Tuesday, January 14, 2014

Keep your enemies close and fraudsters closer

Corruption is a complex global problem that requires special approaches to address. It is known to have regenerative power and its schemes continuously evolve over time

According to the 2013 Corruption Perception Index, out of 177 countries surveyed, more than two-thirds scored less than 50 (out of 100), which suggests that most countries in the world are still plagued by corruption.

In the survey, Indonesia’s ranking improved slightly from 118 (2012) to 114 (2013); but that unfortunately keeps the republic among the most corrupt countries in the world.

Centuries ago the great master of strategy Sun Tzu said: “If you know your enemy and know yourself, you will not be imperiled in a hundred battles.” This principle has been applied globally in various fields and crime eradication is no exception.

Monitoring potential perpetrators of fraud is an example of the application of this principle. The Corruption Eradication Commission (KPK), for example, has been known to use surveillance to detect alleged corrupt acts as well as to gather evidence to prosecute the offenders.

Recently, members of the House of Representatives’ Commission III overseeing legal affairs asked the KPK to submit its phone-tapping standard operating procedures (SOPs).

A commission member said the KPK had gone overboard with its phone-bugging activities, which could undermine democratic principles. But the KPK insisted that its surveillance activities were conducted in accordance with acceptable practices in law enforcement.

In practice, a fraud investigation is a meticulous process that requires substantial resources and, thus, effectiveness and efficiency are the prime criteria for evaluating its success.

To be able to effectively collect evidence to prove or disprove allegations, fraud investigators need to be able to identify various possible sources of evidence on the case under investigation.

Generally, the three primary sources of evidence that can be utilized by fraud investigators are documents, interviews and observations (also known as “surveillance”). Documentary evidence can be gathered from paper, computers and other written and printed sources by means of public record searches, data mining (for instance, Benford’s Law), financial statement ratio analysis and net worth analysis, to name just a few.

Throughout investigative interviews, auditors personally interact with interviewees (suspects, witnesses) in question and answer sessions to gather information or evidence in a case.

Surveillance is where investigators use their senses (hearing and sight) to gather evidence. Various means and methods can be employed to support this process.

Depending on the need and situation, investigators may use stationary (directly observing someone’s actions at a particular place and time), moving (following suspects) or electronic surveillance (email and phone-tapping) methods or any combination of the three.

The means and methods for electronic surveillance, such as video surveillance and phone-tapping, are now growing rapidly.

There are numerous ways someone’s conversation via a phone or through emails can be tapped for investigative purposes. Nevertheless, many fraud investigation experts believe that, due to its sensitive nature, electronic surveillance should not be used as the primary investigative tool.

According to the United Nations Office on Drugs and Crime (UNODC), for example, the use of electronic surveillance should only be considered when other less intrusive means have proven ineffective or when there is no reasonable alternative to obtain crucial information or evidence.

Therefore, regarding the question on the correctness of a law enforcement institution’s decision to employ, for example, phone-tapping in its investigation, we first need to see whether or not other means have failed or are believed to be incapable of gathering sufficient information or evidence.

Even when electronic surveillance is used, to be effective, it generally needs to be supported by other investigative methods.

As far as theories and practices are concerned, a major factor that determines the success of any fraud investigation is its surreptitious nature. In any fraud investigation, it is crucial to maintain the “natural setting” of the investigated parties.

Failure to do so will result in incidences, such as missing or altered evidence, and the escape of the alleged offenders.

In order to succeed, an investigation must be performed in a manner that will at least limit alleged offenders’ abilities to hinder the process.

This includes gathering evidence as quickly as possible and restricting offenders’ movements, as well as limiting their knowledge on the true nature and manner of the investigation (maintaining a degree of secrecy of the process), which, in reality, can be difficult to do.

For example, some parties have demanded the KPK be transparent in its investigations, which includes exposing its investigative techniques to the public or at least to people’s representatives.

Despite this seemingly rightful demand, fulfilling it would risk the commission’s chance of success in investigating corruption, as offenders and potential offenders would be able to anticipate their investigators’ actions.

Fraud investigation is similar in some ways to the game of chess. Every action taken by investigators may result in counteraction by fraud offenders. Investigators devote time and energy to finding the missing pieces of the puzzle and putting them all together to uncover the fraud, whereas offenders do the opposite. Therefore, every action by investigators must be decided by considering, among other things, the possible counteraction by the alleged offenders.

The public must also realize that, due to the nature of the process and for the sake of the effectiveness of that process, not all of the information regarding fraud investigations can be shared with them. By Hendi Yogi Prabowo, Yogyakarta |
The writer is the director of the Center for Forensic Accounting Studies at the Islamic University of Indonesia. He obtained his Master’s and PhD in forensic accounting from the University of Wollongong, Australia.

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