FRAUD EXAMINERS MANUAL TABLE OF CONTENTS VOLUME I SECTION 1 FINANCIAL TRANSACTIONS AND FRAUD SCHEMES ACCOUNTING CONCEPTS Accounting Basics ........................................................................................................................ Financial Statements .................................................................................................................... Generally Accepted Accounting Principles .............................................................................. 1.101 1.105 1.116 FINANCIAL STATEMENT FRAUD What Is Financial Statement Fraud?.......................................................................................... The Cost of Financial Statement Fraud .................................................................................... Why Financial Statement Fraud Is Committed ....................................................................... Trends in Financial Statement Fraud ........................................................................................ Financial Statement Fraud Schemes .......................................................................................... What Red Flags Are Associated with Financial Statement Fraud in General? ................... Detection of Fraudulent Financial Statement Schemes ......................................................... Financial Statement Analysis ...................................................................................................... Interviews in Fraudulent Financial Statement Cases .............................................................. Prevention of Financial Statement Fraud ................................................................................. 1.203 1.204 1.204 1.206 1.208 1.237 1.238 1.240 1.248 1.256 ASSET MISAPPROPRIATION: CASH RECEIPTS Skimming ....................................................................................................................................... Cash Larceny................................................................................................................................. Theft of Cash on Hand ............................................................................................................... 1.301 1.320 1.333 ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS Register Disbursement Schemes ................................................................................................ Payment Tampering Schemes .................................................................................................... Billing Schemes............................................................................................................................. Payroll Fraud Schemes ................................................................................................................ Expense Reimbursement Schemes ............................................................................................ 1.401 1.410 1.437 1.457 1.475 ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS Misuse of Inventory and Other Assets ..................................................................................... 1.501 Theft of Inventory and Other Assets........................................................................................ 1.502 Misappropriation of Intangible Assets ...................................................................................... 1.518 Fraud Examiners Manual: 2022 Edition i FRAUD EXAMINERS MANUAL FINANCIAL TRANSACTIONS AND FRAUD SCHEMES CORRUPTION What Is Corruption? .................................................................................................................... Forms of Corruption ................................................................................................................... Methods of Making Corrupt Payments .................................................................................... Detection of Corruption Schemes............................................................................................. Conflicts of Interest ..................................................................................................................... Anti-Corruption Programs ......................................................................................................... 1.601 1.601 1.609 1.611 1.627 1.638 THEFT OF DATA AND INTELLECTUAL PROPERTY Competitive Intelligence Versus Espionage............................................................................. Where Intelligence Professionals Get Information ................................................................ Favorite Employee Targets of Intelligence Professionals ...................................................... How Information Is Lost or Stolen .......................................................................................... Electronic Countersurveillance .................................................................................................. Insider Threats to Proprietary Information ............................................................................. Investigating Corporate Espionage ........................................................................................... Program for Safeguarding Proprietary Information ............................................................... Minimizing the Risks of Misappropriation Claims.................................................................. 1.702 1.704 1.712 1.713 1.734 1.735 1.740 1.742 1.754 IDENTITY THEFT Perpetrators of Identity Theft .................................................................................................... Victims of Identity Theft ............................................................................................................ Methods of Committing Identity Theft .................................................................................... Types of Identity Theft Schemes ............................................................................................... How Identity Thieves Steal Information .................................................................................. Methods of Preventing Identity Theft ...................................................................................... How to Respond to Identity Theft............................................................................................ 1.801 1.802 1.803 1.804 1.808 1.815 1.816 FINANCIAL INSTITUTION FRAUD Embezzlement Schemes ............................................................................................................. 1.901 Loan Fraud .................................................................................................................................... 1.905 Real Estate Fraud ......................................................................................................................... 1.916 New Account Fraud Schemes .................................................................................................... 1.936 Money Transfer (Wire) Fraud Schemes .................................................................................... 1.940 Automated Teller Machine Fraud.............................................................................................. 1.943 Account Takeover ........................................................................................................................ 1.944 Advance-Fee Fraud ...................................................................................................................... 1.945 ii Fraud Examiners Manual: 2022 Edition FRAUD EXAMINERS MANUAL FINANCIAL TRANSACTIONS AND FRAUD SCHEMES FINANCIAL INSTITUTION FRAUD (CONT.) Letter-of-Credit Fraud ................................................................................................................. Inside/Outside Frauds ................................................................................................................ Prevention ..................................................................................................................................... Suspicious Transaction Reports ................................................................................................. The Basel Committee on Banking Supervision ....................................................................... 1.947 1.947 1.948 1.950 1.951 PAYMENT FRAUD Check Fraud .................................................................................................................................. Payment Card Fraud .................................................................................................................... Prevention and Detection of Payment Card Fraud ................................................................ Electronic Bill Payment and Person-to-Person Payments ..................................................... Online and Mobile Account Fraud ........................................................................................... Alternative Currencies ................................................................................................................. 1.1001 1.1013 1.1023 1.1034 1.1043 1.1045 INSURANCE FRAUD Types of Insurance Policies ........................................................................................................ Agent/Broker Fraud .................................................................................................................... Underwriting Irregularities.......................................................................................................... Vehicle Insurance Schemes ........................................................................................................ Property Schemes......................................................................................................................... Life Insurance Schemes............................................................................................................... Liability Schemes .......................................................................................................................... Workers’ Compensation Fraud .................................................................................................. Detecting and Preventing Insurance Fraud.............................................................................. 1.1101 1.1102 1.1103 1.1105 1.1108 1.1109 1.1109 1.1109 1.1119 HEALTH CARE FRAUD Types of Health Care Systems ................................................................................................... Provider Fraud .............................................................................................................................. Fraud by the Medical Staff .......................................................................................................... Inflated Billings............................................................................................................................. Kickbacks in the Health Care Industry ..................................................................................... Fraud by Medical Institutions .................................................................................................... Other Frauds in the Institutional Setting.................................................................................. Fraud in Special Care Facilities .................................................................................................. Fraud by the Patient..................................................................................................................... Fraud by Insurance Companies ................................................................................................. Employee Claims Fraud .............................................................................................................. 1.1201 1.1205 1.1212 1.1212 1.1217 1.1218 1.1224 1.1225 1.1227 1.1230 1.1232 Fraud Examiners Manual: 2022 Edition iii FRAUD EXAMINERS MANUAL FINANCIAL TRANSACTIONS AND FRAUD SCHEMES HEALTH CARE FRAUD (CONT.) Agent Fraud .................................................................................................................................. 1.1234 Electronic Claims Fraud.............................................................................................................. 1.1235 Health Care Compliance Programs ........................................................................................... 1.1238 CONSUMER FRAUD Consumer Fraud Schemes .......................................................................................................... Elder Fraud ................................................................................................................................... Telemarketing Fraud.................................................................................................................... Ponzi and Pyramid Schemes ...................................................................................................... 1.1301 1.1313 1.1316 1.1334 CYBERFRAUD What Is Cyberfraud? .................................................................................................................... Recognizing Computer Intrusion .............................................................................................. Insider Threats.............................................................................................................................. Computer Hacking....................................................................................................................... Malware ......................................................................................................................................... Email .............................................................................................................................................. Internet Fraud ............................................................................................................................... Electronic Commerce and Information Security .................................................................... Cybersecurity ................................................................................................................................ 1.1401 1.1402 1.1404 1.1405 1.1419 1.1432 1.1434 1.1436 1.1439 CONTRACT AND PROCUREMENT FRAUD Basics of Contract Law ............................................................................................................... Methods of Procurement ............................................................................................................ Phases in the Procurement Process........................................................................................... Categories of Procurement Fraud Schemes ............................................................................. Preventing Contract and Procurement Fraud.......................................................................... 1.1501 1.1503 1.1507 1.1511 1.1534 iv Fraud Examiners Manual: 2022 Edition FRAUD EXAMINERS MANUAL SECTION 2 LAW OVERVIEW OF THE LEGAL SYSTEM Basic Concepts of the Law ......................................................................................................... Types of Legal Systems ............................................................................................................... International Issues in Fraud Cases ........................................................................................... Court Systems ............................................................................................................................... Civil and Criminal Actions for Fraud ........................................................................................ Parallel Proceedings ..................................................................................................................... Administrative Proceedings ........................................................................................................ 2.101 2.103 2.109 2.110 2.111 2.113 2.114 THE LAW RELATED TO FRAUD Definition of Fraud ...................................................................................................................... Principal Types of Fraud ............................................................................................................. International Initiatives Against Fraud and Corruption ......................................................... 2.201 2.201 2.222 BANKRUPTCY (INSOLVENCY) FRAUD Key Parties in the Bankruptcy System ...................................................................................... Types of Bankruptcy Filings ....................................................................................................... Bankruptcy Schemes .................................................................................................................... Cross-Border Insolvency Regimes ............................................................................................ The World Bank Principles ........................................................................................................ 2.301 2.304 2.305 2.308 2.309 SECURITIES FRAUD What Constitutes a Security? ...................................................................................................... 2.401 Securities Laws and Regulations ................................................................................................ 2.422 Self-Regulatory Organizations.................................................................................................... 2.438 Securities Fraud Schemes ............................................................................................................ 2.440 Investigative Tips ......................................................................................................................... 2.455 MONEY LAUNDERING The Money Laundering Process ................................................................................................ Money Laundering Methods ...................................................................................................... International Anti-Money Laundering Efforts ........................................................................ Enforcement and Prevention Strategies ................................................................................... Special Problems for Insurance Companies ............................................................................ Fraud Examiners Manual: 2022 Edition 2.501 2.504 2.529 2.540 2.544 v FRAUD EXAMINERS MANUAL LAW TAX FRAUD Introduction .................................................................................................................................. Evidence of Tax Fraud................................................................................................................ Types of Tax Evasion Schemes ................................................................................................. Common Defenses to Allegations of Tax Evasion ................................................................ Fraud Schemes Targeting Taxpayers......................................................................................... 2.601 2.604 2.605 2.607 2.609 INDIVIDUAL RIGHTS DURING EXAMINATIONS Employees’ Duties and Rights During Investigations ............................................................ Rights and Obligations Under Criminal Law ........................................................................... The Law Relating to Government Search and Seizure........................................................... Investigations in Private Actions ............................................................................................... 2.701 2.708 2.714 2.717 THE CRIMINAL JUSTICE SYSTEM International Covenant on Civil and Political Rights ............................................................. The Charging Process.................................................................................................................. Defenses ........................................................................................................................................ The Trial Process ......................................................................................................................... Sentencing ..................................................................................................................................... Punishment ................................................................................................................................... Appeal ............................................................................................................................................ Corporate Criminal Liability ....................................................................................................... 2.801 2.803 2.805 2.807 2.816 2.817 2.818 2.819 THE CIVIL JUSTICE SYSTEM Procedure in Civil Cases ............................................................................................................. 2.901 Decisions and Remedies in Civil Cases..................................................................................... 2.910 Alternative Dispute Resolution .................................................................................................. 2.912 BASIC PRINCIPLES OF EVIDENCE Three Basic Forms of Evidence .................................................................................................. 2.1002 Direct Versus Circumstantial Evidence ...................................................................................... 2.1002 Admissibility of Evidence ............................................................................................................. 2.1003 Special Rules Concerning the Admission of Evidence in Adversarial Proceedings............. 2.1005 Chain of Custody ........................................................................................................................... 2.1024 Impeachment .................................................................................................................................. 2.1026 Privileges and Protections ............................................................................................................. 2.1028 vi Fraud Examiners Manual: 2022 Edition FRAUD EXAMINERS MANUAL LAW TESTIFYING Considerations for Testifying as a Lay Witness ......................................................................... 2.1102 Considerations for Testifying as an Expert ................................................................................ 2.1105 Qualifying to Testify as an Expert Witness ................................................................................ 2.1111 Preparing to Testify ....................................................................................................................... 2.1115 Direct Examination ....................................................................................................................... 2.1118 Cross-Examination ........................................................................................................................ 2.1123 Expressing an Opinion on Guilt.................................................................................................. 2.1130 Witness Immunity for Experts..................................................................................................... 2.1132 Summary .......................................................................................................................................... 2.1132 Fraud Examiners Manual: 2022 Edition vii FRAUD EXAMINERS MANUAL VOLUME II SECTION 3 INVESTIGATION PLANNING AND CONDUCTING A FRAUD EXAMINATION Why Conduct a Fraud Examination? ........................................................................................ What Fraud Examination Entails .............................................................................................. Fraud Examination and Forensic Accounting ......................................................................... Fraud Examination Methodology.............................................................................................. Develop a Fraud Response Plan ................................................................................................ Initial Response to Suspicions or Allegations of Fraud ......................................................... Planning and Conducting a Formal Investigation ................................................................... Structure the Investigation to Preserve Confidentiality ......................................................... 3.101 3.102 3.104 3.104 3.112 3.116 3.124 3.144 COLLECTING EVIDENCE Types of Evidence ....................................................................................................................... General Rules for Collecting Documents ................................................................................ Obtaining Documentary Evidence ............................................................................................ Examining Fraudulent Documents ........................................................................................... Handling Documents as Physical Evidence ............................................................................. Identifying Writings ..................................................................................................................... The Document Expert’s Findings ............................................................................................. How to Obtain Handwriting Samples ...................................................................................... Typewriters and Computer Printers .......................................................................................... Photocopies .................................................................................................................................. Dating a Document ..................................................................................................................... Indented Writings ........................................................................................................................ Counterfeit Printed Documents ................................................................................................ Fingerprints ................................................................................................................................... Disposal of Evidence................................................................................................................... Sources for Expert Document Examinations.......................................................................... 3.201 3.202 3.202 3.205 3.207 3.210 3.213 3.214 3.216 3.217 3.220 3.222 3.223 3.224 3.226 3.227 INTERVIEW THEORY AND APPLICATION Preparation .................................................................................................................................... Characteristics of a Successful Interview .................................................................................. Characteristics of an Effective Interviewer .............................................................................. Legal Considerations When Conducting an Interview ........................................................... Elements of Conversations......................................................................................................... Inhibitors of Communication .................................................................................................... 3.301 3.302 3.303 3.303 3.305 3.306 viii Fraud Examiners Manual: 2022 Edition FRAUD EXAMINERS MANUAL INVESTIGATION INTERVIEW THEORY AND APPLICATION (CONT.) Facilitators of Communication .................................................................................................. Interviewing Methods and Techniques..................................................................................... Interview Mechanics .................................................................................................................... Question Typology ...................................................................................................................... Introductory Questions ............................................................................................................... Informational Questions ............................................................................................................. Closing Questions ........................................................................................................................ Assessment Questions ................................................................................................................. 3.309 3.311 3.321 3.325 3.327 3.335 3.349 3.352 INTERVIEWING SUSPECTS AND SIGNED STATEMENTS Admission-Seeking Questions.................................................................................................... Signed Statements ........................................................................................................................ Criteria-Based Statement Analysis ............................................................................................. 3.401 3.426 3.429 COVERT OPERATIONS Establishing an Identity ............................................................................................................... Objectives ...................................................................................................................................... Problems in Covert Operations ................................................................................................. Surveillance ................................................................................................................................... Sources and Informants .............................................................................................................. Use of Operatives ........................................................................................................................ 3.502 3.503 3.504 3.506 3.514 3.522 SOURCES OF INFORMATION Public Versus Nonpublic Records............................................................................................. Laws Governing Access to Information .................................................................................. Local Records ............................................................................................................................... Court Records............................................................................................................................... Property Records.......................................................................................................................... Business (Corporate) Filings....................................................................................................... Other Agency Records ................................................................................................................ Nonpublic Records ...................................................................................................................... Other Non-Government Sources.............................................................................................. Accessing Information Online ................................................................................................... Additional Information Sources ................................................................................................ 3.602 3.605 3.607 3.609 3.614 3.617 3.619 3.624 3.631 3.633 3.666 DATA ANALYSIS AND REPORTING TOOLS Understanding the Need for Data Analysis ............................................................................. Data Mining .................................................................................................................................. 3.701 3.703 Fraud Examiners Manual: 2022 Edition ix FRAUD EXAMINERS MANUAL INVESTIGATION DATA ANALYSIS AND REPORTING TOOLS (CONT.) The Data Analysis Process ......................................................................................................... Spectrum of Analysis ................................................................................................................... Using Data Analysis Software .................................................................................................... Textual Analytics .......................................................................................................................... Visual Analytics ............................................................................................................................ Evaluating Data Analysis Software............................................................................................ Reporting and Case Management Software ............................................................................. 3.705 3.712 3.713 3.739 3.742 3.746 3.749 DIGITAL FORENSICS Conducting an Investigation Involving Computers................................................................ Investigations and Digital Forensics ......................................................................................... Investigating in the Cloud ........................................................................................................... Mobile Forensic Investigations .................................................................................................. Digital Forensics Software .......................................................................................................... 3.801 3.814 3.830 3.834 3.840 TRACING ILLICIT TRANSACTIONS General Process for Tracing Illicit Transactions ..................................................................... Direct Methods of Tracing Financial Transactions ................................................................ Indirect Methods of Tracing Financial Transactions.............................................................. Locating Hidden Assets .............................................................................................................. Asset Recovery ............................................................................................................................. 3.901 3.911 3.941 3.958 3.978 REPORT WRITING Types of Reports .......................................................................................................................... Preparation .................................................................................................................................... Characteristics of a Good Report .............................................................................................. Common Reporting Mistakes .................................................................................................... Organization of Information ...................................................................................................... Analyzing the Reader ................................................................................................................... Outlining........................................................................................................................................ Grammatical Considerations ...................................................................................................... Report Structure ........................................................................................................................... Reporting Documents ................................................................................................................. Visual Aids .................................................................................................................................... Presenting the Case for Prosecution ......................................................................................... 3.1001 3.1002 3.1003 3.1005 3.1009 3.1010 3.1013 3.1014 3.1018 3.1027 3.1031 3.1036 x Fraud Examiners Manual: 2022 Edition FRAUD EXAMINERS MANUAL INVESTIGATION APPENDIX A: ENGAGEMENT AND ADVISORY LETTERS Fraud Examination Engagement Letters.................................................................................. 3.1101 Fraud Examination Advisory Letters ........................................................................................ 3.1103 APPENDIX B: FRAUD EXAMINATION CHECKLIST Fraud Examination Checklist ..................................................................................................... 3.1201 APPENDIX C: SAMPLE FORMS Consent to Search ........................................................................................................................ Telephone Recording Consent................................................................................................... Consent to Record ....................................................................................................................... Customer Consent and Authorization for Access to Financial Records ............................. Fraud Incident Report Log ......................................................................................................... Inventory of Evidence and Chain of Custody Log ................................................................. Evidence Control Log ................................................................................................................. 3.1301 3.1303 3.1304 3.1305 3.1306 3.1308 3.1309 APPENDIX D: SAMPLE FRAUD EXAMINATION REPORTS Short-Form Report ...................................................................................................................... 3.1402 Long-Form Report ...................................................................................................................... 3.1409 APPENDIX E: SAMPLE EXPERT WITNESS REPORT Expert Witness Report ................................................................................................................ 3.1501 Fraud Examiners Manual: 2022 Edition xi FRAUD EXAMINERS MANUAL SECTION 4 FRAUD PREVENTION AND DETERRENCE UNDERSTANDING CRIMINAL BEHAVIOR Behavioral Analysis and the Prevention of Fraud ................................................................... Why People Obey the Law ......................................................................................................... Theories of Crime Causation ..................................................................................................... 4.101 4.107 4.116 WHITE-COLLAR CRIME What Is White-Collar Crime? ..................................................................................................... Crimes of the Middle ClassesâŻA Look at White-Collar Crime .................................................. Referring White-Collar Criminals to Law Enforcement ........................................................ Organizational Crime .................................................................................................................. Occupational Fraud ..................................................................................................................... Research in Occupational Fraud and Abuse ............................................................................ 4.201 4.202 4.212 4.214 4.230 4.231 CORPORATE GOVERNANCE Who Is Involved in Corporate Governance?........................................................................... The Role of Corporate Governance in Fighting Fraud.......................................................... Principles of Corporate Governance ........................................................................................ Establishing a Corporate Governance Framework................................................................. Sources of Corporate Governance Guidance .......................................................................... 4.301 4.307 4.308 4.321 4.322 MANAGEMENT’S FRAUD-RELATED RESPONSIBILITIES The Legal Foundation for Management’s Fraud-Related Responsibilities.......................... Management’s Responsibility for Internal Controls ............................................................... Management’s Responsibility for an Effective Compliance and Ethics Program.............. Document Retention Policies .................................................................................................... 4.401 4.402 4.406 4.416 AUDITORS’ FRAUD-RELATED RESPONSIBILITIES External Auditors’ Fraud-Related Responsibilities ................................................................. Internal Auditors’ Fraud-Related Responsibilities .................................................................. Government Auditors’ Fraud-Related Responsibilities.......................................................... 4.501 4.525 4.533 FRAUD PREVENTION PROGRAMS Selling Fraud Prevention to Management ................................................................................ Procedures to Prevent Fraud...................................................................................................... Anti-Fraud Policy ......................................................................................................................... 4.601 4.602 4.617 xii Fraud Examiners Manual: 2022 Edition FRAUD EXAMINERS MANUAL FRAUD PREVENTION AND DETERRENCE FRAUD PREVENTION PROGRAMS (CONT.) Ethics Programs ........................................................................................................................... Sample Anti-Fraud Policy ........................................................................................................... Fraud Policy Decision Matrix..................................................................................................... Sample Code of Business Ethics and Conduct........................................................................ 4.621 4.625 4.629 4.630 FRAUD RISK ASSESSMENT What Is Fraud Risk? .................................................................................................................... What Factors Influence Fraud Risk? ......................................................................................... What Is a Fraud Risk Assessment? ............................................................................................ Preparing the Company for a Fraud Risk Assessment ........................................................... Fraud Risk Assessment Frameworks ........................................................................................ Addressing the Identified Fraud Risks ...................................................................................... Responding to Residual Fraud Risks ......................................................................................... Reporting the Results of the Fraud Risk Assessment............................................................. Making an Impact with the Fraud Risk Assessment ............................................................... The Fraud Risk Assessment and the Audit Process ............................................................... Fraud Risk Assessment Tools and Resources.......................................................................... 4.701 4.701 4.703 4.710 4.714 4.731 4.733 4.735 4.737 4.738 4.739 FRAUD RISK MANAGEMENT Foundational Guidance for Fraud Risk Management ............................................................ What Is Risk Management? ........................................................................................................ Risk Management Frameworks .................................................................................................. Integrating Anti-Fraud Initiatives into Risk Management ..................................................... Managing Third-Party Fraud Risks............................................................................................ Who Is Responsible for Managing Fraud Risk? ...................................................................... The Objectives of a Fraud Risk Management Program ......................................................... Fraud Risk Management Principles ........................................................................................... Steps in Developing a Fraud Risk Management Program ..................................................... Fraud Risk Management Program Components ..................................................................... The Use of Data Analytics in Managing Fraud Risk .............................................................. 4.801 4.801 4.803 4.807 4.809 4.814 4.819 4.819 4.824 4.828 4.832 ETHICS FOR FRAUD EXAMINERS What Is Ethics? ............................................................................................................................ Morality, Ethics, and Legality ..................................................................................................... Conclusion .................................................................................................................................... 4.901 4.903 4.907 Fraud Examiners Manual: 2022 Edition xiii FRAUD EXAMINERS MANUAL FRAUD PREVENTION AND DETERRENCE ACFE CODE OF PROFESSIONAL ETHICS Commitment to Professionalism and Diligence ...................................................................... Legal and Ethical Conduct and Conflict of Interest ............................................................... Integrity and Competence........................................................................................................... Court Orders and Testimony ..................................................................................................... Reasonable Evidential Basis for Opinions ............................................................................... Confidential Information ............................................................................................................ Complete Reporting of Material Matters .................................................................................. Professional Improvement ......................................................................................................... 4.1002 4.1005 4.1009 4.1012 4.1013 4.1016 4.1022 4.1023 CFE CODE OF PROFESSIONAL STANDARDS CFE Code of Professional Standards ....................................................................................... 4.1101 xiv Fraud Examiners Manual: 2022 Edition
