Tag Archives: fraud investigation

Confidential Sources & Informants

There has been much in the news recently concerning the confidential sources and informants involved in current Federal on-going criminal and non-criminal investigations.  During the more complex of our examinations, we, as practicing fraud examiners and forensic accountants, can also expect to encounter the same types of sources and informants. Both sources and informants serve the same purpose, to provide information helpful in the development of a case. However, there are notable differences between confidential sources and confidential informants; the two terms should not be used interchangeably.

A confidential source furnishes information simply consequent on being a member of an occupation or profession and has no culpability in the alleged offense. For example, confidential sources might include barbers, attorneys, accountants, and law enforcement personnel. A confidential informant on the other hand has a direct or indirect involvement in the matter under investigation, and s/he might (incidentally) also be culpable. The distinction between the two sources is their involvement or noninvolvement in the offense. As every CFE knows, informants can pose treacherous legal issues for the fraud examiner.

There is no question that information provided by a well-placed informant can be invaluable to any case; secretly photographed or recorded conversations provided by an informant are the most convincing type of evidence. This information is generally viewed as something the use of which is sure to be successful for a criminal prosecutor, because there is little that a white-collar criminal can dispute when caught red-handed in the fraudulent act.

The ACFE identifies several types of informants with which a CFE might expect to become directly or indirectly involved: the basic lead, the participant, the covert, and the accomplice/witness.

—Basic Lead Informants. This type of informant supplies information to the investigator about illicit activities that they have encountered. The reasons that the informant decides to supply information are varied; some informants simply want to “do their part” to stop an unscrupulous activity, while others are interested in harming the criminals against whom they are informing. For instance, many informants in drug, prostitution, or illegal gambling endeavors are involved in those activities as well and intend to eliminate some of their competition. Whatever the reason, these informants’ only role in an investigation is to supply useful information.

—Participant informants.  The participant informant is directly involved in gathering preliminary evidence in the investigation. The informant in this instance not only supplies an investigation with information, but the informant is also involved in setting up a “sting” operation, initiating contact with the criminal for arrest purposes. A participant informant is just what the name suggests, a participant in the investigation of criminal activity.

—Covert informants. A covert informant also supplies information on criminal behavior to an investigator or to authorities. The difference between covert informants and other types of informants is that a covert informant is one who has been embedded in a situation or scenario for a period, sometimes for years, and is called upon only sporadically for newly uncovered information (i.e., tip-offs) and leads. These types of informants are often referred to as moles because of the nature of their insulated situation as inside sources. There are two instances in which covert informants are commonly used: in organized crime and in hate-extremist group investigations. Covert informants are often culled to get information about upcoming criminal activities by such groups.

—Accomplice/witness informants. The accomplice/witness informant is often called upon to provide information concerning criminal activity. Unlike other types of informants, the accomplice/witness informant seeks to avoid prosecution for an offense by providing investigators with helpful information. For example, the government might promise leniency if the accomplice/witness informant offers details about a co-conspirator.

There are three essential procedures for the investigator to keep in mind and follow when using sources and informants. First, strive to keep the informant’s identity as confidential as possible. Second, independently verify the information provided by the source or informant. Third, develop witness and documentary evidence from independently verified information. For example, an informant might indicate that an investigative target committed fraud. If the fraud examiner subsequently conducts an interview and gets a confession out of the target, the information is no longer dependent on the informant’s claim.

If the confidential source or informant has provided documents, names of potential witnesses, or other evidence, all reasonable steps must be taken to protect the identity of that source. Care should be taken to ensure that the questioning of other witnesses is done in a manner that does not reveal its origin. This can usually be accomplished by phrasing questions in a certain way. For example, Smith furnished confidential information about Jones, the co-owner of Jones Brothers Construction Company. When the fraud examiner confronts Jones, she does not want him to know that she has talked to Smith.

If necessary, in this example, the fraud examiner would display the evidence from witnesses and documents that would not reveal the source or informant’s identity. The information from the source or informant is basically useless unless the fraud examiner can verify its authenticity and independently corroborate it. Suppose a source furnishes the fraud examiner with copies of documents showing that Jones Brothers Construction Company’s building code violations dropped by 80 percent since a bribery arrangement allegedly began. This kind of evidence would corroborate the source’s story. If a source told the fraud examiner that Jones frequently had drinks with Walters, the city’s chief building inspector, the fraud examiner would want to find out some way to verify this information. Recall that the third objective when using sources is to develop the witness’s information and other evidence so that it makes a cohesive case.

Fraud examiners should make every effort to develop and cultivate a wide range of sources. Business and financial institution executives, law enforcement and other governmental personnel, medical and educational professionals, and internal and external auditors are always good contacts for practicing fraud examiners.

The fraud examiner should strive to make contacts in her community, well in advance of needing the information they can provide; my contacts on LinkedIn and in the Central Virginia ACFE Chapter have proven their investigative value again and again!  If the fraud examiner receives an allegation and needs confidential information, s/he might obtain assistance from a source cultivated earlier.  Additionally, we need sources to feel confident that they can share information with us without being compromised. In theory, the source will never have to testify; s/he has no firsthand knowledge. Firsthand information comes either from a witness or from a document.

The fraud examiner might also encounter new sources when tracking leads during a specific investigation. S/he might interview a stockbroker from whom the target purchased stock but who does not want his identity revealed. The fraud examiner shou1d not encourage a person to provide confidential information, but rather try to get verifying reports on the record. But if the fraud examiner promises confidentiality for a source’s information, she must abide by that promise.

The ACFE advises that active recruitment of informants is generally not desirable because doing so might appear unseemly to a jury. It is better to encourage an informant to come forward. It is also desirable to develop an informant relationship, but such relationships must be handled carefully. The fraud examiner must be careful to clearly document the adequate predication for an informant’s involvement. Generally, the most fundamental questions concerning informants will focus on the degree of their culpability or the lack of it. There have been cases where the informant is guiltier than the target; in such cases the court might rule that the informant’s information cannot be introduced.

Finally, it’s recommended that all contact with informants and-sources be reported on a memorandum, although the confidential source or informant’s identity should not be included in the report. Instead of including the source or informant’s identity, the fraud examiner should use symbols to denote the source’s identity. It is further recommended that sources be preceded with an “S,” followed by a unique identifier (i.e., source #1 would be “S-l”; source #2 would be “S-2”). The symbols for informants would then be “I-1” and “I-2.”

Generally, disclosure of the identities of sources and informants should be on a strict need to-know basis. For that reason, the person’s identity should be maintained in a secure file with limited access, and it should be cross-indexed by the source’s symbol number. The reliability of the source, if known, and whether the person can furnish relevant information should always be documented in writing.

Lessons Learnt from the Dread Pirate

OldShip—Rumbi Petrozzello, CPA/CFF, CFE
2016 Central Virginia ACFE Chapter Vice-President

I’m sure that just about every fraud examiner and forensic accountant knows that when Al Capone was finally brought down and sent to prison, it was for simple tax evasion.  Eliot Ness and his Untouchables are famous for doggedly going after Capone and raiding his illegal businesses.  Frank Wilson, the Internal Revenue agent who built the tax evasion case against Capone, is largely unsung.  I thought of Frank Wilson the other day, when a friend shared a New York Times article with me. It was about Gary Alford, the IRS tax investigator who identified Ross Ulbricht as Dread Pirate Roberts, the founder of Silk Road. The piece was particularly interesting because, initially, Alford was brushed aside when he voiced his suspicions about the true identity of Dread Pirate Roberts.  He had to stick to his guns and collect more and more information before the Drug Enforcement Administration (DEA) agents finally took him seriously.

The work of a fraud examiner or forensic accountant is most often not the exciting surveillance, car chases and gun fights that make up action movies. The evidence that’s collected and analyzed can be complex and leave many reviewers cross-eyed, trying to follow the path down which the investigator is trying to lead them.  However, due to the importance of the work we do, it’s important to not give up if, at first, others are not quite finding what you’re proposing to be that compelling. I was struck by how Alford continued to research the leads he’d found, seeking financial and non-financial information to bolster his case and continuing close interaction with his colleagues until he was successful.  I appreciated how the New York Times outlined the various methods that Alford, an IRS tax investigator, employed to collect the evidence that he needed to tie Dread Pirate Roberts to Ross Ulbricht. When I speak to people about the work I do, they’re surprised when I mention the importance and volume of the non-financial information involved, such as chat room posts and the results of Google searches, to corroborate some of the financial information we’re analyzing. When we finally bring together the results of our investigations, if others aren’t quite seeing things as we do, the challenge for us is to figure out how to better communicate our results.

In Alford’s case, to say he was frustrated during his investigation is an understatement. He initially brought forward his theory about the true identity of Dread Pirate Roberts in June 2013. He was excited by his discovery and thought it would be greeted with a degree of enthusiasm equal to his own. He was wrong. But he didn’t give up.  Instead, he went back to work on collecting yet more information and after taking all this to someone else was again rebuffed.  Finally he was advised by a colleague to give it up – essentially that he had done what he could and should do himself a favor and just drop the whole matter.  Fortunately, in September, Alford asked for yet another background check on Ulbricht which, this time, finally led to Ulbricht’s arrest.

In appreciation of Alford’s diligence, his superiors presented him with a plaque with the following Sherlock Holmes quote, “The world is full of obvious things which nobody by chance ever observes.” It’s up to us to be mindful of this and be the nobodies who observe the obvious things, even when others sometimes initially refuse to believe us.

RVACFES Summer 2015 Event



Your Chapter wishes to thank you, our members, and our partners, national ACFE and the Virginia State Police for all the good work in making this year’s summer event such a success!  Special thanks go our speaker, Chis Rosetti, whose in-depth experience and unique insights made this one of our more useful seminars for practicing CFE professionals.

Rosetti_2As Chris so eloquently and forcefully pointed out, the threat of occupational fraud looms over every business or public agency, regardless of its size, stature or function and yet, in too many organizations, fraud prevention can be a hard sell. It’s safe to say that if you have employees, at some point in time some form of occupational fraud will victimize you. These are not crimes that only happen to the company down the street; they occur in every organization (including ours) and employees at every level commit them from top executives down to entry-level clerks. Research from the ACFE Annual Report to the Nation indicates that levels of occupational fraud and abuse are staggeringly high, both in their cost and in their rate of occurrence.  The Report to the National is based on a survey of Certified Fraud Examiners throughout the United States. Chris indicated that the results of the survey have been remarkably consistent over the years estimating that, within the CFE’s own companies, losses due to fraud and abuse accounted for approximately 5-6% of annual revenues. If this figure is applied to the U.S. Gross Domestic Product-which exceeded $10 trillion annually in 2014-this translates to losses of about $600 billion annually, or about $4,500 per employee.

Unfortunately, any estimate of the total cost fraud imposes on our economy is just that—an estimate. The 6% figure reflected by the Report to the Nation is simply the collective opinions of those who work in the anti-fraud field. Finding the actual cost may not be possible by any method. Many organizations are reluctant to report fraud when it occurs for fear that it will make them look vulnerable to consumers or hurt their stock price. Some feel embarrassment at having been victimized and prefer closure to the ongoing process of discovery that comes with an investigation and prosecution. Even those who do report fraud cases frequently are unable to determine the true cost sustained by the crime. And, of course, there are the frauds that are not caught, that go on day after day, silently draining organizational resources. All these factors make it virtually impossible to determine how big a factor fraud is in the business world of today. But whatever the actual costs, it’s clear to Chris that they’re high, and organizations are unwittingly paying them as a part of their total operating expenses.

That small organizations, those with 100 employees or less, are especially vulnerable to occupational fraud has been known for a long time; the median loss resulting from an occupational fraud scheme is $145,000. This is significantly higher than the median loss in the largest organizations. What makes this circumstance all the more disheartening is that small companies, in general, are the least likely to be able to sustain these kinds of losses.  According to the seminar study material, there appear to be two key factors that contribute to the large losses suffered by small companies. First, organizations with small staffs often lack basic accounting controls. Many small businesses have a one-person accounting department-a single employee writes checks, reconciles the accounts, and posts the books. Whenever control of a company’s finances is consolidated in a single individual, occupational fraud is easy to commit and conceal.

The second reason losses are so high in small organizations is that there tends to be a greater degree of trust among co-workers in small businesses. In an atmosphere where employees and management know each other well on a personal basis they tend to be less alert to the possibility of fraud.  Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.

Chris concluded by saying that perhaps the most important overall policy implication that can be drawn is that theft and work place deviance are in large part a reflection of how management at all levels of the organization is perceived by the employee.  Specifically, if the employee were permitted to conclude that his or her contribution to the workplace is not appreciated or that the organization does not seem to care about the theft of its property, one would expect to find greater involvement. In conclusion, a lowered prevalence of employee theft may be one valuable consequence of a management team that is responsive to the current perceptions and attitudes of its workforce.