The 10 Basic Steps of a Complex Fraud and Corruption Investigation

The steps below apply to administrative investigations by international development agencies that lack law enforcement powers to compel evidence from third parties by subpoena or otherwise.  Development organizations, can, however, expand their access to evidence by referring cases to law enforcement agencies for assistance, as discussed below.

Preliminary Matters 

Use the “Case Theory” approach to investigations

It is essential that every investigator or prosecutor develop and follow a “theory of the case” when investigating complex corruption and fraud offenses. The Case Theory approach to complex investigations is second nature to most investigators, at least the successful ones, but is misunderstood or neglected by others, with disastrous results. It is similar to the scientific method of experimentation, and involves the following steps:

  • Analyze the available data to create an hypothesis;
  • Test it against the available facts;
  • Refine and amend it until reasonably certain conclusions can be drawn.

Expressed somewhat differently, the approach begins with an informed assumption or guess, based on the available evidence, of what the investigator thinks may have happened, which is then used to generate an investigative plan to test – prove or disprove – the assumption. It is best illustrated by example:

Example of the Case Theory Approach

Investigator One receives anonymous allegations of corruption in the award of government contracts. He pursues the case with no case theory or investigative plan. He asks a dozen witnesses if they have any knowledge of payoffs; none do (this is not unusual). He subpoenas the contract files and whatever else he can think of but sees no smoking gun as he flips through them (this is even less unusual). He confronts the suspect, who denies any wrongdoing. The investigator does not know what else to do. He has assembled a thick file and an impressive command of the contracts, but can prove nothing. Investigator Two pursues the same case, using the Case Theory approach:

  • He analyzes the available data – the details of the allegations;
  • Creates a simple, initial hypothesis or theory, e.g., company A is paying kickbacks to government official B for government work;
  • Makes assumptions which can be used to test the theory – e.g., if the allegations are true, official B would be expected to:
    • Favor Company A in buying decisions
    • Bend or break the rules to award contract to Company A
    • Display sudden new wealth or have unexplained income

Investigator Two uses his hypothesis to organize the investigation, i.e., looks for evidence to confirm or rebut the theory (initially, this evidence is often the “red flags” of the suspected offense.)

The Case Theory approach generates the investigative plan (see if a, b or c occurred) and if the theory is correct, evidence of guilt. If not, the investigator may amend his theory, e.g., company C is paying official A, and try again. This approach also enables one to prove, to a certain extent, that a suspected act did not occur. Investigator One, after inter-viewing a dozen witnesses, did not know if bribes had been paid or not, only that he could not prove it. Investigator Two, however, can have some assurance that the alleged acts did not take place, if no evidence appears in support of his test assumptions. Remember, the Case Theory approach is simply an investigative tool to generate a hypothesis that can organize and direct an investigation, based on the information available at the time. It should not be treated as evidence itself. Do not be too committed to any particular theory and be ready to amend or abandon it as necessary.

Learn the elements of proof for the suspected offenses

Memorize the elements of proof for each of the suspected offenses, based on your theory of the case, and use them to organize the investigation and test the sufficiency of the evidence. An investigator should know at every stage of the case what evidence he needs to obtain to prove an offense. Again, many investigators neglect this fundamental rule, with the result that too little (or too much irrelevant) evidence is collected.

Carefully organize and maintain the evidence

Use charts and graphs, spreadsheets and summaries as necessary to organize and analyze complex data, but be careful not to overdo this exercise at the expense of having time to pursue leads and pursue your theory of the case. Make sure that all evidence is properly logged in, secured and accounted for, including electronic evidence, and that the source of the evidence is recorded.

Prepare the case chronology

Preparing a Chronology of Events – putting the important facts in the order they occurred – is always helpful, particularly to prove knowledge and intent and to see how a case unfolds. Concisely record the date, the event or document, and the source of information in separate columns. Include important meetings, telephone calls, email communications, travel, key documents and other potentially important events. Keep the chronology simple and focused on potentially relevant evidence – too much extraneous information will reduce its utility – and review and update it regularly. Add new information as the investigation proceeds and remove what is shown to be irrelevant.

The Ten Basic Steps 

Click on each step for a more detailed explanation of each step.

STEP ONE Begin the case (respond to complaint, etc.)

If the case starts with a complaint or report, fully debrief the complainant, getting as much detail as possible. If the case starts with the discovery of a red flag, match the red flag to the potential scheme and then look for other red flags of the suspected schemes. An automated, “proactive” search for fraud indicators might be effective if the necessary data is available.

STEP TWO Evaluate the allegations or suspicions

Determine whether the allegations or suspicions – the “red flags” – are specific and serious enough to justify an investigation, which can be time consuming, disruptive and costly.

If you determine that a complaint or report warrants further investigation, try to make a quick, preliminary assessment of the accuracy of the complaint.  For example, if the complainant alleges that he or she was unfairly disqualified from a tender, examine the relevant project files to attempt to determine if this may have occurred.  Use this information to prepare for the follow up interview of the complainant.

STEP THREE Conduct due diligence background checks

Check on-line and other records on the suspect firms and individuals to evaluate the allegations and to look for other evidence of fraud or corruption, such as the presence of shell companies as subcontractors, prior debarments of a contractor or evidence that a project official is living beyond his means.

STEP FOUR Complete the internal stage of the investigation

Complete the collection of documents, data and interviews within the investigating organization, e.g.,

  • Look in the bidding documents for evidence of corrupt influence through the manipulation of the “SPQQD” factors – Selection, Pricing, Quantity, Quality and Delivery;
  • Carefully examine bids and proposals, CVs and other documents submitted by a suspect firm for possible fraudulent representations;
  • Access, with the proper authority, the relevant e-mail and computer hard drive information;
  • Determine if an early interview of the subject is warranted.

STEP FIVE Check for predication and get organized

Review the results of the investigation to date to determine if there is adequate “predication” – a sufficient factual basis – to proceed. Decide or refine your initial “Case Theory” and organize the evidence according to the elements of proof of the potential claims. If law enforcement assistance is needed (e.g., to subpoena documents, exercise search warrants or to request international legal assistance) take steps to ensure that there is sufficient “probable cause” to obtain such cooperation.

STEP SIX Begin the external investigation

Conduct interviews of witnesses outside the investigating organization, proceeding from the disinterested, cooperative witnesses to “facilitators” to co-conspirators to the subjects. Request or compel documents from third parties and the suspect contractors through negotiated agreements, the exercise of contract audit rights or, if available with law enforcement assistance, subpoenas or search warrants.

STEP SEVEN Prove Illicit Payments

Determine the best strategy to prove illicit payments: out from the point of payment (by examining the contractor’s records), or back from the point of receipt (from the suspect employee’s records) and begin the tracing process. If it is not possible to prove the corrupt payments directly, try to prove them circumstantially by showing the subject displayed unexplained sudden wealth or expenditures.

STEP EIGHT Obtain the cooperation of an inside witness

This could be an honest inside observer or a lesser participant in the offense, such as a middleman or the smaller of several bribe payers.  Decide the best strategy to obtain his or her cooperation.

STEP NINE Interview the primary subject

In a corruption case, conduct a thorough interview of the primary subject, usually the suspected bribe recipient.   Ask about his role in the suspect contract award and relevant financial issues, such as his sources of income and expenditures. Decide if there is sufficient evidence to obtain a confession; if not, try to get helpful admissions and identify possible defenses (different objectives require different tactics.)   Record the interview, if possible, and request all relevant financial and other records. In a fraud case, interview the person most knowledgeable and responsible for the suspected false statement or fraudulent document. Again, decide if there is sufficient evidence to obtain a confession and, if not, try to get helpful admissions and identify possible defenses. These typically include that any false statement was an honest mistake, or that another person was responsible for a fraudulent document. Record the interview if possible.

STEP TEN Prepare the final report

Decide what action to recommend based on the results of the investigation – an administrative sanction or criminal referral, for example – and prepare a concise final report, organized according to the elements of proof for the relevant offenses.