Investigation of FraudPresented by

John L. Gudavich, MA, CFEPresident

J. Lewis & Associates Consulting

Elements of an Offense Components of an Illegal/Negligible Act that

must all be proven to sustain a Finding of Guilt

Larceny Example:

1. The taking or carrying away2. Money or property of another3. Without the consent of the owner4. With the intent to permanently deprive the

owner of its use or possession

The Seven Elements of All Frauds

The Seven Elements of All Frauds

FraudWhat it is and What it isn’t

What it isIntentionalTrick or Deceive

someone out of their assets

TheftA crime

What it isn’tTaken by physical forceA mistake or errorVictimlessInsignificant because no

one got hurtAcceptable or Justifiable

Four Sources for Knowing The Number of Incidents of Fraud 1. Government Agencies

FBI FDIC IRS

2. Researchers3. Insurance Companies4. Victims of Fraud5. Trade Associations

Estimated Cost/Impact of Fraud

$600 Billion or $4,500 per employee $9.00 per day per employee 6% of revenue is lost 6 cents on every revenue dollar is stolen

The Seriousness of Fraud

INCREASING

How is the magnitude perceived to be changing?Size and Dollars

Why is this difficult to know for sure?

Types of Frauds Fraud against an

organization

Fraud on behalf of or for an organization

Who Commits Fraud and WhyWhat Does the Fraudster Look

Like? Individuals like you and me No specific psychological profile 70% male, while females make up 30%,

females are 2% of property offenders Older More religious Less substance abuse

How Does Personal Integrity Affect Likelihood to Commit Fraud?

The higher the personal integrity the less likely to commit fraud

Will take much more of the three fraud elements to move them to commit fraud

Fraud studies show that levels of honesty are decreasing

Fraud RelationshipType of Fraud Victim Perpetrator Explanation

1. Employee embezzlement or occupational

Employers Employees Employees directly or indirectly steal from employers

2. Management Stockholders, lenders, & others relying on Financial Statements

Top management

Top management misrepresentation financial information

3. Investment scams

Investors Individuals Individuals trick investors into putting money into fraudulent investments

4. Vendor Organizations that buy goods & services

Organizations / individuals buying goods & services

Overcharged for goods & services or non-shipment of goods paid for

5. Customer Organizations selling goods and services

Customers Customers deceive sellers into giving them something they should not have

The Fire Triangle.

Heat

Oxygen

Fuel

The Fraud Triangle.

Perc

eive

d Pr

essu

reRationalizatio

n

Perceived Opportunity

Fraud Triangle Perceived Pressure

A situation where someone believes that they have a need to commit a fraud

Perceived Opportunity A situation where someone believes they have a

favorable or promising combination of circumstances to commit an undetectable fraud

Rationalization To devise a self-satisfying but incorrect reasons

for one’s behavior

The First Element Pressure

95% of frauds are either financial or vice related

Common Pressures1. Greed2. Living beyond your means3. High bills or personal debt4. Poor credit5. Personal financial losses6. Unexpected financial needs

The Second Element Perceived Opportunity

What are the three component of perceived opportunity?

1. Lack of Detection2. Ignorance/Apathy3. Lack of Audit Trail

The Third Element Rationalization

They owe it to me I’m only borrowing the money Nobody will get hurt I deserve more It’s for a good cause We’ll fix the books as soon as we get past

this little financial problem It’s for my sick child

Why is it Important to Understand the Fraud

Triangle?Just as a fire can be Just as a fire can be prevented or extinguished prevented or extinguished by removing one of the by removing one of the three elements in the fire three elements in the fire triangle, so to can fraud be triangle, so to can fraud be prevented by removing one prevented by removing one of the three elements of of the three elements of fraud from the fraud fraud from the fraud triangle. triangle.

Intent & Materiality Two Fundamental Factors in Proving a

Fraud Charge:

1. Intent – The accused must have intended and worked deliberately to deceive the victim

1. Materiality – Any misrepresentation must also have material consequences on the outcome.

Burden of Proof of Fraudulent Acts

Criminal – Always Beyond a Reasonable Doubt

Civil – Preponderance of the Evidence

Criminal/CivilPunishment

Criminal Cases - Punished by outcomes such as Imprisonment, Fines, Order of Restitution, Probation and Community Service

Civil Cases - Result in an award of damages or in some cases, the entry of an order or injunction that compels the losing party to take remedial action or to avoid future illegal acts

Civil & Criminal Actions Criminal Actions - Prosecutors on behalf of

public safety file criminal complaints

Civil Actions – Can be filed by an individual or a group of Plaintiff’s in state or federal courts

Most Fraud Suits are fashioned as Misrepresentation Claims and are filed in state courts

Civil & Criminal Jurisdiction

Most Criminal Prosecutions take place at the local or state levels

Federal Law is used to prosecute crimes that result in extreme economic losses or damages

Federal courts hear cases involving parties from different states with more than $50,000.00 in contention and actions covered by federal statutes, such as the RICO Statutes

Misrepresentation of Material Facts

A Material False Statement was Made The Defendant knew the Statement

was False The Victim relied on the False

Statement Damage Incurred

Concealment Material Facts

Subject to legal action for fraud based on the withholding/concealment of a material fact. The Elements are:

1. The defendant’s knowledge2. Of a material fact3. The defendant had a duty to disclose4. And failed to do so5. With the intent to mislead or deceive

Bribery/Corruption of a Public Official

The Elements of Official Bribery include:

Giving or Receiving

Something of Value

To Influence an Official Act

Bribery/Corruption of a Public OfficialThings of Value

Lavish Gifts & Entertainment Payment of Travel and Lodging Expenses Payment of Credit Card Bills Loans Promises of future employment Interests in a business

Bribery/Corruption of a Public Official

Proving a Bribery Charge: Requires that the person receiving the bribe

favored the bribe-payer in an improper or unusual manner

Provided preferential treatment Bent or broke existing rules/regulations Took extraordinary steps to assist the bribe-payer Allowed the bribe-payer to defraud the agency or

organization In a Quid Pro Quo both parties have violated the

law

Illegal GratuityA lesser included offense of Official Bribery

Giving or receiving A thing of Value In exchange for or as a result of an Official

Act

Commercial Bribery May be prosecuted as a criminal or civil

action Half of the states prohibit commercial

bribery Criminal prosecution involves bribes that

defraud business owners of the right to an employee’s unbiased and loyal services

There are no federal statutes prohibiting Commercial Bribery; however they can be prosecuted as mail and wire fraud or RICO

Commercial BriberyThe Elements of Proof include:

1. Giving or receiving

2. A thing of value

3. To influence a business decision

4. Without the knowledge or consent of the principal

Commercial Bribery Remedies

Businesses injured by Commercial Bribery may sue for treble damages and attorney fees under the:

Civil RICO Statute (Title 18 § 1964) Clayton Act (Title 15 § 13(c)

Businesses can further seek compensatory and punitive damages for common law fraud, conflict of interest and breach of fiduciary duty

Civil actions may be taken even if commercial bribery is not a crime in a particular jurisdiction

Embezzlement The wrongful appropriation of money or

property by a person to whom it has been lawfully entrusted

Involves a breach of trust, although it is not necessary to show a fiduciary relationship between the parties.

EmbezzlementThe Elements of Proof are:

1. The defendant took or converted2. Without the knowledge or consent of the

owner3. Money or property of another4. That was properly entrusted to the

defendant

Forgery The Act of Fraudulently Making a False

Document or Altering a Real Document to be Used as if it is Genuine

Extortion Committed by using actual force, the threat of

force, or some other form of intimidation to obtain assets

A demand for a bribe or kickback also constitutes extortion

Extortion is not a defense to bribery. A person who makes a bribe payment upon a demand of the recipient is culpable for bribery

Larceny The wrongful taking of money or property

of another with the intent to convert or to deprive the owner of its possession and use

In larceny, the defendant never has lawful possession or ownership of the property

LarcenyThe Elements of Proof for Larceny

1. Taking or carrying away2. Money or property of another3. Without the consent of the owner4. With the intent to permanently deprive

the owner of its use or possession

Conflicts of Interest A conflict of Interest can arise when one’s

personal interest or the interest of others with influence over the decision maker is at odds with the decision maker’s fiduciary duty

US Federal Criminal Codes, state laws and regulations, and common law in all jurisdictions prohibit conduct by public officials and others with fiduciary duty to have a conflict of interest

Conflicts of Interest May be prosecuted criminally or civilly

Elements of Proof:

1. An agent taking an interest in a transaction

2. That is actually or potentially adverse to the principal

3. Without full and timely disclosure to and approved by the principal