TABLE OF CONTENTS SECTION 1 FINANCIAL TRANSACTIONS AND FRAUD SCHEMES OCCUPATIONAL FRAUDS ACCOUNTING CONCEPTS Accounting Basics... 1.101 Financial Statements... 1.105 FINANCIAL STATEMENT FRAUD What Is Financial Statement Fraud?... 1.203 The Cost of Financial Statement Fraud... 1.203 Why Financial Statement Fraud Is Committed... 1.204 Trends in Financial Statement Fraud... 1.205 Financial Statement Fraud Schemes... 1.206 What Red Flags Are Associated with Financial Statement Fraud Generally?... 1.228 Detection of Fraudulent Financial Statement Schemes... 1.229 Financial Statement Analysis... 1.232 Interviews in Fraudulent Financial Statement Cases... 1.238 Prevention of Financial Statement Fraud... 1.247 ASSET MISAPPROPRIATION: CASH RECEIPTS Skimming... 1.301 Cash Larceny... 1.319 ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS Register Disbursement Schemes... 1.401 Cheque Tampering Schemes... 1.409 Billing Schemes... 1.436 Payroll Fraud Schemes... 1.455 Expense Reimbursement Schemes... 1.473 ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS Misuse of Inventory and Other Assets... 1.501 Theft of Inventory and Other Assets... 1.502 Misappropriation of Intangible Assets... 1.517 2013 Fraud Examiners Manual (International) i
FINANCIAL TRANSACTIONS AND FRAUD SCHEMES BRIBERY AND CORRUPTION Corruption... 1.601 Procurement Fraud... 1.611 Detection of Bribery Schemes... 1.622 Conflicts of Interest... 1.636 THEFT OF INTELLECTUAL PROPERTY Competitive Intelligence (CI) Versus Espionage... 1.702 Open Sources of Information... 1.703 The Intelligence Pyramid... 1.707 Building Financial Statements... 1.711 Nontraditional Sources... 1.714 A Corporate Spy Uses Open Sources: What of It?... 1.715 Favourite Targets... 1.716 How Information is Lost... 1.717 Basic Principles of Spying... 1.723 Infiltration Techniques... 1.729 Transactional Intelligence... 1.736 Telling Good Lies... 1.739 Visual Surveillance Against People... 1.740 Email... 1.742 Social Engineering... 1.742 Cloaking and Misdirection... 1.746 Technical Surveillance... 1.755 Investigating an Information Theft Case... 1.771 Programme for Safeguarding Proprietary Information (SPI)... 1.772 Technical Surveillance Countermeasures Survey... 1.782 Preventing Employee Theft of Proprietary Information... 1.783 Protecting the Trade Secrets of Others... 1.786 FINANCIAL INSTITUTION FRAUD Embezzlement Schemes... 1.801 Loan Fraud... 1.803 Real Estate Fraud... 1.813 New Account Fraud Schemes... 1.821 Money Transfer (Wire) Fraud Schemes... 1.823 Automated Teller Machine (ATM) Fraud... 1.826 Advance Fee Fraud... 1.827 ii 2013 Fraud Examiners Manual (International)
FINANCIAL TRANSACTIONS AND FRAUD SCHEMES FINANCIAL INSTITUTION FRAUD (CONT.) Letter-of-Credit Fraud... 1.828 Inside/Outside Frauds... 1.829 Prevention... 1.829 The Basel Committee on Banking Supervision... 1.832 CHEQUE AND CREDIT CARD FRAUD Cheque Fraud... 1.901 Cheque Fraud Rings... 1.904 Cheque Fraud Detection... 1.905 Cheque Fraud Prevention and Investigation... 1.906 Credit Card Fraud... 1.909 Prevention and Detection of Credit Card Fraud... 1.917 Electronic Bill Payment and Person-to-Person Payments... 1.922 INSURANCE FRAUD Types of Insurance Policies... 1.1001 Agent/Broker Fraud... 1.1002 Underwriting Irregularities... 1.1003 Vehicle Insurance Schemes... 1.1005 Property Schemes... 1.1007 Life Insurance Schemes... 1.1008 Liability Schemes... 1.1008 Red Flags of Insurance Fraud... 1.1008 General Insurance Fraud Indicators... 1.1012 Computer-Generated Detection Reports... 1.1012 Workers Compensation Fraud... 1.1013 HEALTH CARE FRAUD Definition... 1.1101 Provider Fraud... 1.1101 Insured Fraud... 1.1104 CONSUMER FRAUD Con Schemes... 1.1201 Telemarketing Fraud... 1.1207 Ponzi and Pyramid Schemes... 1.1225 Identity Theft... 1.1234 2013 Fraud Examiners Manual (International) iii
FINANCIAL TRANSACTIONS AND FRAUD SCHEMES COMPUTER AND INTERNET FRAUD Computer Fraud... 1.1301 Computer Hacking... 1.1303 Malware... 1.1318 Electronic Mail... 1.1330 Internet Fraud... 1.1332 Electronic Commerce... 1.1344 Insider Threats... 1.1348 Computer Security... 1.1350 Conducting an Investigation Regarding Computer Crimes... 1.1364 Handling Digital Evidence... 1.1367 PUBLIC SECTOR FRAUD False Claims and Statements... 1.1401 Beneficiary Fraud... 1.1403 Contract and Procurement Fraud... 1.1404 Phases of the Contracting Process... 1.1405 Using Computers to Combat Procurement Fraud... 1.1417 The Government Employee s Role... 1.1418 Interviewing Government Officials... 1.1419 iv 2013 Fraud Examiners Manual (International)
SECTION 2 LAW OVERVIEW OF THE LEGAL SYSTEM Substantive and Procedural Law... 2.101 Types of Legal Systems... 2.101 Sources of Substantive Law... 2.105 Court Systems... 2.105 Civil and Criminal Actions for Fraud... 2.105 THE LAW RELATED TO FRAUD Definition of Fraud... 2.201 Principal Types of Fraud... 2.201 International Initiatives Against Fraud and Corruption... 2.212 Major Regional Initiatives Against Corruption... 2.224 The FCPA and the UK Bribery Act 2010... 2.226 BANKRUPTCY (INSOLVENCY) FRAUD Introduction... 2.301 Bankruptcy Schemes... 2.301 The World Bank Principles for Effective Insolvency and Creditor Rights Systems... 2.303 SECURITIES FRAUD Introduction... 2.401 Securities Laws and Regulations... 2.401 What Constitutes a Security?... 2.401 Commodity Futures, Exchange-Traded Options, and OTC Options... 2.414 Securities Fraud Schemes... 2.420 Investigative Tips... 2.431 Securities Fraud and the Internet... 2.433 The International Organisation of Securities Commissions... 2.434 European Securities and Markets Authority... 2.444 MONEY LAUNDERING Money Laundering Methods... 2.501 Enforcement and Prevention Strategies... 2.515 Alternative Remittance Systems... 2.520 The Financial Action Task Force... 2.525 Other International Anti-Money Laundering Organisations and Initiatives... 2.530 2013 Fraud Examiners Manual (International) v
LAW INDIVIDUAL RIGHTS Rights and Obligations Under Criminal Law... 2.601 The Law Relating to Search and Seizure... 2.605 Investigations in Private Actions... 2.610 THE CIVIL JUSTICE SYSTEM Introduction... 2.701 Procedure in Civil Cases... 2.701 THE CRIMINAL JUSTICE SYSTEM The Charging Process... 2.801 The Trial Process... 2.802 Sentencing... 2.807 Appeal... 2.808 Punishment... 2.808 Corporate Criminal Liability... 2.808 EVIDENCE Three Basic Forms of Evidence... 2.901 Direct Versus Circumstantial Evidence... 2.902 Admissibility of Evidence... 2.903 Special Rules Concerning Some Types of Circumstantial Evidence... 2.904 Exhibits... 2.907 General Points About Exhibits... 2.910 Hearsay... 2.914 Impeachment... 2.919 Privileges... 2.920 TESTIFYING AS A WITNESS Introduction... 2.1001 Pre-Trial Preparation... 2.1003 Conflicts of Interest... 2.1003 Preparing a Report... 2.1004 Qualifying to Testify as an Expert Witness... 2.1006 Preparing to Testify... 2.1008 Direct Examination... 2.1011 Cross-Examination... 2.1014 Expressing an Opinion on Guilt... 2.1020 Summary... 2.1021 vi 2013 Fraud Examiners Manual (International)
SECTION 3 INVESTIGATION ANALYSING DOCUMENTS Obtaining Documentary Evidence... 3.101 Examining Fraudulent Documents... 3.103 Early Consultation with an Expert Can Prove Valuable... 3.104 Types of Forensic Document Examinations... 3.104 Handling Documents as Physical Evidence... 3.105 Identifying Writings... 3.108 The Document Expert s Findings... 3.111 How to Obtain Handwriting Samples... 3.112 Typewriters and Computer Printers... 3.115 Photocopies... 3.116 Dating a Document... 3.118 Indented Writings... 3.120 Counterfeit Printed Documents... 3.121 Fingerprints... 3.122 INTERVIEW THEORY AND APPLICATION Preparation... 3.201 Characteristics of a Good Interview... 3.201 Characteristics of a Good Interviewer... 3.202 Question Typology... 3.203 Legal Considerations When Conducting an Interview... 3.204 Elements of Conversations... 3.205 Inhibitors of Communication... 3.207 Facilitators of Communication... 3.210 Interview Mechanics... 3.212 Introductory Questions... 3.214 Informational Questions... 3.222 Closing Questions... 3.235 Assessment Questions... 3.238 Admission-Seeking Questions... 3.250 Kinesic Interview and Interrogation... 3.274 Criteria-Based Statement Analysis... 3.278 The Cognitive Interview Technique... 3.283 2013 Fraud Examiners Manual (International) vii
INVESTIGATION COVERT EXAMINATIONS Establishing an Identity... 3.302 Objectives... 3.303 Problems in Covert Operations... 3.304 Surveillance... 3.304 Sources and Informants... 3.311 Use of Operatives... 3.320 SOURCES OF INFORMATION Municipal/Regional/County Government... 3.402 Federal, State, and Provincial Governments... 3.404 Commercial Sources of Information... 3.407 Public Record Database Vendors... 3.409 Directories... 3.411 Banks and Financial Institutions... 3.416 International Law Enforcement Organisations... 3.418 ACCESSING INFORMATION ONLINE Investigating with the Internet... 3.501 A Guide to Successful Internet Searching... 3.509 Online Public Database Searches... 3.513 DATA ANALYSIS AND REPORTING TOOLS Data Mining... 3.601 Using Data Analysis Software... 3.604 Core Data Analysis Software Functions... 3.605 Types of Data Mining and Analysis Software... 3.626 Reporting and Case Management Software... 3.642 DIGITAL FORENSICS Conducting an Investigation Involving Computers... 3.701 Computer Investigation and Computer Forensics... 3.709 Forensic Examination and Analysis... 3.720 Digital Forensics Software... 3.727 viii 2013 Fraud Examiners Manual (International)
INVESTIGATION TRACING ILLICIT TRANSACTIONS Interviews... 3.801 Direct Methods of Tracing Financial Transactions... 3.805 Indirect Methods of Tracing Financial Transactions... 3.823 Locating Hidden Assets... 3.842 REPORTING STANDARDS Preparation... 3.901 Characteristics of a Good Report... 3.902 Common Reporting Mistakes... 3.903 Methods for Taking Effective Notes... 3.905 Organisation of Information... 3.906 Analysing the Reader... 3.907 Outlining Reports and Memoranda... 3.908 Grammatical Considerations... 3.909 Report Structure... 3.913 Signed Confessions... 3.919 Visual Aids... 3.923 Engagement Contracts... 3.929 Fraud Examination Checklist... 3.932 APPENDIX A: FRAUD EXAMINATION CHECKLIST Fraud Examination Checklist... 3.1001 APPENDIX B: SAMPLE FRAUD EXAMINATION REPORTS Short-Form Report... 3.1102 Long-Form Report... 3.1109 APPENDIX C: SAMPLE FORMS Evidence Control Log... 3.1201 APPENDIX D: ENGAGEMENT CONTRACTS AND OPINION LETTERS Engagement Letters... 3.1301 Fraud Examination Opinion Letters... 3.1305 2013 Fraud Examiners Manual (International) ix
SECTION 4 FRAUD PREVENTION AND DETERRENCE UNDERSTANDING HUMAN BEHAVIOUR Behavioural Analysis and the Detection of Fraud... 4.101 Why People Obey the Law... 4.108 THEORIES OF CRIME CAUSATION Classical Criminology... 4.201 Routine Activities Theory... 4.202 Biological Theories... 4.203 Psychological Theories... 4.203 Social Structure Theories... 4.204 Social Process Theories... 4.205 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... 4.306 ORGANISATIONAL CRIME Corporate Organisation and Criminal Behaviour... 4.402 Opportunities for Unlawful Organisational Behaviour... 4.404 Corporate Executives and Criminal Liability... 4.409 Management Behaviour... 4.410 Controlling Organisational Crime... 4.412 OCCUPATIONAL FRAUD Research in Occupational Fraud and Abuse... 4.501 FRAUD PREVENTION PROGRAMMES Responsibility for Fraud Prevention... 4.601 Implementing a Corporate Compliance Programme... 4.607 Procedures to Prevent Fraud... 4.616 Fraud Prevention Policy... 4.622 Ethics Programmes... 4.626 Sample Fraud Policy... 4.630 Sample Code of Business Ethics and Conduct... 4.634 Code of Conduct Compliance Questionnaire... 4.647 Code of Conduct and Conflict of Interest Employee Certification... 4.651 x 2013 Fraud Examiners Manual (International)
FRAUD PREVENTION AND DETERRENCE FRAUD RISK ASSESSMENT What Is Fraud Risk?... 4.701 What Factors Influence Fraud Risk?... 4.701 What Is a Fraud Risk Assessment?... 4.703 Preparing the Company for a Fraud Risk Assessment... 4.710 Fraud Risk Assessment Frameworks... 4.713 Addressing the Identified Fraud Risks... 4.723 Responding to Residual Fraud Risks... 4.725 Reporting the Results of the Fraud Risk Assessment... 4.726 Making an Impact with the Fraud Risk Assessment... 4.729 The Fraud Risk Assessment and the Audit Process... 4.731 The Fraud Risk Assessment Tool... 4.732 FRAUD RISK MANAGEMENT What Is Risk Management?... 4.801 Risk Management Frameworks... 4.802 Integrating Anti-Fraud Initiatives into Risk Management... 4.805 Who Is Responsible for Managing Fraud Risk?... 4.806 The Objectives of a Fraud Risk Management Programme... 4.810 Steps in Developing a Fraud Risk Management Programme... 4.811 Fraud Risk Management Programme Components... 4.814 MANAGEMENT S, AUDITORS, AND FRAUD EXAMINERS RESPONSIBILITIES Legislation and Best Practices... 1.901 Management s Fraud-Related Responsibilities... 1.904 External Auditors Fraud-Related Responsibilities... 1.907 Internal Auditors Fraud-Related Responsibilities... 1.940 Certified Fraud Examiners... 1.945 CORPORATE GOVERNANCE What Is Corporate Governance?... 4.1001 Principles of Corporate Governance... 4.1004 Establishing a Corporate Governance Framework... 4.1016 ETHICS FOR FRAUD EXAMINERS What Is Ethics?... 4.1101 Morality, Ethics, and Legality... 4.1103 2013 Fraud Examiners Manual (International) xi
FRAUD PREVENTION AND DETERRENCE ETHICS FOR FRAUD EXAMINERS (CONT.) Some Concluding Remarks... 4.1107 ACFE CODE OF PROFESSIONAL ETHICS Commitment to Professionalism and Diligence... 4.1202 Legal and Ethical Conduct and Conflict of Interest... 4.1205 Integrity and Competence... 4.1208 Court Orders and Testimony... 4.1210 Reasonable Evidential Basis for Opinions... 4.1212 Confidential Information... 4.1214 Complete Reporting of Material Matters... 4.1219 Professional Improvement... 4.1220 Professional Standards and Practices... 4.1221 CFE CODE OF PROFESSIONAL STANDARDS CFE Code of Professional Standards... 4.1301 xii 2013 Fraud Examiners Manual (International)