‘Investigating Fraud- A step by step guide’- By Dr. Sharad Saxena

CFE, Former Diplomat at Ministry of External Affairs (GOI)

Fraud and corruption have emerged as the most challenging issue for investigators in the 21st century. The liberalization of the global economy and rapid technological advancements have contributed to these challenges. No two fraud cases area like, meaning investigators must adopt unique approaches tailored to each case. It is critical that, when investigating fraud or corruption, the oral testimony and physical evidence submitted stands the test of Evidence Act and are admissible in court. Expert witness testimony alone, without supporting evidence, is rarely sufficient to win a case.

This article outlines some strategies and lists key steps from beginning to end an investigation strategy for Investigating Fraud and Corruption:

1. Developing a Case Theory

Investigators and prosecutors face unique challenges with every fraud or corruption case. The complexities involved in the case and difficulty in tracing, say illicit funds, turn out to be a mounting task for investigators. Essential steps in developing a hypothesis and case study include:

• Analyzing available evidence and data to hypothesize the likelihood of fraud or corruption.
• Testing and retesting data in light of new information as it becomes available.
• Filtering data from point of view of nature of evidence, reliability, admissibility and possible likelihood of a fraud or corruption or both. The hypothesis should be tested more than once before proceeding for full investigation.

2. Creating Case Scenarios

Think about what could have happen, who could be key players, how they would have operated, and likely chances of covering tracks or destroying evidence. Use Fraud Triangle to identify suspects under potential situational pressure to commit fraud, either financial, social, personal or through position at the organization.

Next, draw your attention to individuals with multiple tasks such as cashier entrusted with collecting cash as well writing books of accounts. Identify individuals who are in the best position to exploit the systems weakness. For example, an organization which has just two accounting experts have better opportunity to commit fraud than one from another department. Also be aware that there is a possibility that an outsider, such as a contractor, consultant, or visiting guest, could have access to the department and its systems. Use these scenarios to develop lines of inquiry, potential suspects and methods of covering tracks. The third leg of the Fraud Triangle is Rationalisation. This requires throughlines of inquiry and will be clearer during the interview sessions.

3. Create a working document

The easiest way to get started is to Create an Excel Sheet to analyze the suspected offence. Start by putting the names of all suspects and based on Fraud hypothesis and initial documentary evidence the likely offences committed by them, admissibility of evidence collected, and further evidence required to be collected to prove such offence in a court of law.

4. Case Chronology

Maintaining a clear record of all important dates, events, and documents is vital for managing a case. Use an Excel sheet to track the timeline, including events, suspects, and the type of evidence collected. This helps ensure the case is well-organized and legally sound. Some ways to begin are:

• Identify whether records are kept in chronological order and free of human error.
• Investigate computerized records, cloud-based systems, and whether any records are missing or destroyed.
• Use hot lines and informal channels to assess the reliability of systems and detect red flags

5. Preserving and Displaying Evidence

There is a saying that, “a picture speaks a thousand words”. When you develop a fraud hypothesis and have to prove it in court of law, use brevity. Use graphics to communicate your theory such as bar diagram, charts, spreadsheets help in communicating the line of investigation. Make sure that you do not use multiple graphics for communicating same process that is likely to confuse the end user. You should electronically preserve all evidence. Use stand-alone computers with no internet connection. Keep a secured log key to preserve all such evidence.

With these key strategies in mind, let’s now dive into the practical steps you can take to begin your investigation.

Key Steps in a Fraud or Corruption Investigation:

Step 1. Study the Organization and Its Systems

Review the organization its systems processes and its internal processes. Read their internal reports especially statutory audit  reports to identify weaknesses pointed out by Auditors and Audit Committee.

Step 2: Review Complaints

Analyze complaints from the past two years, focusing on the nature of the allegations, the amounts involved, key suspects, and outcomes of complaints received.

Step 3: Develop a Fraud Hypothesis

Create a hypothesis outlining the likely modus operandi of the fraud based on available data. Reference back to previous section.

Step 4: Test and Retest Your Hypothesis

Interview key players, collect evidence, and filter the data to ensure accuracy. For example, determine whether the same bidder was consistently selected after changes in process, and assess whether was a coincidence or a calculated move to benefit someone?

Step 5: Due Diligence and Background Checks

Once you have identified few suspects carry check of their bank records, records of their spouse, relatives and kids, even close employees and friends, tax returns, property records from corporation, premium club membership, international travel, overseas bank accounts, kind and value of gifts received and given, background checks of vendors, registration details of companies, year of incorporation, previous balance sheets, key directors, sub-contractors of such companies mostly bribes are facilitated through sub-contractors.

Step 6: Collect additional evidence

Review contracts, bid documents, and communication records. Secure telephone, email, and computer data, ensuring it is legally obtained and secured in both physical hard drive and secured cloud facility. Conduct background checks of suppliers, potential relationships with key employees.

Step 7:Draw a line of Investigation

If the case is too complex to be handled by your agency, does it require any help from other agency, or should it be referred to specialist agency?

Step 8: Assemble an Investigation Team

On the basis of the above step, decide that your agency is competent enough to handle such complex case assemble a multiple expert investigating team with technical, legal, investigation, psychologist and skilled interviewer as part of your team.

Step 9: Trace Illicit Funds

Fraud often involves payments through indirect channels The payments are either routed by favours such as payment of club membership, gifting travel cards, taking care of credit card payments, overseas hospitality, and children education expenses in India and abroad. Property received from distant relatives with no proven source of income, winning lotteries which are suspect in nature and linked to either party to transaction under investigation. Ownership of movable and immovable property acquired through gift or in cash.

Step 10: Gather Oral Evidence

Interview witnesses and employees involved in the fraud. Oral evidence and testimonies are key part of investigation, conduct interview with employees and all those in chain of events and who have valuable information for your investigation. It is important to ensure that these witnesses have proper protection both financially and physically—is essential to securing reliable testimony.

Step 11: Prepare a Preliminary Investigation Report

Summarize the key findings of the investigation, including evidence collected and interviews conducted. Determine whether the case is ready for prosecution, or whether civil or administrative actions are more appropriate.

Step12: Interview Suspects

The Professional interviewing techniques suggest conducting at least three rounds of interviews. First interview is referred to as opening or introductory interview which focuses on gathering personal details gaining the subjects cooperation in investigation. The second interview delves deeper into their role, length of service, duties, and relationships with superiors, colleagues, and subordinates, while also seeking their opinion on the fraud or corruption in question.

Finally, the admission seeking interview which should only occur when sufficient material is available to confront the suspect based on his/her earlier statements. Allow the suspect time to clarify their position. Make your decision between willful suppression of information, misdirection, or an error of judgment. Conduct the interview in a quiet, distraction-free environment, record it if possible, and ensure a witness is present.

Step 13: Prepare a Final Investigation Report

Start by providing a brief background of the case, fraud hypothesis, line of investigation followed, evidence collected, and interview records. Recommendation if case is sound enough to be an administrative or disciplinary proceeding, civil or criminal case for prosecution. Your recommendation should be based on evidence collected and data analyzed.

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I hope this serves as a useful guide for new investigators and a valuable refresher for seasoned professionals. Whether you’re starting out or refining your expertise, I trust this checklist will enhance your approach to fraud investigation.