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Exposing Fraud: Skills, Process and Practicalities



'I convey the notion that investigating fraud is the ultimate challenge in investigating crime. That is if we choose to make the effort needed, and surmount the hurdles we must overcome in investigating fraud at any level or scenario.'

–From the Preface

Expert fraud investigator and internationally recognised trainer Ian Ross offers a comprehensive and accessible resource for understanding and applying best prastices and investigative techniques to uncover and manage fraud in a wide range of circumstances and settings. Written for fraud investigators, compliance officers, human resource professionals and anyone who may be in a position to manage fraud, Exposing Fraud is designed to offer a helpful guide to the practical skills needed to investigate and manage fraud in the real world.

Exposing Fraud includes more than a solid grounding in the basic techniques of fraud investigation. It offers a working knowledge of the application of the principles of fraud investigation in practice and shows how to investigate criminals who may be running a number of scams at the same time. The author includes the tools and techniques that have proven to be effective for managing an investigation and gathering evidence in an ethical manner. The book also outlines the compelling psychological factors that underpin fraudulent behaviour.

This complete guide to fraud is well grounded in principles that can be applied anywhere in the world. Comprehensive, thorough and accessible, Exposing Fraud gives professional fraud investigators and business managers an essential resource for preventing, investigating and managing fraud.

IAN ROSS MSC, CFE, CICA, IAiP, is Regional Director: GIF Consultora, Full Associate of the International Academy of Investigative Psychology and an Accredited Expert Witness. He is a highly respected global trainer specialising in financial fraud, investigative interviewing skills, money laundering and corporate corruption.

Preface xiii

Foreword by James Rately xv

About the Author xvii

Acknowledgements xix

Structure and Method of the Book xxi

Opening Thoughts xxi

Approaching Counter]Fraud Work xxii

Chapter Specifics xxii

Finally xxiii

1. Cutting through the Maze 1

Introduction 1

1.1 What is Fraud? The Most Debated Question 2

Perceptions and representations of fraud 4

Definitions, key distinctions and informing elements 6

The mens rea of Fraud 6

Misrepresentation. Practicalities 7

Conveying the misrepresentation 7

Definition of fiduciary duty 8

1.2 Other Distinctions 9

Intent 9

The difference between ‘misrepresentation’ and a hoax 10

1.3 Lying, Fraud and the State of the Mind 10

Lying and the problem with words 11

Ethnicity misunderstood: the chasm between belief and actual criminal deception 13

1.4 Cutting through the MAZE 14

‘The Three Cs’ 14

1.5 Distinguishing and Overlapping: Fraud and Money Laundering 17

Money laundering: the mens rea 19

‘Politically Exposed Persons’ - a reference 22

Trade]based money laundering 23

1.6 Now Adding Corruption … Linking to Fraud 25

Key distinctions (fraud and corruption) 25

Coercive practices 27

Collusive practices 27

1.7 Legislation Summary 27

Definitions: Comparatives 28

Africa - Middle East - Malaysia - South Africa 28

Sharia law 29

The role of Sharia principles regarding the choice of governing law 30

Insurance and the law: a special mention 31

The United Kingdom Fraud Act 2006 33

Bribery Act 2010 (UK) 34

United States - Definition of Fraud 35

Foreign Corrupt Practices Act 1977 (FCPA) 36

Sarbanes-Oxley Act (USA) 36

Dodd-Frank (USA) 36

Other Fraud Related Legislation 37

1.8 Evidence 37

Evidence - law in itself. Not a ‘free for all’ game to ensure prosecution 37

Basic Principles of Evidence for Fraud Investigators 38

Format 38

Evidential sources, classification and practicalities 38

Evidence (definition) 38

Burden of Proof: Criminal 39

Burden of Proof: Civil 40

Criminal Evidence 40

Direct 40

Primary and secondary 41

Circumstantial 41

Hearsay 42

Forensic 42

Other fraud]relevant incidental evidence 44

Electronic (digital) evidence 44

‘Volatile’ Data 44

Witness Testimony 45

Whistle blowing - witnesses nonetheless. 50

Whistle]blower Retaliation and Criminal Charges 50

Expert Witnesses. Who are they? 50

Accreditation and representation 51

Chapter Summary 53

2. Concepts and Dynamics of Fraud 55

Introduction 55

2.1 Costs of Fraud - Including the Hidden Ones We Don’t Like to Mention 56

2.2 It is Not Enough to Know ‘What Fraud is’ - Know Your Business! 59

2.3 The Varying Psychologies of Fraud 65

Why fraud is unique as a crime 65

Victims and ‘victimhood’ (in fraud) 65

A cluster of informative dogmata to help to advance conceptual thought of fraud and fraud offenders 68

Important Distinction 68

Two distinctly different approaches to fraud offending 68

Narcissist leadership and inevitable Fraud 70

Impulsive fraud 70

Impulsive Decision Making and Working Memory 72

Systemic fraud 73

The Difference between Fraud and Mistake, Under the False Claims Act 76

‘Organised’ fraud? 77

Fraud offender profiling 79

Profiling: where it lies in fraud 79

Profile differences between theft and fraud offenders 81

Why do ‘good people’ do bad things? 82

Predictive modelling? 84

2.4 Contexts, and Leading to Cross]Activities of Fraud 85

Golden Rule: Follow the behaviour, not just the ‘type’ of fraud 85

Financial Fraud - corporate contexts and entities 86

Business Assets 86

Intangible Assets and Intellectual Property Theft 86

Intellectual Property Theft 87

Trade Secret Theft and Corporate Espionage 88

Financial Statements 90

‘Beneish Model’ 95

Accounting 96

Other Fraud Attacks against Banks 101

Shell Companies 102

Ghost Employees 103

Inventory Shrinkage 104

Fraudulent Conveyancing 104

Procurement - a mains scenario reconciling fraud and corruption 105

Procurement - Fraud Definitions: Recap 106

Healthcare 112

Other instances of Healthcare fraud 113

Insurance 115

Telecom fraud 117

Revenue Share Fraud 118

Subscription Fraud 119

Premium Rate Service Fraud 119

Interconnect Fraud 119

Interconnect bypass - also known as GSM Gateway or ‘SIM Box’ fraud 120

Prepaid Fraud 121

Fraud Directly Funding Terrorism 121

Cyberterrorism 125

Stand]alone or peculiar fraud cases of note 126

2.5 Cybercrime and Fraud 129

Cybercrime: A new presence of fraud in the 21st century 129

Hacking 129

Alerts and triggers and ‘Big Data’ 131

Phishing and Internet fraud 132

List of phishing activities 134

Bitcoin and cloud currency: Vulnerabilities 134

Social Networking as a ‘Facilitator’ of Fraud 136

Privacy First: 136

How do online ‘social communities’ work? 137

Victims becoming Fraudsters 138

Safety Culture 138

Preventative Measures: Practicalities

Never give out your social security number 138

Fraud viz]a]viz Social Networking 139

Appendix to Chapter 2--Business Terminology 141

3. From fraud awareness to ‘risk’ - a professional step 143

Introduction 143

Wake up Call - Impactive Case Study 144

3.1 Beyond the Definitions 147

Rational choice theory 147

The Fraud Triangle 147

Who Commits Fraud? 148

Risk assessing as opposed to investigation: The difference 148

Fraud Risk Assessment 148

Right to Audit Clauses 149

‘Pseudo]stability’ 149

Handling intelligence. Handling information 150

4. Exposing Fraud: Fraud Investigation at Work 153

Introduction 153

4.1 What is an Investigation? 154

Investigation work: Is it really for you? 155

Comments on the questions in Self]assessment 1: Investigation Notions 157

Comments on the questions in Self]assessment 2: Avoiding Stereotyping 158

Do you think that there is a place for psychometric testing in our profession? 160

Keeping a ‘Learning Log’ 160

Formats 161

About Roles (and job titles) 162

Auditors 162

Internal Control 164

Risk Managers 165

Journalists Informing Investigation 165

The ‘psychological contract’ 166

4.2 Formalities and Investigation Goals 167

The Truth, but which version? 168

Versions of the ‘Truth’ 169

How far do you go in an investigation? 169

4.3 Identifying the Essential Skill Set of the Fraud Investigator 170

Particular Talents and Skills 172

Where skill goes hand in hand with training 172

Advancing Skill: Lateral and Cognitive Thinking 177

Lateral Thinking Exercise (1) 180

Lateral Thinking Exercise (2). Fraud 180

Memory. The better half of intelligence 181

Memory Training 181

Observing Ethical Behaviour - not a rule, but a way of life! 182

Keeping an Investigations Log - a must! 183

4.4 ‘Hands]On’ 184

‘Respond’ - Do Not React’ 184

Knowing where to start 188

The ‘capability list’ 189

Investigative Interviewing 190

The PEACE Model 190

SE3R - a tool of interviewing excellence 195

‘PEACE,’ ‘SE3R’ and Identifying Unique Knowledge. 202

Resourcing 203

Scenarios 205

Unfamiliar cases 207

Catching the co]accomplices as well! 209

Using IT to inform fraud investigations effectively 210

Data Analytics: Fraud 211

Data Mining 211

Data Analytics in Investigations 212

Associates and Mapping 212

4.5 Management of Investigations 213

Baselines of Investigation Planning 213

Receiving a case from someone else, or handing a case on 214

Managing a fraud investigation’s caseload 215

Setting simple and clear team or organisational counter]fraud efficiency 216

Team building skills are crucial to ensure effective investigations 217

Team Objectives of Fraud Investigation and Prevention 217

4.6 Assessing Your Skill Set 218

1 Appraising information 218

The Analytical Mind - Preparing Yourself 218

Appendix A: Sample response to Skill Assessment 224

4.7 Investigation Outcomes 226

Report Writing 226

Main Points of Note: 226

Avoiding ‘bad duplicity’ 227

Structures and Formats 227

‘Content Not Form’ 227

How are reports read? 227


5. Training and Education 229

5.1 Training: What does it Mean to You? 229

Introduction 229

Academic Qualifications 230

In]house training 230

Professional Accreditations: Fraud specific and collateral qualifications 230

5.2 Preparing Yourself for Exams 231

Multi]choice exams 231

Multi]choice questions - Specific Guidance 231

Essays 233

Typical Essay Questions ] Evaluation Format 233

‘Problem’ or scenario questions. The ‘IDEA’ method 235

Final Summary 241

Bibliography 243