ACFE CFE-Fraud-Schemes-and-Financial-Crimes - Certified Fraud Examiner -Fraud Schemes and Financial Crimes

The ACFE Fraud Examiners Manual addresses Nonconforming Goods or Services under Contract and Procurement Fraud . The Manual states that, to detect nonconforming schemes, the fraud examiner should examine contract specifications, contractor statements, invoices, supporting documents, the received product, and test and inspection results for discrepancies with contract specifications. It then specifically adds:

“Additionally, to detect nonconforming schemes, the fraud examiner should:

• Review correspondence and contract files for indications of noncompliance.

• Request assistance from outside technical personnel to conduct after-the-fact tests.”

This language matches Option B exactly, so it is the most appropriate detection technique.

Why the other options are incorrect

A. Interviewing complaining contractors and unsuccessful bidders about the presence of red flags

This is a detection technique the Manual associates with change order abuse , not nonconforming goods or services schemes.

C. Comparing the direct and indirect labor account totals from the prior year to the current year

This type of comparative cost analysis is more consistent with testing for cost mischarging or other accounting irregularities, not the primary detection methods for nonconforming goods/services. The Manual’s nonconforming-scheme detection guidance focuses on specifications, inspection results, product testing, and contract/correspondence review.

D. Determining if the costs of the contract have exceeded or are expected to exceed the value of the contract

That is not identified by the Manual as the most appropriate method for detecting nonconforming goods or services. Again, the Manual directs the examiner to look for noncompliance with specifications and supporting documentation.

References

ACFE Fraud Examiners Manual, 2020 International Edition

Contract and Procurement Fraud — Nonconforming Goods or Services

Detecting Nonconforming Goods or Services Schemes

Related contrast: Detecting Change Order Abuse

Detailed Explanation:

Rationale for Correct Answer: This is personal purchases with company funds , where an employee uses company resources to acquire goods or services for personal benefit. Baker used ABC’s funds to buy supplies for home improvements.

Analysis of Incorrect Options:

A. Pay and return scheme – Involves overpaying a vendor and pocketing the refund.

C. Pass-through scheme – Involves using a controlled company to bill the employer at inflated prices.

D. Theft of inventory – Involves stealing company stock, not purchasing items for personal use.

Key Concept: Fraudulent disbursement – billing fraud through unauthorized personal purchases.

The correct answer is B because the FATF Recommendations require suspicious transaction reporting when a financial institution suspects that funds are connected to criminal activity or money laundering. Samuel’s repeated purchases of bearer instruments in amounts just below the reporting threshold are classic structuring or smurfing indicators. The fact that each transaction falls below the mandatory cash reporting threshold does not eliminate the suspicious transaction reporting duty. Option A is incorrect because a cash transaction report is generally threshold-based, not merely based on suspicion. Options C and D are incorrect because bearer instruments and sub-threshold amounts are often used to avoid detection, making the activity more suspicious, not less. The ACFE material identifies this conduct as a key money laundering red flag.

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Detailed Explanation:

Rationale for Correct Answer: Deliberate writing of vague specifications is a type of corruption scheme where an employee intentionally drafts unclear requirements. This forces later amendments, which can be manipulated to favor a particular vendor.

Analysis of Incorrect Options:

B. Need recognition – Involves unnecessary purchases, not vague specifications.

C. False specification – General but not precise; “vague specifications” is the correct technical term.

D. Bid-splitting – Breaking contracts into smaller amounts to avoid approval controls, not related to vague specs.

Key Concept: Specification schemes in procurement corruption.

The correct answer is D. The FATF Recommendations establish international standards for combating money laundering, terrorist financing, and related threats. They recommend that countries criminalize money laundering, supervise financial institutions and high-risk professions, require suspicious transaction reporting, and maintain mechanisms for analyzing and disseminating financial intelligence. A financial intelligence unit receives and analyzes suspicious transaction reports and other AML-related information. Option A is incorrect because FATF does not require a universal three-year sentence for every conviction. Option B is too extreme and does not reflect the FATF framework. Option C is not a general FATF requirement; customer due diligence and monitoring focus on risk, transactions, and beneficial ownership, not mandatory review of public social media profiles.

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The correct answer is B. A Ponzi scheme is a fraudulent investment arrangement in which funds from new investors are used to make payments to earlier investors. The payments create an appearance that the investment is legitimate and profitable, even though little or no genuine business activity or investment return exists. This artificial success helps the promoter attract more investors and delay detection. Option A describes a characteristic more closely associated with pyramid schemes, where compensation depends heavily on recruiting participants. Option C is incomplete because Ponzi schemes usually promise high returns with low or no stated risk, not openly high-risk investments. Option D also reflects pyramid-style recruitment structures rather than the defining feature of a Ponzi scheme.

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Detailed Explanation:

Rationale for Correct Answer: By double-entry accounting rules, every accounting entry affects at least two accounts (debit and credit). Fraudulent entries must also follow this rule, meaning manipulation will show up in at least two categories on the financial statements.

Analysis of Incorrect Options:

A. One – Impossible in double-entry accounting.

C. More than two – Possible, but not always; the minimum is two.

D. None of above – Incorrect since “at least two” is correct.

Key Concept: Double-entry accounting ensures at least two accounts are affected in every transaction, including fraudulent ones.

The correct answer is C. A suitability violation occurs when a broker-dealer recommends an investment or investment strategy without having a reasonable basis to believe it is suitable for the client. Suitability requires the broker-dealer to understand the customer’s financial profile, investment objectives, risk tolerance, liquidity needs, time horizon, and related circumstances before giving advice. Advising a client on a “promising” investment without first discussing the customer’s investment strategy fails this professional duty. Option A is not necessarily improper if the investment aligns with the client’s objectives and risk appetite. Option B reflects appropriate caution. Option D might raise a conflict-of-interest concern, but the facts state the investment aligns with the client’s objectives, so it is not the best suitability violation.

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Detailed Explanation:

Rationale for Correct Answer: According to the ACFE Fraud Tree, cash-related asset misappropriation schemes fall into three categories: Skimming (off-book theft), Cash Larceny (on-book theft), and Fraudulent Disbursements (bogus outflows such as billing, payroll, and check tampering) .

Analysis of Incorrect Options:

B. Fraud analysis, skimming, and cash misappropriations – “Fraud analysis” and “cash misappropriations” are not fraud tree categories.

C. Cash larceny, cash distribution, and fraudulent disbursements – “Cash distribution” is not a fraud tree category.

D. Cash distribution, skimming, and fraud analysis – Includes non-fraud tree terms.

Key Concept: Fraud Tree — Cash Schemes: Skimming, Cash Larceny, Fraudulent Disbursements.

Detailed Explanation:

Rationale for Correct Answer: Cash larceny is the theft of cash after it has been recorded in the company’s books. Skimming, in contrast, is theft of cash before recording .

Analysis of Incorrect Options:

B & D – Both describe forms of skimming (unrecorded or understated sales).

C – Kickback scheme is corruption, not cash theft.

Key Concept: Distinguishing cash larceny (on-book theft) from skimming (off-book theft).