Focus on Fraud

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Focus on Fraud
Honest stands at the gate and knocks, and
bribery enters in
Barnabe Rich The accomplice to the crime of
corruption is frequently our own indifference

Bess
Myerson
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Focus on Fraud
Question Do you believe in the devil? You
know, a supreme evil being dedicated to the
temptation, corruption, and destruction of
man? Response Im not sure that man needs the
help.
Calvin Hobbs
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Focus on Fraud
Power corrupts. Knowledge is power. Study
hard. Be evil.
anonymous
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Topics of Discussion

• Ethics
• Foreign Corrupt Practices Act of 1977 (FCPA)
• Money Laundering Control Act (MLCA)
• US Patriot Act

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Ethics and Moral Psychology
Religious Question Do you have an obligation
to improve society to get into Heaven? If you
fail, does everybody go to Hell? Or Do you have
to obey individual rules to get into heaven?
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Ethics and Moral Psychology

• Consequentialists
• morally right choices increase the good
• often a black or white approach
• The greater good may hurt the individual

A Societal or Group Approach E.g., Old Testament,
Prescribed Destruction of Sodom and Gomorrah
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Ethics and Moral Psychology

• Deontologists
• agent centered
• intention focused
• obligation or duty based
• golden rule

An Individual Approach E.g., Old Testament,
Prescribed Destruction of Sodom and Gomorrahbut
if you find 10 good men?
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(No Transcript)
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Foreign Corrupt Practices Act 1977

• Prohibits corrupt payments to foreign officials
  for the purpose of obtaining or keeping business,
  or directing business to anyone.
• Applies to U.S. firms and citizens working
  abroad.
• Applies to foreign firms or persons working in
  the U.S.
• Prohibits payments through intermediaries.
• No Facilitating Payments

Too Much Fraud Corruption For US Companies To
Compete
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Common Methodologies
FCPA

• Bribes Kickbacks
• Bid Rigging
• Defective Pricing
• Phantom Vendors
• Product Substitution
• Conflict of interests
• False Claims
• Cost mischarging
• Contract specification failures
• Duplicate, false, or inflated invoices
• Split purchases
• Unnecessary purchases
• Defective delivery

Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
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Most Likely Violators
FCPA
China, Russia, Turkey, and India
Least Likely Places for Bribes
Switzerland and Sweden
-- Transparency International
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FCPA
Provide Something of Value
Cash, Gifts, Trips, Merchandise, Entertainment,
Drugs, Sex, Loans, Credit Cards, Fees, Spouses
high salary, Discounts
Awarding selection higher prices excessive
quantity accepting lower quality no, delayed,
or short delivery
Later Influence an Official Act
In Germany, a sales director once braggedthe
trick was to find out what they liked
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
13
Potential Red Flags of Bribery Kickbacks
FCPA

• Lack of standard invoices
• Requests for funds to routed to a foreign bank
• Requests for checks made payable to cash or
  bearer
• Commission substantially higher than going rate
• Requests for a large line of credit from a
  customer
• Insistence by government official to use a
  particular agent or supplier
• Lack of staff or facilities to actually perform
  the service
• Request by local agent for rate increase during
  negotiations
• Suggest need to use more than one local agent

Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
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Bribery Kickbacks

• Four Groups
• Each group develop a method of bribery and will
  explain it to the class
• Each group will then critique the method
• How will it be detected (red flags)?
• How will it be proven?
• What control would prevent this method?

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Price Fixing or Bid Rigging
A Form of Price Fixing or Collusion violates the
Sherman Act (1890)
Can be a fraudulent within the company (kickback
related), or, primarily, the company bidding
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Price Fixing or Bid Rigging

• Four Groups
• Each group develop a method of bid rigging and
  will explain it to the class
• Each group will then critique the method
• How will it be detected (red flags)?
• How will it be proven?
• What control would prevent this method?

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Price Fixing or Bid Rigging
Bid Suppression Bid Rotation Cover Bids (not real
bids) Withholding Bids (to be a
sub-contractor) Market Division Cartels
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Defective Pricing
Knowingly Submitting False Cost or Pricing Data
on Negotiated Contracts violates the Truth in
Negotiations Act (1962) and the False Claims Act
(1863, amended 1986, also known as the
whistleblower act)
Again, can be a fraudulent within the company
(kickback related), or, primarily, the company
bidding Often Government Contract Related
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Defective Pricing

• Four Groups
• Each group develop a method of defective pricing
  and will explain it to the class
• Each group will then critique the method
• How will it be detected (red flags)?
• How will it be proven?
• What control would prevent this method?

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Potential Red Flags of Phantom Vendors
FCPA

• Invoices for unspecified consulting or other
  poorly defined services
• Unfamiliar vendors
• Vendors with only post-office-box address
• Rapidly increasing purchases from one vendor
• Vendor billings more than once a month
• Vendor addresses that match employee addresses
• Large billings broken into multiple smaller
  invoices with amounts that may not attract
  attention
• Vendor names consisting only of initials many
  are legitimate, but the practice is favored by
  fraudsters

Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
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Steps Each Firm Should Take
FCPA

• Approved Vendor List that has been vetted
• Verification of physical existence, business
  practices, etc.
• Separation of duties within the organization
  Approval, Custody, Record
  Keeping
• Anonymous hotline for whistleblowers
• Have insurance protection
• Compare lifestyle to compensation

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Fraud Examples
FCPA
In March 2007, a Brazilian federal congressman
and former governor of Sao Paulo was charged in
New York for stealing more than 11.5 million
from a Brazilian public works project in a
construction kickback scheme. He allegedly
transferred the money to a New York bank and then
to an offshore account. The scheme involved
inflated and false invoices to contractors
involved in the building of a giant highway.
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
23
Fraud Examples
FCPA
A Greek prosecutor is investigating claims that
Siemens Greece paid up to 550 million in bribes
to officials at the defense and interior
ministries in order to win a security contract
for the 2004 Olympic games in Athens. A senior
Siemens accountant said bribery was a common
practice at Siemens.
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
24
FCPA
January 17, 2008 SIEMENS IN FOR A ROUGH RIDE AS
MORE FIRST-HAND ACCOUNTS OF MISCONDUCT EMERGE It
is going to be a bumpy ride... Dozens have
apparently come forward, ready to "unload" what
they know. And the trail leads to the top.
January 13, 2008 SHAREHOLDERS ARE PLOTTING AT
SIEMENS On top of their beef list is the
proposed re-appointment of KPMG as the firm's
auditor. Sounds like sparks will fly on January
24th at Siemens annual meetings.
Source The Dailey Caveat
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Fraud Examples
FCPA
A Paris judge launched an investigation into
allegations that Total, a French oil and gas
group, paid bribes to win a 2 billion gas
contract in Iran. The investigation stems from
the discovery of 82 million in two Swiss bank
accounts, allegedly by Total to an Iranian
intermediary to help the French company
consortium to win an Iranian contract.
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
26
Fraud Examples
FCPA
A lawsuit in February 2007 alleged that Intel
provided secret kickbacks to Dell in order to
ensure it remained the computer makers sole
microprocessor supplier.
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
27
Companies Under FCPA Investigation
FCPA
ABB (Switzerland, energy)Alcatel Lucent (France,
communications)AstraZeneca (UK-Sweden,
pharmaceuticals)BAE Systems (UK,
defence)Daimler (Germany, automotive)Innospec
(UK, chemicals)Magyar Telekom (Hungary,
telecoms) Norsk Hydro (Norway, energy)Novo
Nordisk (Denmark, health, pharmaceuticals)Panalpi
na (Switzerland, transport)Siemens (Germany,
engineering, electronics)Smith Nephew (UK,
medical devices)Total (France, energy)
Source http//www.ethicalcorp.com/content_print.
asp?ContentID5685, 2/8/2008
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Top Three FCPA Fines
FCPA
Baker Hughes (oil services) 44 million
(2007)Titan (communications) 28.5 million
(2006)Vetco International (oil services) 26
million (2007)
Source http//www.ethicalcorp.com/content_print.
asp?ContentID5685, 2/8/2008
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Money Laundering Control Act
MLCA
Money Laundering is essentially taking bad money
and converting it to good money, while trying to
obscure its origin

• Financial transaction or international
  transportation
• Specified Unlawful Activities (SUA)

There Must Be Proof of Both Elements of The
Offense
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Simple Flow With Three Opportunities To Expose
Crime, Illicit Activity, Bad Intent
Spending of Funds
Conversion
Note While Money is a concept, cash does lend
a degree of anonymity
At The End of the Day, You Must Know Your Customer
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What Does 1 Million U.S. Dollars Weigh?
1 U.S. 0.67415 Euros
1 Million U.S. Dollars 100 bills 22
pounds 50 bills 44 pounds 20 bills 110
pounds 10 bills 220 pounds 1 bills 2,202
pounds Approximately 0.002202 lbs/bill
674,150 Euros 500 notes 2.97 pounds 200
notes 7.42 pounds 100 notes 14.84 pounds 50
notes 29.69 pounds 10 notes 148.45 pounds 5
notes 296.90 pounds
The Euro Is Gaining In Use In Money Laundering
Popularity
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Money Laundering
MLCA
Used to hide fraud proceeds Used to hide bribery
proceeds Tax Evasion Reduce Income, Repatriate
funds, Expatriate funds Use of cash intensive
businesses Use of banking secrecy in certain
locations (Isle of Man,
Austria, Switzerland, Liechtenstein, Luxembourg,
The Channel Islands, Gibraltar, Republic of
Nauru, Bahamas, Bermuda, and the Cayman Islands,
to name a few)
There Must Be Proof of Both Elements of The
Offense
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Mechanisms to Effect Laundering
MLCA

• Banks
• Securities Commodity Brokers and Dealers
• Currency Exchanges
• Insurance Companies
• Travel Agencies
• Wire Transmitters
• Vehicle Dealers
• Realtors
• Postal Service
• Retail
• Hawalas

• Deposits
• Withdrawals
• Transfers between accounts
• Exchanges of currency
• Loans
• Extensions of credit
• Purchase or sale of any stock, bonds,
  certificates of deposit, etc.
• Use of safety deposit boxes
• Commodities
• Merchandise
• Internet

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Title 18 section 1956
MLCA

• A financial transaction was conducted or
  attempted
• The defendant knew that the property involved in
  the financial transaction represented the
  proceeds of some form of unlawful activity
• The property was in fact the proceeds of a
  specified unlawful activity
• The defendant acted with the intent to do any of
  the four prohibited activities listed under
  section 1956 Promote SUA conceal
  nature, source, location, ownership, or proceeds
  of SUA avoid reporting requirements evade taxes

Specific in Determination, Yet Broad in
Application
Source Money Laundering, a guide for criminal
investigators, 2nd ed., Madinger
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Title 18 section 1956
MLCA

• Real property purchased with drug money and
  resold
• An automobile purchased with counterfeit
  securities and then resold
• An inventory acquired in a fraud scheme
• A fraudulently obtained line of credit
• An automobile used to pay an illegal gambling
  debt
• A stolen diamond

Non-Cash Items That Qualified as Proceeds in Past
Money Laundering Cases
Source Money Laundering, a guide for criminal
investigators, 2nd ed., Madinger
36
Title 18 section 1956
MLCA

• The defendants being connected to drug
  trafficking and paying for a car with a suitcase
  full of cash
• The defendants receiving cash from someone who
  said he was a drug dealer and had no legitimate
  source of income
• The use of information derived from a net worth
  analysis, showing that the defendant had
  insufficient legitimate income to support large
  cash expenditures, to demonstrate that a vehicle
  purchase was made with money from marijuana sales
• Large quantities of cash in small, worn bills
  large transfers of money to Columbia, a source
  for narcotics a co-conspirators statement that
  the money was from drug trafficking and money
  laundering

Circumstantial Evidence Can Be Used To Establish
That The Money Is From An SUA
Source Money Laundering, a guide for criminal
investigators, 2nd ed., Madinger
37
Example
MLCA

• A money launderer wants to set up an online
  business to launder monies held in two offshore
  banks, one in the Cayman Islands and one in
  Nauru. The goal is to move money to the U.S.
• Set up web business on a server in Canada, using
  legitimate ISP, that accepts credit cards.
• Set up multiple accounts with the two above banks
  and establish credit or debit cards for each
  account.
• Purchase consulting services via the web.
• The web company invoices the credit card
  companies for fictitious services, and the credit
  card company invoices the offshore banks.
• The money from the fictitious sales is
  transferred to a U.S. bank account established by
  the money launderers.

All Components Are Separated From Another And
Involve Cross-Border Transfers of Financial
Information an Audit In One Country Would
Probably Not Expose The Scam
Source Money Laundering, a guide for criminal
investigators, 2nd ed., Madinger
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US Patriot Act of 2001
The Act
Money Laundering is essentially taking bad money
and converting it to good money, while trying to
obscure its origin The Patriot Act is concerned
with good money being converted to bad, where the
passers are trying to obscure the
destination. Related legislation International
Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001
Increased Disclosure Requirement of U.S. Banks
and Their Correspondent Banks
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US Patriot Act of 2001

• Allows U.S. Treasury Department to
• Require U.S. financial organizations to file
  specific information about transactions occurring
  in countries identified as primary money
  laundering havens
• May include a complete description of a specified
  transaction, the identity and address of
  participants, the relationship of the
  participants involved in the transaction, and the
  beneficial owner of the monies involved
• Shut down any accounts with countries that are
  deemed to be a money laundering risk

The Bar That Government Agencies Must Meet for
Requests of Information Under MLAA Has Been
Lowered
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
40
US Patriot Act of 2001

• Other Noteworthy Requirements / Enhancements
• Due diligence scrutiny of funds that are
  deposited for senior foreign officials or their
  immediate families (or close associates)
• Shell banks with no physical presence in any
  country are prohibited from using correspondent
  banking services in the U.S.
• Elimination of legal liabilities so financial
  institutions can share information about account
  activities and transactions among themselves
• Encourages foreign governments to require the
  name of the originator of a wire transfer to be
  documented from origin to destination

The Act is Intended to Deter And Close Loopholes
in Financial Procedures
Source Forensic and Investigative Accounting,
3rd ed., Crumbley, Heitger, Smith
41
Source http//www.auctionbytes.com/cab/abn/y03/m
04/i01/s01 retrieved 2/21/08
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May 25, 2005 ICE Campaign Against Illegal Money
Transmitters Underground Hawalas Yields 140
Arrests 138 Indictments Nationwide WASHINGTON,
D.C. - Michael J. Garcia, Department of Homeland
Security Assistant Secretary for U.S. Immigration
and Customs Enforcement (ICE), today announced
that a nationwide campaign by ICE agents against
unlicensed money transmittal businesses and
underground hawalas has resulted in the arrest
of 140 individuals, 138 criminal indictments, and
the seizure of more than 25.5 million in illicit
proceeds since the enactment of the USA Patriot
Act, which requires such businesses to be
licensed and registered. Over the past two
weeks, ICE has shut down a number of unlicensed
money transmittal businesses that were
responsible for the transfer of millions of
dollars to Afghanistan, Pakistan, and Iran," said
Assistant Secretary Garcia. "ICE targets these
illegal operations because we know that terrorist
and other criminal organizations can use these
underground businesses to move illicit funds
anywhere in the world with no questions asked."
In recent days, ICE has won guilty pleas from
two defendants and arrested another on charges of
operating unlicensed money transmittal businesses.
Source http//www.jihadwatch.org/archives/006330
.php retrieved 2/21/08