Opening The Fraud Examiner's Tool Kit

This new, occasional column reviews basic tenets of fraud examination for the practitioner regardless of age or experience. Send potential material to FraudMagazine@ACFE.com. The material for this issue is excerpted and adapted from the 2008 ACFE's Fraud Examiners Manual. - ed. 

 

Essentially three tools are available to the fraud examiner regardless of the nature of the fraud examination. First is interviewing - the process of obtaining relevant information about the matter from those who know about it. For instance, in a corporate situation, it might be necessary to interview a suspect's co-workers, superiors, and subordinates. 

 

Second, the fraud examiner must be skilled in the examination of financial statements, books and records, and supporting documents. The examiner must know the legal ramifications of evidence and ways to maintain the chain of custody over documents. For instance, the fraud examiner must lawfully obtain and analyze checks and other financial records to prove the case and then draw conclusions. 

 

Finally, fraud examiners are often placed in a position in which they must observe behavior, search for displays of wealth, and in some instances, observe specific offenses. For example, you might recommend a video surveillance of a company's cashiers department to witness a defalcation. You might establish visual surveillance in a public place to determine a subject's patterns or activities. 

 

INTERVIEWING 

If it appears that the fraud theory is still applicable after you analyze the documents, the examiner then interviews witnesses. 

 

Neutral Third-party Witnesses 

A neutral third-party witness is a person not involved in a specific instance of fraud. For instance, in the examination of a corporate employee fraud, it would be common for the fraud examiner to interview the personnel officer about the suspect's personnel file. 

 

Corroborative Witnesses 

These witnesses corroborate facts relating to a specific offense. They might be cooperative or uncooperative, but they aren't directly related to the offense. Interview these witnesses after interviewing neutral third-party witnesses. 

 

Co-conspirators 

If after examining documents, neutral third-party witnesses, and corroborative witnesses, it still appears you'll need to do further work, you typically would interview co-conspirators to the alleged offense. Interview people in order of the least to the most culpable. In criminal prosecutions, law enforcement officers and prosecutors can sometimes promise leniency to co-conspirators ("inside witnesses") in return for their cooperation. Private-sector fraud examiners aren't permitted to make these promises; they might legally invalidate any admissions. 

 

Subject 

After you've obtained all necessary facts, interview the subject (also called the suspect or accused) last. Even if you think the subject won't confess, schedule an interview anyway. In many instances, the information you obtain can be used later for impeachment. An interview might also give you a good idea of the defenses the subject might raise. 

 

PURPOSE OF THE FRAUD EXAMINATION 

The fraud examination's purpose is to prove or disprove the offense's legal elements. Each element must be proven (1) beyond a reasonable doubt in criminal cases, and (2) by a preponderance of the evidence in civil cases. To do this, it's necessary to understand certain objectives common to white-collar cases. You can lose sight of the objectives because fraud examinations often involve an extensive array of information. 

 

Elements of White-collar Offenses 

It's not possible or necessary to list every variation of white-collar crime and fraud. But all have common elements including the offender: 

• Having the intent to knowingly commit a wrongful act or achieve a purpose inconsistent with law or public policy
• Disguising of purpose or employing falsities and misrepresentations to accomplish the scheme
• Relying on the ignorance or carelessness of the victim
• Concealing the offense

 

Intent 

You must show intent, which is rarely evident, in a fraud and the pattern of activity. Some of the more common ways to show intent include proof that the accused: 

• Had no legitimate motive for the activities
• Repeatedly engaged in the same or similar activity of an apparent wrongful nature
• Made conflicting statements
• Made admissions
• Acted to impede the investigation of the offense
• Made statements the offender clearly knew to be false 

 

Disguise and Misrepresentation 

This usually is shown through the facts that the representation was false either by omission or commission. 

 

Voluntary Victim Action to Assist the Offender 

It usually isn't difficult to obtain proof from the victim that he assisted the offender. It's important that you ascertain from the victim the fraud's exact circumstances and clearly delineate the reasons that made the fraud possible. In employee thefts, for example, the victim (the company) entrusts the care of assets to the subject. You must establish that fiduciary capacity. 

 

Concealment 

Concealment is a cornerstone of fraud. Perpetrators in traditional crimes make efforts to conceal, but fraudsters take steps to keep victims ignorant. In embezzlement cases, for example, the amount of money taken at any one time usually is small relative to the total company assets. 

 

To hide their actions, fraud perpetrators often create complex financial trails. The more obscure the act, the greater the likelihood that it won't be detected. Some fraud cases involve fraudulent invoices and journal entries. You can often prove concealment in these types of cases by showing that the entries only existed to conceal the fraud. 

 

PROOF STAGES IN FRAUD CASES 

Proof in most complex white-collar cases usually proceeds through three basic stages. First, the fraud examiner builds the circumstantial case through interviews of cooperative witnesses and review of available documentation. Then the examiner uses the circumstantial evidence to identify and persuade an inside witness who can provide direct evidence against the defendant. Finally, the fraud examiner seals the case, identifies and rebuts defenses, and proves intent through examination of the subject. 

 

Stage One: Building the Circumstantial Case 

As used here, circumstantial evidence is all proof other than direct admission of wrongdoing by the subject or a co-conspirator. In a fraud case, it's the proof of the defendant's representations and evidence of his falsity and intent. In a corruption case, it's evidence of the standard behavior, the defendant's breach, and the illegal payments. The circumstantial case also might include "similar act evidence" to show a common scheme or plan, lack or mistake or accident, modus operandi, and most commonly, intent. 

 

Circumstantial evidence might be all that's available. It must be complete with no gaps, consistent (tending to prove a single point), and exclude all explanations other than guilt. 

 

Collecting this type of evidence can be very difficult. Many complex cases lose direction during the circumstantial stage when the examiner becomes overwhelmed by the mass of accumulated details and documents. To avoid getting bogged down, consider the following. 

 

Keep an Eye on the Ball 

Remember the importance of the fraud theory and keep in mind exactly what you're attempting to prove at all times. If you lose track of the objective, review and reorganize the evidence, develop an alternate theory, and refocus efforts. Remember that you're always trying to prove or disprove something - even if it's just a hunch - but never merely collecting information. 

 

Simplify the Case 

If the case starts to sink under its own weight, look for a less-demanding legal theory, break the case down into smaller components (for example, prove one set of charges against one set of defendants before pursuing the other), or look for an informant or inside witness. The objective in every complex case is to break it down to its essentials and make it as simple and clear as possible. 

 

Stage Two: Obtaining Direct Evidence 

In many cases, it's necessary to gain cooperation from a co-conspirator or other insider either because the case is so complicated that it's otherwise unmanageable, or because a key element - such as cash payments in a corruption case or the full extent of wrongdoing or intent in a fraud case - can't be proved circumstantially. In some cases, the objective of the circumstantial stage isn't so much to obtain evidence to convict the ultimate defendant but rather to identify and turn an inside witness. 

 

It's best to approach the least culpable witness first. In a corruption case, this might be the "bag man" - a subordinate. If the only choice is the payer or taker, usually the payer is the better choice. A jury will react negatively if its members believe that the witness is more culpable than the defendant. Decide how to convince the witness to assist. Ideally, to preserve the witness' credibility, the fewer concessions you make, the better. Remember that immunity can be given only with the consent of the court. 

 

Corroborate even the most self-incriminating testimony of a co-conspirator. Testimony from the insider should mesh with and augment the circumstantial evidence and not replace it. The credibility of a turned witness can become the central issue in the case and distract the jury from the strength of the circumstantial evidence. Don't use nonessential testimony from a co-conspirator if it can't be corroborated. 

 

Be aware that cooperating, culpable witnesses in a white-collar case often minimize their roles to avoid embarrassment, even if protected from legal consequences, and are prone to describe themselves more as observers than participants. This is very damaging to credibility, and must be overcome before these witnesses can be perceived as believable. 

 

Stage Three: Sealing the Case through Examination of the Subject 

Circumstantial evidence might be explained away and direct testimony impeached or rebutted. The best witness against the suspect might be himself. The suspect's admissions might provide otherwise missing elements. "False exculpatories" - lies offered to explain or justify conduct - might be the best evidence of intent. False denials of cash deposits in a corruption case might indicate an illicit source; false explanations for fraudulent representations might help prove that the original misstatements were intentional. 

 

To be effective, impeachment must show real - not apparent or explainable contradictions - and must focus on central, not tangential or trivial, points. Attempted impeachment fails many times because the plaintiff hasn't laid a sufficient foundation to show that the defendant's statements were knowingly false. 

 

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