Fraud and Corruption on the Loose

1
Fraud and Corruption on the Loose

• Agenda
• FCPA, AML, Organized Crime, Terrorism Fraud is
  a Common Thread Impacting Compliance
• Introductions
• Terrorist and Criminal Groups
• Fraud and Money Laundering
• Securities Fraud
• Ponzi Schemes
• FCPA
• Conclusions

2
Fraud and Corruption on the Loose

• Martin Biegelman
• Director, Financial Integrity Unit, Microsoft
• Former Inspector in Charge, US Postal Inspectors
• Dennis Lormel
• President CEO, Lormel Associates
• Former Chief Financial Crimes Section FBI
• Dan Wachtler
• President CEO IPSA International, Inc.

3
Terrorist and Criminal Groups

• Must Have Continuous Stream Of Funds Available
• Must Have Capacity to Raise Funds
• Fraud and Money Laundering Often Key
• Nexus Between Fraud and Money Laundering
• Drug Trafficking the Most Lucrative Criminal
  Activity
• Must Have Immediate Access to Funds
• Pose Threat to National Security and Economy
• Importance of Disruptive And Preventive Measures

4
Exploitation of Systemic Vulnerabilities

• Terrorist and Criminal Organizations Constantly
  Exploit Systemic Vulnerabilities
• Vulnerabilities or High Risk Areas in the
  Financial Services Sector

• October 3, 2001
• Wire Transfer
• Correspondent banking
• Fraud
• MSBs
• Lormel Testimony Before House Committee on
  Financial Services

• October 19, 2010
• Fraud
• Money Laundering
• Wire Transfer
• Correspondent Banking
• Illegal Money Remitters/Hawalas
• Shell Companies
• Electronic Payments

5
OC - Terrorism Nexus

• Organized Crime Groups are Incorporating
  Characteristics And Methods of Operations from
  Terrorist Groups
• Terrorist Groups are Adopting Strategies Learned
  from Organized Crime
• This Evolution Makes Both Groups Stronger and
  More Flexible
• Tri-border Region Example

6
Fraud and Money Laundering

• Fraud and Money Laundering are Interconnected
• The Proceeds of Fraud and Other Criminal
  Activities Need to be Laundered
• Gives Appearance of Legitimacy
• Groups Must Have Sources (Fraud) and Availability
  (Laundering) of Funds to Succeed

7
Fraud and Money Laundering

• Who are We Dealing With?
• Individuals or Groups Engaged in Fraud
• Gangs
• Drug Dealers, Organizations or Cartels
• Ethnic Organized Crime Groups
• Terrorists or Terrorist Groups

8
Laundering through Securities Fact or
Fiction?
9
FACT
Testimony in the Stratton Oakmont case supports
the premise that sophisticated criminals have
used the financial markets to launder funds.
An FBI agent taping informants as part of the
case witnessed an accountant explaining how funds
would be laundered through a series of trades
which increased the price of the security and
transferred the funds between parties.
The crumbled yellow legal paper is included as
evidence in the case file.
10
FACT
On an anecdotal basis, arms dealers, drug
traffickers and parties alleged to be associated
with organized crime continue to show up in
association with securities trading on the less
regulated securities exchanges.
A convicted Indo-Canadian gangster with links to
the Air India bombing case has been a shareholder
in three U.S. shell companies whose founding
director remains under police investigation, The
Vancouver Sun has learned. Jethinder Singh
(Roman) Narwal is listed in corporate annual
reports as owning a million shares in each of
Super Ventures, Multimod Investments Ltd. and
Easy Com Inc., registered in Nevada as shell
companies to be used for Internet gambling
opportunities. Both Karin Sidhu and Jaswinder
Parmar were in B.C. Supreme Court March 9 to
support Roman Narwal as Justice Sunni
Stromberg-Stein found him guilty on 13 of 15
counts in three brutal drug-related kidnappings
and extortions. The three 2005 abductions were
in retaliation for ripoffs of marijuana
stockpiles worth more than 1 million during the
first four months of last year, according to
testimony at Roman Narwal's criminal trial.
(EXCERPT, Vancouver Sun, Kim Bolan, 3/27/2006)
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Challenges

• Lack of Transparency and/or accessibility of
  information related to Pink Sheet Only and Grey
  Market securities
• Lack of filings or ability to validate of
  investors and/or total shares outstanding
• No Common Penny Stock Bad Guys list - penny
  stock , officer director bars
• Transaction monitoring rules in many systems may
  not be sophisticated enough to build scenarios of
  concern

12
Dilemmas

• Appropriate Control Points
• Bad Idea vs. Fraudulent Intent
• Determining Association vs. Participation
• Victim vs. Participant
• Practical Reasonable Surveillance Controls
• Surveillance vs. Investigation

13
FATF Global ML/TF Threat Assessment

• Released July 2010
• Based on Typologies and Threat Assessment
• Strategic Surveillance Initiative
• Detailed Questionnaire Responded to By FATF
  Members
• 2009 Strategic Surveillance Survey
• Main Source tor Money Laundering
• White Collar Crimes
• Drug Related Crimes
• Main Source of Terrorist Financing
• Financial Crimes (Particularly Fraud)
• Trafficking in Narcotics, Cigarettes, Weapons,
  Human Beings or Diamonds
• Petty Crimes
• Identifiable Global Trends
• A Noteworthy Proportion of ML/TF Activity
  Involves Cash
• Increased Use of Internet and New Payment
  Mechanisms

14
Emergence of Ponzi Schemes

• Bernard Madoff
• 65 Billion Fraud
• The Mini-madoffs
• Proliferation of Large Multi-million Dollar Fraud
  Schemes Emerging Since January 2009
• Arthur Nadel Darren Palmer
• Nicholas Cosmos Marcus Schrenker
• Joseph Forte George Theodule
• Paul Greenwood Stephen Walsh
• James Nicholson Mark Bloom
• Stanford Financial Group
• 8 Billion Investment Scam
• R. Allen Stanford
• James M. Davis
• Laura Pendergest-holt

15
Investment Fraud Detection

• The Economic Boom Made Investors Susceptible to
  Investment Fraud Schemes
• Promise/Lure of High Returns
• Schemes Were Exposed in Part Because of Economic
  Downturn
• More People Attempted to Cash in Their
  Investments
• Lack of New Investors to Cover / Perpetuate the
  Frauds
• Media Coverage of High Profile Fraud Cases
• Fostered Sense of Awareness / Concern

16
Investment Fraud Indicators

• If it Seems Too Good to Be True, IT USUALLY IS
• Unusually High Investment Returns
• Consistently High Investment Returns
• Lack of Transparency
• Madoff
• Stanford
• Lack of Oversight
• Circumvention of Controls
• Select Individuals With Unfettered Access to
  Funds
• Fraud Triangle

Lack Of Controls Lifestyle Greed/Entitlement

• Opportunity
• Incentive /Pressure
• Rationalization/Attitude

17
ACFEs 2010 Global Fraud Study

• Most schemes are detected by tips
• Employees are most common source of tips
• Existence of hotlines increase number of tips
• Corruption schemes were most commonly reported in
  mining, oil and gas, and construction industries

www.acfe.com
18
Corruption Perceptions Index 2009
19
Impact of the FCPA

• For the first time in the history of the world, a
  measure for bribery was introduced into law that
  was universal as far as those subjected to the
  law were concerned. For the first time, a country
  made it criminal to corrupt the officials of
  another country. Americas ambassadorsthat is,
  its businessmenwere to show American purity
  throughout the globe.
• - John T. Noonan,
  Bribes, 1987

20
Top Ten FCPA Settlements

1. Siemens - 800 million (2008)
2. KBR/Halliburton - 579 million (2009)
3. BAE - 400 million (2010)
4. Snamprogetti Netherlands P.V./ENI S.p.A. - 365
   million (2010)
5. Technip S.A. - 338 million (2010)
6. Daimler AG - 185 million (2010)
7. Baker Hughes - 44.1 million (2007)
8. Willbros - 32.3 million (2008)
9. Chevron - 30 million (2007)
10. Titan Corporation 28.5 million (2005)

Source FCPA Blog
21
Wall Street Reform and the FCPA
22
Dodd-Frank Wall Street Reform Consumer
Protection Act

• Section 922 Bounty Hunting
• Incentivizes Corporate Whistleblowers to Report
  Securities Violations Including FCPA
• Authorizes SEC to Pay Between 10 - 30 of Money
  Collected Exceeding 1 Million
• Voluntary Disclosure of Original Information
  Leading to Successful Enforcement Action
• Contains Anti-retaliation Measures Including
  Private Cause of Action for Retaliation

23
UK Bribery Act 2010

• Passed by Parliament April 10, Eff. April 11
• Two New Bribery Offenses
• Bribery of Foreign Public Official
• Corporate Offense of Failure of Commercial
  Organization to Prevent Bribery
• Criminalizes Both Public and Private Bribery
• Liability for Criminal Conduct of an Associated
  Person
• Defense to Liability if Adequate Procedures to
  Detect and Deter Corruption are in Place

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Fraud and Corruption on the Loose
Conclusion
The Tip of the Iceberg
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Fraud and Corruption on the Loose
Conclusion

• Regulatory Mandates are Increasing and Many Have
  a Nexus to Fraud.
• Despite Best Efforts, Fraud And Corruption are
  Here to Stay Our Best Hope is Awareness,
  Prevention Programs and Thorough Response.
• Public Sector Does Not and Will Not Have The
  Resources To Solve an Unsolvable Problem
  Private Sector Must Participate.
• Job Security

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Fraud and Corruption on the Loose
Questions

• Martin Biegelman
• martinbi_at_microsoft.com
• Dennis Lormel
• dlormel_at_lormelassocllc.com
• Dan Wachtler
• dwachtler_at_ipsaintl.com