Fraud 360

New Laws Are Changing the Battle Against International Bribery & Corruption Pg. 12

Whiplash Fraud and Other Schemes Cause Massive Loss PG. 17

Web of Deceit: Online Fraud PG. 26

ISSUE 2 2013

Preventing the Spiraling Costs of Insider Fraud

5 Biggest Fraudsters in History PG. 30

How Do You Define Bribery?

PG. 37

Crigroup.com

Published by

Corruption, bribery and a lack of due diligence harm business interests worldwide. Learn what the experts are doing to combat these and other threats. Pg. 22

Fraud and White-Collar Crime Investigations | Background Investigations | Business Intelligence | Corporate Security | Forensic Accounting | Investigative Due Diligence

Fraud360 is created for business leaders, directors, investors and professionals who need the latest information and best practices for protecting their assets from fraud. Presenting practical tools, case studies, and articles focused on fraud prevention and detection, Fraud360 provides an insightful look at the issues impacting businesses worldwide.

Fraud360 is published by Corporate Research and Investigations, LLC. (CRI Group).

WORLDWIDE LOCATIONS Middle East & North Africa CRI Group Headquarters – Dubai, UAE Level 9, #904, Liberty House, DIFC P.O. Box 111794 Dubai, UAE Tel: +971-4-3589884 Cell: +971 50 9038184 Fax: +971 4 3589094 Email: crimena@crigroup.com Web: www.crigroup.com Qatar Office Level 22, Tornado Tower Al-Funduq Street PO Box 27774 Doha, Qatar Tel: +974 44292434 Email: doha@crigroup.com Web: www.crigroup.com Europe EMEA Head Office Level 33 25 Canada Square London E14 5LQ United Kingdom Tel: +44 207 038 8023 Cell: +44 7588 454959 Email: london@crigroup.com Web: www.crigroup.co.uk

2 | fraud360 | ISSUE 2 2013

Asia Pakistan Office Level 12, #1210, 1211 55-B, Islamabad Stock Exchange (ISE) Towers Jinnah Avenue, Blue Area Islamabad, Pakistan PO Box 2144 Tel: +92 51 111 888 400 Toll Free : 0800 00 CRI (274) Email: pakistan@crigroup.com Web: www.crigroup.com Singapore Office 1 Raffles Place, #19-61, Tower 2 One Raffles Place, Singapore 048616 Tel: +65 6808 5634(35)(36) Fax: +65 6808 5800 Cell: +6597265812 Email: singapore@crigroup.com Web: www.crigroup.com AMERICAS New York Office 600 Third Avenue, Suite 252 New York, NY, 10016 United States of America Tel: +1 (646) 571-2501 Email: newyork@crigroup.com Web: www.crigroup.com

Spotlights & Features Fraud360 | Issue 2 | 2013

22

17

Double Impact: Whiplash Fraud and Other Schemes Cause Massive Loss

12

26

30

22

The Spiraling Costs of Insider Fraud

Corruption, bribery and a lack of due diligence harm business interests worldwide. Learn what the experts are doing to combat these and other threats.

8

What is Fraud?

12

New Laws Are Changing the Battle Against International Bribery & Corruption

26

A Web of Deceit: Online Fraud

30

5 Biggest Fraudsters in History

34

Unseen Danger: The Business Risks in Third-Party Relationships

37

How Do You Define Bribery? crigroup.com | 3

Message from the CEO Staying Ahead of Fraud and Corruption Welcome to the second edition of Fraud360. Once again, we have carefully selected the articles that you will read in the following pages, and I sincerely hope that you will find them to be exceptionally interesting and valuable to you as a professional.

I would also like to take this opportunity to extend a note of congratulations to all of the professional experts who helped CRI Group reach an important achievement this year. I am proud to announce that recently, I was informed that CRI Group has been named the 2013 Anti-Fraud Advisor of the Year in the UAE by Acquisition International.

This is a great honor, as Acquisition International selects their winners based on “excellence, innovation and performance across the legal community.” I am especially proud knowing that the criteria is more stringent than simply a reader poll — Acquisition International combines votes alongside supporting evidence and their own in-house research to honor those most worthy.

So it is within the pages of this magazine that we hope to communicate some of the knowledge and best practices that our experts use in the field every day. After all, fraud and corruption is always changing and evolving, requiring all business leaders to stay ahead of a learning curve and be informed.

In this edition, you’ll learn some of the latest trends from across the UK, Middle East and other regions in terms of new security risks that require immediate preventative action. You will also learn how insurance fraud continues to make a major impact on the world economy, costing millions in both public and private funds — much of which will never be recovered.

I also invite you to reach out and tell us what you think about these issues, as well as the types of subjects you would like to read more about in the future. Just send us an email at info@fraud360.com. We want Fraud360 to be your reference guide for helping prevent and detect fraud threats among your business, agency or clientele. I hope you enjoy this edition of Fraud360, and I thank you for reading.

Zafar I. Anjum, CFE, CIS, MICA, Int. Dip. (Fin. Crime), MBCI Chief Executive of CRI Group

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YoU KnoW YoUr BUSInESS.

But how well do you know your business partners?

In a digital age where billions change hands every day and financial deals are transacted with little more than an email, it’s crucial to know WHO your business partners really are.

CrI Group has provided clients around the globe comprehensive tools to mitigate risk in international business transactions, mergers and other growth opportunities for more than 20 years. CrI Group offers: » Fraud & White-Collar Crime Investigations —

Minimise risks associated with business operations.

» Employee Background Investigations —

Research new hires for any criminal history, questionable business practices or bankruptcy.

» Forensic Accounting — Root out internal corrup-

tion, expose financial fraud and support internal/ external audits and strategic or tactical acquisitions.

» Due Diligence & “Know-Your-Customer” Investigations — Ensure your business associates, partners, suppliers and customers are financially viable and legally compliant.

» Corporate Security Consulting — Evaluate,

implement and manage security and investigative programs to minimise internal and external risks.

» Insurance Fraud & Intellectual Property Investigations — Examine claims associated with

disability, health, travel, property and liability policies.

Safeguard against counterfeiting, contract breaches and copyright, trademark and patent violations.

» Business Intelligence — Analyse and verify an

organisation’s strengths, weaknesses and growth potential while identifying its assets and investigating corporate officers.

VISIt oUr moBIlE WEBSItE

ContACt US toDAY www.crigroup.co.uk / investigations@crigroup.co.uk / +44 207 038 8366 / United Kingdom / USA / UAE / Qatar /crigroup.com Pakistan / Singapore | 5

About CRI Group ABOUT US Corporate Research and Investigations LLC is a global supplier of investigative, forensic accounting, business due diligence and employee background screening services for some of the world’s leading business organizations. A licensed and incorporated entity of the Dubai International Financial Centre (DIFC), CRI safeguards businesses by establishing the legal compliance, financial viability, and integrity levels of outside partners, suppliers and customers seeking to affiliate with your business.

Memberships, Partners & AFFILIATES CRI Group maintains partnerships with leading global organizations in the fields of due diligence, fraud investigation, forensic accounting and more. Some of our affiliations include:

Connect with us on the web via your mobile device or Social Media.

LinkedIn

Blogs: Fraud360.com FraudInsider.com

FACEBOOK

TWITTER

MOBILE SITE

HONORS & Awards CRI Group is proud to be named the 2013 “Business Due Diligence Firm of the Year – UAE” and “Anti-Fraud Adviser of the Year – UAE” by Acquisition International. AI’s Awards celebrate excellence and recognize investors, advisers and service providers for expertise in their specialized fields.

Implemented and Certified ISO 9001:2008 (Quality Management Systems) ISO27001:2005 (Information Security Management Systems)

Fraud360 is published by Corporate Research and Investigations LLC. Level 9, #904, Liberty House, DIFC, P.O. Box 111794, Dubai, UAE, Tel: +971-4-3589884, Fax: +971 4 3589094. Copyright is reserved throughout. Although Fraud360 may be quoted with proper attribution, no part of this publication may be reproduced without the express written permission of the publisher. Contributions are invited but copies of all work should be kept as Fraud360 can accept no responsibility for loss. The views expressed in Fraud360 are those of the authors and might not reflect the official policies of CRI Group.

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Advertising inquiries: marketing@crigroup.com Editorial inquiries: info@fraud360.com

News & Media Upcoming Events Find CRI Group at the following events around the globe in 2013-2014: • 2013 ACFE Asia-Pacific Fraud Conference, Singapore, 18-22 November 2013 • Anti-Corruption Conference, Frankfurt, Germany, 28-29 November 2013 • Asia Ethics Summit, 4-5 December 2013 • Dubai Conference, 9-10 December 2013 • GCS Summit, Dubai, 15-18 February 2014

In the Media CRI Group is active in the media, notably recently promoting International Fraud Awareness Week. Find CRI on Twitter, Facebook, LinkedIn and at our newly-redesigned website, www.crigroup.com, and our blogs, Fraud360.com and FraudInsider.com.

CRI Group Launches New Website It is an exciting time for CRI Group as we have just refreshed our brand with the launch of our new and improved website, www.crigroup.com.

With the help of the CRI web designers, we have built a more comprehensive source of company information and services with a great dynamic animation screen on the home page.

The website is full of exciting new features including LIVE Chat, news of CRI in the media, a regularly-updated blog, an RSS Feed of the Financial Times and a ’Meet the Team’ page.

We also have a contact page for the press to get in touch as we will be releasing regular press releases about the growth, improvements and services of CRI across the globe, with a hard focus on the UK and Asia Pacific.

CRI are pleased to provide services across the world with a larger contact network to ensure competitive pricing, extensive knowledge and experience and the best customer service in the industry.

Keep watching and we would love to hear your thoughts — please drop an email to pr@crigroup.com.

crigroup.com | 7

What is Fraud?

For businesses, fraud is a vital concept to comprehend, and is defined in different ways depending on the type, environment and other factors

By FRAUD360 STAFF

I

n the broadest sense, fraud can encompass any crime for gain that uses deception as its principal modus operandus. More specifically, fraud is defined by Black’s Law Dictionary as: ‘A knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.’

8 | fraud360 | ISSUE 2 2013

Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.

Types of Fraud Fraud against a company can be committed either internally by employees, man-

agers, officers, or owners of the company, or externally by customers, vendors, and other parties. Other schemes defraud individuals, rather than organizations.

Internal Fraud Internal fraud, also called occupational fraud, can be defined as: “the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets.” Simply stated, this type of fraud occurs when an employee, manager, or executive commits fraud against his or her employer.

Although perpetrators are increasingly embracing technology and new approaches in the commitment and concealment of occupational fraud schemes, the methodologies used in such frauds generally fall into clear, time-tested categories.

To identify and delineate the schemes, the ACFE developed the Occupational Fraud and Abuse Classification System, also known as the Fraud Tree.

The Fraud Tree Occupational frauds are those in which an employee, manager, officer, or owner of an organization commits fraud to the

The Fraud Tree Asset Misappropriation

Corruption

Financial Statement Fraud

Asset/Revenue Overstatements

Asset/Revenue Understatements

Invoice Kickbacks

Timing Differences

Timing Differences

Bid Rigging

Fictitious Revenues

Understated Revenues

Concealed Liabilities and Expenses

Overstated Liabilities and Expenses

Improper Asset Valuations

Improper Asset Valuations

Conflicts of Interest

Bribery

Purchasing Schemes Sales Schemes

Illegal Gratuities

Economic Extortion

Improper Disclosures

Inventory and All Other Assets

Cash

Theft of Cash on Hand

Theft of Cash Receipts

Skimming

Sales

Receivables

Unrecorded

Write-off Schemes

Understated

Lapping Schemes

Unconcealed

Cash Larceny

Refunds and Other

Fraudulent Disbursements

Misuse

Billing Schemes

Payroll Schemes

Expense Reimbursement Schemes

Shell Company

Ghost Employee

Mischaracterized Expenses

Forged Maker

False Voids

NonAccomplice Vendor

Falsified Wages

Overstated Expenses

Forged Endorsement

False Refunds

Personal Purchases

Commission Schemes

Fictitious Expenses

Altered Payee

Multiple Reimbursements

Authorized Maker

Check Tampering

Register Disbursements

Larceny Asset Requisitions and Transfers False Sales and Shipping Purchasing and Receiving Unconcealed Larceny

Figure 1. Source: 2012 ACFE Report to Nations on Occupational Fraud and Abuse.

crigroup.com | 9

detriment of that organization. The three major types of occupational fraud are: Corruption, Asset Misappropriation, and Fraudulent Statements. The complete classification of occupational fraud, frequently referred to as the Fraud Tree, is shown in Figure 1 on page 23.

External Fraud External fraud against a company covers a broad range of schemes. Dishonest vendors might engage in bid-rigging schemes, bill the company for goods or services not provided, or demand bribes from employees. Likewise, dishonest customers might submit bad checks or falsified account information for payment, or might attempt to return stolen or knockoff products for a refund. In addition, organizations also face threats of security breaches and thefts of intellectual property perpetrated by unknown third parties. Other examples of frauds committed by external third-parties include hacking, theft of proprietary information, tax fraud, bankruptcy fraud, insurance fraud, healthcare fraud, and loan fraud.

Fraud Against Individuals Numerous fraudsters have also devised schemes to defraud individuals. Identity theft, Ponzi schemes, phishing schemes, and advanced-fee frauds are just a few of the ways criminals have found to steal money from unsuspecting victims.

Why Does Fraud Occur?

The best and most widely accepted model for explaining why people commit fraud is the fraud triangle. This is a model developed by Dr. Donald Cressey, a criminologist whose research focused on embezzlers — people he called “trust violators.”

10 | fraud360 | ISSUE 2 2013

The Fraud Triangle The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud (see Figure 2 on page 25). It consists of three components, which, together, lead to fraudulent behavior: 1. Perceived un-shareable financial need 2. Perceived opportunity 3. Rationalization The fraud triangle originated from Donald Cressey’s hypothesis on fraudulent behavior (see quote on page 25).

Conclusion After answering the question, “what is fraud?,” it is good to keep in mind one clear rule about what fraud isn’t: an honest mistake. Fraud is a deliberate act, and no matter how small it starts, nor the rationale given by the person committing it, fraud is a serious problem for any organization.

Whether it be external or internal, embezzlement, skimming or another scheme, fraud is theft — and by the most recent estimates, it costs organizations roughly five percent of their total revenues. The bottom line? Preventing fraud, or detecting it early, can mean the difference between success and failure for your business.

The Fraud Triangle

Figure 2. The Fraud Triangle explains factors that cause a person to commit occupational fraud.

Trusted persons become trust violators when they conceive of themselves as having a financial problem which is nonshareable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply to their own conduct in that situation verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.�

Donald Cressey crigroup.com | 11

New Laws Are Changing the Battle Against International Bribery & Corruption

By Mauro Cattana

N

ot long ago, corporations of the more industrialized world could afford to be indulgent when conducting business transactions or commercial agreements in the Asia-Pacific region. Anti-bribery laws mainly targeted western corporations that were gaining commercial advantages in the region by means of illegal payments to local government officials or ruling party representatives. Yet, a system of local branches and ad-hoc mediators, in combination with poor law enforcement, were safely shielding the mother companies from anti-corruption practices.

In an increasingly interconnected world — where international transactions are becoming more sophisticated and often a deal involves several diverse jurisdictions — things are rapidly changing. Beginning with the Foreign Corrupt Practice Act (FCPA) in the U.S. and on to the

recent UK Bribery Act (enacted in 2010 and implemented in 2011), anti-bribery/anticorruption practices and international law enforcement are becoming farther-reaching and adapting to the new dynamics of international business.

The FCPA, enacted in 1977 and amended by the International Anti-Bribery Act in 1998 specifically to include the new OECD anti-bribery convention, was the answer to a systematic use of illegal practices of bribing foreign officials to foster the interest of a specific business organization. With the 1998 amendment, the term of Foreign Official acquired a new broad meaning.

For instance, doctors working for government health organizations, bankers with a position in the local government and employees of government-owned companies are considered Foreign Officials under this provision of the FCPA. It is interesting to note that the FCPA also applies

to non-U.S. citizens — including foreign nationals who engage in bribery while in the territory of the United States.

The UK Bribery Act goes a step further, and is at the forefront of the fight against international bribery. The Act also targets the so-called mediator or facilitator. Under Sec. 6 of the Act, it is clearly stated: “A person will be guilty of this offence if they promise, offer or give a financial or other advantage to a foreign public official, either directly or through a third party,” hence effectively discouraging the use of a common device that was used to shield

the main perpetrator of the bribery from legal action. Three months before the Act entered into force, the Secretary of State issued a set of guidelines in six principles named the Guidance: • Proportionate Procedures • Top-level Commitment • Risk Assessment • Due Diligence

14 | fraud360 | ISSUE 2 2013

• Communication (including training) • Monitoring and Review The Guidance is designed to ensure that a commercial organization has implemented proper awareness through communication and the training of its employees, as well as toward commercial partners in regards to the business code of conduct of the organization. The failure to demonstrate that the Guidance has been implemented in case the organization is already under investigation will be considered in

court as aggravating the position of the commercial entity.

Two years after its implementation, we are not yet aware of important cases brought up under the UK Bribery Act. However, a sense of complacency that no actions will be taken under the Act are at best naïve, and at worse,detrimental. It is likely that investigations are already ongoing under the new Act.

After all, it took more than two years for the first case to become public under the FCPA (which entered into force in the late 70s) and, in the first 20 years, only 18 cases were prosecuted. We saw, however, a steep increase in the FCPA enforcement starting by the end of the 90s. Between 1998 and 2008, more than 50 companies were prosecuted under the FCPA. The UK Bribery Act 2010, and its far-reaching scope, is likely to change substantially the importance of implementing an anti-corruption code of conduct for any organization involved in foreign commercial activities.

Hence, it becomes a must for all commercial organizations having business in Asia to implement proper guidelines for its employees as well as business partners.

Not only the U.S. and the UK are empowering the fight against corrupted practices: The EU adopted the Stockholm Programme in 2010. The Commission has been given the political mandate to monitor the progress of the fight against corruption and develop a comprehensive EU anti-corruption policy.

The International Chamber of Commerce (ICC) has introduced in 2010 an Anti-Corruption Clause to be included in international commercial agreements. The scope of the ICC Clause is “to provide parties with a contractual provision that will reassure them about the integrity of their counterpart during the pre-contractual

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crigroup.com | 15

period as well as during the term of the contract and even thereafter” (from ICC Anticorruption Clause Book).

How to Implement Proper Guidelines A proper internal code of conduct would discourage rogue management from taking advantage of external illegal opportunities. Hence, the following measures should be taken: • Implementation of a clear code of conduct with top management involvement • Training at all employee levels and specifically for key management positions on the do’s and don’ts detailed in the implemented code of conduct.

• Regular review and monitoring of employees to re-enforce compliance regarding the code of conduct • Organize and facilitate a “whistle-blower” policy in which internal employees and disgruntled suppliers are able to report wrongdoing without fear of retaliation.

When working with third-party suppliers, further consideration should be given to the “Three M Rule”:

MANAGE — MONITOR — MAINTAIN • MANAGE: Bid proposals, contracts, licensing, registrations, certifications, training levels • MONITOR: Production standards, output benchmarks, quality and compliance • MAINTAIN: Regular contact with third party providers, including open communications and regular site visits to review operations and ensure compliance with the provision of the contract The very recent tragic event in Bangladesh shall ring as a deafening alarm bell for every organization outsourcing its labour intensive production in developing

16 | fraud360 | ISSUE 2 2013

countries: More than 1,000 workers were killed in the collapse of a crammed and illmanaged factory building.

Besides the irreplaceable lives that were lost, what are the other costs involved? It is very difficult to calculate the full impact, but one loss that immediately comes to mind is the loss of reputation and, most of all, credibility for the foreign companies who used to have their products manufactured in that building.

Clearly the factory’s poor condition was also linked to bribery of government officials — and thorough investigations on this matter are presently ongoing. UK entities with active commercial activities with the site in question came forward offering financial relief and better working condition to their workers. Is that enough?

Clearly not. Proactive measures would have saved lives on the first place and, further, they would have saved the incalculable cost of a wrecked public image, loss of business and legal costs.

A thorough investigation and proper due diligence would have uncovered the bribery system that allowed this factory to remain in operation despite its appalling conditions, and it would have given a powerful analytical tool to any foreign company considering engagement with the site for business operations. In today’s interconnected world, no organization conducting international business can afford to be caught unprepared — and unprotected — by failing to implement anti-corruption measures and proper due diligence.

ABOUT THE AUTHOR Mauro Cattana, Pg Cert International Business Law, is APAC Business Development at CRI Group. He can be reached at __________________.

Double Impact Whiplash Fraud and Other Schemes Cause Massive Loss

By FRAUD360 STAFF

A

slam on the brakes, some screeching tires. The sound, and feel, of impact — jarring, metal on metal.

Few things can be as traumatic as a traffic accident. In the aftermath, those involved may be injured, perhaps seriously; not to mention damage to their vehicles and anything else around. Often, the police are involved to help sort out a confusing situation and take witness statements while the sudden shock of the incident wears on.

A twist to such an unfortunate scenario is the fact that, rather than suffering through such difficult circumstances, there are individuals who actually profit from them — by design. Their schemes are often well-orchestrated, finely tuned, and put into practice multiple times to put insurance money in their pockets.

They are costing us millions.

In the UK, a phenomenon known as “whiplash fraud” has become a target of authorities who have seen this form of

crigroup.com | 17

insurance fraud spiraling out of control.

Often, these cases involve minor, lowspeed accidents in which a victim makes a claim of whiplash injury to receive an insurance payout.

In one of the most egregious examples, the driver of a double-decker bus in Sheffield, England conspired with at least 26 other individuals — who loaded into the bus as passengers — to commit whiplash fraud. With the scammers on board, the driver rear-ended another vehicle, resulting in 26 whiplash claims. The bus company involved set aside £250,000 to pay for the claims before it was discovered that they were fraudulent.

The scheme unraveled when it was found that the company coordinating the fake whiplash claims, an outfit called City Claims 4 U, actually had a staff member on board the bus during the accident... this staff member, subsequently, was one of the claimants.

While the bus scam was exposed, many others are not. In fact, Sky News recently reported that whiplash fraud is costing drivers in the UK an estimated £118 each, based on higher premiums. In fact, experts suggest that at least 15 percent of a driver’s insurance premium goes toward mitigating the impact of fraud on insurance companies.

Caught on Camera It isn’t just whiplash fraud causing concern, nor is the problem limited to the UK. For evidence of this, one needs to look no further than to the prevalence of the famous Russian “dashcam” videos. There are, literally, hundreds of them posted to various websites online.

In one, a vehicle ahead is seen deliberately backing up into the would-be victim’s car, which is outfitted with a dashcam (that is capturing the entire scene). Quickly, a man and woman get out of the car in front,

18 | fraud360 | ISSUE 2 2013

pointing and gesturing dramatically at the damage to their vehicle, undoubtedly demanding money from the driver of the dashcam car. The would-be victim, also outside of his car, calmly points toward his dash, showing them the camera that has been filming their entire charade. They quickly get back in their car and pull away.

In another video, a pedestrian is seen waiting until the last moment, and then throwing himself onto the hood of the car.

He picks himself up off the ground, feigning serious injury. This time, the driver with the dashcam has no restraint in dealing with the situation. The camera catches him

£60 £40

£80

£100 £120

Sky News recently reported that whiplash fraud is costing drivers in the UK an estimated £118 each, based on higher premiums. tackling the pedestrian and throwing him off to the side of the road, before returning to his car and driving away.

It is a sign of the frustration that boils over when such scams become epidemic.

In Russia, a large percentage of cars are now fitted with dashcams to foil such schemes. What seems like an extreme,

expensive measure becomes a rational necessity when fraudsters can simply name their price after staging an incident with an unlucky victim.

In the West, however, cameras for the road are still mostly limited to police cars and, occasionally, motorcycle and bicycle helmets. The work instead falls to investigators, insurance companies and witnesses to sort out the truth in a traffic accident.

Unfortunately, such cases are rarely as cut and dried as one that is caught in living color, on camera.

rewarding a dishonest few — many who conduct these schemes as a business of their own, not a one-time indiscretion.

In the face of such daunting statistics, it is clear that it is the responsibility of more than just police officers or local investigators to stem the tide of insurance fraud.

Insurance agents must be properly trained and should be Certified Fraud Examiners, and hold other relevant certifications in fraud prevention and detection. Individuals caught up in accidents, or as witnesses, should be aware of suspicious behavior or

Insurance Fraud on the Rise The scourge of insurance fraud reaches far beyond our motorways. In fact, BBC News recently reported that home insurance frauds are still the most common. With these claims leading the way, the Association of British Insurers (ABI) announced that fraudulent insurance claims totaled £1.1bn last year in the UK (see facts from the ABI in the sidebar on this page).

One of the problems, according to experts, is that many people still tend to regard insurance fraud as a “victimless crime.”

They may have the view that insurance companies are large profit-makers who treat consumers unfairly, at times, and so committing fraud simply “levels the playing field” to some degree. Or, some might believe, insurance companies expect a certain amount of fraud to occur, and they budget for such payouts to be made as a cost-of-business expense.

The truth, by contrast, is that rampant insurance fraud costs individual consumers hundreds and thousands of pounds in increased premiums, and larger organizations even more. Fraud punishes honest drivers and homeowners alike, while

›› There are 2,390 fake or inflated claims made every week ›› The claims cost the industry (and honest policy holders) £90 million a month ›› There were 51,000 cases involving dishonest householders last year ›› Since 2007, the value of fraudulent claims has doubled Source: Association of British Insurers (ABI)

red flags that their might be fraud — and report it immediately.

And society, as a whole, should reinforce the message that fraud is theft — it is criminal behavior, and is not to be tolerated at any level.

crigroup.com | 19

CRI Group Staff

Lara Jezeph – Marketing & PR Manager, EMEA | London, UK

LOCATION:

London, UK LOCATION:

New York, NY

Kiran Ali – Head of Global Strategy New York, NY (USA)

Welcome to CRI Group CRI Group recently welcomed Kiran Ali as Head of Global Strategy on 1 October 2013. She will be based primarily in the New York office; however she will be managing the business development team across all offices on an International scale working closely with the CEO. Kiran also serves as the general council for CRI. Kiran graduated in 2004 from the American University in Washington with a BSc in Internal Relations and then went on to study Law. She has litigation experience with FCPA (Foreign Corrupt Practices Act and was a member of the corporate council for an insurance company. She now serves on several charity boards.

Kiran looks forward to meeting the rest of the team around the world.

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London Office

Another new starter to join the CRI family is Lara Jezeph, who was employed on 21 October 2013 and has hit the ground running as Marketing & PR Manager – EMEA. She will be primarily based in the London office, working with Kiran Ali in the development team.

Lara has lived and worked in Australia, New Zealand and most recently in Africa where she helped set up and manage a security company in Kenya.

Lara graduated in 2007 from the University of Surrey with BSc in Entrepreneurship in Business, Technology and IT. After returning from her work in Australia she started with a security and private investigations company in Guildford where she slowly progressed to Communications Director after three years. She hopes to make CRI her new career.

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DUBAI STAFF (left to right): Maria Victoria Miones, Research Analyst; Mary Queen S. Crisostomo, Senior Research Analyst; Sherry May Cruda, Research Analyst; Michelle Ann Mangalonzo, Research Associate

PAKISTAN STAFF — Top (left to right): Imran Yousaf, Investigator; Faisal Ayub, Manager Finance; Ejaz Waqar, Investigator; Sobia Syed, Sr. Manager Background Screenings; Sadaf Munir, Asst. Manager Background Screenings; Nuzhat Shakeel, Client Service Executive; Samina Batool, Research Analyst; Rabia Shami, Research Analyst; Shahbaz Ahmed, Accounts Officer; Atif Ameer, IT Administrator. Bottom (left to right): Nousheeen Kousar, Front Desk; Faiza Sittar, Compliance Officer; Qurat ul Ain, Sr. Research Analyst; Anab Gul, Sr. Research Analyst; Abid Saeed, Media Research Analyst

LOCATION: LOCATION:

Pakistan

Dubai

LOCATION:

Pakistan Office

Qatar

LOCATION:

Singapore

Zafar Anjum, CFE – CEO | Dubai

Ezad Ahmad – Principal Representative | Qatar

crigroup.com | 21

Preventing the Spiraling Costs of Insider Fraud

By Arjun Medhi Staff Fraud Operation Manager, CIFAS — The UK’s Fraud Prevention Manager

Insider fraud causes more than financial losses. Just one insider fraud case can lead to reputational damage, which, in turn, can affect the victim company’s share price.

For financial services firms, there are also regulatory implications to consider. For all organizations, insider fraud can destabilise the workforce. It is well-known that to counter insider fraud, it is necessary for an organization to implement a strategy. Such a strategy usually encompasses the following:

Understanding the nature of the insider fraud problem This will involve, among other things, measuring the insider fraud risks/losses.

• Prevention. Implementing controls to remove the opportunities and temptations that cause an employee to commit fraud.

• Detection & investigation. This may involve implementing data analytics or establishing an investigations team.

• Deterrent & awareness. An organization will need to consider what to do after the insider fraud investigation, e.g. whether to proceed with a private prosecution and how to present the situation to your employees.

The trouble is that implementing such a strategy can be costly. Often businesses will only do so reactively, following a damaging insider fraud attack. Furthermore,

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understanding the nature of Furthermore, KPMG’s Fraud Sometimes, the costs Barometer reported that of the investigations and the insider fraud can itself 80 percent of the finanHR costs can outweigh the be problematic. cial loss through fraud in actual loss. This raises all Before pressing ahead, the UK was attributed to sorts of issues. CIFAS and it is worth stressing that management and nonthe University of Portsinsider fraud covers all management staff. mouth will be releasing aspects of staff dishonesty except for violence and drugs in the workplace Sometimes, the costs of the investigations and i.e. thefts of data, cash HR costs can outweigh the actual loss. This and property, decepraises all sorts of issues. tion and job application fraud. There are still organizations who view an employee stealing goods as different from fraud. It is important to remember that any individual who abuses his or her position to steal is a fraudster. He or she has legally applied for a role and stated that he/she is in a position to safeguard the businesses of the employer and protect their customers but instead has In their review of fraud, research in to the true breached that trust.

BDO Stoy Hayward found cost of insider fraud. But When looking at meathat staff frequently aside from costs, every suring fraud losses, it is “commit theft and cash organization should start worth considering the true fraud.” This is certainly by measuring risks. It is cost of insider fraud. We reinforced by CIFAS where worth asking your staff to should follow what the organizations frequently help identify the insider UK Government recomreported theft of cash offraud risks in there area of mends in measuring fraud fences. During the same the workplace. Then apply by including not just the year, it was reported that your fraud risk manageactual losses (which could 1,373 financial services ment to assess what you be £0 if you have foiled an staff were dismissed or need to focus on in your attempt). That is, consider suspended, which repreinsider fraud strategy. too the costs of investigasented an increase of 76 What we do know is that tions, HR costs (e.g. for dispercent the previous year. in 2012, 240 UK organizamissal and re-hiring) and The big question is “where tions reported a 43 percent other miscellaneous costs are these staff now?” increase in insider fraud associated with insider Twenty-five percent of the through CIFAS — The UK’s insider frauds reported to Fraud Prevention Service. fraud (e.g. legal advice).

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DETECTION & INVESTIGATION

Prevention

Implementing controls to remove the opportunities and temptations that cause an employee to commit fraud.

COST

This may involve implementing data analytics or establishing an investigations team.

INSIDER FRAUD COST

COST

DETERRENT & AWARENESS

An organization will need to consider what to do after the insider fraud investigation, e.g. whether to proceed with a private prosecution and how to present the situation to your employees.

Figure 1: The nature of the insider fraud problem CIFAS were reported to the police. However, just 7 percent of the frauds reported reached conviction. That means that 93 percent of the fraudsters do not have a criminal record. Clearly, to reduce the risk of fraud, it is important to do more than criminal record checks.

That in itself is a warning to all those organizations who are not taking insider fraud seriously.

Taking into consideration of the risk and loss measurements of insider fraud and the potential costs of countering it, it becomes more obvious that

organizations should start focusing more on prevention. Enhancing vetting is a start, and then carefully applying employee monitoring systems and internal controls are a must.

Organizations have increasingly come to terms with the idea that the vulnerabilities within an organization are as dangerous, and for some even more so, as those that outsiders might try to exploit.

Countering insider fraud through improving controls, responsible monitoring, and sharing data together with best practice in terms of prevention

are therefore methods that responsible organizations can and do use. It is clear that more must be done by other organizations to prevent their businesses and their customers from being punished from within. While it is true that most staff are honest, hardworking and reliable, guarding against the few bad apples must become an increasing priority for all organizations.

ABOUT THE AUTHOR Arjun Medhi is the Staff Fraud Operation Manager for CIFAS, The UK’s Fraud Prevention Manager. He can be reached at ___________.

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A Web of Deceit The Internet has changed the business world immeasurably.

It’s also changed the world of fraud.

By FRAUD360 STAFF

T

he Internet age has ushered in a frontier where purchasing goods and services from all corners of the globe is exceedingly quick and simple, something that can be done in moments with a few clicks of a mouse. In this virtual marketplace, mostly devoid of face to face interaction and dependent almost solely upon technology, there was little doubt that fraud would find a comfortable home. What some might view as increasingly disturbing, however, is the degree to which it still thrives today.

In Africa, it is estimated that for every 100 online transactions, seven are fraudulent — a staggering number when

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extended across millions of transactions all around the continent. Fairly or unfairly, Africa is sometimes considered “ground zero” for certain types of fraud, primarily due to the infamous Nigerian fraud letters — a correspondence scam started in the 1980s that grew new, much more efficient legs when it took to the Internet in email form.

Regardless of reputation, though, Africa is not alone in its fraud troubles. Other regions are close behind. In Asia, for example, 5 percent of all Web transactions are fraudulent, followed by South America (four percent). Europe and America register two percent and one percent, respectively.

Those statistics, published by global firm iovation, are based on billions of transactions that were analyzed for geographic trends. The study revealed that credit card fraud, identity theft, and account takeover or hijacking attempts were the leading cyber crime schemes in 2012.

experts scratch their heads, asking victims: “why would you believe you had won a lottery for which you hadn’t bought a ticket?”

While most of the purveyors of such schemes are largely anonymous and nearly impossible to catch, occasionally justice does catch up to an unlucky few of them.

Online Fraud Driving an Upward Trend?

In Africa, it is estimated that for every 100 online transactions,

In the UK, lately, fraud in general is often looked at in terms of “how high can it go?”

Troubling numbers from the Office for National Statistics (ONS) are raising the alarm at a time when most consumers are looking for any indications that their online business transactions are more, not less, secure.

Unfortunately, they are in for some bad news: The ONS reported that there were more than 230,000 cases in England and Wales in the first half of this year, marking a shocking 59 percent increase over the last five years. This covers all fraud, not just online theft, but experts see a correlation between the increase in online activity and the rise in fraud cases in general. Indeed, a large percentage of fraud reported in the UK today are “purchase frauds,” involving online shopping, as well as spyware and malware, along with credit card fraud.

seven are fraudulent

7%

FRAUDULENT

Justice, On Occasion In the age of the Internet, do the fraudsters who operate from behind a computer screen ever get caught? To answer that question, we return to Africa for a moment — and the notorious Nigerian fraud letters. One of the most popular mutations of this fraud are the notifications to random, would-be victims that they have won a lottery. All the recipient needs to do is provide banking information, as well as front a nominal processing fee, and their millions will be delivered within days. The emails are usually riddled with misspellings and all manner of red flags, yet people still fall for the scheme on a regular basis. All the while,

Source: 2012 study by iovation Just last month, four Nigerian operators of the lottery fraud were convicted and sentenced to three-year prison terms (and, notably, the imprisonment prescribed for the men was declared as “rigorous”). The courtroom victory and strict sentences will hopefully have some deterrent effect, but that seems doubtful. While the country itself is largely on the path to an economic recovery after years of difficult financial times, there is still widespread poverty, and the opportunity to net fraudulent dollars is

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simply too tempting for many to pass up.

As long as people still fall for the scams, there will be little incentive for the scammers to walk away voluntarily from such a profitable enterprise.

Fraud Loss: Pick a Number

The Road Ahead The fight against online fraud is an uphill battle. With every new and changing facet of technology, the fraudsters tend to stay at least one step ahead of investigators trying to cover thousands of miles and millions of bytes of data to catch them. Given the statistics, however, as well as dire warnings from experts like Kaspersky, it is not a fight that we can afford to lose.

What is online fraud costing all of us, in global terms? No one can say for sure, but Eugene Kaspersky, the Russian co-founder of anti-virus software maker Kaspersky Labs, says he believes it ranges in the hundreds of billions of In the age of the Internet, do the (U.S.) dollars. His refraudsters who operate from behind a marks at a technology conference in Dublin, computer screen ever get caught?

Ireland, as reported

by The Guardian, had him casting doubt on a previous online fraud loss estimate of $100 billion, noting that he thinks it is many times more than that amount.

Kaspersky’s leaning is probably closest to the truth and might even be conservative, given that the latest survey-based estimates of fraud (all fraud, not just online) point to more than a It will be imperative that government trillion dollars in global loss. agencies, along with corporations, Internet Worse, Kaspersky believes the security providers and facilitators, work closely with lapses plaguing systems all across the Insecurity firms and cyber crime experts to ternet, and the sophisticated methods of stem fraud threats, both now and in the exploiting them, create an environment future. It will take the right combination where fraud might be a secondary worry. of expertise, tools, tough laws and strict Kaspersky fears a serious security threat enforcement to keep our transactions in which the next major terrorist attack secure online. Without those measures, the is a crippling online invasion targeting Internet could soon be little more than an infrastructure, financial centers, military online version of the Wild West. systems or all of the above.

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Organization Profile The Fraud Advisory Panel Established in 1998 through an initiative by the Institute of Chartered Accountants in England and Wales, the Fraud Advisory Panel is a registered charity and membership organization that acts as an independent voice and leader of the counter fraud community in the UK. By bringing together people and organizations with an interest and expertise in preventing, detecting, investigating and prosecuting fraud they believe they can make a difference in stopping fraudsters in their tracks.

The Fraud Advisory Panel offers a multi-disciplinary perspective on fraud with members drawn from the public, private and voluntary sectors and across a variety of professions.

Fraud in the UK: Facts and Figures • Fraud is estimated to cost the UK economy £52 billion broken down as follows: public sector £20.6 billion; private sector £21.2 billion; charity sector £147 million; individuals £9.1 billion (NFA, Annual Fraud Indicator, June 2013).

• The average annual cost to small businesses of fraud and online crime is just under £4,000 per year (FSB, Cyber security and fraud: the impact on small business, May 2013).

• Just under one third of Federation of Small Businesses members were a victim of fraud over the last 12 months.

The main types of fraud suffered were customer or client fraud, card fraud, and computer software fraud (FSB, Cyber security and fraud: the impact on small business, May 2013).

www.fraudadvisorypanel.org

• Around one in three FSB members were a victim of online crime over the last 12 months, most commonly from virus infections, hacking or electronic intrusion, or system security breaches/loss of availability (FSB, Cyber security and fraud: the impact on small business, May 2013).

• The value of fraud was up by 38% to £516m in the first half of 2013 with the average value of cases £3.5m (KPMG Fraud Barometer, ‘Fraud increases 38% to over £0.5bn but real cost is human misery’, 02 July 2013).

Global Fraud Statistics »» The global average cost of fraud is estimated at 5.47% of expenditure; equivalent to £2.91 trillion each year worldwide or £85.3 billion in the UK (BDO and the University of Portsmouth, The financial cost of fraud report 2013). »» It is estimated that a typical organization loses approximately 5% of its annual turnover to staff fraud. The median loss was US$140,000 (ACFE 2012 Report to the Nations) »» 70% of companies reported suffering from at least one type of fraud in the past year.

The average economic cost was 1.4% of revenue. The main types of fraud suffered were theft of physical assets, information theft, management conflict of interest, and vendor, supplier or procurement fraud (Kroll, 2013/14 Global Fraud Report). »» 72% of fraud committed involved at least one insider in a leading role (Kroll, 2013/14 Global Fraud Report). »» 39% of respondents reported bribery or corrupt practices occur frequently in their countries (Ernst & Young, 12th Global Fraud Survey).

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Biggest Fraudsters

in History

By FRAUD360 STAFF

W

1

hen you think about fraud, who comes to mind? Is it a nameless, faceless office worker altering financial statements or staying late at the office to forge some checks? Or is an employee stealing from the warehouse, or skimming from a cash register, attempting to stay just out of the watchful gaze of management?

These conjured images of “fraudsters,” as anti-fraud professionals would call them — are accurate, as are a host of other characters that fit the mold of a white-collar criminal. However, there are also individuals in history whose schemes were so large, or so outrageous, they’ve become icons in the history of fraud. They are real people with real names, and many of them are still today doing time in prison.

We’ve rounded up who we believe to be the top five fraudsters of all time. Of course, there is room for debate — there has been a lot of fraud in the centuries since human trading of goods and services first took

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shape. Yet we think you’ll agree that these five individuals (or four individuals and one entity, as it were) certainly made their mark on the history of fraud. Without further ado, we present them to you.

Charles Ponzi

If there is a Godfather of Fraud, Charles Ponzi must be him. No other person has an entire scheme named after him — a scheme, it should be pointed out, that is still widespread to almost epidemic proportions today. The fact is, Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi started early along the road to conning and deceit, adopting many aliases and orchestrating numerous frauds almost as soon as he set foot on U.S. soil from Italy in the 1920s.

The scheme that would lead to Ponzi’s undoing (and subsequently make him famous) was originally based on a concept of the time involving postal reply coupons. Ponzi found he could make money by a loophole of sorts that allowed him to exchange these reply coupons for stamps, taking advantage of a difference in value between the stamps purchased in Italy

then exchanged in the U.S. The scheme itself was simple enough, but it is the business he built around it that vaulted him to the status of history’s fraudster number one.

Ponzi solicited investors, to whom he promised a 50 percent profit within 45 days or 100 percent profit within 90 days. However, Ponzi was simply paying early inves-

SEC, had never been uncovered. His admission — first to his family, then to authorities, as the scheme began to collapse, led to an immediate FBI and SEC investigation that would result in a long list of felony charges (11 to which he would plead guilty).

Though he had founded his investment firm in the 1960s, Madoff claimed that the business did not turn into a Ponzi scheme until the early 1990s. This, however, was disputed by experts, many of whom believe he ran the scheme much longer, perhaps decades. In the fallout of his admissions, it was initially believed that more than $65 billion had been lost to the scheme — yet actual loss estimates were eventually adjusted to a still jaw-dropping $18 billion.

3

Enron

Charles Ponzi tors with the cash infused by newer investors. The pyramid of investors bloated to a scale that soon was unsustainable. When it collapsed after a year, it had cost investors more than $20 million — nearly a quarterbillion dollars by today’s standard.

2

Bernard Madoff

A much more recent figure in fraud history is Bernard Lawrence “Bernie” Madoff, a U.S. financier who is currently in prison on a 150 year sentence.

In 2008, Madoff admitted to running a Ponzi scheme that is considered to be the largest financial fraud in U.S. history.

Using his Wall Street firm, Bernard L. Madoff Investment Securities LLC, he ran what he would later call “one big lie” — a massive fraud that, despite some attention and investigations in previous years by the

To be accurate, Enron is not a person, of course — and so our third position is presented more to an entity than a single fraudster. Still, the human characters were there: Jeffrey Skilling, Kenneth Lay, Andrew Fastow, and others in the leadership circle of Enron. Together, they led the Houston, U.S.-based energy corporation down a one-way path to ruin through a massive financial statement fraud that still has repercussions today.

Enron was formed by Lay in 1985 after merging two existing energy firms. Years later, under CEO Jeffrey Skilling, the staff of Enron began a regular practice of using accounting loopholes, special purpose entities and poor financial reporting in order to hide billions of dollars in debt (mostly from failed projects and deals). Andrew Fastow, CFO of Enron, and other executives not only misled Enron’s board of directors and audit committee on high-risk accounting practices, but also pressured Enron’s auditor at the time, major accounting firm Arthur Andersen, to ignore concerns over Enron’s numbers.

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In fact, Minkow’s scheme is sometimes used as a perfect teaching example of accounting fraud.

The bottom fell out in late 2001. Plummeting Enron share value along with an SEC investigation signaled the worst for shareholders, who in turn filed a $40 billion lawsuit. Enron, previously with assets valued at more than $63 billion, filed for Chapter 11 bankruptcy.

Skilling, Fastow and others were indicted for a variety of charges and were later sentenced to prison. Lay died before his case went to trial. The saddest legacy from the Enron debacle is the state it left former employees and shareholders, many who were left without their retirement funds and with little to gain from lawsuits. The scandal led to new regulations and legislation, including the Sarbanes-Oxley Act, which increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.

4

Allen Stanford

Allen Stanford was a jetsetting, high-rolling financier when his life of luxury came crashing down around him in 2009. His investment company was exposed as a massive Ponzi scheme, yet Stanford professed his innocence all the while (and still does). The Texas-born businessman held financial interests in Antigua and Barbuda as well as the U.S., and was known for projecting an image of wealth that fooled not only clients, but

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government and other officials, as well.

Money helped in that aspect: Stanford contributed millions of dollars to politicians both in the U.S. and overseas. He

Charles Ponzi Mugshot, circa 1910

was also a sports enthusiastic who sponsored large cricket tournaments and other events regularly.

In 2009, Stanford became the subject of several fraud investigations by the SEC, who subsequently charged him with fraud and multiple violations of U.S. securities laws for alleged “massive ongoing fraud” involving more than $7 billion in certificates of deposits. Following FBI raids on his offices, Stanford “voluntarily surrendered” to authorities in June of 2009. A full three

years later, Stanford was convicted on all charges except for a count of wire fraud.

Stanford is currently serving 110-year federal prison sentence in Florida.

5

Barry Minkow

We add Barry Minkow to the list partly because of what he accomplished at such a young age. First, we should note that it is a little bit difficult to put him in the same category as Ponzi, Madoff or Stanford. Minkow arguably did not set out to commit fraud, initially — and when he did, he never pocketed much of the profits.

Still, the sheer magnitude of his fraud and the lengths to which he went to maintain the charade are historically notable.

Barry Jay Minkow founded a carpetcleaning and restoration company called ZZZZ Best while he was still in high school.

While it appeared to be a very successful company, it had actually become a Ponzi scheme run by Minkow. As ZZZZ Best grew, Minkow went to great lengths to hide the fraud. In fact, when investors or auditors questioned certain large restoration jobs, Minkow was known for actually staging fake meetings at office buildings with which he had no contract or affiliation — under the farce that work was about to begin (or was already in progress).

It didn’t last. The scam collapsed in 1987, costing investors and lenders $100 million. This made it one of the largest investment frauds ever perpetrated by a single person, as well as one of the largest accounting frauds in history. In fact, Minkow’s scheme is sometimes used as a perfect teaching example of accounting fraud. Minkow was eventually released from jail, but could not stay out of trouble: in 2011, he was sent back to prison for manipulating stock prices of a company he was “investigating.”

CASE STUDY

Performance Bond Fraud A local financial institution was the victim of significant performance bond fraud. Through various investigations, the company was still unable to secure any evidence or a viable method to properly obtain information on the suspected fraudster. This prevented the bank from determining how much of the frozen assets had been stolen.

After investigating, the CRI Group team — comprised of Certified Fraud Examiners, corporate attorneys and chartered accountants — learned that the suspect had performed bond fraud on several occasions, with numerous companies over many years. CRI Group’s investigation led them to another victim of the fraudster, who had abandoned his claim. With this new evidence and additional investigative work, CRI Group made it possible to freeze the suspect’s assets. The team was then able to search two locations the suspect occupied in London, where they found substantial documentation that supported the claim.

With this new evidence and documentation, CRI Group obtained the necessary information from third parties to support the bank’s claim that their suspect had, in fact, been the criminal behind the performance bond fraud.

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Unseen Danger The Business Risks in Third-Party Relationships

By FRAUD360 STAFF

I

n today’s international business world, most organizations maintain relationships with third-parties on many different levels. Such partnerships, when conducted with carefully selected contractors, suppliers, consultants and other entities, can often help an organization meet its goals in an effective way.

Unfortunately, however, partnering with the wrong organization can sometimes do irreparable harm. Companies have discovered, often too late, that being tied to an unethical or even fraudulent partner can drastically affect their own reputation — not to mention their business operations, finances and legal liability.

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The potential for harm is high on the minds of business owners in Singapore lately, as new studies show there is reason for concern over corruption and fraud risks.

According to a recent Ernst & Young survey, 59 percent of respondents said that their anti-bribery and corruption policy is good in principle but does not work well in practice. Also, Singaporean corporations are more naive in their approach to anti-fraud and corruption practices in comparison to the Asia-Pacific average, the survey found.

The risks involved in partnering with outsiders have not changed over the centuries; it is the potential liability that’s

been ratcheted up several notches. Technology has improved the way businesses communicate. Easy access to data and information enables the media to report on business news before a business can properly respond, and the markets are quick to form opinions based on a 24/7 on-demand news cycle.

“The result of this increased liability is problematic,” said Zafar I. Anjum, CEO of Corporate Research Investigations (CRI Group). “Business litigation has skyrocketed, corporate reputations are constantly being assaulted and business strategies are forever shifting.

“Board members are becoming increasingly subjected to intense scrutiny from outside critics,” Anjum said. “And a highly educated market responds immediately with their pocketbooks.”

“3PRM”: “A “Third-Party Risk Management” Strategy™ At CRI Group, Anjum and his team have developed their own, exclusive “3PRM”: A “Third-Party Risk Management Strategy™” in order to help organizations mitigate such third-party risks. CRI Group’s experts work to help protect clients from liability issues, brand damage and harm to business.

The key to 3PRM’s effectiveness lies with CRI Group’s investigators, who use all means necessary to establish the legal compliance, financial viability and integrity levels of those outside partners, suppliers, customers and other sources worldwide that are considered potential partners for doing business.

The 3PRM strategy includes a focus on the following: • Providing third-party risk assessments • Meeting contracting requirements • Conducting due diligence

CASE STUDY

Fake Invoices and Fraud A large U.S. pharmaceutical company was facing two significant fraud cases with one of its primary business affiliates. The company suspected that the business affiliate was creating phony invoices for purchases and was fraudulently diverting its products.

A CRI Group team, including a Certified Fraud Examiner and forensic accounting staff — conducted a forensic audit of the business affiliate in question. Their research uncovered a large number of fake invoices and bills coming from this business affiliate.

Further investigations and physical verifications revealed that employees were purchasing expensive gifts for physicians to promote the business’ products, costing the pharmaceutical company thousands of dollars.

In addition, the CRI Group team sent an undercover agent to pinpoint locations where some of the company’s inventory was possibly being unloaded on the open market. The agent not only located the inventory but was able to seize a sizable amount before it was sold.

• Providing management oversight With a network of trained professionals positioned across five continents, CRI Group’s 3PRM services utilize one of the largest multi-national fraud investigation teams the industry has to offer.

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“

Business litigation has skyrocketed, corporate reputations are constantly being assaulted and business strategies are forever shifting.”

— Zafar I. Anjum, CFE

“The 3PRM strategy is especially critical when a business is performing pre-merger and acquisition research and pre-IPO due diligence, engages new clients, employs, contracts or retains foreign business partners,” Anjum said. “It should also be utilized when an organization requires a consistent and audit-worthy anti-money laundering and anti-corruption compliance program.”

There is no easy fix for an organization seeking to repair a damaged reputation.

There are no shortcuts for recovering money lost to fraud, or settling lawsuits due to a relationship with the wrong third-party.

Being proactive with third-party risk issues — and enlisting the top experts to conduct proper due diligence — is the best protection any organization can have.

CASE STUDY

Protecting an International Investor An investor in the U.S. was interested in purchasing a major jewelry operation headquartered in Dubai. The jewelry business had painted a rosy picture of itself on paper as one of the region’s most profitable companies, and had attracted the eye of the U.S. investor.

But an intensive due diligence investigation conducted by CRI Group told another story, uncovering several red flags that portrayed the jewelry business as not only a risky investment, but a potentially liable one at that.

In the course of the investigation, (which involved international public records searches and local, hands-on interviews to look into the financial liabilities of the jewelry operation’s directors and primary sharehold-

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ers), it was discovered that the jewelry company was, in fact, in the midst of liquidation proceedings, a major factor not previously disclosed to the potential buyer in the U.S. Further research conducted at a local level revealed that the company’s principals were involved in several bankruptcy cases and that the company had been issued warnings by local regulatory agencies concerning a host of collusive business activities.

Because these discoveries would have been nearly impossible to uncover using conventional Internet-based search methods, the potential buyer stood to lose his entire investment had it not been for the business background investigation conducted by CRI Group.

How Do You

Define

?

Bribery

By Lara Jezeph

T

he word “bribery,” most would agree, has quite the negative connotation. From a young age, most of us learn that a bribe is a form of payoff, possibly an underhanded, darkalley transaction carried out for nefarious purposes. We might picture a wad of cash

poking out of a nondescript envelope, dropped in a mailbox or handed off to a courier. Bribery is illegal, we know, and most upstanding individuals would never consider themselves likely to be in a situation where they were giving — or accepting — a bribe.

So what about that time you took some clients to dinner and drinks? Or better yet, treated a prospective client, one whose business you desperately wanted to secure, to an all-expenses paid night on the town?

Is that bribery? What about taking them to a polo or football match, or even a small vacation? If done innocently, isn’t that just good business practice? Or could that actually be called bribery?

The most honest answer is: It depends.

Whether it is bribery or harmless “entertaining” depends on where (what country or region) you are, who you spent the money on, how the act is perceived by both parties, and all sorts of other variables. Some bribery is stark and undeniable. But other forms of it tend to exist in an international “gray area,” drifting somewhere between influence and corruption.

Risks are Higher Today Shades of gray or not, for anyone presently doing business — especially those who do business across international borders — it has become a smart idea to remain on the safe side. The Foreign Corrupt Practices

A First-Hand Look at Bribery My own experience of what I found to be a clear case of bribery occurred while I was operating a security company in Kenya, Nairobi. I wanted to get some great media coverage in all of the newspapers and magazines to launch our new company, so I met with three or four media representatives and invited a few to attend some of our training days. To my surprise and naivety, perhaps, I was informed by my senior staff that I needed to pay the media representatives in cash to attend — as well as provide food and drink — or they wouldn’t even consider writing a story on the company.

I was astounded by this; however, they seemed surprised that I was surprised — and if I didn’t provide these “gifts,” then the company would be seen as cheap. Media have a huge voice, and we needed to be on the right side of them if we were to ever get contracts and awareness in this country. This was just one example of many in Kenya.

I did find, on the other hand, while working in the UK for a large number of local authorities that they would refuse a Christmas gift or a hosted drinks event. I had invited all of our clients and not one accepted. However, speaking with clients in the private sector, it seemed that some were provided an “entertainment budget” per annum and were at times told by their seniors that “you’re not spending enough on entertainment.”

The truth is that bribery blights lives and businesses.

Act (FCPA), which was passed in 1977 but has recently seen stronger application and enforcement, and the Bribery Act 2010 passed in the UK apply criminal laws to bribery and corruption. Both provide for steep penalties for offenders (including imprisonment for individuals, along with punitive fines for firms).

Notable investigations under the FCPA include a case spurred by allegations published in the New York Times that Walmart engaged in widespread bribery activities in Mexico to obtain construction permits. In another ongoing case, Hewlitt-Packard is under investigation to determine whether company executives paid nearly $11 million in bribes to the Prosecutor General of Russia in an effort to win a lucrative contract to supply computer equipment.

As for the UK Bribery Act, the Serious Fraud Office (SFO) announced in August that it had filed its first-ever charges under the relatively young law. According to an article in Compliance Week: “The SFO stated that it filed a case in the Westminster Magistrates Court against four men connected to

a company called Sustainable AgroEnergy plc. The SFO alleges that the men conspired to commit fraud by false representation and conspiracy to furnish false information related to the ‘promotion and selling of ‘bio fuel’ investment products to UK investors.’ Three of the four men were charged with the offense of ‘making and accepting a financial advantage contrary to section 1 (1) and 2 (1) of the Bribery Act 2010.

“The SFO pegged the amount of the alleged fraud, which allegedly took place between April 2011 and February 2012, at approximately £23 (million).”

The Bribery Act itself provides the following as a sort of case-study/guide for companies that might find themselves in the situation of a hypothetical engineering firm, dubbed (rather unimaginatively), “F.” While possibly a bit overwhelming (or even disconcerting) to a business owner at first read, the bullets do provide some measure of good advice in developing an antibribery and corruption policy.

Hospitality and Promotional Expenditure A firm of engineers (‘F’) maintains a programme of annual events providing entertainment, quality dining and attendance at various sporting occasions, as an expression of appreciation of its long association with its business partners. Private bodies and individuals are happy to meet their own travel and accommodation costs associated with attending these events. The costs of the travel and accommodation of any foreign public officials attending are, however, met by F. F could consider any or a combination of the following: • Conducting a bribery risk assessment relating to its dealings with business partners and foreign public officials and in particular the provision of hospitality and promotional expenditure.

• Publication of a policy statement committing it to transparent, proportionate, reasonable and bona fide hospitality and promotional expenditure.

• The issue of internal guidance on procedures that apply to the provision of hospitality and/or promotional expenditure providing: • That any procedures are designed to seek to ensure transparency and conformity with any relevant laws and codes applying to F • That any procedures are designed to seek to ensure transparency and conformity with the relevant laws and codes applying to foreign public officials

Conclusion With new legislation and authorities on the hunt for corruption, it is critical for organizations worldwide to take all necessary steps and remain in compliance. Due diligence and compliance experts are needed to ensure that all regulations are met, and that practices once seen as “normal business operations” don’t suddenly put a business at risk. The stakes are too high to overlook the details set forth in the FCPA, UK Bribery Act and all regional or locallybased laws that deal with the issue.

The truth is that bribery blights lives and businesses. Its immediate victims include firms that lose out unfairly. The wider victims are government and society, undermined by a weakened rule of law and damaged social and economic development. At stake is the principle of free and fair competition, which stands diminished by each bribe offered or accepted.

About the Author Lara Jezeph is the Marketing & PR Manager at CRI Group, EMEA – London, UK. She can be reached at ljezeph@crigroup.co.uk.

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