Corporate Fraud Playbook

A version of this article was published in Pursuit Magazine.

If there are signs of potential corporate fraud, management must take steps to confirm whether there is actual proof of wrongdoing, determine the identities of all people involved, and obtain a full and clear understanding the scheme. Private investigators specializing in fraud examination are commonly retained by companies and their outside counsel to conduct these inquiries.

Internal frauds that occur inside companies can include embezzlement, payment schemes and financial statement falsification. Employees and executives may also become involved in fraud schemes with vendors, competitors and other third parties, such as bribery, price-fixing and industrial espionage.

Retaining an independent agency to handle the review is particularly important if there are suspicions of fraud or financial improprieties by management or directors, or if questions arise about potential collusion within corporate security, compliance, or accounting departments.
 

Beginning a Fraud Examination

The investigation begins with a review of the known information regarding the scheme. Preliminary interviews will be conducted with any employees, customers, or suppliers who have come forward with whistleblower complaints. Financial records and internal materials related to their claims are gathered and analyzed.
 

Due Diligence and Background Investigation

Most perpetrators commit corporate fraud in response to perceived financial, personal or professional pressures. Investigation is conducted to identify significant problems in the background of individuals who are suspected of participating in the scheme. If no suspects are known, then consideration will be given to employees in positions with the greatest opportunity to have committed the alleged fraud.

Investigators identify financial problems through review of public records such as bankruptcies, liens, judgments or collection suits. Conversely, lifestyle changes that might otherwise seem positive – such as the purchase of a new large house or luxury car – may also be scrutinized if those individuals appear to be conspicuously living beyond their means. Criminal records are reviewed for any recent arrests, including non-financial crimes such as assault, drug and alcohol offenses.
 

Source Interviews

When an investigation is initiated, it is generally advisable to limit the number of people with knowledge of the inquiry. The circle of employees with advance knowledge of a pending investigation should be kept as small as possible, so participants in the scheme do not have a chance to coordinate a cover story.

Fact-finding interviews are conducted with employees, executives and external stakeholders to obtain all available information regarding the scheme. Contradictory or evasive statements may also be significant findings, but do not necessarily prove complicity. Witnesses inside the organization may be afraid to come forward, particularly if the fraud involved their supervisors or senior executives, but a well-run investigation can create a safe and secure channel for employees to share what they know without fear of reprisal.
 

Cultivating an Insider

For complex schemes, it is critically important to expose the entire network of people involved. In certain cases, this can be achieved during the investigation by cultivating an inside source. Lower-level participants may be willing to cut a deal in exchange for being allowed to keep their jobs and benefits. This is especially true of employees who were coerced or pressured by corrupt supervisors.

Certain types of corporate fraud – including kickbacks, collusion and bribery of foreign officials – can be very challenging to prove without the cooperation of an inside source.

Even employees who know they are going to be terminated may cooperate with investigators if properly incentivized. Important witnesses can potentially be persuaded by the offer of a hold-harmless agreement protecting them from civil litigation, criminal charges, or financial clawbacks.
 

Confronting Complicit Employees

It may seem reasonable to immediately terminate employees as soon as they are implicated, but acting prematurely can have adverse consequences. Former employees – even the guilty ones – can prevail in a wrongful termination suit if the evidence against them was weak, circumstantial, or poorly documented in their personnel file. Rather than risk a costly settlement, the investigation should be allowed to run its course before any major decisions are made.

Formal interviews of the suspected participants in a fraud investigation are often deferred until the final stage. An experienced investigator will structure these encounters to create an environment conducive to a voluntary, truthful admission. If the fraudster sees there is no point in protesting their innocence, they may instead seek to offer self-justification for their actions, providing a full confession to a patient and methodical interviewer.
 

Litigation and Law Enforcement

Once a fraud examination has been completed and the findings summarized in a formal report, consideration can be given to the appropriate response, including employee termination, civil litigation, and notification of law enforcement.

 

About the Author

 John Powers - Fraud Investigator

John Powers is president of Hudson Intelligence, an investigative firm in New York that specializes in the investigation of fraud and financial crimes. He works with clients throughout the U.S. and internationally.
 

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