Global fraud is the same — legal systems aren't

Fraud examiners are increasingly tackling complicated cases that simultaneously involve several nations. We must look for legal guidance for our organizations’ cross-border operations. Here’s a start.

Consider this scenario. You work as a fraud examiner for a U.S. multinational corporation. You have strong evidence that a longtime company procurement director, Max, has been taking kickbacks from a vendor. But you’re scratching your head. Max works for a new subsidiary of your corporation in Germany. The vendor is based in Belgium, but Max accepted the  kickbacks from the vendor’s rep in the Netherlands. And, on top of all that, Max is a citizen of France. What do you do? Don’t waste any time — quickly consult reputable legal counsel who are familiar with laws in all these countries.

Like it or not, globalism is increasing. Many fraud examiners are finding that the corporations they work for are acquiring businesses in many countries. These conglomerates are inheriting not just firms’ assets but also their monetary and legal liabilities. CFEs need to know how to translate nations’ laws and regulations to help keep their employers above water.

Here we visit basic and more advanced concepts of the law related to fraud from around the world, including types of legal systems, forms of evidence, investigations in private actions and more.

Types of legal systems

At a basic level, legal systems around the world can be divided into several categories.

Religious and secular systems

Religious systems derive their laws from interpretations of religious texts and treat them as divine mandates. However, today few countries rely exclusively on religious law. Instead, it’s often used in conjunction with secular law. For example, some countries that use religious law restrict its application to issues such as divorce, inheritance and child custody, while using secular law to govern criminal and commercial law.

The majority of legal systems are secular systems. This means they aren’t based on any particular religion. Instead, relevant governmental authorities design and implement them.

Common law and civil law systems

Most legal systems also fall under the umbrella of one of two legal “families”: common law systems and civil law systems. Common law refers to judge-made law. Countries that incorporate common law into their legal systems generally recognize the extensive application of judicial precedent. In the legal context, precedent refers to an earlier court ruling that applies to a particular dispute. For example, if the highest court in a particular jurisdiction issues a ruling regarding government searches, lower courts within that jurisdiction are obligated to follow that ruling whenever the relevant issue arises.

In contrast, judges play less crucial roles in civil law systems. In these systems, judge-made law is either a minor aspect or completely absent. Instead, civil-law countries formally codify their laws. Civil-law countries often don’t recognize judicial precedence, or they utilize it in a more limited manner than common-law jurisdictions. This means that civil-law courts don’t shape the law to the same extent as their counterparts in common law countries. Civil law has its roots in ancient Roman law and is by far the most common basis for legal systems worldwide.

Adversarial and inquisitorial proceedings

A further distinction between common-law and civil-law systems is the process used to settle legal disputes. Most common-law countries use adversarial proceedings, in which a presiding judge essentially acts as a referee between the two parties to the dispute. Each party presents its case and has the opportunity to challenge or rebut arguments advanced by the opposing side. Then, a judge, group of judges or a jury issues a decision based on the facts presented.

In contrast, civil-law countries frequently use inquisitorial proceedings (sometimes referred to as nonadversarial proceedings) to settle legal disputes. Judges play much more active roles in inquisitorial systems, in which they’re generally tasked with actively investigating the case. For example, in adversarial systems the parties involved in the dispute are generally tasked with collecting evidence and questioning witnesses at trial. In countries that use an inquisitorial system the presiding judge might question witnesses and supervise the gathering of evidence. After the completion of an investigation the judge, a group of judges or a jury will decide the outcome of the case.

Hybrid systems

There’s significant crossover between common-law and civil-law systems, and many countries use hybrid systems that incorporate aspects of both. For example, most countries that use common law don’t rely exclusively on judicial decisions as the source of law. Generally, these countries have legislatures that draft and enact laws. However, the judiciary generally has the power to shape those laws (or to strike them down as unconstitutional) if they arise during a legal dispute. Additionally, countries that predominantly use adversarial systems might task judges with more active responsibilities in certain kinds of cases (e.g., minor traffic violations, administrative decisions).

Definition of Evidence

In the most general sense, evidence is anything that tends to prove or disprove some claim or assertion. In the legal sense, evidence refers to the testimony, documents, exhibits and other tangible objects offered to prove or disprove the existence of an alleged fact during court proceedings.

Most legal systems have intricate sets of principles that govern the admission of evidence. The purpose of these principles is to ensure only relevant and probative evidence is admitted in court proceedings and irrelevant, unreliable and prejudicial evidence is excluded so that cases can be decided fairly and expeditiously.

Rules of evidence affect every aspect of a legal case — from filing the complaint to the presentation of witnesses and exhibits. These rules often govern not just what counts as evidence but also how that evidence is gathered, handled and presented.

Of course, the rules of evidence vary significantly among countries and legal systems. Some countries maintain extensive rules that regulate the admission of evidence. For example, in Canada, the Canada Evidence Act regulates the rules of evidence in federal cases. Similarly, the Federal Rules of Evidence (FRE) govern evidence in U.S. federal courts.

In contrast, many countries (particularly those with civil law legal systems) don’t have explicit evidentiary rules or have less detailed rules. As a result, judges in these countries are often afforded greater discretion regarding the admission of evidence.

The rules of evidence in a particular jurisdiction are often complex and can involve not only explicit rules but judicial interpretations of those rules. As a result, fraud examiners should consult legal counsel if an important question of evidence arises during a fraud investigation. Additionally, rules of evidence vary by jurisdiction, even within the same country. For example, in the U.S., state courts maintain their own evidentiary rules that might differ from the Federal Rules of Evidence. Likewise, each province of Canada maintains its own evidence act for provincial proceedings.

Three basic forms of evidence

There are three basic forms that evidence can take: testimonial, real and demonstrative.

Testimonial evidence

Testimonial evidence refers to the oral or written statements made by witnesses under oath. In general, there are two types of testimonial witnesses: lay witnesses and expert witnesses. A lay witness (or fact witness) is a nonexpert witness who must testify from personal knowledge about a matter at issue. An expert witness is a person who, by reason of education, training, skill or experience, has the requisite qualifications to render an opinion or otherwise testify in areas relevant to resolution of a legal dispute.

Real evidence

Real evidence refers to physical objects that played a part in the issue(s) being litigated. The term includes both documentary evidence such as bank statements, invoices, ledgers and letters, as well as other types of physical evidence (e.g., fingerprints, fibers, tire tracks). Therefore, a printer in a case involving questioned documents is clearly real evidence as is an audio recording since members of the court can experience the sounds firsthand.

Demonstrative Evidence

Demonstrative evidence is a tangible item that illustrates some material proposition (e.g., a map, a chart or a summary). Demonstrative evidence differs from real evidence because it wasn’t part of the underlying event; it was created specifically for the legal proceeding. For example, a computer-generated video might be used to show how a car accident likely occurred. The purpose of demonstrative evidence is to provide a visual aid for the fact finder. As long as it meets the relevant evidentiary standards, demonstrative evidence can be introduced to assist the fact finder in reaching a verdict.

Direct versus circumstantial evidence

There are also two basic types, as distinguished from forms, of admissible evidence: direct evidence and circumstantial evidence. Direct evidence is evidence that tends to prove or disprove a fact in issue directly, such as eyewitness testimony or a confession. Circumstantial evidence is evidence that tends to prove or disprove facts in issue indirectly, by inference. Many fraud cases are proven entirely by circumstantial evidence or by a combination of circumstantial and direct evidence but seldom by direct evidence alone. The most difficult element to prove in many fraud cases — fraudulent intent — is usually proved circumstantially, and necessarily so, because direct proof of the defendant’s state of mind, absent a confession or the testimony of a co-conspirator, is often impossible.

Investigations in private actions

The right for businesses and organizations to investigate, examine or audit for fraud is implicit in most countries. Of course, investigations in private actions are subject to certain legal limitations, some of which — such as the laws prohibiting unauthorized electronic surveillance — are enforced with criminal as well as civil penalties. Overzealous or imprudent acts by private parties (even if technically legal) can result in civil suits, complaints and other issues that can delay, disrupt or even completely derail an otherwise meritorious case. Thus, fraud examiners must keep in mind the rights of those involved in any private investigation.

The following is a brief discussion of some legal issues that might arise as a result of an investigation, particularly one conducted in an irresponsible manner, carried out without predication, or conducted in a way that blatantly violates the rights of those involved. These issues are avoidable if fraud examiners employ common sense and professional standards to accomplish legitimate objectives. Fraud examiners should always pursue facts, not people; should ask rather than accuse; and should seek to prove rather than allege.

Defamation

Many countries have defamation laws that provide redress against harm to reputation. Generally speaking, defamation refers to the unprivileged publication of false statements about a person that harm that person’s reputation.

Defamation can be a crime or a civil violation, depending on the particular jurisdiction where the alleged offense occurred. Additionally, some jurisdictions treat certain kinds of defamation as civil violations and other types as crimes punishable by incarceration.

In most common-law jurisdictions, the law of defamation comes in two forms: libel and slander. Libel refers to defamatory statements in writing, and slander refers to spoken statements, although the distinction often is unclear in cases involving electronic media. Thus, the key difference between libel and slander is the form in which an individual made the defamatory statement. However, not all jurisdictions make a distinction between libel and slander.

The threat of a defamation lawsuit is always present when there are allegations of wrongdoing made against employees. For example, a claim of defamation might arise in the context of an interview if the interviewer makes unfounded accusations or statements in the presence of a third party.

If a plaintiff (i.e., the party who initiates a legal action) is successful in a claim for defamation, that party may recover economic damages (e.g., lost business, lost earning potential), noneconomic damages (e.g., pain and suffering, emotional distress), and punitive damages, which can be substantial. The types of damages available vary across jurisdictions and depend on the nature of the case.

Elements of defamation

While the treatment of defamation (whether it’s libel or slander) varies by jurisdiction, the following are the most common elements necessary to support a claim:

• The defendant made an untrue statement of fact.
• The statement was communicated (published) to third parties.
• The statement was made on an unprivileged occasion.
• The statement caused injury to the subject.

Untrue statement of fact

To be defamatory, a statement must be a statement of fact (not opinion) and be untrue. Thus, truth is an absolute defense to defamation.

Communicated to third parties

To be defamatory, a statement must be conveyed, either orally or in writing, to one or more third parties. Defamation doesn’t occur when one accuses another directly and in the presence of no other parties; to be defamatory, a statement must be heard or read by a third party.

Unprivileged occasion

For a statement to qualify as defamatory, the occasion in which the statement is made must be an unprivileged one. Many jurisdictions recognize that there are some circumstances in which the need to share information is so important that people should be free to make mistakes without having to worry about being sued for defamation. Statements made in these circumstances are said to be privileged.

Assuming that an employee can establish that an individual made and communicated defamatory statements about the employee to a third party, some of the most common recognized privileges include:

• Statements made during a judicial proceeding.
• Statements made in preparation of judicial proceedings.
• Statements made between a legal professional (e.g., solicitor or attorney) and client.
• Good faith statements made to protect a legitimate interest of the speaker or recipient, such as a communication between an employee and employer regarding an important business matter or the results of an examination into suspected fraud.

Accordingly, in many jurisdictions, a number of privileges protect prudent fraud examiners from defamation claims.

Injury

Additionally, to be considered defamatory, a statement must cause some kind of injury. This often takes the form of damage to reputations. For example, a plaintiff might argue that he lost business opportunities and income because the statement damaged his professional reputation.

Just the beginning

The information in this article is a start in learning what you need as you conduct fraud examinations that cross global jurisdictions. See chapter 2 in my “International Fraud Handbook,” and the rest of the book, to learn from CFE nationals around the world about the legal specifics of their countries. (See “Legal information about fighting fraud in four disparate countries” at the end of this article.)

And, of course, consult with your legal counsel before tackling any fraud investigations outside your borders.

Dr. Joseph T. Wells, CFE, CPA, is the founder and Chairman of the ACFE. Contact him at jwells@ACFE.com.

This article is excerpted and adapted from the "International Fraud Handbook," edited by Dr. Joseph T. Wells, CFE, CPA, published by John Wiley & Sons Inc. ©2018 Used with permission.

Legal information about fighting fraud in four disparate countries

Anti-fraud professionals from around the world contributed this information, contained in the 2018 International Fraud Handbook, on some legal topics in just four dissimilar countries. It’s just a taste. The book contains much more material from many more regions and nations. Consult with your legal counsel when working in other countries.

Australia

Court records

Generally, civil and criminal court records aren’t available to the public. However, some civil court records are available via the Australasian Legal Information Institute’s online database. Criminal records and convictions generally can’t be accessed without the subject’s consent, but court schedules and attendance lists might be available online and can contain useful information. Court transcripts can sometimes be obtained by making a freedom of information request.

Major data privacy laws

• Australian Privacy Act 1988.
• Local laws governing surveillance devices, workplace surveillance or similar issues.

Most significant pieces of fraud-related legislation

Criminal Code Act 1995 and the criminal laws in states and territories that prohibit fraud.

Special legal considerations of which investigators from outside Australia should be aware

Generally, any person who conducts investigations (including surveillance) in any state or territory of Australia must hold an Investigator or Inquiry Agent License. Australia’s National Privacy Principles govern the collection, use, disclosure and storage of personal information.

China

Court records

For civil cases, most national-, provincial- and municipal-level court records are available online, but they’re usually incomplete. Criminal records aren’t available to be searched, but they’re frequently published in the media.

Major data privacy laws

China’s Cybersecurity Law, which took effect on June 1, 2017, is now the country’s primary data privacy law. Before this law, the legal protection of personal data was spread among a vast number of laws and regulations relating to different types of personal data, such as real estate ownership records, business information, telecommunications data, and data concerning personal identity and cross-border movements. These laws and regulations are still in force, but some of their provisions have been subsumed by the Cybersecurity Law when data is obtained or stored by electronic means. (See pages 219 – 220 of the International Fraud Handbook for a more complete list of major data privacy laws in China. – ed.)

Most significant pieces of fraud-related legislation

• Criminal law.
• Anti-unfair competition law.
• Anti-money laundering law.
• Contract law.
• Law on tendering and bidding.
• Securities law.

Special legal considerations of which investigators from outside China should be aware

Because of the ongoing anti-corruption campaign in China, sources might be reluctant to accept interviews, and it might be necessary to explain that the investigation is not being conducted on behalf of any government body. Interviewees might be more comfortable working with investigators who can speak Chinese.

Czech Republic

Court records

Criminal records are maintained at the Criminal Records Office in Prague, which is part of the Ministry of Justice. Individuals can request copies of their criminal records from the Penal Register. Corporate criminal records are accessible by the general public. The decisions of the Constitutional Court, Supreme Court and Supreme Administrative Court are published periodically in official reports. These decisions are also available for free on each court’s website, but most of them aren’t available in English.

Major data privacy laws

Until May 25, 2018, EU Directive 95/46/EC and Czech Act No. 101/2000 Coll., on the Protection of Personal Data, restricted the collection and transfer of personal information. Now the more restrictive EU General Data Protection Regulation replaced them.

Most significant pieces of fraud-related legislation

Investigators conduct investigations into alleged breaches of, among others, the Civil and Criminal Codes; Codes of Criminal, Civil, and Administrative Procedure; Labor Law; Intellectual Property Law; Act on Criminal Liability of Legal Entities and Their Prosecution; Tax Law; bank regulations under the Czech Anti-Money Laundering Act; Act on Capital Markets; and Public Procurement Act.

Special legal considerations of which investigators from outside the Czech Republic should be aware

Private fraud investigators don’t need a license or special training in the Czech Republic. The CFE designation can be an advantage in some cases. Data privacy laws restrict the transmission of personal data outside the country.

United Arab Emirates

Court records

Not all court records are available to the public. Lawyers and legal professionals must make official requests to the court for access to particular records. There’s no central database for all cases in the United Arab Emirates. To determine whether there’s current litigation against an individual, an investigator must proceed through a law firm or public prosecution. In some cases, local influence with the police or an immigration department can help. The collection/recovery departments of banks often have strong influence.

Major data privacy laws

There’s no general data protection law. However, Article 378 of the Penal Code (Federal Law No. 3 of 1987) prohibits the publication of any personal data that relates to an individual’s private or family life. Disclosing secrets relating to someone’s private life without that person’s consent can result in liability. Similarly, disclosure of confidential information, such as information belonging to an employer, can result in liability. Federal Decree Law No. 5 of 2012 on Combatting Cybercrimes (Cybercrime Law) prohibits the invasion of an individual’s privacy by means of a computer network, electronic information system, or information technology without the individual’s consent.

Most significant pieces of fraud-related legislation

• Federal Law No. 3 of 1987.
• Federal Law No. 19 of 2016.

Enforcement of established anti-corruption laws received a boost with the Abu Dhabi Executive Council announcing the establishment of an Anti-Corruption Unit in May 2015. The decision to establish a specialized department to combat corruption is considered one of the main cornerstones that will assist in the continuing development of the country, limiting the chances of corrupt individuals hindering such growth. The anti-corruption unit is established with the Abu Dhabi Accountability Authority.