By Josh Shilts, CPA, ASA, ABV/CFF/CGMA, CFE
January 6, 2021
Briefing on Criminal Fraud Economic Loss Calculations
One of the more exciting and challenging parts of our profession is learning about our judicial system. Professionals whose practice involves economic loss calculations should consider educating themselves on the similarities and differences between “actual” and “intended” losses prior to providing expert testimony or offering an opinion. In my research, I came across a publication titled PRIMER Loss Calculations Under §2B1.1.(b)(1) (United States Sentencing Commission, February 2019). I recommend anyone interested in this topic to take the time to read the publication in detail. The purpose of this QuickRead is to educate interested professionals on the definitions and items I found to be useful as an introduction to the definitions.
One of the more exciting and challenging parts of our profession is learning about our judicial system. Most of us were drawn in some way to our profession because of the ability to work in the legal context. While we are obviously not attorneys, professionals whose practice involves economic loss calculations should consider educating themselves on the similarities and differences between “actual” and “intended” losses prior to providing expert testimony or offering an opinion. Depending on the scope of a practitioner’s engagement and the standards and methodology applied, two very different calculations can be produced based on which definition is applied. I recently came across this in a case I worked on in the Criminal Law field. Since that, I have gone down the proverbial “rabbit hole” trying to understand actual and intended loss to better prepare myself for the next instance. In my research, I came across a publication titled PRIMER Loss Calculations Under §2B1.1.(b)(1) (United States Sentencing Commission, February 2019). I recommend anyone interested in this topic to take the time to read the publication in detail. The purpose of this QuickRead is to educate interested professionals on the definitions and items I found to be useful as an introduction to the definitions.
§2B1.1 of the United States Sentencing Guidelines defines “loss” as “the greater of actual loss or intended loss” and provides that the sentencing judge “need only make a reasonable estimate of the loss”. Actual loss is defined in the guideline application notes as “the reasonably foreseeable pecuniary harm that resulted from the offense.” It is important to note that pecuniary harm is reasonably foreseeable if it is “harm that the defendant knew or, under the circumstances, reasonably should have known, was a potential result of the offense.” All reasonably foreseeable losses that flow directly, or indirectly, from a defendant’s conduct should be included in the loss calculation. In determining whether loss is reasonably foreseeable, courts have found that the actual loss must have a causal link to the defendant’s conduct.
Intended loss is defined in the guidelines as “pecuniary harm that the defendant purposely sought to inflict.” Determining intended loss is often a fact-specific inquiry, and courts have adapted their analysis depending on the particular case. A court’s determination of whether it is appropriate to calculate intended loss at the full-face value of the property at issue or some lesser amount often turns on whether the defendant intended to jeopardize, or in fact recklessly jeopardized, the full amount of the property.
When I was first introduced to the two terms, I needed an example to help me. If a bank robber intends to steal $1 million dollars out of the bank, then the intended loss is that amount, barring the specific facts surrounding intent, etc.; however, if their actions only produced a theft of $10 dollars, the actual loss is just that. Obviously, in complex white collar criminal fraud cases you can imagine the various facts and circumstances that may or may not be presented, and the impact not only to the case, but the calculation.
Another important concept found in my reading is that courts estimate loss on available information while taking into account various factors. Those factors include:
There are also “special rules” related to certain types of cases at issue. These include: stolen or counterfeit credit cards and access devices, government benefits, Davis-Bacon Act violations, Ponzi and other fraudulent schemes, certain other unlawful misrepresentation schemes, value of controlled substances, value of cultural heritage resources or paleontological resources, and federal health care offenses involving government health care programs. Also, there are certain exclusions such as: interest, finance charges, late fees, penalties and similar costs, costs to the government, and costs incurred by victims.
Losses can also be reduced (i.e., credits against loss) by money and property returned and/or services rendered, as well as collateral. The above are other aspects of a calculation and depending on the scope of your assignment, those considerations may reduce the losses.
Prior to accepting an engagement, the professional should consider discussing the premise of each definition and based upon what is decided, the implications to one’s testimony. Doing so can avoid potential issues during deposition or trial.
The National Association of Certified Valuators and Analysts (NACVA) supports the users of business and intangible asset valuation services and financial forensic services, including damages determinations of all kinds and fraud detection and prevention, by training and certifying financial professionals in these disciplines.
Information contained in this article is provided for informational purposes only. It should not be misconstrued as legal or accounting advice or intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion. It presents matters of general interest relating to business valuation, forensic accounting, and litigation support topics for educational purposes only. Shilts CPA, PLLC disclaims all liability concerning actions taken or not taken based on any or all of the contents of this article.
We would be pleased to perform the requisite research and provide a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation service.