The Golden Era of Fraud Investigations Is Upon Us, But It Relies on Better Financial eDiscovery

Recent reports show that PPP loan fraud soared in the last two years, putting billions of taxpayer dollars in the pockets of fraudsters and criminals.

By: Tod McDonald, CPA and Garth Leonard, CFE

Recent reports show that PPP loan fraud soared in the last two years, putting billions of taxpayer dollars in the pockets of fraudsters and criminals. The Justice Department now faces an unprecedented number of cases to investigate and experts suggest it will be difficult, if not impossible, to build cases and convict all of those responsible. The merits of speeding aid versus having required additional guardrails can be debated endlessly but regardless, one thing stands out about these fraud cases: it’s challenging to “follow the money,” and the burden on teams having to investigate is exceptionally high.

How can we better assess which fraud cases warrant further investigation and find suspect financial relationships and data? How can we improve on what CFEs and partners look at as a dataset? Most importantly — why are we still relegated to manual transcription, legacy optical character recognition (OCR) software and eDiscovery tools, which only evaluate included email systems, mobile devices and file shares, or open-source intelligence from social media sites and forums?

Manual transcription and legacy OCR software shortcomings are evident. eDiscovery solutions, while adept at uncovering key relationships and activities, don’t specifically look at bank or brokerage statements, check images or data direct from financial institutions. This makes fraudulent or suspect financial movements difficult to identify. They don’t truly “follow the money” but rather point to potential financial connections that then require further investigation and valuable staff time. Bank and brokerage statements and monetary transfers, arguably the most significant pieces of information to uncover financial fraud, are simply not included or evaluated in the vast majority of today’s eDiscovery and audit tools.

These lessons were front and center for Tod, as he worked as the lead investigator in Washington’s largest Ponzi scheme — ultimately unraveling a $150 million complex case with a myriad of actors and financial accounts. Creating financial eDiscovery, not just eDiscovery, is key to not only ensuring accuracy in our investigations but to speeding up the time involved and in identifying where we need to focus versus where we do not. Creating financial datasets — and using today’s more modern technologies to assess and analyze the flow of funds — saves critical staff-time, removes the more menial pieces of an investigation and allows lead investigators and CFEs to use their time judiciously.
 
 We will be faced with an unprecedented era and an overwhelming number of fraud cases in the decade ahead. In periods of inexpensive capital and consistent economic expansion, high risk and even fraudulent activities can be masked or even rewarded. But we are starting to see a macroeconomic change; as the money supply becomes more constrained and the cost of capital increases, liquidity and the ability to access funds will become restricted. In other words, the tide is going out and we’ll all get to see who is wearing a swimsuit and who isn’t.

This new macro-environment is bound to expose weak business models, high-risk investments, fraud and Ponzi schemes. There is an abundance of financial fraud cases in our future; we see it in the number of PPP loan fraud cases showing up, and we will see it even more as the economy shifts. This represents the opportunity of a lifetime for CFEs.

Those that embrace new concepts, like financial eDiscovery, will thrive, while those relying on manual procedures and legacy OCR software will fall behind.  

The reality is that we are all well-served by bringing more rigor and ease to fraud investigations and fronting them with the tools that truly follow the money. Judging by both the news and the impending restriction of the economic cycle, there is going to be lots of money to follow in the decade ahead.