FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION 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 1.115 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 1.207 1.236 1.237 1.239 1.247 1.255 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 ................................................................................................ Check Tampering Schemes ........................................................................................................ Electronic Payment Tampering ................................................................................................. Billing Schemes............................................................................................................................. Payroll Fraud Schemes ................................................................................................................ Expense Reimbursement Schemes ............................................................................................ 1.401 1.410 1.433 1.436 1.456 1.473 Fraud Examiners Manual: 2020 International Edition i FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION FINANCIAL TRANSACTIONS AND FRAUD SCHEMES ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS Misuse of Inventory and Other Assets ..................................................................................... Theft of Inventory and Other Assets........................................................................................ Misappropriation of Intangible Assets ...................................................................................... 1.501 1.502 1.518 BRIBERY AND CORRUPTION Corruption..................................................................................................................................... Detection of Bribery Schemes ................................................................................................... Conflicts of Interest ..................................................................................................................... Anti-Corruption Programs ......................................................................................................... 1.601 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 1.714 1.735 1.736 1.742 1.743 1.756 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 1.817 FINANCIAL INSTITUTION FRAUD Embezzlement Schemes ............................................................................................................. Loan Fraud .................................................................................................................................... Real Estate Fraud ......................................................................................................................... New Account Fraud Schemes .................................................................................................... Money Transfer (Wire) Fraud Schemes .................................................................................... 1.901 1.905 1.916 1.929 1.933 ii Fraud Examiners Manual: 2020 International Edition FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION FINANCIAL TRANSACTIONS AND FRAUD SCHEMES FINANCIAL INSTITUTION FRAUD (CONT.) Automated Teller Machine (ATM) Fraud ................................................................................ Account Takeover ........................................................................................................................ Advance-Fee Fraud ...................................................................................................................... Letter-of-Credit Fraud ................................................................................................................. Inside/Outside Frauds ................................................................................................................ Prevention ..................................................................................................................................... Suspicious Transaction Reports ................................................................................................. The Basel Committee on Banking Supervision ....................................................................... 1.936 1.937 1.939 1.940 1.940 1.941 1.943 1.944 PAYMENT FRAUD Check Fraud .................................................................................................................................. 1.1001 Credit Card Fraud ........................................................................................................................ 1.1011 Prevention and Detection of Credit Card Fraud ..................................................................... 1.1020 Electronic Bill Payment and Person-to-Person Payments ..................................................... 1.1027 Online and Mobile Account Fraud ........................................................................................... 1.1035 Alternative Currencies ................................................................................................................. 1.1037 INSURANCE FRAUD Types of Insurance Policies ........................................................................................................ 1.1101 Agent/Broker Fraud .................................................................................................................... 1.1102 Underwriting Irregularities.......................................................................................................... 1.1103 Vehicle Insurance Schemes ........................................................................................................ 1.1105 Property Schemes......................................................................................................................... 1.1108 Life Insurance Schemes............................................................................................................... 1.1109 Liability Schemes .......................................................................................................................... 1.1109 Red Flags of Insurance Fraud .................................................................................................... 1.1109 Computer-Generated Detection Reports ................................................................................. 1.1113 Workers’ Compensation Fraud .................................................................................................. 1.1114 HEALTH CARE FRAUD Types of Health Care Systems ................................................................................................... 1.1201 Provider Fraud .............................................................................................................................. 1.1205 Fraud by the Medical Staff .......................................................................................................... 1.1211 Inflated Billings............................................................................................................................. 1.1212 Kickbacks in the Health Care Industry ..................................................................................... 1.1217 Fraud by Medical Institutions .................................................................................................... 1.1218 Other Frauds in the Institutional Setting.................................................................................. 1.1224 Fraud Examiners Manual: 2020 International Edition iii FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION FINANCIAL TRANSACTIONS AND FRAUD SCHEMES HEALTH CARE FRAUD (CONT.) Fraud in Special Care Facilities .................................................................................................. 1.1226 Insured and Beneficiary Fraud ................................................................................................... 1.1228 Fraud by Insurance Companies ................................................................................................. 1.1231 Employee Claims Fraud .............................................................................................................. 1.1233 Electronic Claims Fraud.............................................................................................................. 1.1235 CONSUMER FRAUD Consumer Fraud Schemes .......................................................................................................... 1.1301 Elder Fraud ................................................................................................................................... 1.1314 Telemarketing Fraud.................................................................................................................... 1.1316 Ponzi and Pyramid Schemes ...................................................................................................... 1.1335 COMPUTER AND INTERNET FRAUD Computer Fraud ........................................................................................................................... 1.1402 Computer Hacking....................................................................................................................... 1.1402 Malware ......................................................................................................................................... 1.1416 Email .............................................................................................................................................. 1.1430 Internet Fraud ............................................................................................................................... 1.1433 Electronic Commerce and Information Security .................................................................... 1.1435 Insider Threats.............................................................................................................................. 1.1438 Computer Security ....................................................................................................................... 1.1439 CONTRACT AND PROCUREMENT FRAUD Basics of Contract Law ............................................................................................................... 1.1501 Methods of Procurement ............................................................................................................ 1.1503 Phases in the Procurement Process........................................................................................... 1.1507 Categories of Procurement Fraud Schemes ............................................................................. 1.1510 Preventing Contract and Procurement Fraud.......................................................................... 1.1533 iv Fraud Examiners Manual: 2020 International Edition FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION 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 ........................................................................................ 2.101 2.104 2.110 2.111 2.113 THE LAW RELATED TO FRAUD Definition of Fraud ...................................................................................................................... Principal Types of Fraud ............................................................................................................. International Initiatives Against Fraud and Corruption ......................................................... 2.201 2.201 2.221 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 2.306 2.307 2.310 2.311 SECURITIES FRAUD What Constitutes a Security? ...................................................................................................... Securities Laws and Regulations ................................................................................................ Securities Fraud Schemes ............................................................................................................ Investigative Tips ......................................................................................................................... 2.401 2.423 2.439 2.454 MONEY LAUNDERING The Money Laundering Process ................................................................................................ Money Laundering Methods ...................................................................................................... International Anti-Money Laundering Efforts ........................................................................ Enforcement and Prevention Strategies ................................................................................... Special Problems for Insurance Companies ............................................................................ 2.501 2.504 2.527 2.538 2.542 TAX FRAUD Introduction .................................................................................................................................. Evidence of Tax Fraud ................................................................................................................ 2.601 2.603 Fraud Examiners Manual: 2020 International Edition v FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION LAW TAX FRAUD (CONT.) Types of Tax Evasion Schemes ................................................................................................. Common Defenses to Allegations of Tax Fraud .................................................................... Fraud Schemes Targeting Taxpayers......................................................................................... 2.604 2.606 2.608 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 2.707 2.713 2.716 THE CRIMINAL JUSTICE SYSTEM International Covenant on Civil and Political Rights ............................................................. The Charging Process.................................................................................................................. Defenses ........................................................................................................................................ The Trial Process ......................................................................................................................... Sentencing ..................................................................................................................................... Appeal ............................................................................................................................................ Punishment ................................................................................................................................... Corporate Criminal Liability ....................................................................................................... 2.801 2.803 2.805 2.807 2.816 2.817 2.817 2.817 THE CIVIL JUSTICE SYSTEM Procedure in Civil Cases ............................................................................................................. Decisions and Remedies in Civil Cases..................................................................................... Alternative Dispute Resolution .................................................................................................. 2.901 2.909 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........... 2.1006 Chain of Custody ......................................................................................................................... 2.1025 Impeachment ................................................................................................................................ 2.1027 Privileges and Protections ........................................................................................................... 2.1028 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 vi Fraud Examiners Manual: 2020 International Edition FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION LAW TESTIFYING (CONT.) Preparing to Testify .................................................................................................................... 2.1114 Direct Examination .................................................................................................................... 2.1117 Cross-Examination ...................................................................................................................... 2.1122 Expressing an Opinion on Guilt................................................................................................ 2.1130 Summary ........................................................................................................................................ 2.1131 Fraud Examiners Manual: 2020 International Edition vii FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION 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 ANALYZING 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 ................................................................................................................................... Sources for Expert Document Examinations.......................................................................... 3.201 3.204 3.206 3.209 3.212 3.213 3.215 3.216 3.219 3.221 3.222 3.223 3.226 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 .................................................................................................... Facilitators of Communication .................................................................................................. Kinesic Interview and Interrogation ......................................................................................... The Cognitive Interview Technique .......................................................................................... 3.301 3.301 3.302 3.303 3.304 3.306 3.309 3.311 3.315 viii Fraud Examiners Manual: 2020 International Edition FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION INVESTIGATION INTERVIEW THEORY AND APPLICATION (CONT.) PEACE Interviewing Method.................................................................................................... Interview Mechanics .................................................................................................................... Question Typology ...................................................................................................................... Introductory Questions ............................................................................................................... Informational Questions ............................................................................................................. Closing Questions ........................................................................................................................ Assessment Questions ................................................................................................................. 3.318 3.320 3.322 3.324 3.332 3.345 3.348 INTERVIEWING SUSPECTS AND SIGNED STATEMENTS Admission-Seeking Questions.................................................................................................... Signed Statements ........................................................................................................................ Criteria-Based Statement Analysis ............................................................................................. 3.401 3.426 3.430 COVERT EXAMINATIONS Establishing an Identity ............................................................................................................... Objectives...................................................................................................................................... Problems in Covert Operations ................................................................................................. Surveillance ................................................................................................................................... Sources and Informants .............................................................................................................. Use of Operatives ........................................................................................................................ 3.502 3.503 3.504 3.507 3.517 3.526 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 3.606 3.608 3.613 3.615 3.617 3.622 3.628 3.631 3.662 Fraud Examiners Manual: 2020 International Edition ix FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION INVESTIGATION DATA ANALYSIS AND REPORTING TOOLS Understanding the Need for Data Analysis ............................................................................. Data Mining .................................................................................................................................. The Data Analysis Process ......................................................................................................... Spectrum of Analysis ................................................................................................................... Using Data Analysis Software .................................................................................................... Textual Analytics .......................................................................................................................... Visual Analytics ............................................................................................................................ Evaluating Data Analysis Software............................................................................................ Types of Data Mining and Analysis Software .......................................................................... Reporting and Case Management Software ............................................................................. 3.701 3.703 3.705 3.713 3.713 3.737 3.740 3.744 3.746 3.747 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 .............................................................................................................. 3.901 3.910 3.940 3.958 REPORT WRITING Types of Reports .......................................................................................................................... 3.1001 Preparation .................................................................................................................................... 3.1002 Characteristics of a Good Report .............................................................................................. 3.1003 Common Reporting Mistakes .................................................................................................... 3.1006 Organization of Information ...................................................................................................... 3.1010 Analyzing the Reader ................................................................................................................... 3.1011 Outlining........................................................................................................................................ 3.1013 Grammatical Considerations ...................................................................................................... 3.1014 Report Structure ........................................................................................................................... 3.1018 Reporting Documents ................................................................................................................. 3.1025 x Fraud Examiners Manual: 2020 International Edition FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION INVESTIGATION REPORT WRITING (CONT.) Visual Aids .................................................................................................................................... 3.1029 Presenting the Case for Prosecution ......................................................................................... 3.1035 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 ........................................................................................................................ 3.1301 Telephone Recording Consent................................................................................................... 3.1303 Consent to Record ....................................................................................................................... 3.1304 Customer Consent and Authorization for Access to Financial Records ............................. 3.1305 Fraud Incident Report Log ......................................................................................................... 3.1306 Inventory of Evidence and Chain of Custody Log ................................................................. 3.1308 Evidence Control Log ................................................................................................................. 3.1309 APPENDIX D: ADDITIONAL INFORMATION SOURCES Directories ..................................................................................................................................... 3.1401 Banks and Financial Institutions ................................................................................................ 3.1405 International Law Enforcement Organizations....................................................................... 3.1407 APPENDIX E: SAMPLE FRAUD EXAMINATION REPORTS Short-Form Report ...................................................................................................................... 3.1502 Long-Form Report ...................................................................................................................... 3.1509 Fraud Examiners Manual: 2020 International Edition xi FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION 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 4.117 WHITE-COLLAR CRIME What Is White-Collar Crime? ..................................................................................................... Crimes of the Middle Classes—A Look at White-Collar Crime .................................................. Organizational Crime .................................................................................................................. Occupational Fraud ..................................................................................................................... Research in Occupational Fraud and Abuse ............................................................................ 4.201 4.203 4.213 4.227 4.228 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................................................................. Corporate Governance Codes and Guidance .......................................................................... 4.301 4.306 4.308 4.322 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 4.417 AUDITORS’ FRAUD-RELATED RESPONSIBILITIES External Audit Standards Related to Fraud ............................................................................. Internal Auditors’ Fraud-Related Responsibilities .................................................................. International Standards for Government Auditing................................................................. 4.501 4.525 4.532 FRAUD PREVENTION PROGRAMS Selling Fraud Prevention to Management ................................................................................ Procedures to Prevent Fraud...................................................................................................... Anti-Fraud Policy ......................................................................................................................... Ethics Programs ........................................................................................................................... 4.601 4.602 4.615 4.620 xii Fraud Examiners Manual: 2020 International Edition FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION FRAUD PREVENTION AND DETERRENCE FRAUD PREVENTION PROGRAMS (CONT.) Sample Anti-Fraud Policy ........................................................................................................... Fraud Policy Decision Matrix..................................................................................................... Sample Code of Business Ethics and Conduct........................................................................ 4.623 4.627 4.628 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 4.724 4.726 4.728 4.731 4.732 4.733 FRAUD RISK MANAGEMENT Foundational Guidance for Fraud Risk Management ............................................................ What Is Risk Management? ........................................................................................................ Risk Management Frameworks .................................................................................................. Integrating Anti-Fraud Initiatives into Risk Management ..................................................... 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 4.810 4.815 4.816 4.821 4.824 4.829 ETHICS FOR FRAUD EXAMINERS What Is Ethics? ............................................................................................................................ Morality, Ethics, and Legality ..................................................................................................... Some Concluding Remarks......................................................................................................... 4.901 4.903 4.907 Fraud Examiners Manual: 2020 International Edition xiii FRAUD EXAMINERS MANUAL INTERNATIONAL EDITION FRAUD PREVENTION AND DETERRENCE ACFE CODE OF PROFESSIONAL ETHICS Commitment to Professionalism and Diligence ...................................................................... 4.1002 Legal and Ethical Conduct and Conflict of Interest ............................................................... 4.1005 Integrity and Competence........................................................................................................... 4.1009 Court Orders and Testimony ..................................................................................................... 4.1012 Reasonable Evidential Basis for Opinions ............................................................................... 4.1013 Confidential Information ............................................................................................................ 4.1016 Complete Reporting of Material Matters .................................................................................. 4.1022 Professional Improvement ......................................................................................................... 4.1023 CFE CODE OF PROFESSIONAL STANDARDS CFE Code of Professional Standards ....................................................................................... 4.1101 xiv Fraud Examiners Manual: 2020 International Edition
