The Wild West ... or Just Wait and See? What Anti-Fraud Professionals Should Understand About Digital Currencies

Guest Blogger

David Long, JD, CFE, CAMS
Principal, Northern California Fraud Prevention Solutions

Recently the digital currency, Bitcoin, has exploded into the news. Much of the news coverage has been decidedly negative. A number of events occurred that have instilled in the public’s mind a vaguely negative impression about Bitcoin, to those at least, who have actually ever heard of Bitcoin. 

In October 2013, the FBI arrested Ross Ulbricht, a.k.a. “Dred Pirate Roberts,” who is alleged to have been the mastermind behind Silk Road, a website devoted to selling illegal drugs and other illicit items and services. The sole medium of exchange on Silk Road: Bitcoin. Then in January 2014, Charlie Shrem, a well-known member of the Bitcoin community and the CEO of BitInstant, one of the most well-known and largest bitcoin exchanges at the time, was arrested on money laundering charges.  Later, in early 2014, Mt. Gox, the Tokyo-based digital currency exchange collapsed and the ensuing loss of millions of dollars-worth of customer’s bitcoins spread through the news like wildfire.  Taken together, these events have caused many anti-fraud professionals working in law enforcement, regulatory agencies, compliance departments, as well as other institutions where digital currencies could conceivably be an issue, to eye Bitcoin and other alternative currencies with a healthy dose of skepticism.

Also, these events have hurt the relative strength of Bitcoin in relation to the dollar. The Bitcoin to dollar exchange rate reached a high of over $1,000 on some exchanges on November 27, 2013; however, the rate dropped to a low of $421.91 on April 7, 2014, and continues to fluctuate, further fueling skepticism about Bitcoin’s long-term viability. 

In spite of the negative news, Bitcoin continues to gain support commercially among merchants and retailers. The Sacramento Kings of the National Basketball Association, the Chicago Sun-Times and Overstock.com, among others, now accept bitcoins as a method of payment. In addition, thousands of small businesses scattered across the U.S. with notable concentrations in San Francisco and New York, also are accepting bitcoins.

Because Bitcoin is a disruptive technology, there were no real applicable regulatory or enforcement mechanisms in place when Bitcoin came into existence in 2009. The nature of the Bitcoin protocol is such that regulations already in existence, in most cases, could not be easily adapted to the Bitcoin protocol. The exchange, transmission, trade, securitization and commoditization of bitcoins all have regulatory implications. Regulators are rightly concerned about such issues as consumer protection, anti-money laundering/countering the financing of terrorism, fraud prevention and more. However, because of Bitcoin’s disruptive nature, the application of existing regulations often place Bitcoin into a regulatory grey area.

In March 2013, the U.S. Financial Crimes Enforcement Network (FinCEN) issued guidance that characterized certain Bitcoin companies, namely Bitcoin exchanges as non-bank financial institution “money services businesses,” namely “money transmitters.”  Money transmitters must register with FinCEN and follow the Bank Secrecy Act’s (BSA) anti-money laundering (AML) regulations and must develop bank-level AML and Know Your Customer compliance standards for their businesses. 

For anti-fraud professionals whose work might involve digital currencies, it is important to reach out and coordinate efforts with other professionals, whether they are employed in law enforcement, regulatory agencies, or compliance departments. Digital currencies are here to stay, and a proactive approach will go a long way in successfully facing difficult issues related to digital currencies likely to arise in the future.

If you would like to learn more about the Digital Currency Environment’s impact on the anti-fraud profession, register now for the David Long’s upcoming ACFE webinar: Anti-Money Laundering in the Digital Currency Environment.

Hunting the Big Cats of Fraud: Dewey & LeBoeuf LLP

SPECIAL TO THE WEB

Robert Tie, CFE, CFP
Contributing Editor, Fraud Magazine

Despite the global financial crisis, all seemed to be well at Dewey in 2008. But then cash flow began to drop, which eventually forced the big firm to declare bankruptcy — five years after the 2007 merger that created it. Thousands of Dewey employees lost their jobs, and creditors and investors were out hundreds of millions of dollars.

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According to the May 14, 2012 article, Dewey's Bienenstock Discusses Law Firm's Demise, by Peter Lattman in The New York Times, "Several former Dewey partners presented prosecutors with evidence of potential financial improprieties."

After a lengthy investigation, the U.S. Department of Justice (DOJ) on March 6, 2014, indicted the former CEO, CFO, executive director and a lower-level manager of the by then-defunct law firm for intentionally issuing false financial statements. At the same time, the SEC filed a civil complaint against the same four employees. It also filed a separate complaint against seven of their colleagues. The CEO, CFO, executive director and manager pleaded not guilty to all criminal and civil charges, and their seven colleagues all pleaded guilty to the civil charges against them.

One of the seven who pleaded guilty is Francis Canellas, the firm's former finance director, who agreed to testify for the prosecution. According to Canellas' plea and cooperation agreement with the DOJ, he and the other 10 defendants falsified the firm's financial statements to fool lenders and investors into thinking Dewey was profitable, even though it wasn't. Multiple insurance companies, deceived by the doctored records, invested $150 million in a private Dewey bond offering, and three banks gave the firm a $100 million line of credit.

"What Canellas told prosecutors about his co-defendants is as yet unproven," Sizemore says. "But we can regard as fact every fraudulent action he admitted taking himself. Each of them is a mirror image of actions taken in virtually every financial statement fraud I've investigated or studied."

As happens in many businesses, Dewey wrote off some of its receivables as bad debt. But the prosecutors and Canellas said that when it became clear the firm wouldn't meet its revenue projections, the defendants fraudulently reversed those write-offs.

"If I were called in to perform a fraud risk assessment at Dewey before the fraud was discovered, I'd want to know how much working capital the firm had and what covenants they had to meet to keep their funding in force," Sizemore says. "And I'd wonder how that firm could pay so many high-priced lawyers, finance its operations and pay its loans — all during a recession."

TIPS FOR FRAUD EXAMINERS

1. Ask as many questions as necessary, and evaluate the answers for reasonability. "If you don't understand something on a financial statement, or it seems unusual, ask for support documentation," Sizemore says. "Test it for reasonableness in terms of your understanding of the company's expenses and income and the business environment in its industry and locality. If your reasonableness test reveals any red flags, perform ratio analyses. Be sure to compare the company with at least two others or with industry-wide values. Company statistics by industry — number of employees, sales and so on — are available online, and I've used them in numerous investigations. Some are available only by subscription, while others are free."
2. Be flexible. Sizemore says no single ratio fits all situations. So choose a ratio appropriate for your client's industry and type of business. If you can't find one, use a universally applicable calculation, such as days' sales outstanding in accounts receivable. He also notes that ratios don't prove fraud, but they can help you detect fraud that otherwise might not be evident.
3. Stay on track. "To conceal red flags, fraudsters will tell you that the support documentation you want isn't available," Sizemore says. "Most red flags have legitimate causes, such as management's inability to run the business effectively. But the only way you can tell is to check the support documentation," he adds.

Read three more tips from Tie and view a table comparing HealthSouth to Dewey & LeBoeuf on Fraud-Magazine.com. 

The Statistical Profile of a Fraudster

GUEST BLOGGER

Andi McNeal, CFE, CPA
ACFE Director of Research

Accounting doesn’t happen in a vacuum. The performance, processing, reporting and analyzing of financial transactions inherently involves people. And people, by nature, make errors, have lapses in judgment, and — sometimes — break the rules intentionally.  

Although this point may seem self-evident, it’s a message that all too often gets forgotten amidst the check-the-box approaches and “it couldn’t happen here” mindsets that are common in many organizations. Thinking about the people behind the processes, transactions and numbers — and considering what might lead those people to succumb to the pressure, opportunity and rationalization to commit fraud — is critical to protecting an entity’s resources from dishonest employees.

As anti-fraud professionals know, individuals who perpetrate fraud look just like everyone else. They are our coworkers, our acquaintances, and even our friends and family members. Many appear outwardly honest and ethical, making it particularly difficult to suspect or believe that they would breach their employer’s trust. And yet, effectively preventing and detecting fraud requires us to do just that.

The ACFE's 2014 Report to the Nations on Occupational Fraud and Abuse provides some insight into the people behind the crimes. Of the perpetrators responsible for the 1,483 occupational fraud cases analyzed in our study:

• 42% were staff-level employees, and 36% were mid-level managers.
• 55% worked alone in committing their scheme.
• 52% were between the ages of 31 and 45.
• Two-thirds were male.
• 47% had worked for the victim organization for less than six years.
• 72% had at least some university education.
• 45% worked in the accounting, primary operations, or sales functions of the victim organization.
• 87% were first-time offenders with no criminal history of fraudulent behavior.
• 44% were known to be living beyond their means.

Obviously, simply meeting the profile outlined by the data above does not mean that an individual is going to commit fraud, nor should someone who falls outside the profile be immune from suspicion. However, examining trends in the characteristics of fraudsters can provide context and perspective to those charged with identifying high-risk areas and individuals.

With this in mind, the ACFE has created an infographic that illustrates the statistical profile of a fraudster to help inform anti-fraud professionals, management and the general public about some of our findings regarding occupational fraud perpetrators. This profile can be a valuable training and awareness tool, particularly when conveying the message that fraudsters don’t exhibit any sort of identifying hallmark — no special uniforms or badges, no “bad-guy” masks. The more we understand and help educate others about the human face of fraud, the better prepared we all are to prevent and detect fraudulent behavior.

Read more about the 2014 Report to the Nations at ACFE.com/RTTN.

Grace Under Pressure: Bouncing Back from a Career Setback

GUEST BLOGGER

Kathy Lavinder, CFE
Owner and Executive Director of Security & Investigative Placement Consultants

An investigator with a boutique professional services firm contacted me recently. Her employer was having financial difficulties. That was something she knew, but what she didn’t expect was that her job would be eliminated. Her work evaluations had been top-notch, but she was the most recent hire. She never saw it coming, so it was a tough blow.

After a day or two to absorb the shock, this investigator did what I recommend anyone in that situation do. She updated her résumé to reflect recent work experience and training. She emailed several people, including her former supervisor at the boutique, to ask if they would serve as references. Then she turned her attention to LinkedIn. She began expanding her network by sending out invitations to connect, with special attention given to recruiters and talent acquisition specialists at employers in her home town. She quickly joined several new LinkedIn groups that focused on her areas of expertise and interest. Then she updated her profile page to make it crystal clear the kind of work she has done and the kind of role she could handle.  

Professional lives, like personal lives, can veer off course sometimes. As this young professional demonstrated, it’s vitally important to begin with an unemotional and clear-eyed assessment of the situation. Discuss the particulars of your situation with several people you trust, who know you well and who you know will be discreet. Find the right perspective – determine if this is a minor setback or something truly serious. If you conclude it’s a minor event, then look for ways to learn from it and move on.  

If the development falls squarely into the serious category, such as a job loss, you’ll need to develop a thoughtful and appropriate response. An adverse event outside of your control, such as a bankruptcy filing by your employer, is an example of something you can’t impact. But you can respond and you can even be prepared for this kind of event. Keep your résumé up-to-date, periodically check job boards and passively use indeed.com to push relevant job announcements your way. In a career crisis, however, don’t do anything hasty because storms – even big ones – blow over, and your career may be none the worse for it.  

If you’re in the middle, or even the periphery, of an adverse event, it becomes something you cannot ignore. As a fraud prevention, investigation, or mitigation specialist it can be problematic if the issue involves some failure on your part – perhaps it was an oversight or a misjudgment. Whatever the matter, your actions and judgments will surely come under the microscope.

Keep doing your job to the best of your ability, while taking ownership of your mistake or shortcoming. Be a professional who exhibits grace under pressure. This response may provide you with an opportunity to redeem yourself even if you had direct involvement in the adverse event. After all, to err is human, to forgive divine. If you can demonstrate how you’ve learned from your mistake or misstep, you may be able to redeem yourself. By communicating that you’ve gained new self-awareness and have serious intentions to correct deficiencies or make amends, you may qualify for a second chance.  

On the other hand, a catastrophically bad judgment call and/or an integrity lapse are two things in the fraud prevention arena that are usually career killers. Keep that stark reality in mind as you go about your work.  

If your career emergency truly is critical and calls for action, contact your fraud sector peers, as well as former colleagues and recruiters, to alert them to your newly launched job search. Communicate that you’re ready for your next career challenge. Do not go into great detail about your situation at this point. Always keep in mind how important discretion is in the anti-fraud arena. You’ll have to be proactive to find your next job since it’s a competitive market, but there are always opportunities available.

Find more career advice from experts like Kathy in the ACFE's online Career Center.

Investigating a Contemptible Fraud

LETTER FROM THE PRESIDENT

I've seen all kinds of fraud. Some are mind-numbing. Others are intriguing or preposterous. But only a few are truly contemptible. The cover story in this month's Fraud Magazine tells of a fraud that endangered the lives of the poorest of the poor while generating millions for the fraudsters.

On May 13, 2013, Ranbaxy USA Inc., a subsidiary of Ranbaxy Laboratories Limited, pleaded guilty to seven federal criminal counts of selling adulterated drugs with intent to defraud, failing to report that its drugs didn't meet specifications and making intentionally false statements to the government. Ranbaxy, in the largest drug safety settlement to date with a generic drug manufacturer, agreed to pay $500 million in fines, forfeitures and penalties.

Dinesh Thakur, a former research executive with Ranbaxy, blew the whistle on the company after his boss found that it had provided false data to the World Health Organization. Thakur, then a new employee, investigated and discovered a company culture that not only tolerated fraud but also apparently celebrated and encouraged it among its employees. His boss reported Thakur's results to the board, and he then later resigned in protest. Thakur also resigned after Ranbaxy falsely accused him of breaking company rules.

Thakur eventually took his discoveries to the U.S. Food and Drug Administration and endured almost nine years of aiding governmental investigative agencies before Ranbaxy finally pleaded guilty.

"It certainly was cathartic to stand in the Federal Court in the District of Maryland in May of last year to hear the company plead guilty to seven counts of felony," Thakur says in the cover interview article. "I felt the weight of this case removed from my shoulders. It was a victory not just for me and my legal team, but the hundreds of millions of patients worldwide who were subjected to adulterated medicines by this company in the most unethical manner. More importantly, this case sent a strong message to manufacturers of medicines that you cannot hide from the long arm of the law just because you are a foreign entity."

For "Choosing Truth Over Self," the ACFE honored Thakur with its Sentinel Award at the recent 25th Annual ACFE Global Fraud Conference.

I know that we'll see many more contemptible frauds. But thanks to Thakur, and the diligent investigators who investigated Ranbaxy's systemic crimes, we'll see a bit less fraud that ravages the defenseless.