The Contagion of Fraud: Best Nipped in the Bud
Only a few months ago, mention of the name Bernard Madoff brought to mind America’s biggest-ever Ponzi scheme. The sheer scale of the financial fraud involved and the audacity with which it was carried out dazzled most people. Fast forward to now and Madoff as an individual has largely faded from sight. Instead, it’s the ramifications of what he did that keep throwing up his name. The latest is the revelation that the former head of Optimal, the Geneva-based hedge fund investment wing of Satander, the Spanish bank, has been charged with criminal mismanagement of client funds placed with Madoff’s operation. The charge carries a maximum sentence of five years jail under the Swiss penal code.
The Spaniard concerned is one of the most senior wealth managers known to be confronting criminal charges as a result of the Madoff scandal. Central to the case against him, as well as to accusations against Satander, is that investors were misled by false claims that adequate due diligence had been conducted on Madoff’s activities. As one legal observer notes, the court investigation will have to establish why people were closing their eyes and not asking enough questions.
The problem is, that’s what people do when things seem to be going smoothly and everyone’s happy with their return. The only solution is to have systems in place that set bells ringing that simply can’t be ignored. It’s dangerous to wait until suspicions are aroused, or intensify to the degree that action is imperative. Rather, it pays to bring in a team of professionals that can apply sophisticated methods of computer forensics and financial analysis to give you the early-warning system you can’t afford to be without. The technology involved and its reach will surprise you.
But no one seemed to be thinking this way in UBS, the Zurich-based bank. Reuters reported in early November that four former dealers with the bank in Britain had plundered customer accounts to trade and then dumped the resulting losses on them. The unauthorised trades – in foreign exchange and precious metals using customer money – involved at least 39 accounts and lasted over a period of two years, with as many as 50 trades a day. The UK Financial Services Authority recently hit UBS with an £8 million penalty – its third largest ever – for this, which comes on top of other massive costs the bank has incurred as a result of the scandal.
The Authority’s director of enforcement and financial crime noted that, “These employees were able to take advantage of UBS’s inadequate systems and controls, giving them free rein to make unauthorised trades with customer money that they were able to conceal.” The FSA also observed that the bank failed to heed warnings that its systems might not be appropriate. It took a whistleblower in the bank’s London-based wealth management business to sound the alarm. For UBS, which has had to write down more than $US50 billion in assets because of the financial crisis and which has lost a large number of customers after a US investigation into client tax evasion, this is a nightmare.
But the saga doesn’t end there. The London trades had involved a number of private Indian banking accounts, some linked to high profile business figures in India. This has triggered an in-depth investigation by New Delhi’s Enforcement Directorate, which is already examining financial transactions by UBS in places like Belgium and Mauritius.
Meanwhile, the scandal that erupted in October over billionaire US investor Raj Rajaratnam’s Galleon hedge fund is also spreading. In this case, US investigators used court-authorised wire taps of cell phones, hidden recording devices and tip-offs from confidential informants to expose illegal activity and lay charges. More charges have recently been laid against other Wall Street hedge fund managers, dealers and attorneys for insider trading. The Securities and Exchange Commission has revealed that one of the lawyers involved, who had also previously worked at Galleon, was known as Octopussy within this insider trading ring. This was because of his reputation for spreading his tentacles into so many pools of inside information – the lifeblood of the system.
The lawyer concerned purportedly gave his tipsters prepaid cell phones in order to minimise the chances of their getting caught when passing on vital information.
Whether you have fears or not in your business, it pays to bring in experienced professionals. They can use state-of-the-art methods of phone and transactional analysis, as well as computer forensics, to keep you ahead of the game and ahead of the crooks who may be playing it right under your nose inside your company.
