For the love of money
What is fraud? What is financial crime? Tackling this subject and the investigation of same, opens up a very broad topic.
Invariably, whatever our chosen terms for these illicit activities, when we are talking about them we are talking about property crimes. But beyond that, there are a surprising variety of definitions for both.
For financial crimes, a brief one I like focuses on the ‘fingerprints’ of the transgression to help focus on behavior and markers integral to the act.
Financial crime involves the use of deception for illegal gain, normally involving breach of trust, and some concealment.
Financial Crime Investigation & Control (1)
And for a fraud description…
Fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.
Association of Certified Fraud Examiners
In either case, for either term, what we see hammered home is that at it’s simplest, this kind of crime involves a breach of trust, an illegal gain, and (usually) a hiding of that gain.
Keeping those three things in mind will help you as you determine the root of the financial crime (what & how much), investigative theories (when & how), and motive & opportunity (who).
Quick Primer
Here’s a quick primer on *some* key features to a financial crime investigation. It is far from exhaustive, and purposefully so – trading detail for brevity.
Admittedly, there are many moving parts to a successful investigation. And a few NOT dealt with here include the rights of employees, including union representation, insuring ethical & legal acquisition of evidence, fiduciary or regulatory duties to investigate and report fraud to authorities.
There is also the need to establish intent, and the rights & obligations of an investigator depending on their employment (government actor).
But with that said, our focus here is a starting point for investigations. A top-of-mind rundown….so here it is.
1. Establish The Framework
Legal Guidance Is Mandatory – Counsel will set the parameters of the investigation.
Importantly, when investigators work under counsel, there is often some legal privilege relative to work product and confidentiality.
This is important given possible future litigation and discovery.
Predication – In short, an investigation should proceed only when there is reason to believe a financial crime, a fraud, has occurred.
Fraud Hypothesis – Every investigation needs a theory at its outset. This gives the investigator a framework to fill in with evidence and findings.
What happened and who might have been involved? How did it likely play out relative to documents, personnel, and systems utilized?
It WILL be revised, possibly replaced completely, as the investigation continues.
Confidentiality – Never compromise confidentiality in an investigation. This means only involve individuals in the investigation who absolutely must be involved because of oversight and expertise.
The best team is the smallest one with the requisite skills to get the job done in a way that will stand up in court. It also means discussions should be kept relevant to the case at hand.
Keep it professional. Gossip can not be tolerated.
2. Follow Investigative Norms
Copies Not Originals – No matter what the evidence, an investigator should be working with facsimiles of that evidence, not originals.
The originals should be physically separate and secure. Documented and organized for future reference.
Chain of Custody – Evidence must be treated with respect. That means access to it is limited to those who absolutely need it.
It means that as evidence makes it way from originating source to investigative application, it is clearly documented WHO took possession and WHEN. This not only protects confidentiality, but also integrity.
Opposing counsel will be concerned about manipulation of original evidence. Proper Chain of Custody makes a claim of manipulation or forgery much more unlikely.
Paper Then Words – I’m of the opinion that it is best to start with documentation rather than interviews in an investigation.
Review all pertinent data to revise a hypothesis and hone it. Don’t seek out a solution to the honing process by interviewing before understanding the documentation.
“Bathtub Drain” Approach – When we are talking actual interviews, think of a bathtub. Just as a rubber duck is drawn to the tub drain in an ever closing spiral, work from least to most suspect when interviewing.
That means starting with parties where research suggests no possible connection to the actual fraud.
This gives you a baseline on how systems, personnel, and actions are supposed to work. It also gives insights into expected outcomes and behaviors.
Then shift to individuals who are unwitting accomplices. Closer to the crime means closer to the actors involved. Perhaps this is in the same department or related business function.
Again, we care about data, behavior, and insights subtly gained about potential wrong-doing and actors.
It is then onto those who are active accomplices. The process is similar, but now less subtle.
Finally, we confront the prime suspect or suspects with evidence built via all the other steps and seek a confession. This confession seeking interview is a process in and of itself and requires a specific approach not detailed here.
3. Provide A Summation & Defense
Findings – A Report for counsel should be tight, focused, and written under the specific requirements and auspices of counsel. It must be factual, and able to stand up to legal action.
This is not a venue for opinion. In other words, this is not an opportunity to state a fraud hypothesis, or make conjectures, whatever you believe. Facts only.
Testifying – As alluded to in terms of team size and documentation, testifying is a real possibility when a corporate investigation occurs and parties are accused of wrong-doing.
Keeping the size of a team to it’s minimum required level is beneficial should parties be called to testify.
Additionally, possible testimony is another reason that careful investigative reasoning is vital throughout a case. Insure your notes and analysis are based on facts and not unfounded conjecture or bias.
There is always a possibility your supporting documentation could be part of the discovery process in lawsuit concerning adverse action and/or subsequent public testimony.
A Starting Point Only
There is a great deal required to execute a successful fraud investigation. And it is vital to remember it can not all be covered on a website post!
In fact, the point of this quick guide is to give pause to someone who needs to run an investigation BEFORE they dive into the heart of it.
Many good resources exist to understand the depth of what is entailed and the approach required. And it is provided in great detail.
The Association of Certified Fraud Examiners (ACFE.COM), maintains extensive training materials with this in mind. Courses are available that cover most aspects of an investigation.
If you take nothing else away from this quick primer, understand that conducting an investigation poses risks in and of itself. This includes risks to an investigator in terms of liability.
It is vital that before you undertake an investigative matter, all key parties (corporate governance, counsel, and fraud analyst) understand the roadmap to avoid surprises.
Fraud investigations are by their very nature unique, complex, and may create risks to the company, the investigator, and the accused.
Legal counsel should be involved in an investigation for these and other reasons. Nothing stated here should be construed as constituting legal advice.
(1) Financial Crime Investigation and Control, Pickett, K.H. Spencer, Pickett, Jennifer M., John Wiley and Sons, Inc. 2002, page 3.