In the midst of continuous construction in Austin, Texas I have been hired to investigate the misappropriation of construction funds by contractors. Where do I start? I start with this checklist of things for investigators and attorneys to consider when investigating fraud.
1. Meet with the client
Your investigation begins with a client meeting. Thoroughly interview the client and any co-workers or support staff with relevant knowledge about the suspected fraud. Clarify exactly what they suspect and why. This is the time to define the scope of the investigation and secure a signed contract and a retainer.
2. Obtain records
Obtain and review the contract made between the client and the contractor to determine the agreed upon terms and conditions, including the required periodic financial reporting and the accessibility of financial records by the client. Determine how many properties are being constructed and the estimated cost of each. This is important because contractors often fail to allocate materials and labor per project, opting instead to take draws, which is a dangerous and nebulous scenario for the client. Secure any reports made by the contractor to the client and if there are none, determine why. Most contractors tell their clients they are too busy to maintain accounting, which creates confusion and increases risk for the client.
3. Determine funding sources
Funds are generally received from invested capital contributed by the client of the entity and/or bank construction loans. For all funds contributed or loaned secure records that show dates and amounts of funds and where they were deposited.
4. Gather and review additional records
Secure all relevant client records, including bank statements and canceled checks or evidence of wire transfers. This will provide a lead to the contractor's bank account. Ask the contractor for his records (bank records, invoices, etc.); if necessary, obtain a power of attorney from the contractor to obtain the records. The client may need to have his attorney file a lawsuit and subpoena records from all known banks. The bank accounts will allow a determination of the amount received and disposition of the funds and allow the identification of other bank accounts. If necessary, subpoena the contractor for invoices for construction materials in an attempt to determine the particular job to which the materials were delivered.
Additional records to secure and review include:
Settlement statements for the purchase of the land (reflecting the property loan) Bank loan documents
Bank loan history (reflecting loan advances and payments)
Draw requests - Comparing the allocations on the draw requests with the checks drawn during the draw period will allow you to determine if the money was spent for the stated purpose or if the contractor used the funds in another way.
Checks or Electronic Funds Transfers (EFTs) - Use these to determine when funds were deposited. Identify and interview the bank officer who inspects the progress of the project and signs off on the draw requests. He/she may have further records of the allocation of expenditures for the construction project as represented in the draw requests and a computation of the percentage of completion. Beware of...