‘Embedded’ – a new approach to corporate fraud

February 2016  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2016 Issue

Let us start with what we know. Statistics tell us that frauds are far more likely to be discovered by anonymous tips, and by accident, than by internal or external audit. They also tell us that most corporate frauds go on for one or two years before they are discovered. Clearly there is work to be done to increase the proactive discovery of corporate fraud.

Let us continue with some anecdotal evidence of how to accumulate corporate intelligence. Popular television shows like ‘Undercover Bosses’ tell us that management can learn a lot more about what is going on by impersonating lower level staff and gathering intelligence at the grass roots, than they can from any other source. Today, reporters use embedded journalism as a way to get information. Through this method, they are involved with the actual troops and move with their movements. This allows the journalist to get first hand information, unfiltered by censorship or bureaucratic spin.

Finally, we have our own experience that once you engage in a peer-to-peer relationship on a day to day basis, people ‘let their hair down’, and you get the full nuanced and contextual truth of what is going on, and why. This is far more effective than the hierarchical, formal, periodic interviews where you get formal, defensive positions inextricably intertwined with ‘the story’.

What we are left with is the obvious: corporations are better off hiring forensic investigators and embedding them in line positions to proactively seek out fraud rather than auditors, internal or external, to try to ferret out fraud from the outside.

So how does this work? First, your auditors or a forensic investigator identifies fraud ‘hot spots’ within your organisation – positions where internal controls are weak, or regularly overridden, for example. Then, because most forensic investigators had line positions before they secured their training, you simply hire a forensic investigator with a resume that qualifies for a ‘temp’ position within that ‘hotspot’. They may replace an employee on vacation, or maternity leave, or they may fill a recently vacated position. In any event, they maintain their real identity and credentials (save those related to fraud investigation, which should be wiped from the internet), and simply carry out the requirements of their new job. The alternative is for the imbedded investigator to adopt a fictitious persona, and use that persona to conduct their investigation. Either way, as a newcomer they can ask a lot of questions without arousing suspicion. Because information is gathered informally, it tends to be more forthcoming and candid. The investigator then files a report which may lead to a more formal investigation, or directly to criminal charges, terminations or civil litigation.

How well does this work? In our experience, just as people forget there is a camera or tape recorder in the room after the first few minutes of an interview, so too even those co-workers who find out that the corporation has hired a forensic investigator for a line position (and being ‘Googled’ is a standard operating procedure for co-workers these days) soon get past it and deal with the investigator as a co-worker, so long as the investigator can step into the line position seamlessly. Thereafter it is simply a question of the investigator being given time to integrate into the formal and informal communication channels, and report what they see and hear. The results are far more ‘fair’ to the subjects of the investigation, and far better evidence in court, so long as the investigator has not adopted a biased mindset bent on prosecution and edited their findings accordingly. The subjects tell their story, their way, as part of a ‘day in the life’ narrative given by the investigator.

Why is this effective? First, the forensic investigator has no formal ‘subject’ to investigate. The investigation develops organically as frauds are discovered and traced to all of those who participate in them. Second, you hear from the people in their own words in a setting where they are comfortable. Formal interviews favour the articulate and personable. Real time dialogue gives the employer, and if necessary, a court, a better reflection of what people are doing, and why.

By way of an apocryphal example, lawyer A joins ABC law firm. Lawyer B is already a member of the firm and hears a rumour from staff that lawyer A is perpetrating a fraud a few doors down from him. After befriending this lawyer in the context of working on a file together, lawyer B learned of what lawyer A was doing, and why – he was ‘borrowing’ from an estate client of his because the estate trustee was a friend, and he intended to pay the money back. Lawyer A had to borrow because he advanced considerable money to family members because of their extravagance, and his trustee friend would understand, indeed he had authorised previous loans in the past. Lawyer A was also paying himself out of accounts held by family members using a power of attorney. He was doing so because he had already made significant advances on their behalf, such that he was entitled to make payments to himself from family accounts as they were really repayments. Getting independent legal advice for the trustee and court approval for incapacitated family members were useless and expensive formalities. Now would the lawyer have told the same story in a formal investigation? Probably not. Did the story as it was told ring true in its explanation of what was happening, the motivation for doing it, and the rationalisation for doing it in the way it was done? Absolutely.

Corporate fraud is not being effectively dealt with by internal or external audits, which together catch only about 15 percent of all corporate frauds. New tools are required. Consider the embedded investigator.

 

David Debenham is the co-chair of the Supreme Court of Canada Practice Group at McMillan. He can be contacted on +1 (613) 691 6109 or by email: david.debenham@mcmillan.ca.

© Financier Worldwide

BY

David Debenham

McMillan

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