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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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ii 2012 Fraud Examiners Manual (Canada)
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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2012 Fraud Examiners Manual (Canada) iii
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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2012 Fraud Examiners Manual (Canada) v
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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vi 2012 Fraud Examiners Manual (Canada)
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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viii 2012 Fraud Examiners Manual (Canada)
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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x 2012 Fraud Examiners Manual (Canada)
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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2012 Fraud Examiners Manual (Canada) xi
ENGAGEMENT CONTRACTS AND OPINION LETTERS
Engagement Letters ..................................................................................................................... 3.1201
Fraud Examination Opinion Letters ......................................................................................... 3.1205
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xii 2012 Fraud Examiners Manual (Canada)
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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2012 Fraud Examiners Manual (Canada) xiii
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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xiv 2012 Fraud Examiners Manual (Canada)
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