Fraud Detection recipes
Another US Ponzi Scheme Hits the Dust
As The Wall Street Journal reported on December 3, a Minnesota jury has found the operator of a $US3.65 billion Ponzi scheme guilty of all 20 counts of wire fraud, mail fraud, money laundering and conspiracy, potentially consigning him to life in prison without parole. The racket dates back at least a decade.
At the time that 52-year-old Tom Petters was arrested in October 2008 and indicted two months later, the allegations against him amounted to one of largest Ponzi schemes in US history. But New York financier, Bernard Madoff, confessed a few months later to a much bigger fraud – an estimated $US65 billion – and is now serving 150 years in prison. Petters, a gregarious businessman, started out selling stereo equipment in high school and later became a liquidator of overstocked goods before his company ventured into retail-based fraud.
The US government has accused him of promising fat returns to investors who lent him money to purchase surplus merchandise, then resell it to big-box retailers such as Wal-Mart Stores and Costco Wholesale. But there were no such transactions and profits funded his ‘extravagant’ lifestyle, which included lavish homes in several states, a number of expensive boats, Mercedes cars and also a Bentley. Moreover, he acquired a number of legitimate companies, including Polaroid Corporation and Sun County Airlines. It all came crashing down in late 2008 when longtime Petters Company employee, Deanna Coleman, approached the US Attorney in Minneapolis. She laid out the nature of the fraud and her role in it, and agreed to wear a recording device that picked up damaging conversations with her boss and others in the following days. She later pleaded guilty to conspiracy to commit fraud, and testified for the government in the trial. In all, three co-workers and four business partners pleaded guilty to aiding the scheme and several testified against Petters.
During the trial, 42 government witnesses testified, compared with 12 called by the defence. Ms. Coleman’s tape recordings were key to the prosecutors’ case. In one of the tapes, Petters is heard saying, “This is one big [expletive] fraud.”
Guarding Against Corporate Fraud
The Indian outsourcing firm, Satyam Computer Services, which was the subject of the country’s biggest corporate fraud scandal in January 2009, has been hit with a tranche of supplementary charges. According to India’s Central Bureau of Investigation, the extent of the total fraud now stands at around $US3 billion. What the Bureau has revealed provides a salutary warning to any company in virtually any country that this could be happening right under your nose. If you suspect that might be the case, call in experienced professionals without delay. A wide variety of methods, ranging from detailed transactional analysis to computer forensics can be used by these experts to give you a clear picture of reality.
The original charges against Satyam’s former chairman revolved around his admission that he had misrepresented the company’s financial condition by inflating assets and understating debts. This included a fictitious cash balance of more than $US1 billion. He stunned India’s financial world when he made his confession. At the time, Satyam was rated as India’s fourth-largest information technology services group by revenue, with world-wide clients like General Motors, Nestlé and General Electric.
The new charges show that others at Satyam had been creating fake customer identities and generating fake invoices against them to boost revenue figures. They had also forged board resolutions and obtained unauthorised loans that were used to buy properties. Investigators have found over 1,000 such properties, purchased by the accused with the siphoned funds and involving 2,430 hectares of land as well as housing plots and building space.
Ten Ways to Protect Against Payroll Fraud
Australia’s Daily Telegraph ran a useful report in mid-November on payroll fraud, a form of financial crime that is often particularly difficult to detect. One victim, a whitegoods and electrical retailer, managed to retrieve the $A20 million stolen by its payroll officer, but most companies never see their money again. And the crooks involved don’t always gamble the proceeds away. In this case, the officer invested the money in property. If you want to avoid being targeted by a clever operator it pays to bring in a team of experienced professionals who use state-of-the-art technology, like computer forensics, to help you secure your system.
An Australian expert has stated that while cases of payroll fraud have increased in the past year, it is impossible to be sure what is happening. Estimates indicate that around 90 per cent of cases go undetected. That should set alarm bells ringing.
Clearly, top priority is to choose the right person for the job in the first place, which means careful screening and checking of references and background. Interestingly, the majority of those caught for payroll fraud have no criminal history as such. But they may have committed similar acts in the past, then been encouraged by their employer to quietly move on – without prosecution. Whether money is paid back or not, many companies avoid embarrassment by not reporting fraud to police. This merely passes the problem on to other employers.
McKinsey Partner’s Arrest Spotlights White-Collar Crime
The elite US consulting firm of McKinsey & Company, long known for its prudence and caution, must have been low on anybody’s suspect list of those likely to be involved in financial crime. Even the suspect himself was shocked when federal officers arrived at his California home recently to arrest him on charges of conspiracy and securities fraud. As The Financial Times reported on October 22, Anil Kumar fainted and had to be briefly hospitalised. Court documents reveal that he has been accused of passing inside information to Raj Rajaratnam, head of the Galleon Group, arrested in New York last week on insider trading charges.
Shocks like this come out of a clear blue sky. As McKinsey’s worldwide managing director, Dominic Barton, has said, “This issue is completely virgin territory for us. We have very clear policies that you do not invest in clients or situations even where it is legal.”
There are, however, protective measures that firms can take. Experienced professional teams of experts exist that can apply sophisticated investigatory methods and state-of-the-art technology to warn top management of possible fraud. Tell-tale signs are often buried in patterns of contact and in other areas where no one else would think to look. Expert financial analysis, coupled with computer forensic work, for example, can usually provide you with a running image of what’s actually going on inside your company, much as infra-red night-vision goggles allow you to “see in the dark”. Without any support of this nature, you’re basically flying blind. Far better to be pro-active and not sorry.
‘Canadian Madoff’ sentenced to jail for 200 fraud charges
This week in a Montreal Court saw former Norbourg CEO Vincent Lacroix sentenced to 13 years in jail after he recently plead guilty to nearly 200 fraud charges in relation to the financial collapse of the Norbourg Group. The charges included multiple counts of fraud, conspiracy to defraud, conspiracy to commit forgery, fabricating documents and money laundering and relate to the 2005 implosion of the investment firm.
Vincent Lacroix was the CEO of the now-bankrupt Norbourg Group which swindled thousands of Quebecers out of their personal investments in one of the most high-profile white collar crime cases in Canadian history was sentenced to 13 years in prison yesterday. He was charged with the fraud after more than CAN$100 million [US$97 million] was illicitly removed from his investment firm, most of it money contributed by over 9,000 personal investors.
Prior to his September 2009 guilty plea, Lacroix was on parole having served part of an earlier 12 year sentence for other facets of the fraud. Lacroix had been successfully convicted during a civil suit on 51 Quebec Securities Act violations brought by Autorite des marches financiers and financed by dues from Quebec’s investment representatives.
A criminal trial will proceed featuring five other managers and employees of the Norbourg Group which authorities allege assisted Lacroix with the fraud and disappearance of the investment funds. The trial has a keen political element as oneof the defendants, Jean Renaud aged 40, was formerly a high-level bureaucrat in Quebec’s Finance Department before he was arrested in relation to this case.
Japanese Banks Call Gangs to Account
If your company is about to go into business in Japan it will pay to know where gangs – referred to as yakuza – fit into the scene. In more ways than one, Japan has the most overt, upfront gangs in the world. They hold annual general meetings and are sometimes seen on TV. But there’s also an ugly side, of extortion and financial crime. And it can be on a huge scale. If you’re not sure what’s going on, call in a computer forensics team that can X-Ray your company’s operations to detect any unwanted dimensions.
To help clean up the country’s act, the Japanese Bankers Association recently decided to instruct its 187 member banks not to allow gang members to open accounts, in an attempt to counter crime syndicates’ money laundering activities. As reported by The Yomiuri Shimbun, the decision was made by the JBA’s board of directors to oblige its members to establish in-house rules to exclude crime syndicates from their services. The Association had already announced in November last year a policy of banning the syndicates from financial transactions, including loans. This latest prohibition covers members and associate members of crime syndicates, companies that have close connections with crime syndicates and corporate racketeers. Banks will refuse to let them open ordinary savings accounts and current accounts, and will not provide safe-deposit boxes. Accounts already set up by gang members will be cancelled once banks determine their identity.
People and organizations involved in illicit activities such as intimidation will also be excluded from bank services, even if they are not clearly linked to crime. To ensure a consistent policy across the banking sector, the JBA has said it will examine the creation of a database of people linked to the syndicates. At present, banks only compile such information on an individual basis.
Lessons According to Saint Bernard: The Madoff Case Laid Bare
Even if Bernard Madoff does manage to complete his 150-year sentence, due to exceptional family genes and a nutritious prison diet, he’s already earned his place in history. And that’s not just because he’s laid down the ground rules for becoming a bold and brazen con man. Rather, it’s due to key lessons he’s taught us about weaknesses in the regulatory system that were just waiting to be exploited. Those same shortcomings exist in businesses too, big and small, around the globe. The message is, if you think something might be awry in your firm get onto the appropriate professionals without delay. Make sure they’re experienced and able to handle state-of-the-art forensic investigation because that’s what you’ll need.
The full 477-page report of the US Securities and Exchange Commission’s inspector-general, recently released, makes for heavy reading. It’s scathing, and one thing leaps out from its meticulous detail: the number of opportunities to catch Madoff that were missed, and why.
Even when the SEC’s own officers remained extremely worried about his integrity, the Commission’s enforcement division closed down its investigation into Madoff’s business, claiming it was a “fishing expedition”. That was less than a year before Madoff confessed to running one of history’s biggest ever Ponzi schemes. The inspector-general concluded that the breakdown on the SEC’s part was not the result of the “misconduct of a particular individual or individuals, and found no inappropriate influence from senior-level officials”. At least that’s comforting. What isn’t, is his conclusion that the Commission failed systematically during its inquiry into Madoff’s 17-year long scheme, missing the significance of eight separate complaints. Each of these offered an opportunity to expose the fraud.
US investigators Kroll all clear to allged Ponzi pair Barry Tannenbaum & Dean Rees
The perils of focusing too strongly on identifying `red flags’ during due diligence profiles has come to haunt Kroll, the well known risk consultancy firm based in New York. Kroll, also known for its Kroll Consulting, Kroll Associates, Kroll Ontrack, Kroll Factual Data businesses is the author of the recent Kroll Global Fraud Report. It has been reported in the media that Kroll screened and gave the green light to two alleged fraudsters.
The matter involves alleged Ponzi scheme operated by two fraudsters with links to South Africa which resulted in a loss of around US$250 Million to investors. In 2007, Kroll was requested to profile Barry Tannenbaum, a South African, and Dean Rees on behalf of a New York-based asset management firm that was considering investing a substantial investment with their venture.
The revelation is a further blow for Kroll as the New York based firm is still reeling from the revelation that one of its top investigators gave a similar upbeat endorsement to Sir Allen Stanford, the Texas billionaire accused of orchestrating a $7 Billion Ponzi scheme which is under investigation by US Federal Authorities.
The due diligence profile was said to focus on identifying any `red flags’ which would indicate a serious flaw in their background, but found nothing unusual with either Tannenbaum or Rees and is instead reported to have portrayed both businessmen in a “very positive light”.
China’s Largest Suspected Bank Fraud
If you’re head of a corporation and you don’t want to wake up one morning to a scenario like this in your own front garden, you should make sure you have a top forensic investigation team on side. As The Financial Times outlined on its front page on August 6, details are emerging of what could be China’s biggest bank fraud, after the former chairman of a company listed on London’s Alternative Investment Market appeared in a Chinese court last week.
Prosecutors in the southern Chinese city of Guangzhou allege that Wang Sheng, former chairman of Canton Properties – a prominent developer in southern China – obtained around $US700 million of illegal loans from the Bank of Communications, a state-controlled lender that is 18.6 per cent owned by HSBC. Wang, it appears, was the main recipient of these loans, which had been arranged with the help of a senior BoComm executive and never actually made available to the company.
Liu Changming, the former president of BoComm’s Guangzhou headquarters, seemingly fled the country soon after authorities launched an investigation in late 2007. He is still on the run despite a global alert being issued by Interpol for his apprehension.
Cyber Sabotage and Phone Hacking Rife
Despite the rampant nature of industrial espionage, it’s a topic that receives surprisingly little coverage in the media. When Germany announced recently that Chinese spies were costing its corporate world billions every year, as well as thousands of jobs, it was Britain’s Guardian that highlighted the story (July 22). As globalisation increasingly weaves us into its intricate pattern, most businesses still feel it’s something that can’t happen to them. Imagine being the subject of a damaging attack and not even knowing. That’s unforgivable in an era when diverse methods of sophisticated forensic investigation are readily available.
The German claim, which came from a counter-intelligence expert in one of the country’s states, warned that China was using an array of ‘polished methods’ to steal industrial secrets. Russia, he said, was also at the top of the list of nations utilising their national intelligence apparatus to help save billions on their own R & D budgets. While Russia had hundreds of thousands of agents, China had a million and ‘years more experience’. It also had the ambition of being the world’s leading economic power by 2020.
Internet spying techniques are way out in front and the areas most under attack are the automobile industry, renewable energy, chemicals, communications, optics, X-Ray technology, machinery, materials research and the arms industry. The information being gathered went beyond R & D results to management techniques and marketing strategies. The Germans see internet espionage as the biggest growth field, with what they refer to as the ‘thick fog of Trojan email attacks’ taking place against thousands of firms on a regular basis and adopting cover-up methods to disguise where the messages have come from.
