investigation of fraud presented by john l. gudavich, ma, cfe president j. lewis & associates...
TRANSCRIPT
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. Researchers
3. Insurance Companies
4. Victims of Fraud
5. 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.
Hea
tO
xygen
Fuel
The Fraud Triangle.
Per
ceiv
ed
Pre
ssure
Ratio
naliza
tio
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 Detection
2. Ignorance/Apathy
3. 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.
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 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
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