Fraud Part1

ACCA - F1   ACCOUNTANT  IN  BUSINESS

Fraud is a general term for deliberate misrepresentation and it includes money laundering as well.

Money laundering is the funneling of cash or other funds generated from illegal activities through legitimate financial institutions and business to conceal the source of the funds. Anti-Money Laundering, 2^nd ed. IFAC, 2004

Fraud is an intentional act involving the use of deception to obtain an unjust or illegal advantage. Unlike fraud, errors are unintentional mistakes (innocent misrepresentations).

Different types of fraud:

Ø  Telemarketing fraud: E.g. "free gift", "high-profit, no-risk - offer"

Ø   "419" Fraud: E.g. Nigerian letter frauds

Ø  Identity theft: fraudster use others identity to perform a fraud or criminal act.

Ø  Advance fee schemes: E.g. "finder's fee", lottery winnings, found money

Ø  Health care/insurance fraud: E.g. "Rolling Lab" schemes, Medicare fraud

Ø  Redemption/ strawman /bond fraud: use of fraudulent financial documents that appear to be legitimate. E.g. "bills of exchange", "indemnity bonds", "sight draft"

Ø  Letter of credit fraud: E.g. con artists offer "letter of credit" or "bank guarantee" as an investment

Ø  Prime bank note fraud: E.g. con artist refer to the "guarantees" as being issued by world's prime bank.

Ø  Ponzi Schemes: promise high financial returns or dividends (collection from newer victims of the fraud is paid to earlier victims)

Ø  Pyramid Schemes: also known as franchise fraud or chain referral scheme (victims themselves are induced to recruit further victims through the payment of recruitment commission)

Ø  Market manipulation or "Pump and Dump" fraud: E.g. inflating securities price by artificial trading and dumping securities in the inflated market.

Common types of internal fraud (Page9/58):

Ø  Asset misappropriation

o   Cash - E.g. taking money from petty cash, cheque fraud, over-billing customers

o   Non-cash - E.g. theft of inventory, confidential information, altering purchase order

Ø  Fraudulent statement

o   Financial - recording fictitious sales and shipping, overstating/fictitious assets

o   Non-financial - false employee credentials/documents (qualification and references)

Ø  Corruption

o   Conflicts of interest - personal interest, hiring closely related less qualified parties

o   Bribery and extortion - extortion (offering to keep subject away from harm in exchange for money or other consideration), blackmail (offering to keep information confidential in exchange for money or other consideration)

Common Fraud Schemes

CIMA Article: Fraud risk management -Page 58-9