In many moral hazard problems, the principal evaluates the agent's performance based on signals which the agent may suppress and replace with counterfeits. This form of fraud may affect the design of optimal contracts drastically, leading to complete
market failure in extreme cases. I show that in optimal contracts, the principal deters
all fraud, and does so by two complementary mechanisms. First, the principal punishes
signals that are suspicious, i.e. appear counterfeit. Second, the principal is lenient on bad signals that the agent could suppress, but does not
