentation of Identity ....................................................................................... 1.923 System Password Security Compromised ................................................................... 1.923 Forged Authorisations ................................................................................................... 1.923 Unauthorised Entry and Interception ......................................................................... 1.923

Preventing and Detecting Wire Transfer Fraud ............................................................... 1.923 Business Audits and Other Controls ........................................................................... 1.923 Bank Audits ..................................................................................................................... 1.924

Automated Teller Machine (ATM) Fraud ................................................................................ 1.925 Detection ................................................................................................................................ 1.926

Advanced Fee Fraud .................................................................................................................... 1.926 Red Flags ................................................................................................................................ 1.926 Brokered Loans ..................................................................................................................... 1.927

Letter-of-Credit Fraud ................................................................................................................. 1.927 Inside/Outside Frauds ................................................................................................................ 1.927

Account Information Frauds ............................................................................................... 1.928 Trading Activities .................................................................................................................. 1.928

Prevention ..................................................................................................................................... 1.928 Loan Origination, Underwriting, Closing, Disbursement, and Servicing Segregation ......................................................................................................... 1.928 Committee Approval of All Large or Unusual Transactions .......................................... 1.928 Transfer Journal Entries and Orders Review .................................................................... 1.929 Independent Review of Loans ............................................................................................ 1.929 Management Review of Write-Offs ................................................................................... 1.929 Routine Examination of Officers’ Accounts .................................................................... 1.929 Proper Lending Policies ....................................................................................................... 1.929 Document Requirements for Standard Transactions ...................................................... 1.929 Information Verification (For Example, Loan Applications) ......................................... 1.930 Employee Training ................................................................................................................ 1.930 Standardised Procedures ...................................................................................................... 1.930

The Basel Committee on Banking Supervision ....................................................................... 1.931 The Basel Core Principles for Effective Banking Supervision ....................................... 1.932 The International Convergence of Capital Measurement and Capital Standards ........ 1.938 Capital Requirements ............................................................................................................ 1.938 The Basel II Framework ...................................................................................................... 1.939 Sound Practices for the Management and Supervision of Operational Risk ............... 1.941

Background ..................................................................................................................... 1.942 Industry Trends and Practices ...................................................................................... 1.943 Sound Practices ............................................................................................................... 1.944


2011 Fraud Examiners Manual (International) 1.xvii

CHEQUE AND CREDIT CARD FRAUD Cheque Fraud ............................................................................................................................... 1.1001

Counterfeiting Cheques ........................................................................................................ 1.1001 Signs of Counterfeit and Forged Cheques .................................................................. 1.1002

Cheque Fraud Vulnerabilities .............................................................................................. 1.1002 Cheque Theft ......................................................................................................................... 1.1002 Cheque Fraud Schemes ........................................................................................................ 1.1003

Paperhangers ................................................................................................................... 1.1003 Stop Payment Orders ..................................................................................................... 1.1003 Cheque Kiting ................................................................................................................. 1.1004 Demand Drafts ............................................................................................................... 1.1004 Third-Party Bill Paying Services ................................................................................... 1.1004 Travellers’ Cheques ........................................................................................................ 1.1005 Payroll Cheque Fraud .................................................................................................... 1.1005 Dumpster Diving ............................................................................................................ 1.1006 Scanning ........................................................................................................................... 1.1006 System Password Security Compromised ................................................................... 1.1006

Cheque Fraud Rings .................................................................................................................... 1.1006 Cheque Fraud Detection ............................................................................................................. 1.1007

FBI Profile of Cheque Fraud Activity ................................................................................ 1.1007 Detection Techniques ........................................................................................................... 1.1008

Cheque Fraud Prevention and Investigation ........................................................................... 1.1009 Cheque Fraud Investigations ............................................................................................... 1.1010 Cheque Fraud Prevention Tools ......................................................................................... 1.1011

Check Writing Pens ........................................................................................................ 1.1011 Fingerprint Identifiers .................................................................................................... 1.1012 Forensic Document Examination ................................................................................ 1.1012 Signature .......................................................................................................................... 1.1012 Handwriting ..................................................................................................................... 1.1013 Video Spectral Comparator .......................................................................................... 1.1013 Electrostatic Detection Apparatus ............................................................................... 1.1013

Credit Card Fraud ........................................................................................................................ 1.1013 Credit Card Schemes ............................................................................................................. 1.1013

Unauthorised Use of a Lost or Stolen Card ............................................................... 1.1013 Organised Crime Rings .................................................................................................. 1.1014 Advance Payments ......................................................................................................... 1.1014 Stolen Card Numbers .................................................................................................... 1.1014 Shave and Paste .............................................................................................................. 1.1015 De-Emboss/Re-Emboss ............................................................................................... 1.1015 Counterfeit Cards ........................................................................................................... 1.1015 Telephone/Mail Order Fraud ....................................................................................... 1.1016 Mail Theft ........................................................................................................................ 1.1016


1.xviii 2011 Fraud Examiners Manual (International)

CHEQUE AND CREDIT CARD FRAUD (CONT.) False Applications .......................................................................................................... 1.1016 Credit “Doctors” ............................................................................................................ 1.1016 True Name Fraud ........................................................................................................... 1.1016 Non-Receipt Fraud ........................................................................................................ 1.1017 Key-Enter Counterfeiting ............................................................................................. 1.1017 Creditmaster .................................................................................................................... 1.1017 Probing ............................................................................................................................. 1.1017 Skimming ......................................................................................................................... 1.1018 Pretext Calling ................................................................................................................. 1.1018 Account Takeover .......................................................................................................... 1.1018 Institutional Identity Theft and “Spoof” Sites ........................................................... 1.1018

Guidance for Cardholders ................................................................................................... 1.1019 Merchant Scams .................................................................................................................... 1.1020 Company Credit Cards ......................................................................................................... 1.1021

Prevention and Detection of Credit Card Fraud ..................................................................... 1.1021 Prevention .............................................................................................................................. 1.1023

Education Programs ...................................................................................................... 1.1023 Liaison with Law Enforcement .................................................................................... 1.1023

Technological Deterrents ..................................................................................................... 1.1023 Activation of Cards ........................................................................................................ 1.1024 CyberSource Advanced Fraud Screen ......................................................................... 1.1024 Computer Edits .............................................................................................................. 1.1024 Card Scrutiny at Point of Sale ....................................................................................... 1.1025 Smart Cards and Chip Cards ........................................................................................ 1.1025 Internet/Telephone Orders .......................................................................................... 1.1025

Electronic Bill Payment and Person-to-Person Payments ..................................................... 1.1027 Electronic Fund Transfer ..................................................................................................... 1.1027 Electronic Bill Presentment and Payment ......................................................................... 1.1028

Biller Direct Systems ...................................................................................................... 1.1028 Person to Person (P2P) Payment Systems ........................................................................ 1.1029

A Model of P2P: PayPal ................................................................................................ 1.1030 Types of Fraud ....................................................................................................................... 1.1030 Detection and Deterrence of Electronic Transfer Fraud ................................................ 1.1031

Issuance and Use of Access Devices ........................................................................... 1.1031 Operation of Payment Systems .................................................................................... 1.1032 Protection of Internet Addresses ................................................................................. 1.1033 Prevention of EFT Fraud in Other Companies ........................................................ 1.1033

INSURANCE FRAUD Types of Insurance Policies ........................................................................................................ 1.1101 Agent/Broker Fraud .................................................................................................................... 1.1102


2011 Fraud Examiners Manual (International) 1.xix

INSURANCE FRAUD (CONT.) Cash, Loan, and Dividend Cheques ................................................................................... 1.1102 Settlement Cheques ............................................................................................................... 1.1102 Premium Fraud ...................................................................................................................... 1.1102 Fictitious Payees .................................................................................................................... 1.1103 Fictitious Death Claims ........................................................................................................ 1.1103 Underwriting Irregularities ................................................................................................... 1.1103

Misrepresentation ........................................................................................................... 1.1103 False Information ........................................................................................................... 1.1103 Fictitious Policies ............................................................................................................ 1.1104 Surety and Performance Bond Schemes ..................................................................... 1.1104 Sliding ............................................................................................................................... 1.1104 Twisting ............................................................................................................................ 1.1104 Churning .......................................................................................................................... 1.1104

Vehicle Insurance Schemes ........................................................................................................ 1.1104 Ditching .................................................................................................................................. 1.1104 Past Posting ............................................................................................................................ 1.1105 Vehicle Repair ........................................................................................................................ 1.1105 Vehicle Smuggling ................................................................................................................. 1.1105 Phantom Vehicles ................................................................................................................. 1.1105 Staged Accidents .................................................................................................................... 1.1105

Two Vehicle Accident.................................................................................................... 1.1105 Three or More Vehicle Accident .................................................................................. 1.1106 Other Staged Accidents ................................................................................................. 1.1106

Inflated Damages .................................................................................................................. 1.1106 Vehicle Identification Number (VIN) Switch ................................................................... 1.1106 Rental Car Fraud ................................................................................................................... 1.1106

Property Schemes ......................................................................................................................... 1.1106 Inflated Inventory ................................................................................................................. 1.1107 Phoney or Inflated Thefts .................................................................................................... 1.1107 Paper Boats ............................................................................................................................ 1.1107

Life Insurance Schemes ............................................................................................................... 1.1107 Fraudulent Death Claims ..................................................................................................... 1.1107 Murder for Profit ................................................................................................................... 1.1107

Liability Schemes .......................................................................................................................... 1.1107 “Red Flags” of Insurance Fraud ................................................................................................ 1.1108 General Insurance Fraud Indicators.......................................................................................... 1.1111 Computer-Generated Detection Reports ................................................................................. 1.1112

Address Similarity Report .................................................................................................... 1.1112 Electronic Confirmations ..................................................................................................... 1.1112 Exception or Manual Override Reports ............................................................................ 1.1112

Workers’ Compensation Fraud .................................................................................................. 1.1112 Common Schemes ................................................................................................................ 1.1112


1.xx 2011 Fraud Examiners Manual (International)

INSURANCE FRAUD (CONT.) Premium Fraud ............................................................................................................... 1.1112 Agent Fraud ..................................................................................................................... 1.1114 Claimant Fraud ............................................................................................................... 1.1114 Organised Fraud ............................................................................................................. 1.1115

Red Flags ................................................................................................................................ 1.1116 Investigation Tips .................................................................................................................. 1.1119

Premium Fraud ............................................................................................................... 1.1119 Claimant Fraud ............................................................................................................... 1.1119

HEALTH CARE FRAUD Definition ...................................................................................................................................... 1.1201 Provider Fraud .............................................................................................................................. 1.1201

Provider Services Charged But Not Rendered ................................................................. 1.1201 Overutilisation ....................................................................................................................... 1.1201 Unnecessary Medical Testing .............................................................................................. 1.1202 Fictitious Providers – Bogus Doctors ................................................................................ 1.1202 Photocopied Claim Forms with Benefit Assignment Repeatedly Submitted by a Provider with New Date of Service ................................................................................ 1.1202 Double Billing ........................................................................................................................ 1.1202 Fictitious Diagnostic Codes ................................................................................................. 1.1202 Coding Fragmentation .......................................................................................................... 1.1203 Mutually Exclusive Procedures ........................................................................................... 1.1204 Upcoding ................................................................................................................................ 1.1204

Insured Fraud ............................................................................................................................... 1.1204 Fictitious Claims .................................................................................................................... 1.1204 Multiple Claims ...................................................................................................................... 1.1204 Alteration ................................................................................................................................ 1.1205 Ineligible Dependants ........................................................................................................... 1.1205 Doctor Shopping ................................................................................................................... 1.1205 Third-Party Fraud .................................................................................................................. 1.1205 Death of Insured ................................................................................................................... 1.1205 Red Flags ................................................................................................................................ 1.1206

Detection ......................................................................................................................... 1.1206 Employee Claims Fraud ....................................................................................................... 1.1206

Detection ......................................................................................................................... 1.1207 Prevention ....................................................................................................................... 1.1207

CONSUMER FRAUD Con Schemes ................................................................................................................................ 1.1301

Advance Fee Swindles and Debt Consolidation Schemes .............................................. 1.1302 Directory Advertising Schemes ........................................................................................... 1.1302


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CONSUMER FRAUD (CONT.) Merchandising Schemes ....................................................................................................... 1.1303 Personal Improvement Frauds ............................................................................................ 1.1303 Diploma Mills ........................................................................................................................ 1.1303 Modeling Schools .................................................................................................................. 1.1303 Direct Debit from Chequing Accounts ............................................................................. 1.1303 Equity-Skimming Schemes .................................................................................................. 1.1304 Fundraising, Nonprofits, and Religious Schemes ............................................................. 1.1304 Home-Based Businesses ....................................................................................................... 1.1304 Home Improvements ........................................................................................................... 1.1304 Money Manager or Financial Planner ................................................................................ 1.1304 Phone Card Schemes ............................................................................................................ 1.1304 Scavenger or Revenge Scheme ............................................................................................ 1.1304 Sweepstakes, Giveaways, and Prizes .................................................................................. 1.1305 College Scholarship Services ................................................................................................ 1.1305 Credit Repair .......................................................................................................................... 1.1305 Weight Loss Fraud ................................................................................................................ 1.1305 Other Con Schemes .............................................................................................................. 1.1305

Block Hustle .................................................................................................................... 1.1305 Pigeon Drop .................................................................................................................... 1.1305 Bank Examiner Swindle ................................................................................................ 1.1306 Jamaican Handkerchief or Envelope Switch .............................................................. 1.1306 The Obituary Hustle ...................................................................................................... 1.1306 Three-Card Monte .......................................................................................................... 1.1306 Poker Bunco .................................................................................................................... 1.1306 Missing-Heir Scheme ..................................................................................................... 1.1306 Gold Mine Swindle ......................................................................................................... 1.1307 Spanish Prisoner Game ................................................................................................. 1.1307 Murphy Game ................................................................................................................. 1.1307 Badger Game ................................................................................................................... 1.1307 Goat Pasture Scam ......................................................................................................... 1.1307

Telemarketing Fraud .................................................................................................................... 1.1307 Telemarketing Terminology ................................................................................................. 1.1308

Boiler Room Staff ........................................................................................................... 1.1308 Fronters ............................................................................................................................ 1.1308 Closers .............................................................................................................................. 1.1308 Verifiers ............................................................................................................................ 1.1308

Staff Exploitation .................................................................................................................. 1.1309 Telemarketing Suppliers ....................................................................................................... 1.1309

Turnkeys .......................................................................................................................... 1.1310 Independent Service Organisations ............................................................................. 1.1310 Factoring Companies ..................................................................................................... 1.1310 Cheque-Cashing Establishments .................................................................................. 1.1311


1.xxii 2011 Fraud Examiners Manual (International)

CONSUMER FRAUD (CONT.) Common Telemarketing Scams .......................................................................................... 1.1311

Senior Scams ................................................................................................................... 1.1311 Targeting the Unemployed ........................................................................................... 1.1312 Affinity Fraud .................................................................................................................. 1.1312 Consolation ..................................................................................................................... 1.1312 Toll-Free Numbers ......................................................................................................... 1.1313 Automatic Debits ........................................................................................................... 1.1313 Business Opportunities (Biz Ops) and Work-at-Home Schemes ........................... 1.1314 Fly and Buy ...................................................................................................................... 1.1314 Vending Machine and Pay Phone Scams .................................................................... 1.1315 Entrepreneurial Enterprises .......................................................................................... 1.1315 Employment Services .................................................................................................... 1.1315 Credit Services................................................................................................................. 1.1316 Credit Repair Scams ....................................................................................................... 1.1316 Prime-Rate Credit Cards ................................................................................................ 1.1316 Gold Cards ...................................................................................................................... 1.1316 Real Estate ....................................................................................................................... 1.1317 Art/Rare Items ............................................................................................................... 1.1317 Collectibles and Memorabilia ........................................................................................ 1.1318 Precious Stones ............................................................................................................... 1.1318 Precious Metals ............................................................................................................... 1.1319 International Calls .......................................................................................................... 1.1319 Selling Free Information................................................................................................ 1.1319 Scholarship Services ....................................................................................................... 1.1319 Charity Fronts ................................................................................................................. 1.1320 Door-to-Door Promotions ........................................................................................... 1.1320 Prizes, Sweepstakes, Discount Services ...................................................................... 1.1320 Magazine Subscriptions ................................................................................................. 1.1321 Office and Household Supplies ................................................................................... 1.1321 Phishing ........................................................................................................................... 1.1321 SMiShing or Tishing ....................................................................................................... 1.1323 Voice Phishing or Vishing ............................................................................................. 1.1323 Pharming .......................................................................................................................... 1.1323 Recovery Rooms ............................................................................................................. 1.1324

Ponzi and Pyramid Schemes ...................................................................................................... 1.1324 Definition ............................................................................................................................... 1.1324 Illegal Pyramid or Ponzi Scheme? ....................................................................................... 1.1325

Pyramid Schemes, Legal and Illegal ............................................................................. 1.1325 What’s the Difference Between an Illegal Pyramid and a Ponzi Scheme? ................... 1.1326 Categories of Ponzi Schemes .............................................................................................. 1.1328

Pure Cash Schemes ........................................................................................................ 1.1328 Product Fronts ................................................................................................................ 1.1330


2011 Fraud Examiners Manual (International) 1.xxiii

CONSUMER FRAUD (CONT.) Spotting Pyramid Schemes................................................................................................... 1.1332

Identity Theft ................................................................................................................................ 1.1334 The Profile .............................................................................................................................. 1.1334 Common Ways of Obtaining Information ........................................................................ 1.1335

Sorting Through Discarded Trash ............................................................................... 1.1335 Shoulder Surfing ............................................................................................................. 1.1336 Rifling Through CoWorkers’ Desk Drawers .............................................................. 1.1336 Theft of Mail—Incoming or Outgoing ....................................................................... 1.1336 Using an Accomplice Within the Organisation ......................................................... 1.1336 Soliciting Identifiers Through False Job Application Schemes ............................... 1.1337 Certifications, Diplomas, or Licences Placed On Workplace Walls ....................... 1.1337 Using Pretext, Ruse, or Gag Calls ................................................................................ 1.1337 Rental and Loan Applications ...................................................................................... 1.1337 Public Records ................................................................................................................ 1.1337 The Internet .................................................................................................................... 1.1338

Tracking Down the Thief .................................................................................................... 1.1338 Confronting the Fraudster ................................................................................................... 1.1339 Preventing False Identity Fraud .......................................................................................... 1.1339 What To Do If Your Identity Is Stolen ............................................................................. 1.1340

COMPUTER AND INTERNET FRAUD Computer Fraud ........................................................................................................................... 1.1401 Computer Hacking ....................................................................................................................... 1.1403

Definition ............................................................................................................................... 1.1403 Social Engineering ................................................................................................................. 1.1404 Hacker Computer Manipulation ......................................................................................... 1.1405

Trojan Horse ................................................................................................................... 1.1405 Trap Doors ...................................................................................................................... 1.1405 Salami Techniques .......................................................................................................... 1.1405 Logic Bombs ................................................................................................................... 1.1405 Data Diddling .................................................................................................................. 1.1406 Scavenging and Dumpster Diving ............................................................................... 1.1406 Data Leakage ................................................................................................................... 1.1406 Piggybacking/Impersonation ....................................................................................... 1.1406 Simulation and Modelling ............................................................................................. 1.1406 Wire Tapping .................................................................................................................. 1.1406 Network Weaving ........................................................................................................... 1.1406 Altering the Way a System Generates Passwords ...................................................... 1.1407 Buffer Overflow Exploits ............................................................................................. 1.1407 Privilege Escalation Exploits ........................................................................................ 1.1408 Backdoors ........................................................................................................................ 1.1408


1.xxiv 2011 Fraud Examiners Manual (International)

COMPUTER AND INTERNET FRAUD (CONT.) HTTP Exploits ............................................................................................................... 1.1408

Anti-Hacker Measures .......................................................................................................... 1.1409 Hacker Detection Measures ................................................................................................. 1.1410 Hacking Insurance ................................................................................................................ 1.1411

Electronic Mail ............................................................................................................................. 1.1411 E-Mail Security Concerns .................................................................................................... 1.1412

E-mail Ownership .......................................................................................................... 1.1412 Organisational Liability .................................................................................................. 1.1413

Computer Viruses ........................................................................................................................ 1.1414 Hoaxes .................................................................................................................................... 1.1415 Types and Terminology of Computer Viruses ................................................................. 1.1415

Macro Virus ..................................................................................................................... 1.1415 Boot Sector Viruses ........................................................................................................ 1.1416 Parasitic Viruses .............................................................................................................. 1.1416 TSR Viruses ..................................................................................................................... 1.1417 Application Software Viruses ....................................................................................... 1.1417 Multi-Partite Viruses ...................................................................................................... 1.1417 Polymorphic Viruses ...................................................................................................... 1.1418 Stealth Viruses ................................................................................................................. 1.1418 Mutation Engine Viruses ............................................................................................... 1.1418 Network Viruses ............................................................................................................. 1.1419 Worms .............................................................................................................................. 1.1419

Virus Carriers ......................................................................................................................... 1.1420 Virus Indicators ..................................................................................................................... 1.1420 Virus Protection .................................................................................................................... 1.1421 Antivirus Software Operation ............................................................................................. 1.1421

Conventional Disk Scanners ......................................................................................... 1.1421 Heuristic Scanners .......................................................................................................... 1.1421 Behaviour-Based Detection Scanners ......................................................................... 1.1422 Change Detection Scanners .......................................................................................... 1.1422 Inoculation ....................................................................................................................... 1.1422

Investigating Virus Infections ............................................................................................. 1.1422 Internet Fraud ............................................................................................................................... 1.1423

Typical Internet Schemes ..................................................................................................... 1.1423 Modem Hijacking ........................................................................................................... 1.1423 Internet Commerce ........................................................................................................ 1.1424 Get Rich Quick ............................................................................................................... 1.1424 Pyramid Schemes ............................................................................................................ 1.1424 Foreign Trusts ................................................................................................................. 1.1424 Chain Letters ................................................................................................................... 1.1425 Investment and Securities Fraud .................................................................................. 1.1425 Spamming ........................................................................................................................ 1.1425


2011 Fraud Examiners Manual (International) 1.xxv

COMPUTER AND INTERNET FRAUD (CONT.) Counterfeit Cheque Scams ............................................................................................ 1.1426 Phishing ........................................................................................................................... 1.1426 SMiShing or Tishing ....................................................................................................... 1.1429 Pharming .......................................................................................................................... 1.1430

Combating Internet Fraud ................................................................................................... 1.1430 Electronic Commerce .................................................................................................................. 1.1431

Applying Encryption to E-Commerce Security ................................................................ 1.1433 Smart Cards ..................................................................................................................... 1.1433

Insider Threats .............................................................................................................................. 1.1434 Characteristics ........................................................................................................................ 1.1435

Computer Security ....................................................................................................................... 1.1436 Effective Security .................................................................................................................. 1.1436

Securing the Communications Network ..................................................................... 1.1436 Passwords ........................................................................................................................ 1.1436 Other Network Security ................................................................................................ 1.1437

The Risk Assessment Process ............................................................................................. 1.1438 Internal Controls in the Data Centre ........................................................................................ 1.1438

Systems Maintenance ............................................................................................................ 1.1439 Implementation Controls ..................................................................................................... 1.1439 Computer Operations ........................................................................................................... 1.1440 System Software .................................................................................................................... 1.1440 Data Files ................................................................................................................................ 1.1440 Access and Telecommunication Controls ......................................................................... 1.1440 Segregation of Duties ........................................................................................................... 1.1441 Logs and History Files .......................................................................................................... 1.1441 Security Software ................................................................................................................... 1.1442

Internal Controls in Computer Applications ........................................................................... 1.1443 Control Techniques .............................................................................................................. 1.1443 Control Objectives ................................................................................................................ 1.1444 Evaluating Application Controls ......................................................................................... 1.1444 End-User Computing Internal Control ............................................................................. 1.1445

Conducting an Investigation Regarding Computer Crimes ................................................... 1.1445 PUBLIC SECTOR FRAUD False Claims and Statements ...................................................................................................... 1.1501

Examples of False Claims .................................................................................................... 1.1501 Detection ................................................................................................................................ 1.1501

Failure to Produce Documents in a Timely Manner ................................................. 1.1502 Failure to Respond to Inquiries in a Timely Manner ................................................ 1.1502 Inadequacies in Reporting Requirements ................................................................... 1.1502 Failure to Have Adequate Information Gathering and Retrieval Systems ............ 1.1502


1.xxvi 2011 Fraud Examiners Manual (International)

PUBLIC SECTOR FRAUD (CONT.) Altered or Missing Documents .................................................................................... 1.1502 Photocopied or Duplicate Documents ....................................................................... 1.1503 Failure to Have Adequate Supporting Documentation for Reports and Summary Data ............................................................................................................. 1.1503

Beneficiary Fraud ......................................................................................................................... 1.1503 Detection ................................................................................................................................ 1.1503

Contract and Procurement Fraud .............................................................................................. 1.1504 Elements of a Contract......................................................................................................... 1.1504 Contract and Procurement Fraud Schemes ...................................................................... 1.1505

Presolicitation Phase ...................................................................................................... 1.1505 Solicitation and Negotiation Phase .............................................................................. 1.1507 Contract Performance and Administration Phase ..................................................... 1.1510

Computer Programs.............................................................................................................. 1.1513 The Government Employee’s Role ........................................................................................... 1.1513

Common Problems of Investigators .................................................................................. 1.1513 Lack of Familiarity with Terminology ......................................................................... 1.1513 Wide Variety of Case Assignments .............................................................................. 1.1513 Case Loads ....................................................................................................................... 1.1514

Key Issues Facing Investigators .......................................................................................... 1.1514 Overcoming the Reluctance to Investigate ....................................................................... 1.1514

Interviewing Government Officials .......................................................................................... 1.1515 Assigning the Interview ........................................................................................................ 1.1515 Obstructing the Investigation .............................................................................................. 1.1516 Rules of Procedure ................................................................................................................ 1.1516

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TABLE OF CONTENTS

OVERVIEW OF THE LEGAL SYSTEM Basic Concepts of the Law ......................................................................................................... 2.101 Substantive and Procedural Law ................................................................................................ 2.101 Types of Legal Systems ............................................................................................................... 2.101 Sources of Law ............................................................................................................................. 2.102 Court Systems ............................................................................................................................... 2.103 THE LAW RELATED TO FRAUD Definition of Fraud ...................................................................................................................... 2.201 Principal Types of Fraud ............................................................................................................. 2.201

Misrepresentation of Material Facts ................................................................................... 2.201 Concealment of Material Facts ............................................................................................ 2.203 Bribery ..................................................................................................................................... 2.204

Types of Bribery Schemes .............................................................................................. 2.204 Methods of Making Corrupt Payments ........................................................................ 2.205 Corrupt Influence ............................................................................................................ 2.205 Illegal Gratuity ................................................................................................................. 2.206

Extortion ................................................................................................................................ 2.206 Conflict of Interest ................................................................................................................ 2.206 Forgery .................................................................................................................................... 2.208 Theft ........................................................................................................................................ 2.208

Embezzlement ................................................................................................................. 2.208 Larceny .............................................................................................................................. 2.208 Misappropriation of Trade Secrets ............................................................................... 2.209

Breach of Fiduciary Duty ..................................................................................................... 2.210 Duty of Loyalty ................................................................................................................ 2.210 Duty of Care ..................................................................................................................... 2.210

International Initiatives Against Fraud and Corruption ......................................................... 2.211 Introduction ........................................................................................................................... 2.211 The Organisation for Economic Co-operation and Development ............................... 2.211

The Recommendation on Combating Bribery in International Business ............... 2.212 The Tax Recommendation and Revised Recommendation ...................................... 2.213 The Convention on Combating Bribery of Foreign Public Officials in International Business Transactions .......................................................................... 2.214 Other OECD Instruments ............................................................................................. 2.216

United Nations Convention Against Corruption ............................................................. 2.219 Prevention ........................................................................................................................ 2.220 Criminalization ................................................................................................................. 2.220

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THE LAW RELATED TO FRAUD (CONT.) Asset Recovery ................................................................................................................. 2.221 International Cooperation .............................................................................................. 2.222

Major Regional Initiatives Against Corruption ........................................................................ 2.222 Inter-American Convention Against Corruption ............................................................. 2.222 European Union Convention on the Fight Against Corruption Involving Officials of the European Communities or Officials of Member States ................... 2.222 Council of Europe Criminal Law Convention on Corruption ....................................... 2.223 African Union Convention on Preventing and Combating Corruption ....................... 2.223

BANKRUPTCY (INSOLVENCY) FRAUD Introduction .................................................................................................................................. 2.301 Bankruptcy Schemes .................................................................................................................... 2.301

Concealed Assets ................................................................................................................... 2.301 The Planned Bustout ............................................................................................................ 2.301 Multiple Filings ...................................................................................................................... 2.302 Credit Card Bustout .............................................................................................................. 2.302 Forged Filings ........................................................................................................................ 2.302 Typing Services or Petition Mills ........................................................................................ 2.303

The World Bank Principles for Effective Insolvency and Creditor Rights Systems.......... 2.303 Introduction ........................................................................................................................... 2.303 Objectives and Scope of the World Bank Principles ....................................................... 2.304 Legal Framework for Creditor Rights ................................................................................ 2.306

Compatible Credit and Enforcement Systems ............................................................ 2.306 Collateral Systems ............................................................................................................ 2.306 Enforcement Systems ..................................................................................................... 2.307

Legal Framework for Insolvency ........................................................................................ 2.307 Selected Antifraud Requirements........................................................................................ 2.309

Governance and Management ....................................................................................... 2.309 Avoidable Transactions .................................................................................................. 2.309

Reorganisation Proceedings ................................................................................................. 2.310 Implementation: Institutional and Regulatory Frameworks ........................................... 2.310

Overarching Considerations of Sound Investment Climates: Transparency, Accountability, and Corporate Governance ............................................................ 2.311

Selected Antifraud Requirements........................................................................................ 2.315 Integrity of the System .................................................................................................... 2.315 Competence and Integrity of Insolvency Representatives ........................................ 2.315

SECURITIES FRAUD Introduction .................................................................................................................................. 2.401 Securities Laws and Regulations ................................................................................................ 2.401 What Constitutes a Security? ...................................................................................................... 2.401

Traditional Securities ............................................................................................................ 2.402 Stocks ................................................................................................................................ 2.402 Bonds ................................................................................................................................ 2.402

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SECURITIES FRAUD (CONT.) Certificates of Deposit .................................................................................................... 2.402 Futures and Options ....................................................................................................... 2.403

Investment Contracts ........................................................................................................... 2.404 Examples of Investment Contracts .............................................................................. 2.404

Commodity Futures, Exchange-Traded Options, and OTC Options ................................. 2.412 Commodity Futures Primer ................................................................................................. 2.412

The Principle of Offset ................................................................................................... 2.413 Trading on Margin........................................................................................................... 2.413 Trading Basics .................................................................................................................. 2.414

Options Primer ...................................................................................................................... 2.414 Exchange-Traded Options ............................................................................................. 2.415 Relationship of the Underlying Security to an Option .............................................. 2.415 Option Values and Premiums ....................................................................................... 2.416

Over-the-Counter (OTC) Options ..................................................................................... 2.416 Securities Fraud Schemes ............................................................................................................ 2.417

Securities Fraud by Registered Persons and Entities ....................................................... 2.417 Churning ........................................................................................................................... 2.417 Unsuitable Recommendations ....................................................................................... 2.418 Failure to Supervise ......................................................................................................... 2.418 Parking .............................................................................................................................. 2.418 Front Running—Dual Trading ..................................................................................... 2.419 Bucket Shops .................................................................................................................... 2.420 Excessive Markups .......................................................................................................... 2.420 Misuse or Misappropriation of Customer’s Securities ............................................... 2.420 Unauthorised Trading ..................................................................................................... 2.420 Systematically Trading Accounts Against Each Other .............................................. 2.420 Block Order Schemes ..................................................................................................... 2.421 Market Manipulation ....................................................................................................... 2.422 Insider Trading................................................................................................................. 2.423 Disclosures (Misrepresentations and Omissions) ....................................................... 2.423

Securities Fraud by Unregistered Persons ......................................................................... 2.424 Backdating Stock Options ................................................................................................... 2.424

Investigative Tips ......................................................................................................................... 2.425 Promotional Materials .......................................................................................................... 2.425

Securities Fraud and the Internet ............................................................................................... 2.427 Same Old Frauds, New Medium ......................................................................................... 2.427

Newsletters ....................................................................................................................... 2.428 Online Trading ................................................................................................................. 2.428

The International Organisation of Securities Commissions .................................................. 2.429 Overview of the IOSCO Principles ................................................................................... 2.430

The Protection of Investors ........................................................................................... 2.430 Ensuring That Markets Are Fair, Efficient, and Transparent ................................... 2.431 The Reduction of Systemic Risk ................................................................................... 2.432

The IOSCO Fraud Report ................................................................................................... 2.435 Corporate Governance ................................................................................................... 2.436

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SECURITIES FRAUD (CONT.) Transparency and Regulation of Corporate Bond Markets ...................................... 2.437 Conflicts of Interest in Initial Public Offerings .......................................................... 2.437 Special Purpose Entities ................................................................................................. 2.438

MONEY LAUNDERING

Money Laundering Methods ............................................................................................... 2.501 The Money Laundering Process ......................................................................................... 2.502

Placement.......................................................................................................................... 2.502 Layering ............................................................................................................................. 2.502 Integration ........................................................................................................................ 2.502

Using a Legitimate Business to Launder Funds ................................................................ 2.504 Income Statement Laundering ...................................................................................... 2.504 Balance Sheet Laundering .............................................................................................. 2.505

Favourite Businesses for Hiding or Laundering Money .................................................. 2.506 Bars, Restaurants, and Night Clubs .............................................................................. 2.506 Vending Machine Operations ........................................................................................ 2.507 Wholesale Distribution ................................................................................................... 2.507 Real Estate Purchases ..................................................................................................... 2.507 ATMs ................................................................................................................................ 2.507

Calling in a Specialist ............................................................................................................. 2.508 Enforcement and Prevention Strategies ................................................................................... 2.508

Policy Statement .................................................................................................................... 2.508 “Know Your Customer” Programs .................................................................................... 2.509

New Deposit Accounts .................................................................................................. 2.509 New Loan Accounts ....................................................................................................... 2.510 Services for Non-Accountholders ................................................................................ 2.510

Monitoring Accounts ............................................................................................................ 2.511 Special Problems for Insurance Companies ...................................................................... 2.511

Red Flags........................................................................................................................... 2.511 Detection .......................................................................................................................... 2.512

Alternative Remittance Systems ................................................................................................. 2.512 International Anti-Money Laundering Organizations and Initiatives .................................. 2.515

The Financial Action Task Force ........................................................................................ 2.516 The United Nations .............................................................................................................. 2.516 International Monetary Fund/World Bank ....................................................................... 2.516 The Egmont Group of Financial Intelligence Units ........................................................ 2.516

The Financial Action Task Force .............................................................................................. 2.517 40+9 Recommendations ...................................................................................................... 2.517 Recent Revisions to the Forty Recommendations ........................................................... 2.518

Legal Systems ................................................................................................................... 2.518 Financial Institutions and Related Professions ........................................................... 2.518 International Cooperation .............................................................................................. 2.521

Non-Cooperative Countries and Territories ..................................................................... 2.521

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INDIVIDUAL RIGHTS Rights and Obligations Under Criminal Law ........................................................................... 2.601

The Right to Remain Silent .................................................................................................. 2.601 Right to Counsel .................................................................................................................... 2.602 Confessions ............................................................................................................................ 2.602

The Law Relating to Search and Seizure .................................................................................. 2.602 Reasonableness ...................................................................................................................... 2.603 Definition of a Search Warrant ........................................................................................... 2.603 Consent Searches ................................................................................................................... 2.604 Evidence in Plain View ......................................................................................................... 2.604 Surveillance ............................................................................................................................. 2.604

Investigations in Private Actions ............................................................................................... 2.606 Defamation ............................................................................................................................. 2.607

Untrue Statement of Fact ............................................................................................... 2.607 Published to Third Parties .............................................................................................. 2.607 Unprivileged Occasions .................................................................................................. 2.607 Damaging to Reputation ................................................................................................ 2.608

Invasion of Privacy ............................................................................................................... 2.608 Publicity of Private Facts ................................................................................................ 2.608 Intrusion into Seclusion .................................................................................................. 2.609

False Imprisonment .............................................................................................................. 2.609 Malicious Prosecution ........................................................................................................... 2.610 Intentional Infliction of Emotional Distress ..................................................................... 2.610 Wrongful Discharge .............................................................................................................. 2.610 Whistleblower Laws .............................................................................................................. 2.611

THE CIVIL JUSTICE SYSTEM Introduction .................................................................................................................................. 2.701 Procedure in Civil Cases ............................................................................................................. 2.701

Beginning the Action ............................................................................................................ 2.701 Discovery ................................................................................................................................ 2.702 Trials in Civil Cases ............................................................................................................... 2.703 Decisions in Civil Cases ....................................................................................................... 2.704

THE CRIMINAL JUSTICE SYSTEM The Charging Process .................................................................................................................. 2.801

Information or Indictment .................................................................................................. 2.801 The Trial Process ......................................................................................................................... 2.801

The Burden of Proof in Criminal Trials ............................................................................ 2.801 Participants in the Trial Process .......................................................................................... 2.802 Witnesses ......................................................................................................................... 2.802

The Prosecutor ................................................................................................................ 2.802 Defence Counsel ............................................................................................................. 2.803 The Judge .......................................................................................................................... 2.803

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THE CRIMINAL JUSTICE SYSTEM (CONT.) Jury Selection ......................................................................................................................... 2.803 How a Trial is Conducted .................................................................................................... 2.804 Reaching a Verdict ................................................................................................................ 2.805

Sentencing ..................................................................................................................................... 2.806 Appeal ............................................................................................................................................ 2.806 Punishment ................................................................................................................................... 2.806 Corporate Criminal Liability ....................................................................................................... 2.806

Liability of Officers and Employees ................................................................................... 2.807 Punishment of Corporations ............................................................................................... 2.807

EVIDENCE Three Basic Forms of Evidence ................................................................................................ 2.901 Direct Versus Circumstantial Evidence .................................................................................... 2.902 Admissibility of Evidence ........................................................................................................... 2.902 Special Rules Concerning Some Types of Circumstantial Evidence .................................... 2.904

Character Evidence ............................................................................................................... 2.904 Opinion Testimony ............................................................................................................... 2.905

Exceptions to the Opinion Rule ................................................................................... 2.906 Exhibits .......................................................................................................................................... 2.906

Authenticating Typical Exhibits .......................................................................................... 2.907 Demonstrative Evidence ................................................................................................ 2.907 Diagrams ........................................................................................................................... 2.908 Writings ............................................................................................................................. 2.908 Business Records and Other Documents .................................................................... 2.908 Government Documents ............................................................................................... 2.909 Digital Evidence .............................................................................................................. 2.909 Photographs ..................................................................................................................... 2.909

General Points .............................................................................................................................. 2.910 The “Best Evidence” Rule ................................................................................................... 2.910 Objections to Exhibits .......................................................................................................... 2.911

Chain of Custody ............................................................................................................. 2.911 Hearsay .......................................................................................................................................... 2.913

Exceptions to the Hearsay Rule .......................................................................................... 2.914 The Truth of the Statement Is Not at Issue ................................................................ 2.914 Admissions by an Adverse Party ................................................................................... 2.914 Statement Against Interest ............................................................................................. 2.915 Business and Government Records .............................................................................. 2.915 Absence of an Entry in Business Records ................................................................... 2.915 Recorded Recollections .................................................................................................. 2.916 Former Testimony ........................................................................................................... 2.916 Present Sense Impressions ............................................................................................. 2.916 Excited Utterances .......................................................................................................... 2.916 Then Existing Mental, Emotional, or Physical Condition ........................................ 2.917 Statements for Purposes of Medical Diagnosis or Treatment .................................. 2.917

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EVIDENCE (CONT.) Printed Matter, Learned Treatises, and Refresher Writings ...................................... 2.917 Other Exceptions ............................................................................................................ 2.918

Impeachment ......................................................................................................................... 2.918 Privileges ........................................................................................................................................ 2.919

Introduction ........................................................................................................................... 2.919 Attorney-Client Privilege ...................................................................................................... 2.919 Attorney Work Product ........................................................................................................ 2.921 Self Evaluation Privilege....................................................................................................... 2.921 Marital Privilege ..................................................................................................................... 2.922 Law Enforcement Privilege to Withhold the Identity of an Informant ........................ 2.922

TESTIFYING AS A WITNESS Introduction .................................................................................................................................. 2.1001 Pre-Trial Preparation ................................................................................................................... 2.1003

Conflicts of Interest .............................................................................................................. 2.1003 Preparing a Report ................................................................................................................ 2.1004 Discoverability of Expert’s Reports ................................................................................... 2.1005 Keeping Good Files .............................................................................................................. 2.1005

Qualifying to Testify as an Expert Witness .............................................................................. 2.1005 Qualifications ......................................................................................................................... 2.1006 Testimony ............................................................................................................................... 2.1007

Preparing to Testify ..................................................................................................................... 2.1008 Depositions of Expert Witnesses ....................................................................................... 2.1008 Appearance ............................................................................................................................. 2.1009 Do’s and Don’ts .................................................................................................................... 2.1009

Direct Examination ..................................................................................................................... 2.1011 Presenting Expert Testimony. ............................................................................................. 2.1011 Direct Testimony Considerations ....................................................................................... 2.1012

Cross-Examination ...................................................................................................................... 2.1013 Myopic Vision ........................................................................................................................ 2.1015 Safety ....................................................................................................................................... 2.1015 Contradiction ......................................................................................................................... 2.1016 New Information .................................................................................................................. 2.1016 Support Opposing Side’s Theory ........................................................................................ 2.1016 Bias .......................................................................................................................................... 2.1016 Confrontation ........................................................................................................................ 2.1017 Sounding Board ..................................................................................................................... 2.1017 Fees .......................................................................................................................................... 2.1017 Terms of Engagement .......................................................................................................... 2.1017 Discrediting the Witness ...................................................................................................... 2.1017

Attacking the Fraud Examiner ................................................................................................... 2.1018 Personal Attacks .................................................................................................................... 2.1018

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TESTIFYING AS A WITNESS (CONT.) Failure to Follow the Standards of the Profession ........................................................... 2.1018

Expressing an Opinion on Guilt................................................................................................ 2.1019 Summary ........................................................................................................................................ 2.1020

INVESTIGATION



TABLE OF CONTENTS ANALYSING DOCUMENTS Obtaining Documentary Evidence ............................................................................................ 3.101

Types of Evidence ................................................................................................................. 3.102 Organisation of Evidence .................................................................................................... 3.102

Chronologies ................................................................................................................... 3.103 To-Do Lists ..................................................................................................................... 3.103

Examining Fraudulent Documents ........................................................................................... 3.103 Early Consultation with an Expert Can Prove Valuable ........................................................ 3.104 Types of Forensic Document Examinations ........................................................................... 3.104 Handling Documents as Physical Evidence ............................................................................. 3.105

Chain of Custody ................................................................................................................... 3.106 Preserving for Fingerprint Examinations .......................................................................... 3.106 Charred or Partially Burned Documents ........................................................................... 3.107 Recognising Phoney Documents ........................................................................................ 3.107

Identifying Writings ..................................................................................................................... 3.108 Class Characteristics .............................................................................................................. 3.109

Copy-Book Styles ........................................................................................................... 3.109 “Copycat” Styles ............................................................................................................. 3.109

Natural Variations, Disguise, Distortions, and Forgeries ................................................ 3.109 Variations ......................................................................................................................... 3.109 Disguise ............................................................................................................................ 3.110 Distortions ....................................................................................................................... 3.110 Forgeries .......................................................................................................................... 3.110

The Document Expert’s Findings ............................................................................................. 3.111 Non-Identification ................................................................................................................ 3.111 Identification .......................................................................................................................... 3.111 Inconclusive ........................................................................................................................... 3.112

How to Obtain Handwriting Samples ...................................................................................... 3.112 Non-Dictated Writing Samples ........................................................................................... 3.112 Dictated Writing Samples .................................................................................................... 3.113

Obtaining Dictated Handwriting Samples by Court Order ..................................... 3.113 Preparation for Taking Dictated Handwriting Samples ........................................... 3.113 Directions for Obtaining Dictated Handwriting Samples ........................................ 3.114

Typewriters and Computer Printers .......................................................................................... 3.114 Typewriter Ribbons Could Be Evidence ........................................................................... 3.115 Avoid Taking Unnecessary Samples ................................................................................... 3.115 Taking Typewriter Samples.................................................................................................. 3.115

Propietario

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INVESTIGATION


ANALYSING DOCUMENTS (CONT.) Photocopies .................................................................................................................................. 3.116

Identifying the Source of a Photocopy .............................................................................. 3.116 Permanent “Trash Marks” ............................................................................................ 3.117 Transient “Trash Marks” ............................................................................................... 3.117

Taking Photocopier Samples ............................................................................................... 3.117 Dating a Document ..................................................................................................................... 3.118

The “Alibi” Document ......................................................................................................... 3.118 The “Long Lost” Will ........................................................................................................... 3.118 Valuable Historical and Collectible Documents ............................................................... 3.118 Anachronisms in Documentary Materials ......................................................................... 3.119

Indented Writings ........................................................................................................................ 3.119 Developing Indented Writings ............................................................................................ 3.120

Counterfeit Printed Documents ................................................................................................ 3.120 Counterfeiting Methods ....................................................................................................... 3.121 Detecting Counterfeits ......................................................................................................... 3.121

Fingerprints ................................................................................................................................... 3.122 Fingerprints on Paper or Other Absorbent Porous Surfaces ......................................... 3.122 Fingerprints on Hard, Non-Porous Surfaces .................................................................... 3.123 Fingerprint Comparison Standards .................................................................................... 3.123

INTERVIEW THEORY AND APPLICATION Preparation .................................................................................................................................... 3.201 Characteristics of a Good Interview ......................................................................................... 3.201 Characteristics of a Good Interviewer ...................................................................................... 3.202 Question Typology ...................................................................................................................... 3.202

Introductory Questions ........................................................................................................ 3.203 Informational Questions ...................................................................................................... 3.203 Closing Questions ................................................................................................................. 3.203 Assessment Questions .......................................................................................................... 3.203 Admission-Seeking Questions ............................................................................................. 3.204

Legal Considerations When Conducting an Interview ........................................................... 3.204 Legal Authority to Conduct Interviews ............................................................................. 3.204 False Imprisonment .............................................................................................................. 3.204 Use of Deception in Interviews .......................................................................................... 3.205 Recording Interviews ............................................................................................................ 3.205

Elements of Conversations......................................................................................................... 3.205 Expression .............................................................................................................................. 3.205 Persuasion ............................................................................................................................... 3.206 Therapy ................................................................................................................................... 3.206 Ritual ....................................................................................................................................... 3.206 Information Exchange.......................................................................................................... 3.206

Inhibitors of Communication .................................................................................................... 3.207

INVESTIGATION


INTERVIEW THEORY AND APPLICATION (CONT.) Competing Demands for Time ........................................................................................... 3.207 Ego Threat ............................................................................................................................. 3.207

Repression ....................................................................................................................... 3.207 Disapproval ..................................................................................................................... 3.207 Loss of Status .................................................................................................................. 3.208

Etiquette ................................................................................................................................. 3.208 Trauma .................................................................................................................................... 3.208 Forgetting ............................................................................................................................... 3.208 Chronological Confusion ..................................................................................................... 3.209 Inferential Confusion ............................................................................................................ 3.209 Unconscious Behaviour........................................................................................................ 3.209

Facilitators of Communication .................................................................................................. 3.209 Fulfilling Expectations .......................................................................................................... 3.210 Recognition ............................................................................................................................ 3.210 Altruistic Appeals .................................................................................................................. 3.210 Sympathetic Understanding ................................................................................................. 3.210 New Experience .................................................................................................................... 3.211 Catharsis.................................................................................................................................. 3.211 Need for Meaning ................................................................................................................. 3.211 Extrinsic Rewards .................................................................................................................. 3.211

Interview Mechanics .................................................................................................................... 3.212 Note-Taking ........................................................................................................................... 3.212 Maintain Eye Contact ........................................................................................................... 3.212 Opinions ................................................................................................................................. 3.212 Writing Down Questions ..................................................................................................... 3.213 Documenting Results ........................................................................................................... 3.213

Introductory Questions ............................................................................................................... 3.213 Four Objectives ..................................................................................................................... 3.213

Provide the Introduction ............................................................................................... 3.213 Establish Rapport ........................................................................................................... 3.213 Establish the Interview Theme .................................................................................... 3.214 Observe Reactions .......................................................................................................... 3.216

Methodology .......................................................................................................................... 3.219 Physical Contact ............................................................................................................. 3.219 Don’t Interview More than One Person ..................................................................... 3.220 Privacy .............................................................................................................................. 3.220 Establish Transitional Statement .................................................................................. 3.220 Seek Continuous Agreement ........................................................................................ 3.221 Do Not Invade Body Space .......................................................................................... 3.221

Informational Questions ............................................................................................................. 3.221 Question Sequences .............................................................................................................. 3.222 Questioning Techniques....................................................................................................... 3.222

INVESTIGATION


INTERVIEW THEORY AND APPLICATION (CONT.) Open Questions .............................................................................................................. 3.222 Closed Questions ............................................................................................................ 3.223 Leading Questions .......................................................................................................... 3.223 Double-Negative Questions ......................................................................................... 3.224 Complex Questions ........................................................................................................ 3.224 Attitude Questions ......................................................................................................... 3.224 Controlled Answer Techniques .................................................................................... 3.224 Free Narratives................................................................................................................ 3.225

Suggestions ............................................................................................................................. 3.225 Methodology .......................................................................................................................... 3.226

Begin with Background Questions .............................................................................. 3.226 Observe Verbal and Nonverbal Behaviour ................................................................ 3.227 Ask Nonleading (Open) Questions ............................................................................. 3.227 Approach Sensitive Questions Carefully ..................................................................... 3.228

Dealing with Resistance ........................................................................................................ 3.228 “I’m Too Busy” .............................................................................................................. 3.229 “I Don’t Know Anything About It” ........................................................................... 3.229 “I Don’t Remember” ..................................................................................................... 3.229 “What Do You Mean by That?” .................................................................................. 3.230

Difficult People ..................................................................................................................... 3.230 Don’t React ..................................................................................................................... 3.230 Disarm the Person .......................................................................................................... 3.230 Change Tactics ................................................................................................................ 3.231 Make It Easy to Say “Yes” ............................................................................................ 3.231 Make It Hard to Say “No” ............................................................................................ 3.231

Volatile Interviews ................................................................................................................ 3.231 Physical Symptoms ......................................................................................................... 3.232 Other Considerations ..................................................................................................... 3.232 Overcoming Objections ................................................................................................ 3.233

Closing Questions ........................................................................................................................ 3.234 Reconfirm Facts .............................................................................................................. 3.234 Gather Additional Facts ................................................................................................ 3.234 Conclude the Interview ................................................................................................. 3.236

Assessment Questions ................................................................................................................. 3.237 Norming or Calibrating ........................................................................................................ 3.237 Physiology of Deception ...................................................................................................... 3.238

Verbal Clues .................................................................................................................... 3.239 Nonverbal Clues ............................................................................................................. 3.242

Methodology of Assessment Questions ............................................................................ 3.243 Admission-Seeking Questions .................................................................................................... 3.248

Purpose of Questions ........................................................................................................... 3.249 Preparation ............................................................................................................................. 3.249

INVESTIGATION


INTERVIEW THEORY AND APPLICATION (CONT.) Interview Room .............................................................................................................. 3.249 Note-Taking .................................................................................................................... 3.250 Presence of Outsiders .................................................................................................... 3.250

Theme Development ............................................................................................................ 3.250 Steps in the Admission-Seeking Interview ........................................................................ 3.251

Direct Accusation ........................................................................................................... 3.251 Observe Reaction ........................................................................................................... 3.252 Repeat Accusation .......................................................................................................... 3.252 Interrupt Denials ............................................................................................................ 3.253 Establish Rationalisation ............................................................................................... 3.255 Diffuse Alibis .................................................................................................................. 3.260 Present an Alternative Question .................................................................................. 3.263 Obtain a Benchmark Admission .................................................................................. 3.263 Reinforce Rationalisation .............................................................................................. 3.264 Verbal Confession .......................................................................................................... 3.264 Motive for Offence ........................................................................................................ 3.267

Kinesic Interview and Interrogation ......................................................................................... 3.271 Self-Initiated Verbal Statements .......................................................................................... 3.272 Prompted Verbal Responses ............................................................................................... 3.273

Structured Questions ..................................................................................................... 3.273 Nonverbal Behaviour/Body Language .............................................................................. 3.273

Criteria-Based Statement Analysis ............................................................................................. 3.275 Parts of Speech ...................................................................................................................... 3.275

Pronouns .......................................................................................................................... 3.275 Possessive Pronouns ...................................................................................................... 3.276 Verbs ................................................................................................................................ 3.276

Balance of the Statement ...................................................................................................... 3.277 General Characteristics ......................................................................................................... 3.277 Specific Content .................................................................................................................... 3.278 Peculiarities of Content ........................................................................................................ 3.278

The Cognitive Interview Technique .......................................................................................... 3.279 The Narrative Phase ............................................................................................................. 3.280

Reconstruct the Circumstances of the Event ............................................................. 3.281 Instruct the Eyewitness to Report Everything and Be Complete ........................... 3.281 Recall the Events in Different Orders......................................................................... 3.281 Change Perspective ........................................................................................................ 3.281

Specific Details ...................................................................................................................... 3.282 Physical Appearance ...................................................................................................... 3.282 Names .............................................................................................................................. 3.282 Number ............................................................................................................................ 3.282 Speech Characteristics ................................................................................................... 3.283 Conversation ................................................................................................................... 3.283

INVESTIGATION


COVERT EXAMINATIONS Establishing an Identity ............................................................................................................... 3.302 Objectives ...................................................................................................................................... 3.303 Problems in Covert Operations ................................................................................................. 3.304 Surveillance ................................................................................................................................... 3.305

Methods of Surveillance ....................................................................................................... 3.305 Preparation ............................................................................................................................. 3.306

Electronic Equipment .................................................................................................... 3.306 Basic Precautions ............................................................................................................ 3.306

Techniques of Foot Surveillance ......................................................................................... 3.307 One-Person Surveillance ............................................................................................... 3.307 Two-Person Surveillance ............................................................................................... 3.307 Three-Person Surveillance ............................................................................................. 3.307 Other Techniques ........................................................................................................... 3.308

Techniques of Vehicle Surveillance .................................................................................... 3.308 General ............................................................................................................................. 3.308 One-Vehicle Surveillance .............................................................................................. 3.309 Two-Vehicle Surveillance .............................................................................................. 3.309

Fixed Surveillance .................................................................................................................. 3.309 Satellite Surveillance .............................................................................................................. 3.310 Night Surveillance Equipment ............................................................................................ 3.310

Sources and Informants .............................................................................................................. 3.311 Types of Informants ............................................................................................................. 3.312

Basic Lead Informants ................................................................................................... 3.312 Participant Informants ................................................................................................... 3.312 Covert Informants .......................................................................................................... 3.312 Accomplice/Witness Informants ................................................................................. 3.312

Objectives of Source and Informant Information ........................................................... 3.313 Recruitment of Sources and Informants ........................................................................... 3.314 Motives of Sources and Informants ................................................................................... 3.315

Sources ............................................................................................................................. 3.315 Informants ....................................................................................................................... 3.315

Legal Considerations ............................................................................................................. 3.316 Reporting Contacts ............................................................................................................... 3.316 Promises of Confidentiality ................................................................................................. 3.317

Use of Operatives ........................................................................................................................ 3.318 SOURCES OF INFORMATION Municipal/Regional/County Government .............................................................................. 3.401

Building Inspector Records ................................................................................................. 3.401 Regulatory Agency Records ................................................................................................. 3.402 City Tax Assessor/Collector Records ................................................................................ 3.402 Coroner’s Register ................................................................................................................. 3.402

INVESTIGATION


SOURCES OF INFORMATION (CONT.) Court Records ........................................................................................................................ 3.402

Federal, State, and Provincial Governments ............................................................................ 3.403 Birth, Death, and Marriage Records ................................................................................... 3.403 Professional Associations and Licensing Boards .............................................................. 3.403 Land Registry Office ............................................................................................................. 3.404 Business Filings Division ..................................................................................................... 3.405 Department of Labour ......................................................................................................... 3.405 Civil Litigation Records ........................................................................................................ 3.405 Criminal Records ................................................................................................................... 3.405 Bankruptcy Records .............................................................................................................. 3.405 Customs and Revenue Agencies ......................................................................................... 3.405 Other Regulatory Agencies .................................................................................................. 3.406

Commercial Sources of Information......................................................................................... 3.406 Associations and Lobby Groups ......................................................................................... 3.406

Better Business Bureau .................................................................................................. 3.406 Chamber of Commerce ................................................................................................. 3.406

Abstract and Title Companies ............................................................................................. 3.407 Bonding Companies .............................................................................................................. 3.407 Credit Card Records ............................................................................................................. 3.407 Stockbrokers .......................................................................................................................... 3.407 Western Union ....................................................................................................................... 3.407 International Air Transport Association ............................................................................ 3.407 International Foundation for Art Research ....................................................................... 3.408

Public Record Database Vendors .............................................................................................. 3.408 Types of Public Record Database Vendors ...................................................................... 3.408

Commercial Database Vendors .................................................................................... 3.408 Search Firms .................................................................................................................... 3.408 Document Retrievers ..................................................................................................... 3.409

Types of Information Available .......................................................................................... 3.409 Directories ..................................................................................................................................... 3.409

City Directories ...................................................................................................................... 3.410 Gale ......................................................................................................................................... 3.410

Gale Directory Library ................................................................................................... 3.410 Gale Directory of Databases......................................................................................... 3.410 Directories in Print ......................................................................................................... 3.411 Gale Directory of Publications and Broadcast Media ............................................... 3.411 Encyclopedia of Associations ....................................................................................... 3.411 Encyclopedia of Business Information Sources ........................................................ 3.411

D&B’s Million Dollar Database Series............................................................................... 3.412 Factiva ..................................................................................................................................... 3.412 Index to Legal Periodicals .................................................................................................... 3.412 Insurance Reporting Services .............................................................................................. 3.412

INVESTIGATION


SOURCES OF INFORMATION (CONT.) IHS Fairplay ........................................................................................................................... 3.412 Magazines for Libraries ........................................................................................................ 3.413 Mergent ................................................................................................................................... 3.413

Mergent’s Bank and Finance Manual and News Reports ......................................... 3.413 Reader’s Guide to Periodical Literature ............................................................................. 3.413 Standard & Poor’s NetAdvantage ...................................................................................... 3.414

Corporation Records ...................................................................................................... 3.414 Company Profile ............................................................................................................. 3.414 Register of Corporations, Directors, and Executives ............................................... 3.414

The Global Banking Resource ............................................................................................ 3.414 Banks and Financial Institutions ................................................................................................ 3.414 International Law Enforcement Organisations ....................................................................... 3.415

International Criminal Police Organisation ....................................................................... 3.415 International Chamber of Commerce Commercial Crime Bureau ................................ 3.416 International Criminal Police Organisation Case Tracking System ............................... 3.416 United Nations Crime and Justice Information Network ............................................... 3.416 World Criminal Justice Library Network ........................................................................... 3.416

ACCESSING INFORMATION ONLINE Limitations of Online Database Searches .......................................................................... 3.501 Online Searches Through Database Vendors ................................................................... 3.502 Locating People Using Online Records ............................................................................. 3.503

Types of Searches ........................................................................................................... 3.503 Obtaining Financial Information and Locating Assets .................................................... 3.503

Searches for Hard Assets............................................................................................... 3.504 Searches for Potential Assets ........................................................................................ 3.504

Finding Legal Records .......................................................................................................... 3.504 Conducting Background Checks ......................................................................................... 3.505

Due Diligence ................................................................................................................. 3.505 Employment Background ............................................................................................. 3.505

Newspaper/Media Databases ............................................................................................. 3.506 LexisNexis ....................................................................................................................... 3.507 HighBeam Research ....................................................................................................... 3.507

Investigating with the Internet ................................................................................................... 3.507 Traditional Methods for Finding Information on the Internet ...................................... 3.508

Search Engines ................................................................................................................ 3.508 Meta-search Engines ...................................................................................................... 3.509 Directories ....................................................................................................................... 3.510

Non-traditional Methods for Finding Information on the Internet .............................. 3.512 eBay .................................................................................................................................. 3.513 The Whois Protocol ....................................................................................................... 3.513 Craigslist ........................................................................................................................... 3.513

INVESTIGATION


ACCESSING INFORMATION ONLINE (CONT.) Archive ............................................................................................................................. 3.514 Zoominfo......................................................................................................................... 3.514 GuideStar ......................................................................................................................... 3.514 Noza ................................................................................................................................. 3.514 Social-Networking Websites ......................................................................................... 3.514

A Guide to Successful Internet Searching ......................................................................... 3.515 Boolean Operators ......................................................................................................... 3.515 Reserved Words and Noise Words .............................................................................. 3.516 Specific Search Operators ............................................................................................. 3.516

DATA ANALYSIS AND REPORTING TOOLS Data Mining .................................................................................................................................. 3.601 Data Analysis ................................................................................................................................ 3.604 Using Data Analysis Software .................................................................................................... 3.604

Advantages of Using Data Analysis Software ................................................................... 3.604 Core Data Analysis Software Functions ................................................................................... 3.605

Sorting ..................................................................................................................................... 3.606 Record Selection .................................................................................................................... 3.607 Joining Files ............................................................................................................................ 3.607 Multi-File Processing ............................................................................................................ 3.607 Correlation Analysis .............................................................................................................. 3.608 Verifying Multiples of a Number ........................................................................................ 3.608 Compliance Verification ....................................................................................................... 3.608 Duplicate Searches ................................................................................................................ 3.609 Vertical Ratio Analysis .......................................................................................................... 3.609 Horizontal Ratio Analysis .................................................................................................... 3.609 Date Functions ...................................................................................................................... 3.610 Graphing ................................................................................................................................. 3.611 Examples of Data Analysis Queries ................................................................................... 3.611

General Ledger Analysis ................................................................................................ 3.611 Accounts Receivable ...................................................................................................... 3.612 Sales Analysis .................................................................................................................. 3.612 Accounts Payable ............................................................................................................ 3.612 Asset Management ......................................................................................................... 3.612 Cash Disbursement ........................................................................................................ 3.612 Payroll ............................................................................................................................... 3.613 Purchasing ....................................................................................................................... 3.613

Data Analysis Checklist ........................................................................................................ 3.613 Evaluating Data Analysis Software ..................................................................................... 3.614 Evaluating Data Mining Software ....................................................................................... 3.614 Evaluating Data Mining Consultants ................................................................................. 3.615

Types of Data Mining and Analysis Software .......................................................................... 3.615

INVESTIGATION

3.x 2011 Fraud Examiners Manual (International)

DATA ANALYSIS AND REPORTING TOOLS (CONT.) ACL ......................................................................................................................................... 3.616 IDEA ...................................................................................................................................... 3.617

General Functions .......................................................................................................... 3.618 Fraud Tests ...................................................................................................................... 3.619

Excel ........................................................................................................................................ 3.620 ActiveData for Excel ............................................................................................................ 3.621

Fraud Detection Techniques for Accounts Payable ................................................. 3.622 Fraud Detection Techniques for the General Ledger ............................................... 3.626 Fraud Detection Techniques for Revenue .................................................................. 3.627

AutoAudit ............................................................................................................................... 3.629 SNAP! Reporter ..................................................................................................................... 3.630 DataWatch Corporation’s Monarch for Windows ........................................................... 3.630 DATAS for IDEA ................................................................................................................ 3.632 IDEA for Windows .............................................................................................................. 3.633

Files, File Management, and File Manipulation ......................................................... 3.633 Data .................................................................................................................................. 3.633 Sampling........................................................................................................................... 3.634 Analysis ............................................................................................................................ 3.634

Arbutus Query ....................................................................................................................... 3.634 Oversight Systems ................................................................................................................. 3.634

Reporting and Case Management Software ............................................................................. 3.634 i2’s Analysis Product Line .................................................................................................... 3.635 Analyst’s Notebook ............................................................................................................... 3.635

iBase .................................................................................................................................. 3.636 Data Miner ....................................................................................................................... 3.636 Analyst’s Workstation .................................................................................................... 3.636

CaseMap by CaseSoft ........................................................................................................... 3.636 Spreadsheets .................................................................................................................... 3.637 Issue Spreadsheet ........................................................................................................... 3.639 Question Spreadsheet .................................................................................................... 3.639 Research Spreadsheets ................................................................................................... 3.639 Linking ............................................................................................................................. 3.640 Filtering ............................................................................................................................ 3.640

Xanalys Suite .......................................................................................................................... 3.641 PowerCase ....................................................................................................................... 3.641 Link Explorer .................................................................................................................. 3.642 Indexer ............................................................................................................................. 3.642

Enterprise Investigation Management ............................................................................... 3.643 Multi-Channel Fraud ............................................................................................................. 3.643 i-Sight Case Management Software .................................................................................... 3.644 EthicsPoint Issue and Event Manager ............................................................................... 3.644

INVESTIGATION

2011 Fraud Examiners Manual (International) 3.xi

DIGITAL FORENSICS Conducting an Investigation Involving Computers ................................................................ 3.701

Computer Investigation Versus Computer Forensics ..................................................... 3.701 Digital Evidence .................................................................................................................... 3.701 Integrity of Digital Evidence ............................................................................................... 3.702 Forensic Experts ................................................................................................................... 3.703 Locating Evidence ................................................................................................................. 3.705

Workstation ..................................................................................................................... 3.706 Network ........................................................................................................................... 3.708

Law Enforcement Assistance .............................................................................................. 3.708 Computer Investigation and Computer Forensics .................................................................. 3.708

Seizing Digital Evidence ................................................................................................ 3.708 Image Acquisition ........................................................................................................... 3.712 Analysis ............................................................................................................................ 3.713 Reporting and Testifying ............................................................................................... 3.714

Guidelines for Processing Evidence for Removal ............................................................ 3.714 Evidence Storage ................................................................................................................... 3.718

Forensic Examination and Analysis .......................................................................................... 3.719 Keyword Searches ................................................................................................................. 3.720 Recovering Evidence ............................................................................................................ 3.720

User-Created Files .......................................................................................................... 3.721 User-Protected Files ....................................................................................................... 3.721 Computer-Created Files ................................................................................................ 3.722

Digital Forensics Software .......................................................................................................... 3.724 EnCase Forensic .................................................................................................................... 3.724

How EnCase Forensic Works ....................................................................................... 3.725

Key Features .................................................................................................................... 3.726 Forensic ToolKit ................................................................................................................... 3.726

Integrated Computer Forensics .................................................................................... 3.726 Enterprise-Class Architecture ....................................................................................... 3.726 Powerful Processing and Speed ................................................................................... 3.727 Advanced Analytics ........................................................................................................ 3.727 Preview, Acquisition, and Analysis of Live Data ....................................................... 3.727

Password Recovery Toolkit ................................................................................................. 3.727 Security Risk Assessment Tool ..................................................................................... 3.727 Features ............................................................................................................................ 3.728

ProDiscover Forensics ......................................................................................................... 3.728 Features ............................................................................................................................ 3.729

Gargoyle Investigator Forensic Pro Edition ..................................................................... 3.730 Stego Suite .............................................................................................................................. 3.731

INVESTIGATION

3.xii 2011 Fraud Examiners Manual (International)

TRACING ILLICIT TRANSACTIONS Comprehensive Guidelines for Information to Be Collected in Financial Interviews ...... 3.801

Identification .......................................................................................................................... 3.801 Birth ......................................................................................................................................... 3.801 Address During Pertinent Years ......................................................................................... 3.801 Occupation ............................................................................................................................. 3.802 General Background ............................................................................................................. 3.802 Financial Institutions (Business and Personal) ................................................................. 3.802 Source of Income .................................................................................................................. 3.803 Net Income and Expenditures ............................................................................................ 3.803 Liabilities ................................................................................................................................. 3.804 Expenditures .......................................................................................................................... 3.804 Business Operations ............................................................................................................. 3.804 Books and Records ............................................................................................................... 3.804 Business Receipts .................................................................................................................. 3.805

Direct Methods of Tracing Financial Transactions ................................................................ 3.805 Financial Institutions ............................................................................................................ 3.805 Internal Bookkeeping Procedures....................................................................................... 3.806 Electronic Banking ................................................................................................................ 3.806 Gaining Access to Records Held by Financial Institutions ............................................ 3.807 Types of Bank Records ........................................................................................................ 3.807

Account Opening Documents ..................................................................................... 3.807 Negotiated Cheques ....................................................................................................... 3.808 Deposit Slips ................................................................................................................... 3.809 Wire Transfers ................................................................................................................ 3.810 Telegraphic Transfers .................................................................................................... 3.810 Intrabank Transfers ........................................................................................................ 3.810 Savings Accounts ............................................................................................................ 3.810 Certificates of Deposit ................................................................................................... 3.810 Bank Statements ............................................................................................................. 3.811 Other Exchange Instruments ....................................................................................... 3.812

Loan Records ......................................................................................................................... 3.813 Line of Credit or Borrowing an Overdraft ................................................................. 3.814 Mortgage Loan Files ...................................................................................................... 3.815 Consumer or Instalment Loans .................................................................................... 3.815

Credit Card Records ............................................................................................................. 3.815 Bank Collection Department Records ............................................................................... 3.816 Debit Cards and Automated Teller Machines .................................................................. 3.816 Safe-Deposit Box Records ................................................................................................... 3.816 Stock Brokerage Records ..................................................................................................... 3.817 Tax Returns and Related Documents ................................................................................ 3.818 Establish a Database ............................................................................................................. 3.818

Indirect Methods of Tracing Financial Transactions .............................................................. 3.821

INVESTIGATION

2011 Fraud Examiners Manual (International) 3.xiii

TRACING ILLICIT TRANSACTIONS (CONT.) Elements of Financial Examination Techniques .............................................................. 3.822

The Environment ........................................................................................................... 3.822 The Accounting System ................................................................................................. 3.822

Various Detection Techniques ............................................................................................ 3.823 Statistical Sampling ......................................................................................................... 3.823 Net Worth Methods ....................................................................................................... 3.826 Net-Worth Analysis ....................................................................................................... 3.831

Locating Hidden Assets .............................................................................................................. 3.839 Common Asset Hiding Techniques ................................................................................... 3.839

Transfer to Family Members or Parties Under Their Control ................................ 3.839 Children’s or Family Trust ............................................................................................ 3.839 Home Mortgage Pay-Down .......................................................................................... 3.840 Insurance Policies ........................................................................................................... 3.840 Prepaid Credit Cards ...................................................................................................... 3.840 Savings Bond Purchases ................................................................................................ 3.840 Cashier’s Cheques and Traveller’s Cheques ............................................................... 3.841

Computer Databases ............................................................................................................. 3.841 Locating Assets Through Subpoenas ................................................................................. 3.841 Locating Assets Offshore .................................................................................................... 3.841 Legal Assistance in Obtaining Information Regarding Foreign Assets ........................ 3.843

Letter Rogatory ............................................................................................................... 3.843 Mutual Legal Assistance Treaties ................................................................................. 3.844 Public Records ................................................................................................................ 3.844

REPORTING STANDARDS Preparation .................................................................................................................................... 3.901 Accuracy of Reports .................................................................................................................... 3.902 Clarity ............................................................................................................................................. 3.902 Impartiality and Relevance .......................................................................................................... 3.902 Timeliness ...................................................................................................................................... 3.902 Common Reporting Mistakes .................................................................................................... 3.903

Conclusions and Opinions ................................................................................................... 3.903 Evidence ................................................................................................................................. 3.903 Copy Documents .................................................................................................................. 3.904 Safeguarding and Maintaining Documents........................................................................ 3.904

Effective Note Taking ................................................................................................................. 3.904 Organisation of Information ...................................................................................................... 3.905

Chronological ......................................................................................................................... 3.905 By Transaction ....................................................................................................................... 3.905

Analysing the Reader ................................................................................................................... 3.906 Company Insiders ................................................................................................................. 3.906 Attorneys ................................................................................................................................ 3.906

INVESTIGATION

3.xiv 2011 Fraud Examiners Manual (International)

REPORTING STANDARDS (CONT.) Defendants and Witnesses ................................................................................................... 3.906 Press ........................................................................................................................................ 3.907 Juries ........................................................................................................................................ 3.907

Outlining........................................................................................................................................ 3.907 Step One ................................................................................................................................. 3.907 Step Two ................................................................................................................................. 3.908 Step Three .............................................................................................................................. 3.908

Grammatical Considerations ...................................................................................................... 3.908 Style ......................................................................................................................................... 3.908 Voice ....................................................................................................................................... 3.908 Person ..................................................................................................................................... 3.909 Point of View ......................................................................................................................... 3.909 Constructing Clear Sentences .............................................................................................. 3.910

Rambling Sentences ....................................................................................................... 3.910 Run-On Sentences .......................................................................................................... 3.910 Omitted Verbs ................................................................................................................ 3.910 Omitted Subjects ............................................................................................................ 3.911 Unnecessary Compound Sentences ............................................................................. 3.911 Misplaced Modifiers ....................................................................................................... 3.911

Paragraph Structure ............................................................................................................... 3.912 Report Structure ........................................................................................................................... 3.912

Suggested Standard Format ................................................................................................. 3.912 Background ..................................................................................................................... 3.912 Executive Summary........................................................................................................ 3.912 Scope ................................................................................................................................ 3.913 Approach ......................................................................................................................... 3.913 Findings ............................................................................................................................ 3.913 Summary .......................................................................................................................... 3.914 Impact .............................................................................................................................. 3.914 Recommendations .......................................................................................................... 3.914

Reporting Documents .......................................................................................................... 3.914 Memoranda ............................................................................................................................ 3.915 Cover Page or Letter ............................................................................................................. 3.915 Exhibits ................................................................................................................................... 3.915 Forms ...................................................................................................................................... 3.915

Consent to Search .......................................................................................................... 3.916 Receipt for Property ....................................................................................................... 3.916 Telephone Recording Consent ..................................................................................... 3.916 Consent to Record ......................................................................................................... 3.916 Customer Consent and Authorisation for Access to Financial Records ................ 3.917 Evidence Control Log ................................................................................................... 3.917

Signed Confessions ...................................................................................................................... 3.917

INVESTIGATION

2011 Fraud Examiners Manual (International) 3.xv

REPORTING STANDARDS (CONT.) Voluntariness of Confessions .............................................................................................. 3.917 Intent ....................................................................................................................................... 3.917 Approximate Dates of Offence .......................................................................................... 3.918 Approximate Amounts of Losses ....................................................................................... 3.918 Approximate Number of Instances .................................................................................... 3.918 Willingness to Cooperate ..................................................................................................... 3.918 Excuse Clause ........................................................................................................................ 3.919 Confessor Read the Statement ............................................................................................ 3.919 Truthfulness of Statement.................................................................................................... 3.919 Key Points in Signed Statements ........................................................................................ 3.919

Visual Aids .................................................................................................................................... 3.920 Link-Network Diagrams ...................................................................................................... 3.920 Matrices ................................................................................................................................... 3.922 Time-Flow Diagrams ............................................................................................................ 3.923 Summaries of Witnesses’ Statements ................................................................................. 3.923

Engagement Contracts ................................................................................................................ 3.924 Elements of the Engagement Contract.............................................................................. 3.924

The Long Form .............................................................................................................. 3.925 The Short Form .............................................................................................................. 3.925 Terms ............................................................................................................................... 3.925 Close ................................................................................................................................. 3.925 Indemnity Clause ............................................................................................................ 3.926

Opinions ................................................................................................................................. 3.926 Fraud Examination Checklist ..................................................................................................... 3.927

INVESTIGATION

3.xvi 2011 Fraud Examiners Manual (International)

APPENDIX

FRAUD EXAMINATION CHECKLIST Fraud Examination Checklist ..................................................................................................... 3.1001 SAMPLE FRAUD EXAMINATION REPORTS Bailey Books, Incorporated ........................................................................................................ 3.1101 ENGAGEMENT CONTRACTS AND OPINION LETTERS Engagement Letters

Fraud Policy Review Proposal ............................................................................................. 3.1201 Fraud Examination Proposal ............................................................................................... 3.1202 Fraud Policy Review Opinion ............................................................................................. 3.1203

Fraud Examination Opinion Letters Evidence Does Not Support Allegation ............................................................................ 3.1205 Evidence Supports Allegation ............................................................................................. 3.1206 Inconclusive Evidence .......................................................................................................... 3.1207

FRAUD PREVENTION AND DETERRENCE



TABLE OF CONTENTS

UNDERSTANDING HUMAN BEHAVIOUR Behavioural Analysis and the Detection of Fraud .................................................................. 4.101

Conclusion .............................................................................................................................. 4.106 Why People Obey the Law ......................................................................................................... 4.108

Instrumental Perspective ...................................................................................................... 4.108 Normative Perspective ......................................................................................................... 4.108 Legitimacy ............................................................................................................................... 4.109 Voluntary Compliance .......................................................................................................... 4.110 Measuring Legitimacy and Compliance ............................................................................. 4.111

Legitimacy and Compliance .......................................................................................... 4.112 Implications of the Chicago Study ............................................................................... 4.113 The Psychological Variables ......................................................................................... 4.113 Legitimacy and Experience ........................................................................................... 4.114 The Meaning of Procedural Justice .............................................................................. 4.115 Influence of Control on the Meaning of Procedural Justice .................................... 4.116

THEORIES OF CRIME CAUSATION Classical Criminology .................................................................................................................. 4.201 Routine Activities Theory ........................................................................................................... 4.202 Biological Theories ...................................................................................................................... 4.203 Psychological Theories ................................................................................................................ 4.204

Cognitive Theories ................................................................................................................ 4.204 Integrated Theories ............................................................................................................... 4.204 Conditioning Theory ............................................................................................................ 4.204

Social Structure Theories ............................................................................................................ 4.205 Theory of Anomie ................................................................................................................. 4.205

Social Process Theories ............................................................................................................... 4.206 Social Learning Theories ...................................................................................................... 4.206 Theory of Differential Association ..................................................................................... 4.206 Social Control Theory ........................................................................................................... 4.208 Differential Reinforcement Theory .................................................................................... 4.210

WHITE-COLLAR CRIME What Is White-Collar Crime? ..................................................................................................... 4.301 Public Perceptions of White-Collar Crime ............................................................................... 4.303

National Survey of Crime Severity Ratings: Selected Offence Stimuli .......................... 4.303 Crimes of the Middle Classes—A Look at White-Collar Crime .................................................. 4.305

Propietario

Resaltado



WHITE-COLLAR CRIME (CONT.) Profiles of Offenders ............................................................................................................ 4.306 Cressey Study ......................................................................................................................... 4.306 Effect of Status ...................................................................................................................... 4.307 Organisational Opportunity ................................................................................................. 4.307 The Middle Class ................................................................................................................... 4.307 Methodology .......................................................................................................................... 4.308 Offenders Ranked by Status, with Selected Demographic Information ....................... 4.309 Cooperating Defendants ...................................................................................................... 4.310 Pleas by White-Collar Defendants ...................................................................................... 4.311 Judgements ............................................................................................................................. 4.311 Personal Suffering ................................................................................................................. 4.312 Imprisonment ........................................................................................................................ 4.312 Contributing Factors ............................................................................................................. 4.313 Conclusion .............................................................................................................................. 4.314

ORGANISATIONAL CRIME Corporate Organisation and Criminal Behaviour ................................................................... 4.402

The Image of the Corporation ............................................................................................ 4.402 Clinard and Yeager ................................................................................................................ 4.403

Opportunities for Unlawful Organisational Behaviour .......................................................... 4.404 Organisational Structure ....................................................................................................... 4.404

Criminogenic Organisational Structures ................................................................................... 4.406 Corporate Executives and Criminal Liability ........................................................................... 4.409 Management Behaviour .............................................................................................................. 4.411 Controlling Organisational Crime ............................................................................................. 4.412

The Enforcement Effort: Preventing and Reducing Fraud ............................................ 4.414 Compliance ...................................................................................................................... 4.414 Deterrence ....................................................................................................................... 4.415 Increased Enforcement ................................................................................................. 4.415

Fraud Prevention Programs ................................................................................................. 4.415 OCCUPATIONAL FRAUD Research in Occupational Fraud and Abuse ............................................................................ 4.501

Edwin H. Sutherland ............................................................................................................ 4.501 Donald R. Cressey ................................................................................................................. 4.502

Cressey’s Hypothesis ...................................................................................................... 4.502 Non-Shareable Financial Problems ............................................................................. 4.503 Perceived Opportunity .................................................................................................. 4.505 Rationalisations ............................................................................................................... 4.506 Conjuncture of Events .................................................................................................. 4.510 Conclusions ..................................................................................................................... 4.510

Dr. Steve Albrecht ................................................................................................................. 4.510



OCCUPATIONAL FRAUD (CONT.) The Albrecht Study ........................................................................................................ 4.510 The Fraud Scale .............................................................................................................. 4.512

Richard C. Hollinger and John P. Clark ............................................................................. 4.514 The Hollinger-Clark Study ............................................................................................ 4.514 Hypotheses of Employee Theft ................................................................................... 4.514

2010 Report to the Nations on Occupational Fraud and Abuse ................................... 4.519 Measuring the Cost of Occupational Fraud ............................................................... 4.520 How Occupational Fraud Is Committed .................................................................... 4.521 Duration of Fraud Schemes .......................................................................................... 4.524 Detection of Fraud Schemes ........................................................................................ 4.524 Geographical Location of Organisations .................................................................... 4.526 Victims of Occupational Fraud .................................................................................... 4.527

FRAUD PREVENTION PROGRAMS Responsibility for Fraud Prevention ......................................................................................... 4.601

Vicarious or Imputed Liability ............................................................................................ 4.601 The Treadway Commission ................................................................................................. 4.602 COSO Recommendations ................................................................................................... 4.602

Control Environment .................................................................................................... 4.603 Risk Assessment ............................................................................................................. 4.604 Control Activities............................................................................................................ 4.605 Information and Communication ................................................................................ 4.606 Monitoring ....................................................................................................................... 4.606

Implementing a Corporate Compliance Program ................................................................... 4.607 Establishing Standards .......................................................................................................... 4.610 Assigning Responsibility ....................................................................................................... 4.610 Audit Committees ................................................................................................................. 4.611 Due Diligence in Hiring ....................................................................................................... 4.611 Communicating the Policy ................................................................................................... 4.612

Training Employees ....................................................................................................... 4.612 Achieving Compliance .......................................................................................................... 4.613 Disciplinary Action ............................................................................................................... 4.613 Appropriate Responses ........................................................................................................ 4.614 Periodic Assessment ............................................................................................................. 4.615 Relation of COSO and Corporate Sentencing Guidelines .............................................. 4.615

Procedures to Prevent Fraud ...................................................................................................... 4.617 Proactive Fraud Policies ....................................................................................................... 4.617

Use of Analytical Review ............................................................................................... 4.617 Fraud Assessment Questioning .................................................................................... 4.617 Enforcement of Mandatory Vacations ........................................................................ 4.618 Job Rotation .................................................................................................................... 4.618



FRAUD PREVENTION PROGRAMS (CONT.) Surprise Audits Where Possible ................................................................................... 4.618

Management Oversight ........................................................................................................ 4.618 Increasing the Perception of Detection ...................................................................... 4.619 Employee Education ...................................................................................................... 4.619 Minimise Employee Pressures ...................................................................................... 4.619 Open-Door Policies ....................................................................................................... 4.619 Employee Support Programs........................................................................................ 4.620 Management Climate ..................................................................................................... 4.620

Monitoring Systems .............................................................................................................. 4.620 Reporting Programs ....................................................................................................... 4.621 Hotlines ............................................................................................................................ 4.621

Fraud Prevention Policy .............................................................................................................. 4.622 Fraud Policy Objectives ....................................................................................................... 4.622 Selling Fraud Prevention to Management ......................................................................... 4.622

The Impact on the Bottom Line .................................................................................. 4.623 The Impact of Publicity ................................................................................................. 4.623

Writing the Fraud Policy ...................................................................................................... 4.624 Policy Statement ............................................................................................................. 4.624 Scope of Policy ............................................................................................................... 4.624 Actions Constituting Fraud ........................................................................................... 4.624 Nonfraud Irregularities .................................................................................................. 4.624 Investigation Responsibilities ....................................................................................... 4.625 Confidentiality ................................................................................................................. 4.625 Authorisation for Investigation .................................................................................... 4.625 Reporting Procedures .................................................................................................... 4.625 Termination ..................................................................................................................... 4.625

Communicating the Fraud Policy ....................................................................................... 4.625 Orientation/Annual Training ....................................................................................... 4.625 Memoranda ..................................................................................................................... 4.625 Posters .............................................................................................................................. 4.626 Employee Morale ........................................................................................................... 4.626 Legal Considerations ...................................................................................................... 4.626

Ethics Programs ........................................................................................................................... 4.626 Origins of Ethics ................................................................................................................... 4.627 Ethics’ Current Place in Business ....................................................................................... 4.628 Ethics Program Development ............................................................................................. 4.628

Sample Fraud Policy .................................................................................................................... 4.630 Sample Code of Business Ethics and Conduct ........................................................................ 4.634

Introduction ........................................................................................................................... 4.634 Competition ........................................................................................................................... 4.635

Fair Competition ............................................................................................................ 4.635 Compliance with Laws and Regulatory Orders ................................................................ 4.636



FRAUD PREVENTION PROGRAMS (CONT.) Conflicts of Interest .............................................................................................................. 4.636

Gifts and Entertainment................................................................................................ 4.636 Outside Employment ..................................................................................................... 4.638 Relationships with Suppliers and Customers ............................................................. 4.638 Employment of Relatives .............................................................................................. 4.639

Confidential Information and Privacy of Communications ........................................... 4.639 Confidential Information .............................................................................................. 4.639

Company Assets .................................................................................................................... 4.640 Cash and Bank Accounts .............................................................................................. 4.640 Company Assets and Transactions .............................................................................. 4.641 Expense Reimbursement ............................................................................................... 4.642 Company Credit Card .................................................................................................... 4.642 Software and Computers ............................................................................................... 4.642

Political Contributions .......................................................................................................... 4.643 Employee Conduct ............................................................................................................... 4.643

Conduct on Company Business ................................................................................... 4.643 Reporting Violations ............................................................................................................. 4.644 Discipline ................................................................................................................................ 4.644 Compliance Letter and Conflict of Interest Questionnaire ............................................ 4.646

Code of Conduct Compliance Questionnaire .......................................................................... 4.647 Conflict of Interest ................................................................................................................ 4.647 Political ................................................................................................................................... 4.649 Securities Trading .................................................................................................................. 4.649 Financial Integrity .................................................................................................................. 4.649 Other ....................................................................................................................................... 4.649

FRAUD RISK ASSESSMENT What Is Fraud Risk? .................................................................................................................... 4.701

Why Should an Organisation Be Concerned About Fraud Risk? .................................. 4.701 The Business It Is In ...................................................................................................... 4.702 The Environment in Which It Operates ..................................................................... 4.702 The Effectiveness of Internal Controls Within the Business Processes ................ 4.702 The Ethics and Values of the Company and the People Within It ......................... 4.702

What Is a Fraud Risk Assessment? ............................................................................................ 4.703 What Is the Objective of a Fraud Risk Assessment? ....................................................... 4.703 Why Should Organisations Conduct Fraud Risk Assessments? .................................... 4.703

Improve Communication and Awareness About Fraud .......................................... 4.703 Identify What Activities Are the Most Vulnerable to Fraud .................................... 4.704 Know Who Puts the Organisation at the Greatest Risk ........................................... 4.704 Develop Plans to Mitigate Fraud Risk ......................................................................... 4.704 Develop Techniques to Determine If Fraud Has Occurred in High-Risk Areas .......................................................................................................... 4.704



FRAUD RISK ASSESSMENT (CONT.) What Makes a Good Fraud Risk Assessment? ................................................................. 4.704

The Right Sponsor ......................................................................................................... 4.705 Independence/Objectivity of the People Leading and Conducting the Work ....................................................................................................................... 4.705 A Good Working Knowledge of the Business .......................................................... 4.706 Access to People at All Levels of the Organisation .................................................. 4.706 Engendered Trust ........................................................................................................... 4.707 The Ability to Think the Unthinkable ......................................................................... 4.707 A Plan to Keep It Alive and Relevant ......................................................................... 4.707

Considerations for Developing an Effective Fraud Risk Assessment .......................... 4.707 Packaging It Right .......................................................................................................... 4.707 One Size Does Not Fit All ............................................................................................ 4.708 Keeping It Simple ........................................................................................................... 4.708

Preparing the Company for a Fraud Risk Assessment ........................................................... 4.708 Assemble the Right Team to Lead and Conduct the Fraud Risk Assessment ............. 4.709 Determine the Best Techniques to Use to Conduct the Fraud Risk Assessment ....... 4.709

Interviews ........................................................................................................................ 4.710 Focus Groups ................................................................................................................. 4.710 Surveys ............................................................................................................................. 4.710 Anonymous Feedback Mechanisms ............................................................................ 4.711

Obtain the Sponsor’s Agreement on the Work to Be Performed ................................. 4.711 Educate the Organisation and Openly Promote the Process ......................................... 4.711

Executing the Fraud Risk Assessment ...................................................................................... 4.712 Choosing a Framework ........................................................................................................ 4.712 Sample Fraud Risk Assessment Framework #1 ............................................................... 4.712

Identify Potential Inherent Fraud Risks ...................................................................... 4.713 Assess the Likelihood of Occurrence of the Identified Fraud Risks ...................... 4.716 Assess the Significance to the Organisation of the Fraud Risks ............................. 4.717 Evaluate Which People and Departments Are Most Likely to Commit Fraud and Identify the Methods They Are Likely to Use ................................................. 4.717 Identify and Map Existing Preventive and Detective Controls to the Relevant Fraud Risks .................................................................................................. 4.717 Evaluate Whether the Identified Controls Are Operating Effectively and Efficiently ..................................................................................................................... 4.718 Identify and Evaluate Residual Fraud Risks Resulting from Ineffective or Nonexistent Controls ................................................................................................. 4.719

Sample Fraud Risk Assessment Framework #2—Fraud Risk Index ............................ 4.719 Fraud Risk Index ............................................................................................................ 4.719 Leadership Risk Profile .................................................................................................. 4.720

Responding to Residual Fraud Risks ......................................................................................... 4.721 Avoid the Risk ....................................................................................................................... 4.722 Transfer the Risk ................................................................................................................... 4.722



FRAUD RISK ASSESSMENT (CONT.) Mitigate the Risk .................................................................................................................... 4.722 Assume the Risk .................................................................................................................... 4.722 Combination Approach ........................................................................................................ 4.722

Reporting the Results of the Fraud Risk Assessment ............................................................. 4.723 Considerations When Reporting the Assessment Results ............................................... 4.723

Report Objective—Not Subjective—Results ............................................................ 4.723 Keep It Simple ................................................................................................................ 4.723 Focus On What Really Matters .................................................................................... 4.723 Identify Actions That Are Clear and Measurable to Drive Results ........................ 4.723

Sample Report Formats ........................................................................................................ 4.724 Graphic Report Format ................................................................................................. 4.724 Executive Summary Report Format ............................................................................ 4.724

Reporting the Leadership Risk Assessment Results ........................................................ 4.725 Making an Impact with the Fraud Risk Assessment ............................................................... 4.725

Begin a Dialogue Across the Company ............................................................................. 4.725 Look for Fraud in High-Risk Areas ................................................................................... 4.726 Hold Action Owners Accountable for Progress .............................................................. 4.726 Keep It Alive and Relevant .................................................................................................. 4.726

The Fraud Risk Assessment and the Audit Process ............................................................... 4.726 The Fraud Risk Assessment Tool .............................................................................................. 4.728

Introduction ........................................................................................................................... 4.728 MODULE # 1—Employee Assessment .......................................................................... 4.729 MODULE # 2—Management/Key Employee Assessment ......................................... 4.733 MODULE # 3—Physical Controls to Deter Employee Theft and Fraud .................. 4.738 MODULE # 4—Skimming Schemes ................................................................................ 4.740 MODULE # 5—Cash Larceny Schemes .......................................................................... 4.743 MODULE # 6—Cheque Tampering Schemes ................................................................ 4.746 MODULE # 7—Cash Register Schemes ......................................................................... 4.749 MODULE # 8—Purchasing and Billing Schemes .......................................................... 4.751 MODULE # 9—Payroll Schemes ..................................................................................... 4.754 MODULE # 10—Expense Schemes ................................................................................ 4.756 MODULE # 11—Theft of Inventory and Equipment .................................................. 4.757 MODULE # 12—Theft of Proprietary Information ..................................................... 4.761 MODULE # 13—Corruption ............................................................................................ 4.763 MODULE # 14—Conflicts of Interest ............................................................................ 4.764 MODULE # 15—Fraudulent Financial Reports ............................................................. 4.765

ETHICS FOR FRAUD EXAMINERS What Is Ethics?............................................................................................................................. 4.801

An Ethical Decision Maker’s Role ...................................................................................... 4.802 Ethical Decisions ................................................................................................................... 4.802

Morality, Ethics, and Legality ..................................................................................................... 4.803



ETHICS FOR FRAUD EXAMINERS (CONT.) The High Road ...................................................................................................................... 4.803 Philosophy, Ethics, and Law ............................................................................................... 4.804 Means and Ends .................................................................................................................... 4.805

Some Concluding Remarks......................................................................................................... 4.806 ACFE CODE OF PROFESIONAL ETHICS Commitment to Professionalism and Diligence ...................................................................... 4.902

Professionalism ...................................................................................................................... 4.902 Specialised Knowledge and Formal Education .......................................................... 4.902 Professional Admission Standards ............................................................................... 4.903 Standards of Conduct .................................................................................................... 4.903 Individual Fraud Examiners ......................................................................................... 4.903

Diligence ................................................................................................................................. 4.904 Legal and Ethical Conduct and Conflict of Interest ............................................................... 4.904

Illegal Conduct ....................................................................................................................... 4.904 Libel and Slander ............................................................................................................ 4.904 False Imprisonment ....................................................................................................... 4.905

Unethical Conduct ................................................................................................................ 4.905 Conflict of Interest and “Independence” Considerations............................................... 4.906

Integrity and Competence ........................................................................................................... 4.906 Integrity ................................................................................................................................... 4.907 Professional Competence ..................................................................................................... 4.907

Programming ................................................................................................................... 4.908 Investigation .................................................................................................................... 4.908 Reporting ......................................................................................................................... 4.908

Professional Scepticism ........................................................................................................ 4.908 Court Orders and Testimony ..................................................................................................... 4.909 Reasonable Evidential Basis for Opinions ............................................................................... 4.910

Evidential Basis for Opinions ............................................................................................. 4.910 Guilt and Innocence ............................................................................................................. 4.911

Confidential Information ............................................................................................................ 4.912 Proper Authorisation ............................................................................................................ 4.914 Relation to Conflict of Interest ........................................................................................... 4.914 Public Information ................................................................................................................ 4.915 Blowing the Whistle .............................................................................................................. 4.915

Complete Reporting of Material Matters .................................................................................. 4.916 Professional Improvement ......................................................................................................... 4.917 Professional Standards and Practices ........................................................................................ 4.918

General Standards ................................................................................................................. 4.918 Independence and Objectivity ...................................................................................... 4.918 Qualifications .................................................................................................................. 4.918 Fraud Examinations ....................................................................................................... 4.919



ACFE CODE OF PROFESIONAL ETHICS (CONT.) Confidentiality ................................................................................................................. 4.919

Specific Standards.................................................................................................................. 4.919 Independence and Objectivity ...................................................................................... 4.919 Qualifications .................................................................................................................. 4.920 Fraud Examination ......................................................................................................... 4.921 Confidentiality ................................................................................................................. 4.921

Predication Standards .................................................................................................................. 4.922 Bribery ..................................................................................................................................... 4.922 Conflicts of Interest .............................................................................................................. 4.922 Embezzlement ....................................................................................................................... 4.923 False Financial Statements ................................................................................................... 4.923 False Pretences ....................................................................................................................... 4.923 Theft ........................................................................................................................................ 4.924

CFE CODE OF PROFESIONAL STANDARDS CFE Code of Professional Standards ....................................................................................... 4.1001

I. Preamble ............................................................................................................................. 4.1001 II. Applicability of Code ....................................................................................................... 4.1001 III. Standards of Professional Conduct ............................................................................. 4.1002 IV. Standards of Examination ............................................................................................. 4.1004 V. Standards of Reporting ................................................................................................... 4.1004