FRAUD EXAMINERS MANUAL (CANADIAN EDITION) TABLE …...fraud examiners manual (canadian edition) ii...
Transcript of FRAUD EXAMINERS MANUAL (CANADIAN EDITION) TABLE …...fraud examiners manual (canadian edition) ii...
FRAUD EXAMINERS MANUAL (CANADIAN EDITION)
2012 Fraud Examiners Manual (Canada) i
TABLE OF CONTENTS
VOLUME I
SECTION 1 FINANCIAL TRANSACTIONS AND FRAUD SCHEMES
OCCUPATIONAL FRAUDS
ACCOUNTING CONCEPTS
Accounting Basics ........................................................................................................................ 1.101
Financial Statements .................................................................................................................... 1.106
Generally Accepted Accounting Principles (GAAP) .............................................................. 1.116
FINANCIAL STATEMENT FRAUD
What Is Financial Statement Fraud? ......................................................................................... 1.203
Why Financial Statement Fraud Is Committed ....................................................................... 1.203
Trends in Financial Statement Fraud ........................................................................................ 1.205
Financial Statement Fraud Schemes .......................................................................................... 1.205
What Red Flags Are Associated with Financial Statement Fraud Generally? ..................... 1.225
Detection of Fraudulent Financial Statement Schemes ......................................................... 1.226
Financial Statement Analysis ...................................................................................................... 1.229
Interviews in Fraudulent Financial Statement Cases .............................................................. 1.235
Prevention of Financial Statement Fraud ................................................................................. 1.244
ASSET MISAPPROPRIATION: CASH RECEIPTS
Skimming ....................................................................................................................................... 1.301
Cash Larceny ................................................................................................................................. 1.320
ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS
Register Disbursement Schemes ................................................................................................ 1.401
Cheque Tampering Schemes ..................................................................................................... 1.410
Billing Schemes ............................................................................................................................. 1.439
Payroll Fraud Schemes ................................................................................................................ 1.459
Expense Reimbursement Schemes ............................................................................................ 1.477
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FINANCIAL TRANSACTIONS AND FRAUD SCHEMES
ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS
Misuse of Inventory and Other Assets ..................................................................................... 1.501
Theft of Inventory and Other Assets ........................................................................................ 1.502
Misappropriation of Intangible Assets ...................................................................................... 1.518
BRIBERY AND CORRUPTION
Bribery ........................................................................................................................................... 1.601
Detection of Bribery Schemes ................................................................................................... 1.619
Conflicts of Interest ..................................................................................................................... 1.634
THEFT OF INTELLECTUAL PROPERTY
Competitive Intelligence Versus Espionage ............................................................................ 1.702
Open Sources of Information .................................................................................................... 1.703
The Intelligence Pyramid ............................................................................................................ 1.707
Building Financial Statements .................................................................................................... 1.712
Nontraditional Sources ................................................................................................................ 1.715
A Closer Look at Databases ....................................................................................................... 1.717
A Coprorate Spy Uses Open Sources: What of It? ................................................................. 1.719
Favourite Targets ......................................................................................................................... 1.720
How Information Is Lost ............................................................................................................ 1.721
Basic Principles of Spying ........................................................................................................... 1.728
Infiltration Techniques ................................................................................................................ 1.734
Transactional Intelligence ........................................................................................................... 1.741
Telling Good Lies ........................................................................................................................ 1.744
Visual Surveillance Against People ............................................................................................ 1.745
Email .............................................................................................................................................. 1.747
Social Engineering ....................................................................................................................... 1.747
Cloaking and Misdirection .......................................................................................................... 1.750
Technical Surveillance ................................................................................................................. 1.761
Investigating an Information Theft Case ................................................................................. 1.776
Program for Safeguarding Proprietary Information (SPI) ..................................................... 1.778
Technical Surveillance Countermeasures (TSCM) Survey ..................................................... 1.787
Preventing Employee Theft of Proprietary Information ....................................................... 1.788
Protecting the Trade Secrets of Others .................................................................................... 1.791
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OTHER FRAUDS
FINANCIAL INSTITUTION FRAUD
Embezzlement Schemes ............................................................................................................. 1.801
Loan Fraud .................................................................................................................................... 1.803
Real Estate Fraud ......................................................................................................................... 1.813
New Account Fraud Schemes .................................................................................................... 1.822
Money Transfer (Wire) Fraud Schemes .................................................................................... 1.824
Automated Teller Machine (ATM) Fraud ................................................................................ 1.828
Advanced Fee Fraud .................................................................................................................... 1.828
Letter-of-Credit Fraud ................................................................................................................. 1.830
Inside/Outside Frauds ................................................................................................................ 1.830
Prevention ..................................................................................................................................... 1.831
The Basel Committee on Banking Supervision ....................................................................... 1.833
CHEQUE AND CREDIT CARD FRAUD
Cheque Fraud ............................................................................................................................... 1.901
Cheque Fraud Rings .................................................................................................................... 1.907
Cheque Fraud Detection ............................................................................................................. 1.908
Cheque Fraud Prevention and Investigation ........................................................................... 1.909
Credit Card Fraud ........................................................................................................................ 1.913
Prevention and Detection of Credit Card Fraud ..................................................................... 1.922
Electronic Bill Payment and Person-to-Person Payments ..................................................... 1.932
INSURANCE FRAUD
Types of Insurance Policies ........................................................................................................ 1.1001
Agent/Broker Fraud .................................................................................................................... 1.1002
Underwriting Irregularities .......................................................................................................... 1.1003
Vehicle Insurance Schemes ........................................................................................................ 1.1005
Property Schemes ......................................................................................................................... 1.1008
Life Insurance Schemes............................................................................................................... 1.1008
Liability Schemes .......................................................................................................................... 1.1009
Red Flags of Insurance Fraud .................................................................................................... 1.1009
General Insurance Fraud Indicators.......................................................................................... 1.1013
Computer-Generated Detection Reports ................................................................................. 1.1013
Workers’ Compensation Fraud .................................................................................................. 1.1014
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HEALTH CARE FRAUD
Definition ...................................................................................................................................... 1.1101
Provider Fraud .............................................................................................................................. 1.1101
Insured Fraud ............................................................................................................................... 1.1104
BANKRUPTCY (INSOLVENCY) FRAUD
Introduction .................................................................................................................................. 1.1201
Bankruptcy Proceedings .............................................................................................................. 1.1201
Bankruptcy Fraud Law ................................................................................................................ 1.1203
Bankruptcy Schemes .................................................................................................................... 1.1213
SECURITIES FRAUD
Introduction .................................................................................................................................. 1.1301
Securities Laws and Regulations ................................................................................................ 1.1301
What Constitutes a Security? ...................................................................................................... 1.1306
Commodity Futures, Exchange-Traded Options, and OTC Options ................................. 1.1315
Securities Fraud Schemes ............................................................................................................ 1.1321
Investigative Tips ......................................................................................................................... 1.1329
Securities Fraud and the Internet ............................................................................................... 1.1330
MONEY LAUNDERING
Introduction .................................................................................................................................. 1.1401
The Money Laundering Process ................................................................................................ 1.1401
International Anti-Money Laundering Efforts ........................................................................ 1.1412
Enforcement and Prevention Strategies ................................................................................... 1.1413
Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations .................. 1.1417
Terrorist Financing ...................................................................................................................... 1.1422
Sample Form ................................................................................................................................. 1.1423
CONSUMER FRAUD
Con Schemes ................................................................................................................................ 1.1501
Telemarketing Fraud .................................................................................................................... 1.1509
Ponzi and Pyramid Schemes ...................................................................................................... 1.1527
Identity Theft ................................................................................................................................ 1.1546
COMPUTER AND INTERNET FRAUD
Computer Fraud Versus Computer Crime ............................................................................... 1.1603
Computer Hacking....................................................................................................................... 1.1604
Electronic Mail ............................................................................................................................. 1.1614
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COMPUTER AND INTERNET FRAUD (CONT.)
Computer Viruses ........................................................................................................................ 1.1616
Internet Fraud ............................................................................................................................... 1.1625
Electronic Commerce .................................................................................................................. 1.1635
Insider Threats .............................................................................................................................. 1.1638
Computer Security ....................................................................................................................... 1.1640
Internal Controls in the Data Centre ........................................................................................ 1.1646
Internal Controls in Computer Applications ........................................................................... 1.1650
Conducting an Investigation Regarding Computer Crimes ................................................... 1.1653
Computer Crime Laws ................................................................................................................ 1.1654
PUBLIC SECTOR FRAUD
False Claims and Statements ...................................................................................................... 1.1701
Beneficiary Fraud ......................................................................................................................... 1.1703
Contract and Procurement Fraud .............................................................................................. 1.1704
Using Computers to Combat Procurement Fraud .................................................................. 1.1715
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VOLUME II
SECTION 2 LAW
OVERVIEW OF THE CANADIAN LEGAL SYSTEM
Substantive and Procedural Law ................................................................................................ 2.101
Types of Legal Systems ............................................................................................................... 2.101
Sources of Law ............................................................................................................................. 2.103
The Constitution Act of 1982 .................................................................................................... 2.108
Canada’s Court System ................................................................................................................ 2.113
Outline of Federal Courts in Canada ........................................................................................ 2.115
Outline of Provincial Courts in Canada ................................................................................... 2.117
Jurisdiction of Provincial Courts ............................................................................................... 2.120
THE LAW RELATED TO FRAUD
Definition of Fraud ...................................................................................................................... 2.201
Principal Types of Fraud ............................................................................................................. 2.201
Basic Overview of the Criminal Code ...................................................................................... 2.212
Miscellaneous Fraud-Related Offences and Legislation......................................................... 2.247
Whistleblower Laws ..................................................................................................................... 2.256
INDIVIDUAL RIGHTS DURING EXAMINATIONS
The Canadian Charter of Rights and Freedoms ...................................................................... 2.301
Rights and Obligations Under Criminal Law ........................................................................... 2.312
The Law Relating to Search and Seizure .................................................................................. 2.318
THE CIVIL JUSTICE SYSTEM
Introduction .................................................................................................................................. 2.401
Procedure in Civil Cases ............................................................................................................. 2.401
Investigations in Private Actions ............................................................................................... 2.405
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LAW
THE CRIMINAL JUSTICE SYSTEM
The Charging Process .................................................................................................................. 2.501
The Trial Process ......................................................................................................................... 2.502
Sentencing ..................................................................................................................................... 2.508
Appeal ............................................................................................................................................ 2.508
Paroles and Pardons .................................................................................................................... 2.508
Punishment ................................................................................................................................... 2.509
Corporate Criminal Liability ....................................................................................................... 2.511
EVIDENCE
Direct and Circumstantial Evidence ......................................................................................... 2.601
Admissibility of Evidence ........................................................................................................... 2.602
Evidence of Handwriting ............................................................................................................ 2.603
Types of Evidence ....................................................................................................................... 2.603
Exhibits .......................................................................................................................................... 2.607
TESTIFYING AS A WITNESS
Introduction .................................................................................................................................. 2.701
Pre-Trial Preparation ................................................................................................................... 2.705
Preparing to Testify ..................................................................................................................... 2.708
Direct Examination ..................................................................................................................... 2.711
Cross-Examination ...................................................................................................................... 2.713
Expressing an Opinion on Guilt................................................................................................ 2.719
Summary ........................................................................................................................................ 2.721
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SECTION 3 INVESTIGATION
ANALYZING DOCUMENTS
Obtaining Documentary Evidence ............................................................................................ 3.101
Examining Fraudulent Documents ........................................................................................... 3.103
Handling Documents as Physical Evidence ............................................................................. 3.105
Chain of Custody ......................................................................................................................... 3.106
Identifying Writings ..................................................................................................................... 3.108
The Document Expert’s Findings ............................................................................................. 3.111
How to Obtain Handwriting Samples ...................................................................................... 3.112
Typewriters and Computer Printers .......................................................................................... 3.115
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
Introductory Questions ............................................................................................................... 3.214
Informational Questions ............................................................................................................. 3.222
Closing Questions ........................................................................................................................ 3.235
Assessment Questions ................................................................................................................. 3.238
Admission-Seeking Questions .................................................................................................... 3.249
Kinesic Interview and Interrogation ......................................................................................... 3.273
Criteria-Based Statement Analysis ............................................................................................. 3.277
The Cognitive Interview Technique .......................................................................................... 3.282
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INVESTIGATION
COVERT EXAMINATIONS
Establishing an Identity ............................................................................................................... 3.302
Objectives ...................................................................................................................................... 3.303
Problems in Covert Operations ................................................................................................. 3.304
Surveillance ................................................................................................................................... 3.305
Sources and Informants .............................................................................................................. 3.312
Use of Operatives ........................................................................................................................ 3.320
SOURCES OF INFORMATION
Public Versus Non-Public Records ........................................................................................... 3.402
Municipal/Regional Government (Canada) ............................................................................ 3.402
County Government (Canada) ................................................................................................... 3.404
Provincial Government (Canada) .............................................................................................. 3.405
Federal Government (Canada) ................................................................................................... 3.408
State Government (U.S.) ............................................................................................................. 3.411
Commercial Sources .................................................................................................................... 3.416
Public Record Database Vendors .............................................................................................. 3.418
Directories ..................................................................................................................................... 3.420
Banks and Financial Institutions ................................................................................................ 3.426
Law Enforcement Organizations .............................................................................................. 3.428
ACCESSING INFORMATION ONLINE
Investigating with the Internet ................................................................................................... 3.501
A Guide to Successful Internet Searching ................................................................................ 3.508
Online Public Database Searches .............................................................................................. 3.512
DATA ANALYSIS AND REPORTING TOOLS
Data Mining .................................................................................................................................. 3.601
Data Analysis ................................................................................................................................ 3.604
Using Data Analysis Software .................................................................................................... 3.604
Types of Data Mining and Analysis Software .......................................................................... 3.616
Reporting and Case Management Software ............................................................................. 3.632
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INVESTIGATION
DIGITAL FORENSICS
Conducting an Investigation Involving Computers ................................................................ 3.701
Computer Investigation and Computer Forensics .................................................................. 3.708
Forensic Examination and Analysis .......................................................................................... 3.719
Digital Forensics Software .......................................................................................................... 3.726
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 .............................................................. 3.828
Locating Hidden Assets .............................................................................................................. 3.847
REPORTING STANDARDS
Preparation .................................................................................................................................... 3.901
Characteristics of a Good Report .............................................................................................. 3.901
Common Reporting Mistakes .................................................................................................... 3.903
Methods for Taking Effective Notes ........................................................................................ 3.905
Organization of Information ...................................................................................................... 3.906
Analyzing the Reader ................................................................................................................... 3.906
Outlining........................................................................................................................................ 3.908
Grammatical Considerations ...................................................................................................... 3.909
Report Structure ........................................................................................................................... 3.913
KGB Statements .......................................................................................................................... 3.920
Signed Confessions ...................................................................................................................... 3.922
Visual Aids .................................................................................................................................... 3.925
Engagement Contracts ................................................................................................................ 3.932
Fraud Examination Checklist ..................................................................................................... 3.935
APPENDIX
FRAUD EXAMINATION CHECKLIST
Fraud Examination Checklist ..................................................................................................... 3.1001
SAMPLE REPORT
Bailey Books, Incorporated ........................................................................................................ 3.1101
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ENGAGEMENT CONTRACTS AND OPINION LETTERS
Engagement Letters ..................................................................................................................... 3.1201
Fraud Examination Opinion Letters ......................................................................................... 3.1205
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SECTION 4 FRAUD PREVENTION AND DETERRENCE
UNDERSTANDING HUMAN BEHAVIOUR
Behavioural Analysis and the Detection of Fraud .................................................................. 4.101
Reinforcing and Punishing ......................................................................................................... 4.103
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 ................................................................................................................ 4.204
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 Class—A Look at White-Collar Crime ..................................................... 4.305
ORGANIZATIONAL CRIME
Corporate Organization and Criminal Behaviour ................................................................... 4.402
Opportunities for Unlawful Organizational Behaviour ......................................................... 4.404
Criminogenic Organizational Structures................................................................................... 4.406
Corporate Executives and Criminal Liability ........................................................................... 4.409
Management Behaviour .............................................................................................................. 4.411
Controlling Organizational Crime ............................................................................................. 4.412
OCCUPATIONAL FRAUD
Research in Occupational Fraud and Abuse ............................................................................ 4.501
FRAUD PREVENTION PROGRAMS
Responsibility for Fraud Prevention ......................................................................................... 4.601
Implementing a Corporate Compliance Program ................................................................... 4.606
Procedures to Prevent Fraud ...................................................................................................... 4.616
Fraud Prevention Policy .............................................................................................................. 4.622
Ethics Programs ........................................................................................................................... 4.626
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FRAUD PREVENTION AND DETERRENCE
FRAUD PREVENTION PROGRAMS (CONT.)
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 ..................................... 4.647
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 ........................................................... 4.709
Executing the Fraud Risk Assessment ...................................................................................... 4.712
Responding to Residual Fraud Risks ......................................................................................... 4.722
Reporting the Results of the Fraud Risk Assessment ............................................................. 4.723
Making an Impact with the Fraud Risk Assessment ............................................................... 4.726
The Fraud Risk Assessment and the Audit Process ............................................................... 4.728
The Fraud Risk Assessment Tool .............................................................................................. 4.728
FRAUD RISK MANAGEMENT
What Is Fraud 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 Program ......................................................... 4.810
Steps in Developing a Fraud Risk Management Program ..................................................... 4.811
Fraud Risk Management Program Components ..................................................................... 4.814
MANAGEMENT’S, AUDITORS’, AND FRAUD EXAMINERS’
RESPONSIBILITIES
Management’s Fraud-Related Responsibilities ........................................................................ 4.901
External Auditors’ Fraud-Related Responsibilities ................................................................. 4.903
Internal Auditors’ Fraud-Related Responsibilities .................................................................. 4.924
Certified Fraud Examiners’ Responsibilities ............................................................................ 4.929
CORPORATE GOVERNANCE
What Is Corporate Governance? ............................................................................................... 4.1001
Principles of Corporate Governance ........................................................................................ 4.1004
Establishing a Corporate Governance Framework ................................................................ 4.1007
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ETHICS FOR FRAUD EXAMINERS
What Is Ethics?............................................................................................................................. 4.1101
Morality, Ethics, and Legality ..................................................................................................... 4.1103
Some Concluding Remarks ........................................................................................................ 4.1106
ACFE CODE OF PROFESSIONAL ETHICS
Commitment to Professionalism and Diligence ...................................................................... 4.1202
Legal and Ethical Conduct and Conflict of Interest ............................................................... 4.1204
Integrity and Competence .......................................................................................................... 4.1207
Court Orders and Testimony ..................................................................................................... 4.1210
Reasonable Evidential Basis for Opinions ............................................................................... 4.1211
Confidential Information ............................................................................................................ 4.1213
Complete Reporting of Material Matters .................................................................................. 4.1218
Professional Improvement ......................................................................................................... 4.1219
Professional Standards and Practices ........................................................................................ 4.1220
CFE CODE OF PROFESSIONAL STANDARDS
CFE Code of Professional Standards ......................................................................................... 4.1301