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FRAUD EXAMINERS MANUAL (CANADIAN EDITION)

2012 Fraud Examiners Manual (Canada) i

TABLE OF CONTENTS

VOLUME I

SECTION 1 FINANCIAL TRANSACTIONS AND FRAUD SCHEMES

OCCUPATIONAL FRAUDS

ACCOUNTING CONCEPTS

Accounting Basics ........................................................................................................................ 1.101

Financial Statements .................................................................................................................... 1.106

Generally Accepted Accounting Principles (GAAP) .............................................................. 1.116

FINANCIAL STATEMENT FRAUD

What Is Financial Statement Fraud? ......................................................................................... 1.203

Why Financial Statement Fraud Is Committed ....................................................................... 1.203

Trends in Financial Statement Fraud ........................................................................................ 1.205

Financial Statement Fraud Schemes .......................................................................................... 1.205

What Red Flags Are Associated with Financial Statement Fraud Generally? ..................... 1.225

Detection of Fraudulent Financial Statement Schemes ......................................................... 1.226

Financial Statement Analysis ...................................................................................................... 1.229

Interviews in Fraudulent Financial Statement Cases .............................................................. 1.235

Prevention of Financial Statement Fraud ................................................................................. 1.244

ASSET MISAPPROPRIATION: CASH RECEIPTS

Skimming ....................................................................................................................................... 1.301

Cash Larceny ................................................................................................................................. 1.320

ASSET MISAPPROPRIATION: FRAUDULENT DISBURSEMENTS

Register Disbursement Schemes ................................................................................................ 1.401

Cheque Tampering Schemes ..................................................................................................... 1.410

Billing Schemes ............................................................................................................................. 1.439

Payroll Fraud Schemes ................................................................................................................ 1.459

Expense Reimbursement Schemes ............................................................................................ 1.477


ii 2012 Fraud Examiners Manual (Canada)

FINANCIAL TRANSACTIONS AND FRAUD SCHEMES

ASSET MISAPPROPRIATION: INVENTORY AND OTHER ASSETS

Misuse of Inventory and Other Assets ..................................................................................... 1.501

Theft of Inventory and Other Assets ........................................................................................ 1.502

Misappropriation of Intangible Assets ...................................................................................... 1.518

BRIBERY AND CORRUPTION

Bribery ........................................................................................................................................... 1.601

Detection of Bribery Schemes ................................................................................................... 1.619

Conflicts of Interest ..................................................................................................................... 1.634

THEFT OF INTELLECTUAL PROPERTY

Competitive Intelligence Versus Espionage ............................................................................ 1.702

Open Sources of Information .................................................................................................... 1.703

The Intelligence Pyramid ............................................................................................................ 1.707

Building Financial Statements .................................................................................................... 1.712

Nontraditional Sources ................................................................................................................ 1.715

A Closer Look at Databases ....................................................................................................... 1.717

A Coprorate Spy Uses Open Sources: What of It? ................................................................. 1.719

Favourite Targets ......................................................................................................................... 1.720

How Information Is Lost ............................................................................................................ 1.721

Basic Principles of Spying ........................................................................................................... 1.728

Infiltration Techniques ................................................................................................................ 1.734

Transactional Intelligence ........................................................................................................... 1.741

Telling Good Lies ........................................................................................................................ 1.744

Visual Surveillance Against People ............................................................................................ 1.745

Email .............................................................................................................................................. 1.747

Social Engineering ....................................................................................................................... 1.747

Cloaking and Misdirection .......................................................................................................... 1.750

Technical Surveillance ................................................................................................................. 1.761

Investigating an Information Theft Case ................................................................................. 1.776

Program for Safeguarding Proprietary Information (SPI) ..................................................... 1.778

Technical Surveillance Countermeasures (TSCM) Survey ..................................................... 1.787

Preventing Employee Theft of Proprietary Information ....................................................... 1.788

Protecting the Trade Secrets of Others .................................................................................... 1.791


2012 Fraud Examiners Manual (Canada) iii

OTHER FRAUDS

FINANCIAL INSTITUTION FRAUD

Embezzlement Schemes ............................................................................................................. 1.801

Loan Fraud .................................................................................................................................... 1.803

Real Estate Fraud ......................................................................................................................... 1.813

New Account Fraud Schemes .................................................................................................... 1.822

Money Transfer (Wire) Fraud Schemes .................................................................................... 1.824

Automated Teller Machine (ATM) Fraud ................................................................................ 1.828

Advanced Fee Fraud .................................................................................................................... 1.828

Letter-of-Credit Fraud ................................................................................................................. 1.830

Inside/Outside Frauds ................................................................................................................ 1.830

Prevention ..................................................................................................................................... 1.831

The Basel Committee on Banking Supervision ....................................................................... 1.833

CHEQUE AND CREDIT CARD FRAUD

Cheque Fraud ............................................................................................................................... 1.901

Cheque Fraud Rings .................................................................................................................... 1.907

Cheque Fraud Detection ............................................................................................................. 1.908

Cheque Fraud Prevention and Investigation ........................................................................... 1.909

Credit Card Fraud ........................................................................................................................ 1.913

Prevention and Detection of Credit Card Fraud ..................................................................... 1.922

Electronic Bill Payment and Person-to-Person Payments ..................................................... 1.932

INSURANCE FRAUD

Types of Insurance Policies ........................................................................................................ 1.1001

Agent/Broker Fraud .................................................................................................................... 1.1002

Underwriting Irregularities .......................................................................................................... 1.1003

Vehicle Insurance Schemes ........................................................................................................ 1.1005

Property Schemes ......................................................................................................................... 1.1008

Life Insurance Schemes............................................................................................................... 1.1008

Liability Schemes .......................................................................................................................... 1.1009

Red Flags of Insurance Fraud .................................................................................................... 1.1009

General Insurance Fraud Indicators.......................................................................................... 1.1013

Computer-Generated Detection Reports ................................................................................. 1.1013

Workers’ Compensation Fraud .................................................................................................. 1.1014


iv 2012 Fraud Examiners Manual (Canada)

HEALTH CARE FRAUD

Definition ...................................................................................................................................... 1.1101

Provider Fraud .............................................................................................................................. 1.1101

Insured Fraud ............................................................................................................................... 1.1104

BANKRUPTCY (INSOLVENCY) FRAUD

Introduction .................................................................................................................................. 1.1201

Bankruptcy Proceedings .............................................................................................................. 1.1201

Bankruptcy Fraud Law ................................................................................................................ 1.1203

Bankruptcy Schemes .................................................................................................................... 1.1213

SECURITIES FRAUD

Introduction .................................................................................................................................. 1.1301

Securities Laws and Regulations ................................................................................................ 1.1301

What Constitutes a Security? ...................................................................................................... 1.1306

Commodity Futures, Exchange-Traded Options, and OTC Options ................................. 1.1315

Securities Fraud Schemes ............................................................................................................ 1.1321

Investigative Tips ......................................................................................................................... 1.1329

Securities Fraud and the Internet ............................................................................................... 1.1330

MONEY LAUNDERING

Introduction .................................................................................................................................. 1.1401

The Money Laundering Process ................................................................................................ 1.1401

International Anti-Money Laundering Efforts ........................................................................ 1.1412

Enforcement and Prevention Strategies ................................................................................... 1.1413

Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations .................. 1.1417

Terrorist Financing ...................................................................................................................... 1.1422

Sample Form ................................................................................................................................. 1.1423

CONSUMER FRAUD

Con Schemes ................................................................................................................................ 1.1501

Telemarketing Fraud .................................................................................................................... 1.1509

Ponzi and Pyramid Schemes ...................................................................................................... 1.1527

Identity Theft ................................................................................................................................ 1.1546

COMPUTER AND INTERNET FRAUD

Computer Fraud Versus Computer Crime ............................................................................... 1.1603

Computer Hacking....................................................................................................................... 1.1604

Electronic Mail ............................................................................................................................. 1.1614


2012 Fraud Examiners Manual (Canada) v

COMPUTER AND INTERNET FRAUD (CONT.)

Computer Viruses ........................................................................................................................ 1.1616

Internet Fraud ............................................................................................................................... 1.1625

Electronic Commerce .................................................................................................................. 1.1635

Insider Threats .............................................................................................................................. 1.1638

Computer Security ....................................................................................................................... 1.1640

Internal Controls in the Data Centre ........................................................................................ 1.1646

Internal Controls in Computer Applications ........................................................................... 1.1650

Conducting an Investigation Regarding Computer Crimes ................................................... 1.1653

Computer Crime Laws ................................................................................................................ 1.1654

PUBLIC SECTOR FRAUD

False Claims and Statements ...................................................................................................... 1.1701

Beneficiary Fraud ......................................................................................................................... 1.1703

Contract and Procurement Fraud .............................................................................................. 1.1704

Using Computers to Combat Procurement Fraud .................................................................. 1.1715


vi 2012 Fraud Examiners Manual (Canada)

VOLUME II

SECTION 2 LAW

OVERVIEW OF THE CANADIAN LEGAL SYSTEM

Substantive and Procedural Law ................................................................................................ 2.101

Types of Legal Systems ............................................................................................................... 2.101

Sources of Law ............................................................................................................................. 2.103

The Constitution Act of 1982 .................................................................................................... 2.108

Canada’s Court System ................................................................................................................ 2.113

Outline of Federal Courts in Canada ........................................................................................ 2.115

Outline of Provincial Courts in Canada ................................................................................... 2.117

Jurisdiction of Provincial Courts ............................................................................................... 2.120

THE LAW RELATED TO FRAUD

Definition of Fraud ...................................................................................................................... 2.201

Principal Types of Fraud ............................................................................................................. 2.201

Basic Overview of the Criminal Code ...................................................................................... 2.212

Miscellaneous Fraud-Related Offences and Legislation......................................................... 2.247

Whistleblower Laws ..................................................................................................................... 2.256

INDIVIDUAL RIGHTS DURING EXAMINATIONS

The Canadian Charter of Rights and Freedoms ...................................................................... 2.301

Rights and Obligations Under Criminal Law ........................................................................... 2.312

The Law Relating to Search and Seizure .................................................................................. 2.318

THE CIVIL JUSTICE SYSTEM

Introduction .................................................................................................................................. 2.401

Procedure in Civil Cases ............................................................................................................. 2.401

Investigations in Private Actions ............................................................................................... 2.405


2012 Fraud Examiners Manual (Canada) vii

LAW

THE CRIMINAL JUSTICE SYSTEM

The Charging Process .................................................................................................................. 2.501

The Trial Process ......................................................................................................................... 2.502

Sentencing ..................................................................................................................................... 2.508

Appeal ............................................................................................................................................ 2.508

Paroles and Pardons .................................................................................................................... 2.508

Punishment ................................................................................................................................... 2.509

Corporate Criminal Liability ....................................................................................................... 2.511

EVIDENCE

Direct and Circumstantial Evidence ......................................................................................... 2.601

Admissibility of Evidence ........................................................................................................... 2.602

Evidence of Handwriting ............................................................................................................ 2.603

Types of Evidence ....................................................................................................................... 2.603

Exhibits .......................................................................................................................................... 2.607

TESTIFYING AS A WITNESS

Introduction .................................................................................................................................. 2.701

Pre-Trial Preparation ................................................................................................................... 2.705

Preparing to Testify ..................................................................................................................... 2.708

Direct Examination ..................................................................................................................... 2.711

Cross-Examination ...................................................................................................................... 2.713

Expressing an Opinion on Guilt................................................................................................ 2.719

Summary ........................................................................................................................................ 2.721


viii 2012 Fraud Examiners Manual (Canada)

SECTION 3 INVESTIGATION

ANALYZING DOCUMENTS

Obtaining Documentary Evidence ............................................................................................ 3.101

Examining Fraudulent Documents ........................................................................................... 3.103

Handling Documents as Physical Evidence ............................................................................. 3.105

Chain of Custody ......................................................................................................................... 3.106

Identifying Writings ..................................................................................................................... 3.108

The Document Expert’s Findings ............................................................................................. 3.111

How to Obtain Handwriting Samples ...................................................................................... 3.112

Typewriters and Computer Printers .......................................................................................... 3.115

Photocopies .................................................................................................................................. 3.116

Dating a Document ..................................................................................................................... 3.118

Indented Writings ........................................................................................................................ 3.120

Counterfeit Printed Documents ................................................................................................ 3.121

Fingerprints ................................................................................................................................... 3.122

INTERVIEW THEORY AND APPLICATION

Preparation .................................................................................................................................... 3.201

Characteristics of a Good Interview ......................................................................................... 3.201

Characteristics of a Good Interviewer ...................................................................................... 3.202

Question Typology ...................................................................................................................... 3.203

Legal Considerations When Conducting an Interview ........................................................... 3.204

Elements of Conversations......................................................................................................... 3.205

Inhibitors of Communication .................................................................................................... 3.207

Facilitators of Communication .................................................................................................. 3.210

Introductory Questions ............................................................................................................... 3.214

Informational Questions ............................................................................................................. 3.222

Closing Questions ........................................................................................................................ 3.235

Assessment Questions ................................................................................................................. 3.238

Admission-Seeking Questions .................................................................................................... 3.249

Kinesic Interview and Interrogation ......................................................................................... 3.273

Criteria-Based Statement Analysis ............................................................................................. 3.277

The Cognitive Interview Technique .......................................................................................... 3.282


2012 Fraud Examiners Manual (Canada) ix

INVESTIGATION

COVERT EXAMINATIONS

Establishing an Identity ............................................................................................................... 3.302

Objectives ...................................................................................................................................... 3.303

Problems in Covert Operations ................................................................................................. 3.304

Surveillance ................................................................................................................................... 3.305

Sources and Informants .............................................................................................................. 3.312

Use of Operatives ........................................................................................................................ 3.320

SOURCES OF INFORMATION

Public Versus Non-Public Records ........................................................................................... 3.402

Municipal/Regional Government (Canada) ............................................................................ 3.402

County Government (Canada) ................................................................................................... 3.404

Provincial Government (Canada) .............................................................................................. 3.405

Federal Government (Canada) ................................................................................................... 3.408

State Government (U.S.) ............................................................................................................. 3.411

Commercial Sources .................................................................................................................... 3.416

Public Record Database Vendors .............................................................................................. 3.418

Directories ..................................................................................................................................... 3.420

Banks and Financial Institutions ................................................................................................ 3.426

Law Enforcement Organizations .............................................................................................. 3.428

ACCESSING INFORMATION ONLINE

Investigating with the Internet ................................................................................................... 3.501

A Guide to Successful Internet Searching ................................................................................ 3.508

Online Public Database Searches .............................................................................................. 3.512

DATA ANALYSIS AND REPORTING TOOLS

Data Mining .................................................................................................................................. 3.601

Data Analysis ................................................................................................................................ 3.604

Using Data Analysis Software .................................................................................................... 3.604

Types of Data Mining and Analysis Software .......................................................................... 3.616

Reporting and Case Management Software ............................................................................. 3.632


x 2012 Fraud Examiners Manual (Canada)

INVESTIGATION

DIGITAL FORENSICS

Conducting an Investigation Involving Computers ................................................................ 3.701

Computer Investigation and Computer Forensics .................................................................. 3.708

Forensic Examination and Analysis .......................................................................................... 3.719

Digital Forensics Software .......................................................................................................... 3.726

TRACING ILLICIT TRANSACTIONS

Comprehensive Guidelines for Information to Be Collected in Financial Interviews ...... 3.801

Direct Methods of Tracing Financial Transactions ................................................................ 3.805

Indirect Methods of Tracing Financial Transactions .............................................................. 3.828

Locating Hidden Assets .............................................................................................................. 3.847

REPORTING STANDARDS

Preparation .................................................................................................................................... 3.901

Characteristics of a Good Report .............................................................................................. 3.901

Common Reporting Mistakes .................................................................................................... 3.903

Methods for Taking Effective Notes ........................................................................................ 3.905

Organization of Information ...................................................................................................... 3.906

Analyzing the Reader ................................................................................................................... 3.906

Outlining........................................................................................................................................ 3.908

Grammatical Considerations ...................................................................................................... 3.909

Report Structure ........................................................................................................................... 3.913

KGB Statements .......................................................................................................................... 3.920

Signed Confessions ...................................................................................................................... 3.922

Visual Aids .................................................................................................................................... 3.925

Engagement Contracts ................................................................................................................ 3.932

Fraud Examination Checklist ..................................................................................................... 3.935

APPENDIX

FRAUD EXAMINATION CHECKLIST

Fraud Examination Checklist ..................................................................................................... 3.1001

SAMPLE REPORT

Bailey Books, Incorporated ........................................................................................................ 3.1101


2012 Fraud Examiners Manual (Canada) xi

ENGAGEMENT CONTRACTS AND OPINION LETTERS

Engagement Letters ..................................................................................................................... 3.1201

Fraud Examination Opinion Letters ......................................................................................... 3.1205


xii 2012 Fraud Examiners Manual (Canada)

SECTION 4 FRAUD PREVENTION AND DETERRENCE

UNDERSTANDING HUMAN BEHAVIOUR

Behavioural Analysis and the Detection of Fraud .................................................................. 4.101

Reinforcing and Punishing ......................................................................................................... 4.103

Why People Obey the Law ......................................................................................................... 4.108

THEORIES OF CRIME CAUSATION

Classical Criminology .................................................................................................................. 4.201

Routine Activities Theory ........................................................................................................... 4.202

Biological Theories ...................................................................................................................... 4.203

Psychological Theories ................................................................................................................ 4.204

Social Structure Theories ............................................................................................................ 4.205

Social Process Theories ............................................................................................................... 4.206

WHITE-COLLAR CRIME

What Is White-Collar Crime? ..................................................................................................... 4.301

Public Perceptions of White-Collar Crime ............................................................................... 4.303

Crimes of the Middle Class—A Look at White-Collar Crime ..................................................... 4.305

ORGANIZATIONAL CRIME

Corporate Organization and Criminal Behaviour ................................................................... 4.402

Opportunities for Unlawful Organizational Behaviour ......................................................... 4.404

Criminogenic Organizational Structures................................................................................... 4.406

Corporate Executives and Criminal Liability ........................................................................... 4.409

Management Behaviour .............................................................................................................. 4.411

Controlling Organizational Crime ............................................................................................. 4.412

OCCUPATIONAL FRAUD

Research in Occupational Fraud and Abuse ............................................................................ 4.501

FRAUD PREVENTION PROGRAMS

Responsibility for Fraud Prevention ......................................................................................... 4.601

Implementing a Corporate Compliance Program ................................................................... 4.606

Procedures to Prevent Fraud ...................................................................................................... 4.616

Fraud Prevention Policy .............................................................................................................. 4.622

Ethics Programs ........................................................................................................................... 4.626


2012 Fraud Examiners Manual (Canada) xiii

FRAUD PREVENTION AND DETERRENCE

FRAUD PREVENTION PROGRAMS (CONT.)

Sample Fraud Policy .................................................................................................................... 4.630

Sample Code of Business Ethics and Conduct ....................................................................... 4.634

Code of Conduct Compliance Questionnaire ......................................................................... 4.647

Code of Conduct and Conflict of Interest Employee Certification ..................................... 4.647

FRAUD RISK ASSESSMENT

What Is Fraud Risk?..................................................................................................................... 4.701

What Factors Influence Fraud Risk? ......................................................................................... 4.701

What Is a Fraud Risk Assessment? ............................................................................................ 4.703

Preparing the Company for a Fraud Risk Assessment ........................................................... 4.709

Executing the Fraud Risk Assessment ...................................................................................... 4.712

Responding to Residual Fraud Risks ......................................................................................... 4.722

Reporting the Results of the Fraud Risk Assessment ............................................................. 4.723

Making an Impact with the Fraud Risk Assessment ............................................................... 4.726

The Fraud Risk Assessment and the Audit Process ............................................................... 4.728

The Fraud Risk Assessment Tool .............................................................................................. 4.728

FRAUD RISK MANAGEMENT

What Is Fraud Risk Management? ............................................................................................. 4.801

Risk Management Frameworks .................................................................................................. 4.802

Integrating Anti-Fraud Initiatives into Risk Management ..................................................... 4.805

Who Is Responsible for Managing Fraud Risk? ...................................................................... 4.806

The Objectives of a Fraud Risk Management Program ......................................................... 4.810

Steps in Developing a Fraud Risk Management Program ..................................................... 4.811

Fraud Risk Management Program Components ..................................................................... 4.814

MANAGEMENT’S, AUDITORS’, AND FRAUD EXAMINERS’

RESPONSIBILITIES

Management’s Fraud-Related Responsibilities ........................................................................ 4.901

External Auditors’ Fraud-Related Responsibilities ................................................................. 4.903

Internal Auditors’ Fraud-Related Responsibilities .................................................................. 4.924

Certified Fraud Examiners’ Responsibilities ............................................................................ 4.929

CORPORATE GOVERNANCE

What Is Corporate Governance? ............................................................................................... 4.1001

Principles of Corporate Governance ........................................................................................ 4.1004

Establishing a Corporate Governance Framework ................................................................ 4.1007


xiv 2012 Fraud Examiners Manual (Canada)

ETHICS FOR FRAUD EXAMINERS

What Is Ethics?............................................................................................................................. 4.1101

Morality, Ethics, and Legality ..................................................................................................... 4.1103

Some Concluding Remarks ........................................................................................................ 4.1106

ACFE CODE OF PROFESSIONAL ETHICS

Commitment to Professionalism and Diligence ...................................................................... 4.1202

Legal and Ethical Conduct and Conflict of Interest ............................................................... 4.1204

Integrity and Competence .......................................................................................................... 4.1207

Court Orders and Testimony ..................................................................................................... 4.1210

Reasonable Evidential Basis for Opinions ............................................................................... 4.1211

Confidential Information ............................................................................................................ 4.1213

Complete Reporting of Material Matters .................................................................................. 4.1218

Professional Improvement ......................................................................................................... 4.1219

Professional Standards and Practices ........................................................................................ 4.1220

CFE CODE OF PROFESSIONAL STANDARDS

CFE Code of Professional Standards ......................................................................................... 4.1301