Post-Conference Auditing and Investigating Fraud Seminar · 2015-06-16 · Fraud Seminar General Session Legal Issues in Fraud Examinations ®2015 Association of Certified Fraud Examiners,

1 of 25 ®2015 Association of Certified Fraud Examiners, Inc. ®2015 Association of Certified Fraud Examiners, Inc.

Post-Conference

Auditing and Investigating

Fraud Seminar

General Session

Legal Issues in Fraud Examinations

2 of 25 ®2015 Association of Certified Fraud Examiners, Inc.

Legal Issues in Fraud Examinations

What must be proven in a fraud case

The statutes available to prosecute

perpetrators

What information will be admissible as

evidence

The legal rights and obligations of parties in a

fraud examination


Criminal vs. Civil Fraud

Legal definition of fraud is

essentially the same whether

the offense is criminal or civil

Differences:

• Burden of proof

• Evidence needed to prove case

• Who must prove the facts

• Civil—preponderance

• Criminal—beyond reasonable doubt


Criminal vs. Civil Fraud

Differences (cont.):

• Parties permitted to pursue action

• Civil action may be pursued by private parties

• Criminal action must be brought by government; local,

state, or federal

• Subject matter

• Civil—generally a dispute over something

• Contract terms or performance

• Legal duty owed to another (tort)


Legal Elements of Fraud

Misrepresentation of a

material fact

Made with knowledge

of its falsity

The victim relies upon

the misrepresentation

The victim suffers

damages as a result


How to Prove Intent or Knowledge

There are no accidental frauds

Intent: desire to cause social harm

or knowledge that social harm will

almost certainly result from one’s

actions

Court may consider “willful

blindness”


How to Prove Intent or Knowledge

Must show that the perpetrator:

• Could not have had a legitimate motive for his

actions

• Altered documents or took steps to conceal

actions

• Gave false or misleading statements

• Repeatedly engaged in the activity

• Personally gained from acts


Breach of Fiduciary Duty

Duties of loyalty and care

• Loyalty—agent must act solely in the best interest

of the principal

• Example p. 11

• Care—conduct business prudently with the skill

and attention normally exercised by those in

similar positions


Breach of Fiduciary Duty

To show a breach, the plaintiff must

establish:

• The defendant occupied a position of trust or

fiduciary responsibility with respect to the plaintiff.

• The defendant breached that duty to advance a

personal interest.

• The plaintiff suffered damages as a result of the

breach.


Common Criminal Statutes

Mail fraud and wire fraud

• 18 US Code 1341–1343

• The mail was used in the

furtherance of the scheme

• Example p. 13

Bank fraud

• 18 US Code 1344

• Scheme to defraud federally

insured financial institutions

• Banks, credit unions, etc.



Securities fraud

• Section 17(a) of the Securities Act of 1933 and rule

10b-5

• Civil remedies enforced by SEC

• Criminal sanctions enforced by Dept. of Justice

17(a)—unlawful to employ fraudulent devices or

misrepresentations in connection with the sale of

securities through jurisdictional facilities (mail–

interstate commerce)

E Rule 10b—same in connect with “purchase or

sale”; broader reach and more often used

Example p. 16



FCPA and UK Bribery Act

• FCPA makes a crime for certain publicly traded

companies to make corrupt payments to foreign

officials or political parties to obtain or retain

business

• Bribery provision and books and records/internal

controls provision

• Example p. 17

• UK Bribery Act

• Scope broader than FCPA

• Offense for failure to prevent bribery



False statements 18 US Code Section 1001

• Knowingly make a false statement related to a

matter within the jurisdiction of a government

agency

• Statement must be about a material fact that could

influence the outcome of the investigation

• Example p. 18


Evidence

Evidence—anything used to prove

something; perceivable by the five

senses; must be legally admissible at

trial—induce a belief in the minds of the

fact finder

Types of evidence

• Direct evidence—shows prima facie the

facts at issue (eye witness, confession)

• Circumstantial evidence—proves or

disproves facts indirectly, by inference


Evidence

Forms of evidence

• Testimonial evidence—statements by

witnesses

• Real evidence—objects/documents

• Demonstrative evidence—used to illustrate

such as maps, charts or summary


Issues Affecting the

Admissibility of Evidence

Relevance

• Tendency to prove or disprove a fact at

issue

• Relevant if offered to prove:

• Motive

• Opportunity

• Elements of the offense

• Threats

• Physical evidence linking to the suspect

• Attempts to conceal or destroy evidence




Character evidence

• Purported to establish a “trait of character” or

propensity to behave in a particular way

Judicial notice

• Judge on his own motion admits items of evidence

into the record without discussion

The exclusionary rule

• Not admitted if obtained illegally

Authentication of exhibits

• It is what it is purported to be




Chain of custody

Best evidence rule

Admissibility of testimony

Hearsay

Objections to evidence


Protected Communications

Attorney-client privilege

Attorney work product

doctrine


Employees’ Duties and Rights

Duty to cooperate with

an investigation

Contractual rights

Constitutional rights


Employees’ Rights During Interviews

Fifth Amendment right against self-

incrimination

• Kalkines warning (federal)

Sixth Amendment right to counsel

• Miranda warnings

• Upjohn warnings (corporate Miranda)

• Corporate attorney present does NOT represent the

employee—“I represent the company, not you.”


Employees’ Rights During Interviews

National Labor Relations Act

• Prohibits interrogations by employers that

interferes with the rights of employees to organize,

bargain, etc.

Employee Polygraph Protection Act

• Generally prohibits the use of polygraphs by

private employers

• Exception is ongoing investigation involving

economic loss and employer has reasonable

suspicion that the employee is involved


Employees’ Privacy Rights

Fourth Amendment privacy rights

• Searches and seizures

• Surveillance

Electronic Communications Privacy Act

• Phone calls, email, Internet

• Exceptions

• Ordinary course of business

• Providers of services

• Prior consent

International privacy laws


Employees’ Rights

Employees’ rights under state constitutions

and statutes

Common law protections

• Defamation

• Libel—written form

• Slander—spoken word


Employees’ Rights (Cont.)

• Invasion of privacy

• Intrusion “upon the solitude or seclusion of another or

his private affairs or concerns” and “the intrusion would

be highly offensive to a reasonable person”

• Example p. 38

• False imprisonment

• Restraint by one person of the physical liberty of another

without the consent or legal justification

Post-Conference Auditing and Investigating Fraud Seminar · 2015-06-16 · Fraud Seminar General Session Legal Issues in Fraud Examinations ®2015 Association of Certified Fraud Examiners,

Documents