Investigation of Fraud

1. Investigation of Fraud Presented by John L. Gudavich, MA, CFE President J. Lewis & Associates Consulting

2. Elements of an Offense • Components of an Illegal/Negligible Act that must all be proven to sustain a Finding of Guilt Larceny Example: • The taking or carrying away • Money or property of another • Without the consent of the owner • With the intent to permanently deprive the owner of its use or possession

3. The Seven Elementsof All Frauds 1. A Representation 2. About a Material Point 3. Which is False 4. And is Intentional or Reckless

4. The Seven Elements of All Frauds 5. Which is Believed 6. And Acted Upon by the Victim 7. To the Victim's Damage

5. What it is Intentional Trick or Deceive someone out of their assets Theft A crime What it isn’t Taken by physical force A mistake or error Victimless Insignificant because no one got hurt Acceptable or Justifiable FraudWhat it is and What it isn’t

6. Four Sources for Knowing The Number of Incidents of Fraud • Government Agencies • FBI • FDIC • IRS • Researchers • Insurance Companies • Victims of Fraud • Trade Associations

7. 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

8. INCREASING The Seriousness of Fraud How is the magnitude perceived to be changing? Size and Dollars Why is this difficult to know for sure?

9. Types of Frauds • Fraud against an organization • Fraud on behalf of or for an organization

10. 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

11. 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

12. Fraud Relationship

13. Heat Oxygen Fuel The Fire Triangle.

14. Perceived Pressure Rationalization Perceived Opportunity The Fraud Triangle.

15. 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

16. The First ElementPressure • 95% of frauds are either financial or vice related • Common Pressures • Greed • Living beyond your means • High bills or personal debt • Poor credit • Personal financial losses • Unexpected financial needs

17. The Second ElementPerceived Opportunity • What are the three component of perceived opportunity? • Lack of Detection • Ignorance/Apathy • Lack of Audit Trail

18. 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

19. Why is it Important to Understand the Fraud Triangle? Just as a fire can be prevented or extinguished by removing one of the three elements in the fire triangle, so to can fraud be prevented by removing one of the three elements of fraud from the fraud triangle.

20. Intent & Materiality • Two Fundamental Factors in Proving a Fraud Charge: • Intent – The accused must have intended and worked deliberately to deceive the victim • Materiality – Any misrepresentation must also have material consequences on the outcome.

21. Burden of Proof of Fraudulent Acts • Criminal – Always Beyond a Reasonable Doubt • Civil – Preponderance of the Evidence

22. 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

23. 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

24. 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

25. 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

26. Concealment Material Facts Subject to legal action for fraud based on the withholding/concealment of a material fact. The Elements are: • The defendant’s knowledge • Of a material fact • The defendant had a duty to disclose • And failed to do so • With the intent to mislead or deceive

27. Bribery/Corruption of a Public Official The Elements of Official Bribery include: • Giving or Receiving • Something of Value • To Influence an Official Act

28. Bribery/Corruption of a Public Official Things 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

29. 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

30. Illegal Gratuity A lesser included offense of Official Bribery • Giving or receiving • A thing of Value • In exchange for or as a result of an Official Act

31. 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

32. Commercial Bribery The Elements of Proof include: • Giving or receiving • A thing of value • To influence a business decision • Without the knowledge or consent of the principal

33. 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

34. 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.

35. Embezzlement The Elements of Proof are: • The defendant took or converted • Without the knowledge or consent of the owner • Money or property of another • That was properly entrusted to the defendant

36. Forgery • The Act of Fraudulently Making a False Document or Altering a Real Document to be Used as if it is Genuine

37. 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

38. 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

39. Larceny The Elements of Proof for Larceny • Taking or carrying away • Money or property of another • Without the consent of the owner • With the intent to permanently deprive the owner of its use or possession

40. 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

41. Conflicts of Interest • May be prosecuted criminally or civilly • Elements of Proof: • An agent taking an interest in a transaction • That is actually or potentially adverse to the principal • Without full and timely disclosure to and approved by the principal