7. Glossary
of Fraud Schemes and Terms
Abuse:
In some cultures, a minor Fraud or
infraction.
Accomplice: In fraud, a partner to the fraud scheme. See
also Perpetrator and Shill.
Advance Fee Scheme: The
Fraudster collects
fees in advance without ever intending to fulfil the agreement to provide
services or products.
Affidavit:
A sworn statement.
Affiliate Bidding:
A condition in purchasing when
multiple bids are tendered for a contract from a single company under various
names to give the appearance of competition.
Agent:
A person with an agency relationship
(employee or independent contractor).
"At will":
An employment situation where the
employee is not protected from arbitrary firing -- the employee works only at
the pleasure of management and may be terminated at any time for no reason.
Contrast "For cause."
Backdate:
To post a date on a document earlier than the
actual creation date for purposes of deception.
Back Door:
In computer fraud, unauthorized entry point
or weakness discovered by a Hacker. Similar to Trapdoor, except
that back doors are usually pre-existing weaknesses.
Bait and Switch:
In consumer fraud, advertising a low cost
item and then steering the customer to a higher priced item when they come to
buy, claiming the low priced item was "sold out."
Bank Examiner Scheme:
The Fraudster poses as a
Bank Examiner who is trying to catch a dishonest teller. The Bank Examiner
needs the victim to withdraw a substantial sum from their account to test the
teller. The Bank Examiner then asks the victim to hand over the cash for a
receipt while they use the cash as evidence. The fraudulent Bank Examiner then
disappears with the cash ,and the receipt turns out to be worthless.
Bankruptcy Fraud:
The Perpetrator files a
notice of bankruptcy. He then approaches each of his creditors (who have
received a cop of the notice of bankruptcy) and tells each one in turn that
they are the special one that he wants to see get paid at least something. The
creditor often settles for 10% of the amount owed. Once a settlement with one
creditor is reached, the Perpetrator approaches the next creditor, and so on
until all creditors have been settled with at a small fraction of the outstanding
amounts owed. The Perpetrator then withdraws his petition for bankruptcy, have
extinguished most of his debt for a small fraction of the original amount.
Bid Rigging:
In purchasing, any scheme that gives the appearance
of competitive bids but is actually not competitive because the participants
establish the winner before submitting bids for the contract. See Affiliate
Bidding and Bid Rotation.
Bid Rotation: In purchasing when bidders for contracts
Collude
to distribute work among themselves by establishing which among them will win
particular bids.
Boiler Room Operation:
A fraud scheme that attempts to
sell worthless securities (or similar assets) over the telephone through high
pressure sales tactics. If the money is sent in or the credit card number given
out, there is nothing of value received.
Bribery:
To offer money in exchange for favourite treatment
or to compel or influence some action. Official (government employee or elected
official) bribery involves a promise for acting or withholding some official
act. Official bribery (Corruption) is unlawful in most cultures. Commercial
Bribery is known as "facilitating payments" in some cultures and
is not a crime in most cultures, although it often is against the
organization's policies and procedures.
Bucket Shop:
A securities fraud scheme that pretends to
buy and sell securities for customers, but actually never invests the money it
receives. The scheme depends upon stock price manipulation or a continuously
rising market to encourage more buyers than sellers. Also associated sometimes
with the Pump-and-Dump scheme.
Case Method:
In fraud Investigation, a six-step
process of gathering evidence in order to identify a Suspect.
Chain of Custody:
In evidentiary matters, the record
of possession from original discovery until produced at trial. If the chain of custody
is broken or unclear, the Evidence may be challenged as not the original
or not in its original condition.
Chain Letter Schemes:
Letters with names listed and
claims that the recipient of the letter, by putting their name on the list,
removing the top name and sending them some nominal amount, then mailing the
new list to some number of friends and acquaintances, will receive a lot of
riches in the mail. There is usually also a "curse" or bad luck
associated with individuals who "break the chain."
Check Kiting:
See Kiting.
Code of Conduct: See
Code of Ethics.
Code of Ethics:
A document adopted by an organization that
describes the expectations of the organization of employee and management
behaviour to all employees, suppliers, customers, the government, and the
community.
Coerce:
To influence action against someone's will,
usually by threat.
Collateral Frauds:
Fraudulent representing collateral
for loans that (1) does not exist, (2) is not owned by the loan applicant, or
(3) is grossly over-valued, or some or all of these.
Collude:
In the context of Fraud, to act
together for a fraudulent purpose.
Commercial Bribery:
Giving and accepting payments to favour
or not favour a commercial transaction or relationship. See also Bribery
and Corruption.
Computer Virus:
See Virus.
Con: Short form of
Confidence Game.
Conceal(ment):
The second step in committing a Fraud.
To hide from view.
Confidence Game:
A fraud scheme where the Perpetrator
gains the confidence of the Mark to defraud the Mark in some way.
Perfect Confidence Games are so effective that Marks do not report them to the
authorities for fear of looking foolish or because the game involved something
unlawful (such as illegal gambling).
Conflict of Interest:
An employee owes a duty to the employer
to act in the interest of the employer (and no other) when carrying out the
duties of an employer. A Conflict of Interest exists when the employee has some
personal kinship, friendship or financial interest in the transaction that may
divide the employee's interests and put his duty to his employer in jeopardy.
Conspiracy:
Two or more persons come together for the
purpose of committing a Fraud.
Conversion:
The third step in a Fraud.
To exchange for personal gain.
"Cooking the Books":
Altering the official accounts to
deceive. See also Journal Entry Fraud.
Corruption:
Bribery of a government official. See also Commercial
Bribery.
Cost of Goods Sold changes:
Unusual changes in cost of goods
sold as a percentage of sales may be an indicator of the theft of revenue or
theft of finished goods inventory. See Fictitious Refunds Fraud.
Covert: Hidden or secret, as in
Covert Operations.
Covert Operation:
A plan or activity to obtain
evidence through Operatives or Agents whose true role is undisclosed
to the target. Examples of covert operations include Undercover work and Pretense. See also
Ruse.
Cyber-crime:
Referring to frauds perpetrated on the
Internet or through the use of computers.
Cycle Counts:
In inventory control, counting various
portions of the inventory frequently until it is all counted (vs. counting the
whole inventory once a quarter or once a year).
Defalcation:
A fancy word for Fraud, theft or other
dishonest act relating to a position of trust in an organization.
Defamation:
The act of knowingly uttering Slander
or printing Libel that is untrue but harms another person's character
and reputation.
Denial of Access attack:
A computer Virus or
computer program run to generate many thousands of requests to the central
computer, thereby tying up the processor and denying legitimate requests of
access.
Deposition: A pre-trial legal proceeding in
which a person is questioned under oath by an attorney, usually witnessed and
recorded by audio, video, and/or written verbatim notes. The purpose of
the deposition is to discover Evidence that may be used later at trial
or to induce the person to make statements of knowledge or fact that can be
used at trial.
Directory Advertising Schemes:
Fraudulent invoices claiming that
the company is listed in a business directory and requesting payment. There may
or may not be such a directory, and the directory may or may not ever be distributed
or distributed as widely as claimed. For certain, no one ever ordered or
authorized the directory advertisement. See also Shipping Short.
Direct Inward System Access:
A feature on PBX (Private Branch
Exchange) telephone equipment that is vulnerable to fraud. It is used to allow
people outside of the office to call anywhere in the world through the DISA port
using a toll-free number and a PIN (Personal Identification Number). Hackers attack the PBX through the toll-free number and try to break in by guessing
the PIN. If successful, the hackers can use the telephone network of the victim
to place calls billed back to the victim.
DISA: See
Direct Inward System Access.
Documentary Evidence:
Written or photographic representations
of fact.
Dual Custody:
A method of protecting cash by requiring all
cash assets handled by two people (two signatures, two keys, two people
counting, etc.).
Dummy: Fictitious.
"Dumpster Diving":
Rummaging through someone's trash
to obtain information.
Eavesdropping:
See Electronic Surveillance.
Electronic Surveillance:
Listening and/or recording activities
using electronic means (audio and video) without being detected. In some
jurisdictions, electronic surveillance is unlawful without permission from all
parties.
Embezzlement:
Theft of money from an employer by an employee
using false entries in accounting records to cover up the crime. See also Journal Entry Fraud.
Employee Account Fraud:
When employees are also
customers, employees may make unauthorized adjustments to their accounts
(including write-off).
Entrapment:
Unlawfully lured into a crime by a police officer.
A common defense in a criminal activity where the criminal claims they were
innocent and would not have been involved in the crime otherwise.
Expense Report Fraud:
Charging unauthorized or
fictitious amounts on an expense report. See Padding Expense Accounts.
Exposure:
The potential for loss.
Extortion: The offer to keep from harm in exchange for
money or other consideration. The demand for Restitution in exchange for
not prosecuting a crime is a form of extortion.
Factors of Fraud: Opportunity (an opening or control weakness
to be able to commit the fraud), Pressure (a problem that cannot be shared or
resolved), and Attitude (a propensity to steal or the ability to rationalize
fraudulent behavior). All frauds have these three factors as a cause.
False Claims:
Claims for reimbursement by an employee or
contractor for nonexistent or inflated expenses. False claims can be for
business expenses or personal expenses (such as medical). See Padding
Expense Accounts.
False Credentials:
Misrepresenting education or experience
or professional certification to fraudulently obtain and hold employment.
False Imprisonment:
During an Interrogation,
blocking the subject's avenue of escape, essentially holding the person against
their will. Unless the person has been arrested, they may not be detained
against their will at any time.
False Pretense:
See Pretense, Ruse or Subterfuge.
Fictitious Refunds Scheme: Preparing false documents of
refunds to cover thefts of cash. A retail cashiering fraud. See Cost
of Goods Sold changes.
Fictitious Sales:
A scheme to record sales to
fictitious customers or fictitious sales to existing customers at the end of
one period and reversing the transactions at the beginning of the next period.
The purpose of the scheme is to inflate sales to create false profit statements
or earn unwarranted bonuses. Excessive credit memos or sales cancellations at
the beginning of an accounting period can be an indicator of this fraud.
Fiduciary Duty:
The acts necessary (usually of an authorized
employee or agent) to carry out a responsibility to care for assets prudently.
See Embezzlement.
Firewall:
A software program that protects direct
access to a local area network by establishing a "public" network in
front of the "trusted" network. The purpose of the program is
to secure data and systems from Hackers.
"For cause":
An employment arrangement where
employees may only be terminated for a proven cause. For contrast, see "At
will."
Forensic:
Suitable for use in a court proceeding.
Forensic Auditing: Examination of a business process
for evidence of Fraud.
Forgery:
Creation of false documents or altering
existing documents, especially financial instruments or other authorizations.
Fraud:
A theft, concealment and conversion to
personal gain of another's money, physical assets, information, or time.
Fraud Scenarios:
A method of developing mental models of
possible Frauds. "Thinking like a crook."
Fraudster:
One who commits the Fraud.
"Ghost" employees:
Fictitious employees on the
payroll, for whom the supervisor or manager receives the extra paychecks.
Hacker:
(Old) One who enjoys unraveling the mysteries
of the computer. (Modern) A person who attacks another's computer and seeks to
gain unauthorized access by hacking (breaking down) the computer's logical
security.
Hearsay:
A weak form of evidence that is an opinion of
the witness or that is not personally and directly known to them.
Hidden Bank Accounts:
A possible indication of Embezzlement,
Bribery or Kickback frauds.
Hot Line:
A telephone number to report suspected Fraud.
Often hot lines are handled as anonymous tips.
Impeach: In
Testimony, to catch the person in
a lie or contradiction of fact.
Improprieties:
A polite word for Frauds and
wrongdoings.
Inflated Inventory:
An indication of Embezzlement
or possible theft of inventory. See Inventory Shrinkage.
Influence Pedaling:
The offer by a government official
to use their office to influence actions for a private party in return for
something of value.
Informant:
A person, such as a co-worker or friend of
the accused, used in the investigation of a fraud who may know something about
the crime but is otherwise not involved.
Insider Trading:
Using business information not released to
the public to reap profits trading in the financial markets.
Interrogation: An interview of a suspect conducted for the
main purpose of obtaining an admission of guilt, to identify and neutralize
defenses the target may raise, and to obtain information used to impeach the Suspect.
Interview:
A structured (planned) question and answer
session with a person designed to elicit information.
Inventory Shrinkage:
Theft of physical inventory.
Investigation:
A structured gathering of Documentary Evidence
and Testimony to solve a reported Fraud.
Irregularity:
A polite word for Fraud.
Journal Entry Fraud: Using accounting journal entries
to fraudulently adjust financial statements. See also Embezzlement.
Kickback:
A payment by a vendor to an employee at the request
of the employee in order for the vendor to receive favorable treatment.
Kiting:
Using several bank accounts in different
banks, making deposits and writing checks against the accounts before the
deposit checks clear the banking system, creating a "float" of money
out of nothing more than the lag in time while checks clear and post to their
respective accounts.
Lapping:
Stealing a customer payment and then using a
subsequent customer payment to cover the previous customer's account. This
overlapping payments creates a "float" of money that can be used as
long as all payments are eventually posted. What usually occurs is that the
lapping process builds up like a giant pyramid until it falls apart when not
enough payments are available to cover the amounts owed.
Libel:
Knowingly publishing false statements about another
person that creates harm.
Lie Detector:
See Polygraph.
Lifestyle changes:
A possible indicator of theft is
the sudden change in lifestyle such as exhibiting more than usual wealth.
"Lowballing":
Placing an unusually low bid to
win the business. Often with the intent to inflate the price later with extras
or change orders. Also can indicate a defective Request for Proposal.
Maintenance Port:
An access point in the PBX
(Private Branch Exchange) telephone equipment that is vulnerable to fraud. The
port exists to allow the manufacturer's repair technicians to call into the PBX
from a remote location and diagnose problems or administer maintenance software
patches. Also known as the Remote Access Unit, or RAU.
Malicious Prosecution:
Targeting someone for prosecution
without reasonable grounds for suspicion.
Mark:
The intended victim of a Swindle or Confidence
Game.
Misappropriation:
A polite word for theft.
MLM:
See Multi-Level Marketing.
Moving Surveillance:
Following the target of
surveillance from one position to another, as in Shadowing or Tailing
a suspect.
Multi-Level Marketing:
A form of Pyramid Scheme,
not necessarily fraudulent, where sales are made to retail customers and
commissions earned through many levels of the chain within the pyramid. The
chain is built and expanded by each layer constantly recruiting more people to
sell the product or service.
Negative Invoicing:
Using an invoice for a negative
amount to cover a theft of a customer payment. The negative invoice is less
noticeable than a credit memorandum and usually under less stringent control. A
negative invoice is a symptom of possible theft.
Nigerian Letter:
A fraud scheme that now includes fax and
email versions of a letter from a supposed official in Nigeria. The official
has a large sum of money (often stated as $20 to $30 million) to transfer out
of the country. Due to exchange controls, the official asks for the victim's
help with the transfer. All that is required to earn a hefty reward/commission
is to furnish the Nigerian official with your bank account number, and they
will handle the rest. What actually happens is that the Perpetrator
depletes the victim's account.
Obstruction of Justice:
Impeding a lawful Investigation by
such acts as providing false documents, false testimony, destruction of
evidence, and intimidating witnesses.
Ombudsman:
A person who acts as an advocate for
employee grievances against the organization. Also, a neutral party to
whom employees can turn to report Fraud.
Operative:
A person acting on your behalf or under your
care, custody or control in a specific manner. A source or Informant
working Undercover in Covert Operations is an operative. There is
no agency relationship with an operative as with an Agent.
Overbilling schemes:
Padding invoices with extraneous
or fictitious items. Intentional duplicate billing, such as billing two parties
for the same work is also an overbilling scheme.
Overt:
Open, not hidden. See Covert for
contrast.
Out-of-Route:
Outside sales or service workers who deviate
from their normal route or time schedule, such as conducting personal errands
or taking excessively long coffee or lunch breaks.
Outstanding Items:
In checking operations, checks
that have been written but not cleared through the bank. An equivalent banking
term for interbank transactions.
Padding Expense Accounts: Adding extra expense items or
inflating the value of legitimate expense items to obtain unwarranted
reimbursements.
Padding Overtime:
Adding extra hours to falsely
inflate the payroll and earn unwarranted pay.
Palming: To conceal in the hand.
Perjury:
Lying under oath, including sworn
court appearances, Depositions, Affidavits, and other sworn
statements and documents.
Perpetrator:
The person who commits the Fraud.
Personal Identification Number:
A code used to access personal
data or accounts.
Pilfering:
Theft, usually referring to theft of
physical goods. In retail business, customer theft is known as Shoplifting
and employee theft is called pilfering. Occasionally used also with theft of
cash, especially petty cash or for small thefts.
PIN:
See Personal Identification Number.
Pigeon Drop:
A fraud scheme that involves a wallet/purse/envelope
with a large sum of money in it but no identification. The Perpetrator
and Accomplice, together with the victim "finds" the wallet,
and the victim is persuaded to withdraw a sum of money as "good
faith" to share in the cache. The victim is distracted and the Perpetrators
steal the money and disappear with it.
"Pingponging":
In medical insurance or Workers
Compensation Fraud, referring patients to other doctors in the same clinic
in order to claim reimbursement for "consultations" rather than for
actual treatment. See also False Claims.
Polygraph:
A machine for recording a number of life
signs (breathing rate, pulse, etc.) to aid in determining if a Suspect
is lying. Also known as a Lie Detector.
Ponzi Scheme: A fraud in which a high rate of return is
promised on investments. The first few investors receive the high rate of
return from part of the investments of later victims. At no time is any actual
investment made.
Pretense:
Also False Pretense. To represent
something to be what it is not. See Ruse and Subterfuge.
"Pump-and-Dump":
Manipulating stock prices by artificially
creating demand through rumor, high pressure sales tactics, or multiple large
orders. The price is "pumped" upwards and then when other investors
join the trend, the original investors "dump" the stock in a rapid
sell-off. See also Bucket Shop.
Pyramid Scheme: A commercial version of the
Chain Letter
scheme where the Fraudster sells bogus distributorships, franchises or
business opportunity plans to people who are in turn induced to do the same.
See also Multi-Level Marketing.
"Razoring":
Removing the last check, invoice,
purchase order or other sequentially numbered item from a pad of items by
carefully cutting with a razor around the staple holding the pad together. In
this manner, fictitious transactions can be documented on official forms.
RAU:
Remote Access Unit. Also known as the Maintenance
Port.
Reconciliation:
A process of comparing details with control
totals, such as checks paid during the month and deposits made that month with
the change in bank balance at end of the month.
Red Flags:
Symptoms and indicators (of Fraud).
Remote Access Unit:
See Maintenance Port.
Request for Proposal:
A request to potential vendors for
tender offers or bids to perform a service or provide a product (or both) to
solve a particular business problem. See also Request for Quote.
Request for Quote:
A request to potential vendors for
price quotes and delivery terms -- usually for much simpler procurement
requirements than Request for Proposals.
Restitution: Restoring money or property to the victim of
a Fraud.
Resume Inflation:
See False Credentials.
RFP:
See Request for Proposal.
RFQ: See
Request for Quote.
Rube: A slang term for a
Mark or victim,
especially someone who appears naïve.
Ruse:
A scheme that tries to make something appear
as something else. Hiding the true meaning or acting out a lie. A Subterfuge
or Pretense.
Sabotage:
Destroying or delaying some part of the business
process.
"Salami": In banking, a fraud that
involves taking all of the "round-down" fractional cents from
periodic interest payments and crediting them to a single account. Thus
each transaction has only a thin slice removed.
"Salting" cash:
Testing accounts receivable
employee honesty by placing some cash in the customer receivables process to
see if it is reported as cash or stolen.
Secure Socket Layer:
A protocol used in electronic commerce
to afford more security to transactions on the Internet.
Self-approval:
The act of authorizing a transaction for
one's own benefits or gains, or an act of approval for an activity in which the
approval authority participated.
Sewer Service:
Many consumer frauds rely on litigation to
win judgments to collect the proceeds of the fraud. These organizations limit
the ability of the victim to defend against this litigation by not informing
them of the suit (literally dropping the Subpoena "down the
sewer") and filing false Affidavits in court that the litigation papers
had been properly served.
Shadowing:
Following the suspect or target of Surveillance
from place to place to observe activities without being detected.
Shell Game: A game where a pebble or dried pea is hidden
under one of three shells or cans. The Perpetrator moves the shells
around quickly, often Palming the pebble, and then asks the Mark
to choose the shell where the pea is located. A common street Confidence
Game. See also Sleight-of-hand.
Shill: An person in a
Confidence Game that
acts as a participant to draw in the Mark. An Accomplice -- one
who is paid to play as part of a Swindle. Derived from casino gambling,
where the shill is a paid employee used to attract other gamblers.
Shoplifting: Customer theft from retail inventory.
See also Pilfering.
"Short-and-Over": An account used in cashiering
operations to track the imbalance of cash to sales recorded. A perfectly
balanced cash operation day-after-day, with no shorts or overs, is a symptom of
possible theft. It is unusual to never make mistakes handling money.
Shorting:
In medical frauds, delivering less
prescription medicine than actually charged to the insurance company or government.
Short Shipping:
Shipping less than the quantity shown on the
invoice (or shipping nothing at all; see Directory Advertising Scheme).
"Shoulder Surfing":
Observing someone using a PIN
(Personal Identification Number) by covertly looking over their shoulder,
sometimes with the aid of binoculars or video camera with zoom lens.
Shrinkage:
See Inventory Shrinkage.
Slander:
Knowingly uttering false statements about another
person that causes harm.
Sleight-of-hand:
A magician's trick. The ability to conceal a
physical action by distracting the participant. See also Palming.
Spying: See
Surveillance.
SSL:
See Secure Socket Layer.
Stakeout:
See Stationary Surveillance.
Stationary Surveillance:
Observation of activities of a
suspect from one vantage point. Also known as a Stakeout.
Statutory Employee:
An employee by action and tax law,
but not actually on the payroll. There are potential violations of USA tax and
employment benefits laws if independent contractors and consultants are found
to be statutory employees instead.
Suborn:
The act of Bribery.
Subterfuge:
Masking the true nature or reason for an action.
Surveillance:
Gathering evidence through observation from
outside of the operation (contrasted with Undercover). Surveillance can be Moving
Surveillance, Stationary Surveillance or Electronic Surveillance.
Also known as Spying or Eavesdropping.
Suspect (n.):
The target of the fraud Investigation. See
also Perpetrator and Fraudster.
Suspect (v.): To place under suspicion of wrongdoing.
Swindle:
A scheme to obtain money by Ruse or False
Pretense. See also Confidence Game.
Tailing: See
Shadowing.
Testimony:
Oral evidence (representations of fact) taken
by Interview or Interrogation. Testimonial evidence is
necessarily weaker than Documentary Evidence.
Theft:
The first step in a Fraud.
Unlawfully taking.
"Thief's Calculator":
A collection of innocent-looking
bits and pieces near the cash register for the purpose of tracking the amount
of cash stolen by Skimming.
"Tone at the Top":
The messages and actions of senior
management in relation to Fraud detection and deterrence.
Trapdoor:
In computer fraud, a means of unauthorized access
to the computer operating system or files, usually placed by a Hacker.
Trojan Horse:
A type of computer program that remains inert
(and possibly hidden) until activated by an external event such as a date. Used
as Viruses to disrupt or destroy computer operations, or used to open a Trapdoor
for unauthorized access.
Unauthorized Use:
Policies should be in place
to determine what business resources may be used for personal business and at
what times. Other use constitutes Theft.
Undercover:
Secret or Covert Operations where a
person works under an assumed identity, adopts a disguise, or takes on an
assumed role in order to gather evidence.
Under-ring:
To record less than the actual sales price.
Usually refers to a cashier ringing a sale on a cash register. Under-rings may
be a method used in Skimming cash by the cashier, or they may be used to
give unauthorized discounts to an Accomplice.
Unethical:
Behavior that does not meet community standards
for "right behavior," but that does not violate any laws either.
Unlawful:
Behavior that violates established laws.
Virus:
In computer operations, a program that is deliberately
released to a system with the ability to replicate itself and spread by
attaching unauthorized data to files. Viruses can be benign, just taking up
disk storage space, or they may be vicious and actually destroy data or deny
authorized access.
Voids: In cashiering, ringing a "Void" to
cancel a previous sale. Excessive voids may be a sign of theft.
Whistleblowing:
The act of an employee revealing suspected
fraud (usually involving senior management) to an outside third party.
Witnesses: People who may have information of a
Fraud
based on observation.
Worker's Compensation Fraud: False claims for
on-the-job injuries. Usually takes the Collusion of employee and unscrupulous
doctors to submit false diagnoses. Back injuries (soft tissue strains) and
stress are the most common ailments used in this scheme.
