CFE Conducting Investigations 4 — Questions and Answers
Question 1: When a fraud examiner is asked to conduct a covert investigation, the MOST critical consideration is:
- Ensuring the investigation is completed as quickly as possible
- Obtaining proper authorization and maintaining strict confidentiality (Correct answer)
- Using undercover operatives for all evidence gathering
- Avoiding documentation to prevent leaks
Correct answer: Obtaining proper authorization and maintaining strict confidentiality
Covert investigations must be properly authorized and kept confidential to remain legally defensible and protect the integrity of the inquiry.
Question 2: The 'fraud theory' approach to investigating requires the examiner to:
- Begin by assuming the suspect is guilty and work backward
- Formulate a hypothesis about how the fraud was committed and test it with evidence (Correct answer)
- Conduct random audits without a predetermined focus
- Interview all employees before reviewing any documents
Correct answer: Formulate a hypothesis about how the fraud was committed and test it with evidence
The fraud theory approach involves developing a hypothesis about the scheme and then systematically gathering evidence to confirm or refute it.
Question 3: A fraud examiner reviewing bank statements notices several round-dollar transactions just below the $10,000 CTR reporting threshold. This pattern is MOST indicative of:
- Normal business cash flow management
- Structuring, which is itself a federal crime (Correct answer)
- Legitimate tax planning strategies
- Accounts payable float management
Correct answer: Structuring, which is itself a federal crime
Structuring (also called 'smurfing') involves deliberately breaking up transactions to avoid Currency Transaction Report requirements and is a federal crime.
Question 4: Which of the following BEST describes the purpose of a 'Suspicious Activity Report' (SAR) in a fraud investigation context?
- An internal memo documenting the examiner's initial suspicions
- A mandatory report filed by financial institutions to FinCEN for suspected money laundering (Correct answer)
- A report submitted to the SEC when securities fraud is detected
- A document prepared for insurance carriers when fraud loss is claimed
Correct answer: A mandatory report filed by financial institutions to FinCEN for suspected money laundering
SARs are required reports that financial institutions must file with FinCEN when they detect suspected money laundering or other financial crimes.
Question 5: During an investigation, a fraud examiner obtains evidence through an illegal search. This evidence is MOST likely to be:
- Admissible if the examiner is a private party, not law enforcement (Correct answer)
- Inadmissible in all proceedings regardless of who conducted the search
- Automatically dismissed from the investigation without further consideration
- Admissible only in civil proceedings but not criminal ones
Correct answer: Admissible if the examiner is a private party, not law enforcement
The exclusionary rule primarily applies to government actors; evidence obtained by private investigators through illegal searches may still be admissible in court, though the investigator may face separate liability.
Question 6: When a fraud examiner identifies a potential conflict of interest in conducting an assigned investigation, the MOST appropriate action is to:
- Proceed with the investigation but document the conflict
- Disclose the conflict to supervisors and recuse if necessary (Correct answer)
- Assign a junior team member to conduct the investigation instead
- Ignore the conflict if it is unlikely to affect the outcome
Correct answer: Disclose the conflict to supervisors and recuse if necessary
Disclosing conflicts of interest and recusing when appropriate preserves the examiner's objectivity and the investigation's credibility.
Question 7: In a fraud investigation, which of the following PUBLIC RECORDS would be MOST useful for tracing hidden asset ownership?
- Federal income tax returns
- County property deed records and UCC filings (Correct answer)
- Personal bank account statements
- Corporate internal memoranda
Correct answer: County property deed records and UCC filings
County property deeds and UCC (Uniform Commercial Code) filings are public records that reveal real property ownership and security interests, helping trace hidden assets.
CFE Conducting Investigations 4
When a fraud examiner is asked to conduct a covert investigation, the MOST critical consideration is: