10/15/2009 Meeting - Tools of The Trade (Background Checks)

Background Investigationsg g
Tips and tools
ACFE, San Jose ChapterACFE, San Jose Chapter
Linda JusticeLinda Justice
Deloitte Financial Advisory Services LLP
Business Intelligence Services
October 15, 2009
These materials are for presentation purposes only, and are not intended to represent opinions or an authoritative position of Deloitte FAS LLP.

Agenda
• Introduction
– Some of the common needs for backgroundSome of the common needs for background
investigations
• Sources available for research
– Permissible purpose considerationsPermissible purpose considerations
– Common misuses/caveats
– Domestic vs. International
• How background investigations help:How background investigations help:
– Fraud investigations
– Fraud prevention
– Litigation supportLitigation support
• Q & A
Copyright © 2009 Deloitte Development LLC. All rights reserved.1

I d iIntroduction
OverviewOverview

Background investigations can help in…
• Investigating occurrences of fraud
– Theft, embezzlement, whistleblower, bribery, FCPA, AML, and other internalTheft, embezzlement, whistleblower, bribery, FCPA, AML, and other internal
investigations
– Conduct background investigations prior to conducting interviews
– Help determine where a subject might be in the fraud trianglep j g g
• Preventing fraud
– Integrity/reputational due diligence (prior to mergers, acquisitions, forming joint
ventures, forming partnerships, client/customer acceptance, investmentg
targets, strategic alliance partners, channel partners, distributors, vendors,
FCPA, and ITAR)
– “Know Your Vendor” process
• Litigation support
– Witness location
– Expert witness vetting
– Asset searches
– Fact-finding outside of the discovery process

What you will learn today
• What is the value of online research?
• What types of intelligence are there?What types of intelligence are there?
• What resources are available online — in the public domain — and how
can they be utilized most effectively?
• What if the subject is a foreign national or entity?• What if the subject is a foreign national or entity?
• What are the limitations of online research?

S f hSources of research
What’s out there? What is it used for?What s out there? What is it used for?

Resources — Subscription databases
• Subscriber databases are essential
– Instant desktop access to extensive information sourcesInstant desktop access to extensive information sources
– Unique capabilities not available elsewhere
– Easy way to quickly identify red flags
– Cost-efficientCost efficient
– Adds focus to additional investigative phases
– Discreet
• Examples of popular subscription databases:Examples of popular subscription databases:
– LexisNexis
– Westlaw
– Dun & BradstreetDun & Bradstreet
– Factiva
– PACER
– World-Check
World Check
– Dialog

Resources — Permissible purpose
• Use of the proprietary databases is governed by applicable law,
including the Drivers’ Privacy Protection Act (DPPA) and related stateg y ( )
laws, and the Gramm-Leach-Bliley Act (GLBA)
• The data regulated by the DPPA and the GLBA may be used only for the
permissible uses listed in the selections by the database providers.p y p
• If you do not have a permissible use, you will not be given access to that
data.
• FCRA — The data retrieved may not be used as a factor in establishingFCRA The data retrieved may not be used as a factor in establishing
a consumer’s eligibility for credit, insurance, employment, or other
purposes identified under the Fair Credit Reporting Act (FCRA).

Overview — What can be found
• Litigation
– Civil and criminal litigation (county, state, and federal)Civil and criminal litigation (county, state, and federal)
– Bankruptcies
– Reported legal decisions
– Judgment filingsJudgment filings
– Tax liens — federal and state
– Financial Industry Regulatory Authority (FINRA) and other regulatory
sanctions
• Assets
– Real property ownership records
– Watercraft/Aircraft registrationate c a t/ c a t eg st at o
– Motor vehicle registration
– Stock ownership of 5% or greater in public entities
– Undisclosed businesses/relatives that may own assets
y

Overview — What can be found (cont.)
• Media — What has already been reported?
– Newspapers, magazines, specialty trade and industry publications,Newspapers, magazines, specialty trade and industry publications,
broadcasts, and wire transcripts
• Business issues/reputation/relationships
• Criminal problemsp
• Adverse data
• Litigation
• History of fraudy
• Property transactions
• Published biographies
– Unique Internet resourcesq
• Local newspapers not available through pay services
• International publications
• Chat rooms

Other sources of value
• States’ Web sites (Secretary of State, Division of Corporations, or equivalent records)
– Corporations
– Partnerships
– DBAs
• State Boards of Accountancy for licensing and disciplinary records (select states)
• State Bar Associations for licensing and disciplinary records (select states)g p y ( )
• Medical licenses (select states)
• Securities and Exchange Commission Web site
– Proxies, 10Ks, and 10Qs
C b i• Company web site
• Google, Yahoo, chat rooms, and other Internet sources
• Individual court Web sites (records vary by state)
– Criminal records — federal state and local– Criminal records — federal, state, and local
– Civil litigation — federal and state
– Bankruptcy filings
– Tax liens — federal and state
J d fili
– Judgment filings

Other sources of value (cont.)
• Federal agency Web sites for regulatory records
– FINRA (securities)FINRA (securities)
– EPA (environmental issues)
– SEC (public companies’ filings)
– OFAC (Specially Designated Nationals — SDN)OFAC (Specially Designated Nationals SDN)
– Federal Trade Commission (consumer complaints and trade practices)
– Federal Election Commission (political donations)
• Internet sourcesInternet sources
– Telephone and address directories
– Business directories
– Mapping toolsMapping tools

Free Internet sources
• Office of Foreign Assets Control: www.ustreas.gov/offices/enforcement/ofac/
• NASD: http://pdpi.nasdr.comNASD: http://pdpi.nasdr.com
• U.S. Dept. of the Treasury: www.occ.treas.gov
• Health & Human Svcs — excluded individuals:
http://oig.hhs.gov/fraud/exclusions.htmlp g g
• http://www.thevault.com/
– Basic service is free, but additional services are fee based. You can monitor chat rooms
for information regarding specific companies.
• http://finance.yahoo.com/
– Free. You can monitor chat boards of many companies.

Free Internet sources (cont.)
• http://www.virtualchase.com/people/public records.html
– A great site that lists hyperlinks to a number of investigative searches you canA great site that lists hyperlinks to a number of investigative searches you can
do.
• www.diligizer.com
– A board containing “information regarding the backgrounds of and/or theA board containing information regarding the backgrounds of and/or the
experiences others have had with individuals/entities who/which have offered
or are offering fraudulent investment transactions relating to unregistered
private placements, high-yield investment opportunities, HYIPs, the buying
d/ lli f t /b k i d i t t l j t fi iand/or selling of corporate/bank-issued instruments, loans, project financing
transactions, or other fraudulent business practices to investors worldwide.”

Caveats
Online research is a cost-effective and valuable first step but is not a
substitution for further in-depth investigative efforts.p g
• Availability, accuracy, and coverage of online information vary by source,
and by state and jurisdiction
– Online research should be supplemented by manual searchesOnline research should be supplemented by manual searches
• Not all potentially material information is apparent in online sources
– Nuances in data require investigative analysis

Common misuses of online information
• Missing leads
• Not conducting follow-up researchNot conducting follow-up research
• Not recognizing patterns
• Not recognizing significance of findings
S hi “ i ” i h id i i i• Searching names “as is” without considering variations
– (e.g., alternative spellings, common nicknames, and cultural differences)
• Relying heavily on a single source
• Misunderstanding content/jurisdictional deficiencies

U.S. versus international investigations
• What are the major differences between U.S. and foreign public
records?
• Can a critical mass of intelligence be developed without readily
accessible public records?
• How do these differences affect investigative approaches?How do these differences affect investigative approaches?
– Methodology
– Cost
– Timing– Timing

Reporting — Visual charts (i2)

How Background
I i i h lInvestigations help…
Fraud investigationsFraud investigations
Fraud preventionp
Litigation support

Fraud investigations
Public record research can assist fraud investigations by uncovering…
• Undisclosed businesses of individuals potentially involved in the schemeUndisclosed businesses of individuals potentially involved in the scheme
• Previously unknown relationships between internal employees and
outside vendor or customer
• Patterns of criminal or similar legal problems• Patterns of criminal or similar legal problems
• Subjects’ current legal or financial problems
• “Ghost” employees on the payroll
• Fictitious vendors
• Discrepancies between income and lifestyle

Preventing fraud — Due diligence
Who’s doing background checks and why bother?
• Companies are the people who run them — background checks of keyCompanies are the people who run them background checks of key
management of target entities/investment targets are a logical
complement to legal and financial due diligence.
• Background/reputational checks of individuals and entities have becomeBackground/reputational checks of individuals and entities have become
predeal “best practice.”
• These checks provide legal, reputational, and financial protection for
clients/investors and give financial services firms an edge in the marketclients/investors, and give financial services firms an edge in the market.

Preventing fraud — Due diligence (cont.)
Key risk areas
• Reputation and risk profile of target company
How due diligence can help
• Investigative due diligence on managementReputation and risk profile of target company
and key principals
• Material misrepresentations/omissions
• Current or past criminal, legal, or regulatory
problems
• Direct or indirect foreign government
g g g
team, shareholders, connected persons, and
other parties of interest
• Provide an overview of corporate history and
development
• Direct or indirect foreign government
ownership interests
• Political links and relationships with
government officials
• Business affiliations and known associates
C fli t f i t t
• Assess the subjects’ track record and
reputation in current and past ventures
• Seek to identify past regulatory, governance,
or ethical issues of concern
• Conflicts of interest
• Macro risks inherent in a region or specific
sector for cross-border transactions
• Integrity and stability of the current government
• Attitude of key public authorities to foreign
• Country Risk Assessment to assess macro
risks inherent in emerging markets
investors
• Possible changes in legislation or with local
regulators that may impact operations in
overseas markets
• Adequacy, integrity, and efficiency of the
q y, g y, y
judicial system

Preventing fraud — Know Your Vendor (KYV)
• A high-level assessment of the background of a large number of
payment recipients (“Vendors”), including suppliers, agents, distributors,p y p ( ), g pp , g , ,
and sales intermediaries
• Aims to identify red flags, adverse information, conflicts of interest, and
fictitious vendors by consulting external data sourcesy g
• The process can apply to:
– Existing vendors (in the context of a risk mitigation program or fraud/FCPA
investigation).g )
– New vendors (as part of the onboarding process)

Preventing fraud — Know Your Vendor (KYV) (cont.)
• Verify existence of vendor
– Identify corporate filings
– Identify Web site and its registrar
– Compare addresses identified on Web site and in corporate databases against that in vendor file
• Search PEPS and sanction list checks
– Databases of Politically Exposed Persons (PEPS) and sanction and embargo lists such as the UNDatabases of Politically Exposed Persons (PEPS) and sanction and embargo lists, such as the UN
Oil for Food Program, the Office of Foreign Assets Control, the United Kingdom HM Treasury,
European Union, Office of the Superintendent of Financial Institutions, Financial Action Task Force,
the Australian Department of Foreign Affairs and Trade, and others
– Conduct adverse media search (in appropriate languages) in numerous publications to identify past
issues of fraud, criminality, business conflicts, and other matters
• Other “Red Flags”
– Adverse Internet researchCivil litigation
– Conduct civil litigation searches to check for lawsuits including past contract disputes fraud falseConduct civil litigation searches to check for lawsuits, including past contract disputes, fraud, false
claims, etc.Criminal litigation
– Conduct criminal litigation searches to check for criminal records, including mail or wire fraud, drug
possession, Foreign Corrupt Practices Act violations, etc.
– Bankruptcy filings
a uptcy gs
– Judgment and lien filings

How do background investigations assist the
litigation process?
• Background checks on opposing parties can reveal:
– Patterns of litigiousness
Fi i l diffi lti
litigation process?
– Financial difficulties
– Poor business track record (e.g., a history of mismanagement or bankrupting companies)
– Undisclosed professional relationships that have impacted inventories, sales, or loans (in bankruptcy
cases)
Amount of assets if any (Is a judgment worth pursuing? Are there circumstances that might– Amount of assets, if any (Is a judgment worth pursuing? Are there circumstances that might
affect solvency between pre- and post-litigation period of a bankruptcy?)
– Contradictions or inconsistencies in claim
• Asset searches
Conduct prior to litigation to evaluate the value of proceeding– Conduct prior to litigation to evaluate the value of proceeding
– Help collection on judgments
• Background checks on opposing expert witnesses can uncover:
– Conflicts of interest
Prior contradictory testimonies– Prior, contradictory testimonies
– Criminal records or other adverse findings
• Investigation of the underlying facts of a lawsuit can help to:
– Verify key information, as well as uncover additional leads
Identify and locate other relevant parties to the litigation (e g witnesses former business associates
– Identify and locate other relevant parties to the litigation (e.g., witnesses, former business associates,
or potential creditors)

About DeloitteAbout Deloitte
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is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal
structure of Deloitte Touche Tohmatsu and its member firms. Please see www.deloitte.com/us/about for a detailed
description of the legal structure of Deloitte LLP and its subsidiaries.
Copyright © 2009 Deloitte Development LLC. All rights reserved.
Member of Deloitte Touche Tohmatsu

10/15/2009 Meeting - Tools of The Trade (Background Checks)

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