The Basic Steps of a Complex Fraud and Corruption Investigation

The steps below primarily 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 utilize contract audit rights and refer cases to law enforcement agencies to access additional evidence, 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 many investigators, at least the successful ones, but is misunderstood or neglected by others, with unfortunate consequences. 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;
  • Amend and refine it based on additional facts 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 obtains 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:

  1. She analyzes the available data – the details of the allegations;
  2. Creates a simple, initial hypothesis or theory, e.g., company A is paying kickbacks to government official B for government work;
  3. 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 her hypothesis to organize the investigation, i.e., looks for evidence to confirm or rebut the theory and assumptions (initially, this evidence is often the “red flags” of the suspected offense.)

The Case Theory approach generates the investigative plan (to see if the assumptions in fact occurred) and if the theory is correct, evidence of guilt. If not, the investigator may amend her 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 her 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.  Use them to organize the investigation and test the sufficiency of the evidence. An investigator should know at every stage of the case, and before and during each interview, what evidence he or she needs to prove each element of an offense.

Many investigators neglect this fundamental rule with the result that too little relevant (and 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.  Don’t overdo the complexity of the charts – their purpose is to simplify, clarify and focus the investigation, not to record every detail that occurred, thereby making the case more, not less complicated.

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.   All evidence – documentary or electronic – should be from the best available source.  Critical witness statements should be corroborated to the fullest extent possible.

Prepare the case chronology

A Chronology of Events – recording the important facts in the order they occurred – is almost 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. Review and update it regularly. Add new information as the investigation proceeds and remove what is shown to be irrelevant.

The Basic Steps of a Complex  Investigation 

The information below illustrates basic steps in a typical complex procurement fraud case. Most serious fraud and corruption cases occur in procurement.

Click on each step for a more detailed explanation.  The steps are general suggestions that should, of course, be adjusted to the specific allegations.  Some cases will require fewer steps than those listed, others perhaps more or different, such as requesting international legal assistance, which is not addressed here.

See a case exercise that illustrates the points below.

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 indicators

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

If a complaint warrants further investigation, try to make a quick, preliminary assessment of the accuracy of the report.  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 the basic facts if this may have occurred.  Use this information to prepare for a follow up interview of the complainant to obtain more information.  You will, of course, examine the transactions in much greater detail later.

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 or her 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.

See basic but important advice on how to interview a cooperative witness.

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 refer the case and obtain such cooperation.

STEP SIX Begin the external investigation

Conduct interviews of witnesses outside the investigating organization, proceeding “up the ladder” 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, 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 a cooperating  bribe payer. Decide the best strategy to obtain his or her cooperation, as discussed in the link.

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 or her role in the suspect contract award and relevant financial issues, such as sources of income and expenditures. Decide if there is sufficient evidence to obtain a confession, which is unlikely; otherwise, try to get helpful admissions, information on the subject’s source of funds and possible defenses, as discussed in the link.  Detailed preparation is the key to success.

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.  Again, detailed preparation is essential.

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.