CONDUCTING INTERNAL INVESTIGATIONS. SHERMAN MCGREW, JD, CFE Program Analyst TSA Netherlands

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Investigating one s own colleagues for fraud is an extremely difficult situation and poses unique challenges, particularly when the suspected fraudster may continue to be employed at the same company

1 Investigating one s own colleagues for fraud is an extremely difficult situation and poses unique challenges, particularly when the suspected fraudster may continue to be employed at the same company as the investigator. Explore how to tackle the internal investigation, detect falsehood, and avoid the pitfalls when dealing with coworkers and friends. SHERMAN MCGREW, JD, CFE Program Analyst TSA Netherlands Sherman R. McGrew entered military service as a Reservist in 1979, retiring as a U.S. Army Lieutenant Colonel in He is a graduate of Army Command and General Staff College and has had three active duty deployments, working extensively with the UK Military and UK Civilian Police Contingent in Basra, Iraq. McGrew retired as a Captain with the Waterbury Police Department in 2009, having also served as a Patrolman, Detective, Sergeant and Lieutenant. He has conducted thousands of interviews with suspects and has lectured on interview and interrogation to the police, military, and international audiences. As a detective, he extensively investigated financial crimes, securing convictions while at all times respecting the rights of the accused. He holds a Bachelor s Degree from the University of Connecticut, a Masters in Forensic Science from the University of New Haven, and a Law Degree from The University of Connecticut, School of Law Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without the prior consent of the author. 2014

2 Introduction Investigating one s own colleagues for fraud is an extremely difficult situation. This breakout session will explore how to tackle the internal investigation, detect falsehood, and avoid the pitfalls when dealing with coworkers and friends. Specifics of What We Will Discuss Today This presentation will focus on the uncomfortable, but sometimes unavoidable, situation when one must investigate a coworker concerning fraud. Internal investigations are becoming more and more vital, not just as a defense tool in a possible litigation down the road, but perhaps even more importantly, in the court of public opinion. Investigating a colleague poses unique challenges to the fraud investigator, particularly when the suspected fraudster may continue to be employed at the same company as the investigator. How does one interview a friend? How does one balance the need of the corporation for transparency, reactiveness to perceived wrongdoing, and compliance against a friendship? Why is the worst case scenario to go too easy on a colleague and not find fraud that is subsequently discovered by the government or a plaintiff? When is it time to back off from an internal investigation and bring in an outside source? Learning Objectives At the end of today s presentation, you should be able to articulate the following: How does an internal investigation differ from outside investigations? Are investigations privileged? If so, who holds the privilege? How do you keep personal relationships from interfering with your investigation?

3 How things can go wrong very wrong, very fast. How does life go on in the workplace after the investigation? Why Conduct Internal Investigations? Internal investigations usually commence at the bequest of management. A suspected fraud has been uncovered. Management generally wants to know what is occurring and to what extent. In short, how bad is it, and how far into the organization does it go? Based upon the results of the internal investigation, management might decide to call in an outside source to complete the investigation or even, in some cases, refer the matter to the authorities (i.e., police). What Sets Internal Investigations Apart? The main difference for the fraud investigator is that in an internal investigation, he is investigating colleagues. This is never an easy task. It is entirely possible that in a small firm you might personally know the suspected fraudster. If the investigation does not result in a termination, it is likely that you might very well be working, once again, alongside the person you previously investigated. This creates a very unique atmosphere for internal investigations. What Happens If an Internal Investigation Is Not Conducted? A corporation can find itself in very hot water if it knows of a problem, such as an internal fraud, and takes no steps to investigate it. This can easily lead to allegations of a coverup or sweeping the problem under the rug. Many times, it is not only the consequences of legal action that must be considered, but, particularly when dealing with very large, well known corporations, the court of public opinion must be taken into account. One can win in a court of law, but lose the respect of the community at large. Also, generally, fraud might become public at some point in the

4 future. If a corporation knew of a fraud and took no actions to bring those responsible to account, it can be seen as uncaring or incompetent. Getting Started The Allegation As odd as it might sound, many investigations are ordered with minimal guidance to the investigator as to why an investigation needs to take place. Sometimes, the allegations will simply be broad, sweeping statements, such as, We believe X is stealing money from the company. We want you to investigate. Obviously, there is some reason that management wants an investigation to be initiated. Something has happened. Do your best to find out the specifics that have caused an allegation to be made. Also, what is the goal of the investigation? Does management simply want the facts? Does management want a recommendation at the end of the investigation in terms of how to prevent the fraud in the future or what should be the recommendation for discipline for any wrong doer? It is vital to get clear guidance from the outset, if at all possible. Levels of Proof It is important to understand from the outset what the various degrees of proof will be used in the investigation. As a general rule, the levels will fall into these categories: Mere suspicion (10 percent) Reasonable suspicion (35 percent) Probable cause (51 percent) Clear and convincing (75 percent) Beyond a reasonable doubt (95 percent) ***There is no such thing as 100 percent proof Mere Suspicion (10 Percent) Mere suspicion is no more than a hunch or guess. Someone might believe that a fraud is taking place, but is unable to articulate exactly why. Something just

5 doesn t feel right, is a common expression at this stage. Rarely is an investigation officially launched at this level of suspicion. One can, however, look a little harder in the interest of reaching the next level. Reasonable Suspicion (35 Percent) The difference between mere and reasonable suspicion is that facts and circumstances can now be articulated. As in, I believe that a fraud is occurring because of X, Y, and Z. You can point to specific instances and explain how they lead to the possibility of fraud occurring. This is the normal point where an official investigation is opened. Once you have reasonable suspicion, the investigation moves to one of two directions: You either move toward the level of probable cause or to exoneration. Probable Cause (51 Percent) Probable cause is when facts and circumstances exist that make it more likely than not that a fraud has occurred. This applies to either a person or a situation. You have zeroed in on a fraudster. But, in order to take action, we need to try to get to the next level. Clear and Convincing (75 Percent) Facts and circumstances show that a fraud has been committed and who has committed it. You have a very solid case. This is normally the point where action can be taken. There can be employment consequences. If directed, the case can be turned over to the authorities (i.e., police). Proof Beyond a Reasonable Doubt (95 Percent) This is the level that is normally required for criminal convictions. It is generally not required for internal investigations. Your investigation might develop to this

6 level of proof, and that is excellent, but generally we do not have to go that far. Outcomes of the Allegations There are three possible outcomes to an allegation: Sustained Non-sustained Exonerated We will now talk about each in detail. Sustained You have investigated an allegation to the point where facts and circumstances lead to clear and convincing evidence that a fraud has occurred and who has committed it. Non-sustained Evidence gathered to this point does not lead to clear and convincing evidence of fraud. Despite our best efforts, the evidence simply does not rise to that level. A fraud may or may not have occurred. We cannot definitely say. Exonerated The allegation has been thoroughly investigated. The outcome shows that the fraud was either not committed at all or that a particular person did not commit it. Why Go Through All These Levels of Proof and Outcomes? During an investigation, it is very easy to lose focus on what you are trying to accomplish. An investigation needs focus and clarity. These levels of proof and outcomes remind you of exactly what you need to prove and to what degree. These guidelines help to direct your investigation

7 The Unexpected Investigation Many times, a fraud will lead you down many different paths. It is all too common to have an investigation start with a simple focus and directive, and then to have it branch out into several directions. Often, the starting point is merely the tip of the iceberg. Attorneys During the course of an investigation, management might want in-house or outside counsel to be present. Nearly all countries will consider the communication between an attorney and a client to be privileged. The client speaks, the attorney listens, and neither can be compelled to say what has transpired between them. The Difference in Internal Investigations The question of attorney/client privilege hinges on who holds the privilege! Particularly in the case of in-house counsel, the privilege belongs to the firm, not the individual! Make sure the person being interviewed knows this and has it in writing. Many people will assume that if they are speaking to an attorney, the attorney cannot later reveal the content of the conversation. Generally, in these situations, the attorney s client is the firm and not the suspected fraudster. Does an Employee Have to Answer? Generally, yes employees do. An internal investigation is not commonly conducted by the police (unless it involves police officers as the target of the investigation). In normal civilian circumstances, an individual may face disciplinary actions, up to and including termination, for failing to answer questions in an investigation. Perhaps he will lose his job, but that s better than going to jail. Remember an internal investigation is not a criminal prosecution. It may

8 later be referred to the police, but the right to remain silent does not apply in internal investigations. Why You Need to Get the Investigation Right When a fraud is uncovered, it is sometimes big news, or perhaps an actual media event. If this happens, your actions as a fraud internal investigator will be heavily scrutinized. In effect, your investigation will be investigated. This is why it is important to avoid some common pitfalls. Keep the High Moral Ground at All Times Ensure your personal background is clean, particularly in regards to your employer. A common defensive tactic is to accuse the investigator of impropriety. Stay honest and impartial. And remember this: You did not commit the fraud, he did. Play by the rules and let the chips fall where they may. Stay neutral and impartial. Neither go too hard on a suspected fraudster, nor too tough. Avoid Investigating Personal Friends, If Possible In internal investigations, particularly high profile ones, you must avoid even the appearance of partiality. Ideally, you are not in the same hierarchy/chain of command as the suspected fraudster. Sometimes there is no choice in the matter you must investigate a personal acquaintance or friend. If you must do this, remain professional at all times. Do not cut a friend some slack. This can come back to bite you. Fairness and impartiality are your guidelines at all times. Remember This Thought If there must be an internal investigation, who would you want to do the investigation? Hopefully, the answer is that you would want someone who is fair and unbiased

9 Disclosure You have uncovered a fraud. It is a big one. There will be a lot of fallout; possible criminal prosecutions and media attention. The most important thing to do now is to get out in front of the power curve. Bad News Is Like Garbage There is an old saying, Bad news is like garbage. The longer you hold onto it, the more it starts to stink. If the fraud you have uncovered in your investigation is media worthy, get the news out as soon as possible. You can control how the news is released. This is ten times better than having the media frenzy surprise you or your firm. If there was wrongdoing, admit it! State what the consequences were for those involved (contact legal for guidance on what you can safely say). Say what steps have been taken to ensure this does not happen again. The Push Back Bosses hate this! The natural tendency is to keep things quiet in the hope that it will all go away. And it is true, this sometimes does happen. Things sometimes quiet down and the public knowledge of the fraud is contained within the company. However, if, and this is a big if, the news does break, you are now playing catch up. Accusations of coverup are now much more difficult to defend. People respect honesty and they respect others and firms that can admit wrongdoing has occurred, provided that there have been consequences and corrective measures taken. Straightforwardness beats out tap dancing every day of the week. Summary The internal investigation is one of the most difficult duties you can be asked to perform. Done properly, it keeps the honor of a company or an individual clean. It shows the

10 world that your firm cares about what goes on in the company and that your firm is willing to take steps to maintain integrity. A well done internal investigation can save a company. Stay honest. Stay fair. Stay impartial Even when it hurts. Good luck

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