Focus on Fraud…

1. 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

2. 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: “I’m not sure that man needs the help.” – Calvin & Hobbs

3. Focus on Fraud… “Power corrupts. Knowledge is power. Study hard. Be evil.” – anonymous

4. Topics of Discussion… • Ethics • Foreign Corrupt Practices Act of 1977 (FCPA) • Money Laundering Control Act (MLCA) • US Patriot Act

5. 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?

6. 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

7. 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 Gomorrah…but if you find 10 good men?

9. 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

10. 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

11. Most Likely Violators… FCPA China, Russia, Turkey, and India Least Likely Places for Bribes… Switzerland and Sweden -- Transparency International

12. FCPA Provide Something of Value… Cash, Gifts, Trips, Merchandise, Entertainment, Drugs, Sex, Loans, Credit Cards, Fees, Spouse’s 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 bragged…the 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

14. 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?

15. 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

16. 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?

17. Price Fixing or Bid Rigging… Bid Suppression Bid Rotation Cover Bids (not real bids) Withholding Bids (to be a sub-contractor) Market Division Cartels

18. 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

19. 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?

20. 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

21. 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

22. 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

25. 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 maker’s 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)Panalpina (Switzerland, transport)Siemens (Germany, engineering, electronics)Smith & Nephew (UK, medical devices)Total (France, energy) Source: http://www.ethicalcorp.com/content_print.asp?ContentID=5685, 2/8/2008

28. 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?ContentID=5685, 2/8/2008

29. 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

30. 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

31. 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

32. 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

33. Mechanisms to Effect Laundering… MLCA • 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 • Banks • Securities & Commodity Brokers and Dealers • Currency Exchanges • Insurance Companies • Travel Agencies • Wire Transmitters • Vehicle Dealers • Realtors • Postal Service • Retail • Hawalas

34. 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

35. 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 defendant’s being connected to drug trafficking and paying for a car with a suitcase full of cash • The defendant’s 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-conspirator’s 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

38. 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

39. 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/m04/i01/s01; retrieved 2/21/08

42. 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