FRAUD EXAMINERS MANUAL

TABLE OF CONTENTS

VOLUME I

SECTION 1
FINANCIAL TRANSACTIONS AND FRAUD SCHEMES

OCCUPATIONAL FRAUDS

ACCOUNTING CONCEPTS
Accounting Basics ........................................................................................................................ 1.101
Financial Statements .................................................................................................................... 1.105
Generally Accepted Accounting Principles (GAAP) .............................................................. 1.115

MANAGEMENT’S AND AUDITORS’ RESPONSIBILITIES

Management .................................................................................................................................. 1.201
Certified Fraud Examiners.......................................................................................................... 1.207
External Auditors ......................................................................................................................... 1.209
Internal Auditor Responsibilities ............................................................................................... 1.229
GAO Auditing Standards ........................................................................................................... 1.248
The Sarbanes-Oxley Act ............................................................................................................. 1.259
Private Securities Litigation Reform Act .................................................................................. 1.273

FINANCIAL STATEMENT SCHEMES

What is Financial Statement Fraud? .......................................................................................... 1.303
The Cost of Financial Statement Fraud .................................................................................... 1.303
Why Financial Statement Fraud is Committed ........................................................................ 1.304
Trends in Financial Statement Fraud ........................................................................................ 1.306
Financial Statements Fraud Schemes ........................................................................................ 1.308
What Red Flags are Associated with Financial Statement Fraud Generally? ...................... 1.331
Detection of Fraudulent Financial Statement Schemes ......................................................... 1.334
Financial Statement Analysis ...................................................................................................... 1.337
Interviews in Fraudulent Financial Statement Cases .............................................................. 1.343
Prevention of Financial Statement Fraud ................................................................................. 1.352

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ASSET MISAPPROPRIATION: CASH RECEIPTS

Skimming ....................................................................................................................................... 1.401
Cash Larceny................................................................................................................................. 1.419

ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS

Register Disbursement Schemes ................................................................................................ 1.501
Check Tampering ......................................................................................................................... 1.509
Billing Schemes ............................................................................................................................. 1.533
Payroll Fraud ................................................................................................................................. 1.553
Expense Reimbursement Schemes ............................................................................................ 1.570

ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS

Misuse of Inventory and Other Assets ..................................................................................... 1.601
Theft of Inventory and Other Assets........................................................................................ 1.602
Detection ....................................................................................................................................... 1.612
Prevention ..................................................................................................................................... 1.616

BRIBERY AND CORRUPTION

Bribery ........................................................................................................................................... 1.701
Methods of Making Illegal Payments ........................................................................................ 1.714
Detection ....................................................................................................................................... 1.716
Conflicts of Interest ..................................................................................................................... 1.731
Prevention ..................................................................................................................................... 1.739

INTELLECTUAL PROPERTY
Competitive Intelligence (CI) Versus Espionage .................................................................... 1.802
Open Sources of Information .................................................................................................... 1.803
The Intelligence Pyramid ............................................................................................................ 1.806
Building Financial Statements .................................................................................................... 1.813
Nontraditional Sources................................................................................................................ 1.816
A Closer Look at Databases ....................................................................................................... 1.817
A Corporate Spy Uses Open Sources: What of It? ................................................................. 1.820
Favorite Targets............................................................................................................................ 1.821
How Information is Lost ............................................................................................................ 1.822
Basic Principle of Spying............................................................................................................. 1.828
Infilitration Techniques ............................................................................................................... 1.834
Transactional Intelligence ........................................................................................................... 1.842
Telling Good Lies ........................................................................................................................ 1.844
Visual Surveillance Against People ............................................................................................ 1.846

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INTELLECTUAL PROPERTY (CONT.)

E-Mail ............................................................................................................................................ 1.847
Social Engineering........................................................................................................................ 1.848
Cloaking and Misdirection .......................................................................................................... 1.851
Technical Surveillance ................................................................................................................. 1.862
Investigating an Information Theft Case ................................................................................. 1.877
Program for Safeguarding Proprietary Inforamtion (SPI) ..................................................... 1.879
Technical Surveillance Countermeasures (TSCM) Survey ..................................................... 1.885
Preventing Employee Theft of Propietary Information ........................................................ 1.887
Protecting the Trade Sectrets of Others ................................................................................... 1.889
Legal Issues Related to Theft of Intellectual Property ........................................................... 1.891

OTHER FRAUDS

FINANCIAL INSTITUTION FRAUD

Embezzlement Schemes ............................................................................................................. 1.901
Loan Fraud .................................................................................................................................... 1.903
Real Estate Fraud ......................................................................................................................... 1.913
New Account Fraud Schemes .................................................................................................... 1.931
Money Transfer (Wire) Fraud Schemes .................................................................................... 1.934
Automated Teller Machine (ATM) Fraud ................................................................................ 1.938
Advanced Fee Fraud .................................................................................................................... 1.938
Letter-of-Credit Fraud ................................................................................................................. 1.939
Inside/Outside Frauds ................................................................................................................ 1.940
Prevention ..................................................................................................................................... 1.940
Suspicious Activity Reports ........................................................................................................ 1.943
Applicable Federal Statutes......................................................................................................... 1.944

CHECK AND CREDIT CARD FRAUD

Check Fraud .................................................................................................................................. 1.1001
Check Fraud Rings ....................................................................................................................... 1.1009
Check Fraud Detection ............................................................................................................... 1.1010
Check Fraud Prevention and Investigation .............................................................................. 1.1011
Credit Card Fraud ........................................................................................................................ 1.1015
Prevention and Detection of Credit Card Fraud ..................................................................... 1.1027
Electronic Bill Payment & Person-to Person Payments ........................................................ 1.1037

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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

Laws Relating to Health Care Fraud ......................................................................................... 1.1201
Fraud by the Insurance Company ............................................................................................. 1.1206
Employee Claims Fraud .............................................................................................................. 1.1208
Agent Fraud .................................................................................................................................. 1.1209
Provider Fraud.............................................................................................................................. 1.1211
Fraud by the Medical Staff .......................................................................................................... 1.1217
Kickbacks in the Health Care Industry ..................................................................................... 1.1218
Inflated Billings............................................................................................................................. 1.1219
Insured Fraud ............................................................................................................................... 1.1222
Criminal Rings .............................................................................................................................. 1.1223
Collusion........................................................................................................................................ 1.1223
Detection of External Fraud ...................................................................................................... 1.1224
Fraud by Medical Institutions .................................................................................................... 1.1225
Nursing Homes ............................................................................................................................ 1.1232
Psychiatric Hospital Fraud .......................................................................................................... 1.1234
Other Frauds in the Institutional Setting.................................................................................. 1.1235
Managed Care ............................................................................................................................... 1.1237
Medicaid Fraud ............................................................................................................................. 1.1239
Electronic Claims Fraud.............................................................................................................. 1.1246
Health Care Compliance Programs ........................................................................................... 1.1250

BANKRUPTCY FRAUD
Introduction .................................................................................................................................. 1.1301
The Bankruptcy Code.................................................................................................................. 1.1304
Trustees ......................................................................................................................................... 1.1307

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BANKRUPTCY FRAUD (CONT.)

Creditors’ Rights and Remedies ................................................................................................. 1.1312
Bankruptcy Crime Statutes ......................................................................................................... 1.1314
Bankruptcy Schemes .................................................................................................................... 1.1321

TAX FRAUD
Introduction .................................................................................................................................. 1.1401
Hallmarks (Badges) of Fraud...................................................................................................... 1.1402
Civil vs. Criminal .......................................................................................................................... 1.1404
Taxpayer Penalties........................................................................................................................ 1.1405
Tax Preparer Penalties ................................................................................................................. 1.1407
Whistleblower Program............................................................................................................... 1.1409
Defenses for Tax Fraud .............................................................................................................. 1.1410
Evidence of Tax Fraud ................................................................................................................ 1.1412
Other Legal Elements of Tax Fraud ......................................................................................... 1.1413

SECURITIES FRAUD
Introduction .................................................................................................................................. 1.1501
Federal Regulation ....................................................................................................................... 1.1501
Self- Regulatory Organizations .................................................................................................. 1.1513
State Regulation ............................................................................................................................ 1.1514
What Constitutes a Security? ...................................................................................................... 1.1515
Commodity Futures, Exchange-Traded Options, and OTC Options ................................. 1.1525
Securities Fraud Schemes ............................................................................................................ 1.1531
Investigative Tips ......................................................................................................................... 1.1546
Securities Fraud and the Internet............................................................................................... 1.1549

MONEY LAUNDERING
Introduction .................................................................................................................................. 1.1601
The Money Laundering Process ................................................................................................ 1.1601
Hawala Exchanges ....................................................................................................................... 1.1613
Federal and State Law.................................................................................................................. 1.1616
International Anti-Money Laundering Efforts ........................................................................ 1.1641
Enforcement and Prevention Strategies ................................................................................... 1.1642
Special Problems for Insurance Companies............................................................................. 1.1646

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CONSUMER FRAUD
Con Schemes ................................................................................................................................ 1.1702
Telemarketing Fraud.................................................................................................................... 1.1708
Ponzi and Pyramid Schemes ...................................................................................................... 1.1731
Franchise Fraud ............................................................................................................................ 1.1741
Identity Theft ................................................................................................................................ 1.1747

COMPUTER AND INTERNET FRAUD

Computer Fraud vs. Computer Crime ...................................................................................... 1.1804
Computer Hacking....................................................................................................................... 1.1806
Electronic Mail ............................................................................................................................. 1.1814
Computer Viruses ........................................................................................................................ 1.1817
Internet Fraud ............................................................................................................................... 1.1826
Electronic Commerce .................................................................................................................. 1.1838
Insider Threats.............................................................................................................................. 1.1841
Computer Security ....................................................................................................................... 1.1842
Internal Controls in the Data Center ........................................................................................ 1.1845
Internal Controls in Computer Applications ........................................................................... 1.1849
Conducting an Investigation Regarding Computer Crimes ................................................... 1.1852
Computer Crime Laws ................................................................................................................ 1.1866
Government Information on Cybercrime ................................................................................ 1.1877

PUBLIC SECTOR FRAUD

Government Fraud Auditing Standards ................................................................................... 1.1901
False Claims and Statements ...................................................................................................... 1.1911
Beneficiary Fraud ......................................................................................................................... 1.1915
Government Initiatives to Reduce Fraud ................................................................................. 1.1919
Prosecution: The Government Employee’s Role .................................................................. 1.1921
Interviewing Government Officials .......................................................................................... 1.1923

CONTRACT AND PROCUREMENT FRAUD

Elements of a Contract ............................................................................................................... 1.2001
Presolicitation Phase .................................................................................................................... 1.2001
Solicitation and Negotiation Phase............................................................................................ 1.2003
Contract Performance and Administration Phase .................................................................. 1.2006

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VOLUME II

SECTION 2
LAW

OVERVIEW OF THE UNITED STATES LEGAL SYSTEM

Constitutional, Statutory, and Common Law .......................................................................... 2.101
Substantive and Procedural Law ................................................................................................ 2.102
The Court System ........................................................................................................................ 2.103
Civil and Criminal Actions for Fraud........................................................................................ 2.109

THE LAW RELATED TO FRAUD (PART 1)

Definition of Fraud ...................................................................................................................... 2.201
Principal Types of Fraud ............................................................................................................. 2.201
Federal Legislation Related to Fraud......................................................................................... 2.212

THE LAW RELATED TO FRAUD (PART 2)

Federal Legislation Related to Fraud (Cont.) ........................................................................... 2.301
Fines Under Title 18 .................................................................................................................... 2.345
Qui Tam Suits and the False Claims Act .................................................................................. 2.349
Federal “Whistleblower” Statutes .............................................................................................. 2.352

INDIVIDUAL RIGHTS DURING EXAMINATIONS

Employee’s Duty to Cooperate.................................................................................................. 2.401
Employee’s Rights During the Investigation ........................................................................... 2.401
Interviews ...................................................................................................................................... 2.403
Searches and Surveillance ........................................................................................................... 2.412
Polygraph Examinations ............................................................................................................. 2.431
Obtaining Information About Employees ............................................................................... 2.432
Avoiding Liability for Obstruction of Justice and Witness Tampering ............................... 2.439
Discharging a Suspected Wrongdoer ........................................................................................ 2.442

CRIMINAL PROSECUTIONS FOR FRAUD

Basic Principles of Criminal Law ............................................................................................... 2.501
Arrest and Interrogation ............................................................................................................. 2.502
The Charging Process.................................................................................................................. 2.504
The Trial Process ......................................................................................................................... 2.514
Sentencing ..................................................................................................................................... 2.519
Appeal ............................................................................................................................................ 2.523

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THE CIVIL JUSTICE SYSTEM

Civil Litigation .............................................................................................................................. 2.601
Alternative Dispute Resolution .................................................................................................. 2.611
Trial of a Civil Case...................................................................................................................... 2.612
Fidelity Bond Claims ................................................................................................................... 2.614

BASIC PRINCIPLES OF EVIDENCE

Definition of Evidence ................................................................................................................ 2.701
Three Types of Evidence ............................................................................................................ 2.701
Direct Versus Circumstantial Evidence .................................................................................... 2.702
Relevance ....................................................................................................................................... 2.703
Special Problems Concerning Some Types of Circumstantial Evidence ............................. 2.704
Exhibits .......................................................................................................................................... 2.706
Hearsay .......................................................................................................................................... 2.713

TESTIFYING AS AN EXPERT WITNESS

Introduction .................................................................................................................................. 2.801
Pre-Trial Preparation ................................................................................................................... 2.803
Conflicts of Interest ..................................................................................................................... 2.804
Preparing a Report ....................................................................................................................... 2.804
Qualifying as an Expert Witness ................................................................................................ 2.809
Preparing to Testify ..................................................................................................................... 2.812
Direct Examination ..................................................................................................................... 2.815
Cross-Examination ...................................................................................................................... 2.817
Expressing an Opinion on Guilt................................................................................................ 2.822
Witness Immunity for Experts................................................................................................... 2.823
Summary ........................................................................................................................................ 2.824

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SECTION 3
INVESTIGATION

ANALYZING DOCUMENTS
Chain of Custody ......................................................................................................................... 3.101
Obtaining Documentary Evidence ............................................................................................ 3.102
Examining Fraudulent Documents ........................................................................................... 3.104
Early Consultation with an Expert Can Prove Valuable ........................................................ 3.105
Types of Forensic Document Examinations ........................................................................... 3.105
Handling Documents as Physical Evidence ............................................................................. 3.106
Identifying Writings ..................................................................................................................... 3.108
The Document Expert’s Findings ............................................................................................. 3.111
How to Obtain Handwriting Samples ...................................................................................... 3.112
Typewriters and Computer Printers .......................................................................................... 3.114
Photocopies .................................................................................................................................. 3.116
“Dating” a Document ................................................................................................................. 3.118
Indented Writings ........................................................................................................................ 3.120
Counterfeit Printed Documents ................................................................................................ 3.120
Fingerprints ................................................................................................................................... 3.122
Sources for Expert Document Examinations.......................................................................... 3.124

INTERVIEW THEORY AND APPLICATION

Preparation .................................................................................................................................... 3.201
Characteristics of a Good Interview ......................................................................................... 3.201
Characteristics of a Good Interviewer ...................................................................................... 3.202
Question Typology ...................................................................................................................... 3.202
Legal Elements of Interviewing ................................................................................................. 3.204
Elements of Conversations......................................................................................................... 3.204
Inhibitors of Communication .................................................................................................... 3.206
Facilitators of Communication .................................................................................................. 3.208
Introductory Questions ............................................................................................................... 3.211
Informational Questions ............................................................................................................. 3.217
Assessment Questions ................................................................................................................. 3.233
Admission-Seeking Questions.................................................................................................... 3.245
Kinesic Interview and Interrogation ......................................................................................... 3.268
Criteria-Based Statement Analysis ............................................................................................. 3.272
The Cognitive Interview Technique.......................................................................................... 3.277

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INVESTIGATION

COVERT EXAMINATIONS
Establishing an Identity ............................................................................................................... 3.302
Objectives ...................................................................................................................................... 3.303
Problems in Covert Operations ................................................................................................. 3.304
Entrapment ................................................................................................................................... 3.305
Surveillance ................................................................................................................................... 3.305
Sources and Informants .............................................................................................................. 3.312
Use of Operatives ........................................................................................................................ 3.319

SOURCES OF INFORMATION
Rules Governing Public Record Information .......................................................................... 3.401
City Government ......................................................................................................................... 3.410
County Government.................................................................................................................... 3.412
State Government ........................................................................................................................ 3.416
Federal Government.................................................................................................................... 3.420
Commercial Sources .................................................................................................................... 3.436
Credit Records .............................................................................................................................. 3.438
Commercial Databases and Research Reference Services ..................................................... 3.440
Directories ..................................................................................................................................... 3.441
Banks and Financial Institutions ................................................................................................ 3.458
Investigative and Law Enforcement Information Centers and Databases ......................... 3.462

ACCESSING INFORMATION ONLINE

Accessing Information Through Computer Databases ......................................................... 3.501
Using an Online Service to Find Information ......................................................................... 3.503
The Internet .................................................................................................................................. 3.516
A Guide to Successful Searching ............................................................................................... 3.521
Useful Websites ............................................................................................................................ 3.523

DATA ANALYSIS AND REPORTING TOOLS

Data Analysis Software Functions ............................................................................................. 3.601
Data Analysis Software................................................................................................................ 3.611
Reporting and Case Management Software ............................................................................. 3.633
Other Fraud-Related Software ................................................................................................... 3.651

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INVESTIGATION

COMPUTER FORENSICS
Conducting an Investigation Regarding Computer Crimes ................................................... 3.701
Computer Investigation and Computer Forensics .................................................................. 3.702
Computer Investigation vs. Computer Forensics ................................................................... 3.703
Computer Forensic Examination and Analysis ....................................................................... 3.722
Computer Forensic Tools ........................................................................................................... 3.723

TRACING ILLICIT TRANSACTIONS

Comprehensive Guidelines for Information to be Collected in Financial Interviews....... 3.801
Direct Methods of Tracing Financial Transactions ................................................................ 3.805
Indirect Methods of Tracing Financial Transactions.............................................................. 3.822
Locating Hidden Assets .............................................................................................................. 3.840

REPORTING STANDARDS
Preparation .................................................................................................................................... 3.901
Accuracy of Reports .................................................................................................................... 3.901
Clarity ............................................................................................................................................. 3.902
Impartiality and Relevance.......................................................................................................... 3.902
Timeliness...................................................................................................................................... 3.902
Reporting Mistakes ...................................................................................................................... 3.903
Effective Note-Taking................................................................................................................. 3.904
Organization of Information ...................................................................................................... 3.905
Analyzing the Reader ................................................................................................................... 3.905
Outlining........................................................................................................................................ 3.907
Report Structure ........................................................................................................................... 3.912
Signed Statements ........................................................................................................................ 3.917
Visual Aids .................................................................................................................................... 3.920
Engagement Contracts ................................................................................................................ 3.924
Fraud Examination Checklist ..................................................................................................... 3.926

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INVESTIGATION

APPENDIX

FRAUD EXAMINATION CHECKLIST

Fraud Examination Checklist ..................................................................................................... 3.1001

SAMPLE FRAUD EXAMINATION REPORTS

Bailey Books, Incorporated ........................................................................................................ 3.1101

FORMS
Consent to Search ........................................................................................................................ 3.1201
Telephone Recording Consent .................................................................................................. 3.1203
Consent to Record ....................................................................................................................... 3.1204
Customer Consent and Authorization for Access to Financial Records ............................. 3.1205
Evidence Control Log ................................................................................................................. 3.1206

ENGAGEMENT CONTRACTS AND OPINION LETTERS

Engagement Letters ..................................................................................................................... 3.1301
Fraud Examination Opinion Letters ......................................................................................... 3.1305

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SECTION 4
CRIMINOLOGY AND ETHICS

INTRODUCTION TO CRIMINOLOGY/
UNDERSTANDING HUMAN BEHAVIOR
Applying Behavioral Theory to a Fraud Case .......................................................................... 4.102
Why People Obey the Law ......................................................................................................... 4.121

THEORIES OF CRIME CAUSATION

Classical Criminology .................................................................................................................. 4.201
Routine Activities Theory ........................................................................................................... 4.202
Biological Theories ...................................................................................................................... 4.203
Pyschological Theories ................................................................................................................ 4.204
Social Structure Theories ............................................................................................................ 4.205
Social Process Theories ............................................................................................................... 4.206

WHITE-COLLAR CRIME
What is White-Collar Crime?...................................................................................................... 4.301
Public Perceptions of White-Collar Crime ............................................................................... 4.303
Crimes of the Middle Classes⎯A Look at White-Collar Crime .................................................. 4.305
Varieties of White-Collar Crime ................................................................................................ 4.315

ORGANIZATIONAL CRIME
Corporate Organization and Criminal Behavior ..................................................................... 4.402
Types of Violations ...................................................................................................................... 4.405
Causes of Organizational Crimes............................................................................................... 4.407
Opportunities for Unlawful Organizational Behavior ............................................................ 4.410
Criminogenic Organizational Structures................................................................................... 4.416
Corporate Executives and Criminal Liability ........................................................................... 4.420
Management Behavior ................................................................................................................. 4.421
Controlling Organizational Crime ............................................................................................. 4.422
Prosecuting Organizational Fraud ............................................................................................. 4.427

OCCUPATIONAL CRIME
Research in Occupational Fraud and Abuse ............................................................................ 4.501

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FRAUD PREVENTION PROGRAMS

Responsibility for Fraud Prevention ......................................................................................... 4.601
Corporate Sentencing Guidelines .............................................................................................. 4.608
Implementing an Effective Compliance and Ethics Program Under the Corporate
Sentencing Guidelines .............................................................................................................. 4.614
Fraud Prevention Standards Under Sarbanes-Oxley .............................................................. 4.629
Fraud Prevention Policy .............................................................................................................. 4.634
Ethics Programs ........................................................................................................................... 4.638
Sample Corporate Compliance Program .................................................................................. 4.641
Sample Fraud Policy .................................................................................................................... 4.652
Fraud Policy Decision Matrix..................................................................................................... 4.656
Sample Code of Business Ethics and Conduct........................................................................ 4.657

PUNISHMENT AND THE CRIMINAL JUSTICE SYSTEM

The Police and Regulatory Inspectors ...................................................................................... 4.702
Processing Offenders .................................................................................................................. 4.706
The Court System ........................................................................................................................ 4.708
Sentencing Options...................................................................................................................... 4.713
Corrections .................................................................................................................................... 4.718
Crime Statistics ............................................................................................................................. 4.726
Public Attitudes Toward the Criminal Justice System ............................................................ 4.733

ETHICS FOR FRAUD EXAMINERS

What is Ethics? ............................................................................................................................. 4.801
Morality, Ethics, and Legality ..................................................................................................... 4.803
Values and Principles ................................................................................................................... 4.806
Some Concluding Remarks ........................................................................................................ 4.817

ACFE CODE OF ETHICS

Commitment to Professionalism and Diligence ...................................................................... 4.902
Legal and Ethical Conduct and Conflict of Interest ............................................................... 4.905
Integrity and Competence........................................................................................................... 4.908
Professional Skepticism ............................................................................................................... 4.910
Court Orders and Testimony ..................................................................................................... 4.911
Reasonable Evidential Basis for Opinions ............................................................................... 4.912
Evidential Basis for Opinions .................................................................................................... 4.912
Guilt and Innocence .................................................................................................................... 4.914

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ACFE CODE OF ETHICS (CONT.)

Confidential Information ............................................................................................................ 4.915
Blowing the Whistle ..................................................................................................................... 4.919
Complete Reporting of Material Matters .................................................................................. 4.919
Professional Improvement ......................................................................................................... 4.920
Professional Standards and Practices ........................................................................................ 4.921
Predication Standards .................................................................................................................. 4.925

CFE CODE OF PROFESSIONAL STANDARDS

CFE Code of Professional Standards ....................................................................................... 4.1001

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