Panama Papers Aftershocks: Mossack Fonseca's Offices Raided, Founders Arrested

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Martin Kenney
Managing Partner of Martin Kenney & Co., Solicitors

Authorities finally appear to have caught up with Mossack Fonseca’s (MF) founders, Jürgen Mossack and Ramon Fonseca, who were arrested last month in Panama City in connection to the Brazilian “Lava Jato” or “Operation Car Wash” corruption scandal.  Along with the high-profile arrests, the firm’s offices were also raided.

The news is another blow to the company, which was already reeling from the aftershocks of the Panama Papers scandal, in which MF was shown to be the center of countless international shell companies and tax havens.

In a statement, Panama’s Attorney General Kenia Porcell said that recently the firm allegedly worked with contacts in Brazil to "destroy evidence related to those implicated" in the Brazilian scandal. "In short: money from bribes circulate through various places to return laundered to Panama," she said.

Although further details have yet to be released, tying the firm to Operation Car Wash will raise a few eyebrows. The year-long investigation reads like a Who’s Who of South American countries; added to the mix are the U.S. and Switzerland.

Although the Panama Papers scandal has been fading from the public eye, I had mused that silence was not linked to inaction. Most criminal investigations are cloaked in secrecy for obvious reasons. The Panama Papers story was simply too big and too grave for law enforcement to ignore. Public interest was always going to dictate that a full investigation would be required to gauge the depth of the problems being unearthed.

The Operation Car Wash investigation is similarly vast, and the many levels of corruption and the losses incurred by the public purse demand that many stones be overturned.

It remains to be seen if MF’s founders were involved in the events tying the firm to Operation Car Wash, either directly or by turning a blind eye. MF has issued a denial that they were connected to any entity linked to Operation Car Wash.

The underlying problems for the firm are a lack of plausibility and credibility. There have been too many revelations and too many blanket denials. MF handled the initial and subsequent fallout very poorly; issuing denial after denial, or flimsy excuses, is not the way to limit damage when under criticism from the press and the public. Ramon Fonseca argued that his firm can’t be held to account for how the 200,000+ offshore companies it formed behaved – just as GM can’t be blamed for a reckless driver doing harm with one of its vehicles. That’s just not credible, and it ignores his firm’s obligations to know its customers, identify the UBOs of the companies it formed, and to ferret out and report suspicious activities. The use of misdirection and red herrings is unhelpful in this context.

If MF has knowingly facilitated the improper movement of assets away from Brazil, then it deserves all it will get. In this instance, the ordinary citizens of Brazil have suffered the most as billions of dollars appear to have been unlawfully diverted elsewhere.

There is also going to be a lot more fallout from the Panama Papers scandal. The countries affected have lost billions in revenue as a consequence of tax evasion, and will not let matters lie. Add the facilitation of money laundering for criminal gangs and organized crime, plus the potential links to terrorist extremists and their revenue streams, and you have a heady cocktail of reasons why this scandal is anything but dead. Global authorities owe it to their people to right the wrongs and bring those responsible to book.

Martin Kenney is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI and focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com |@MKSolicitors . Mr Kenney was recently selected as one of the Top 40 Thought Leaders of the Legal Professionin 2017 by Who's Who Legal International. He is the only fraud and asset recovery lawyer included in this list of Thought Leaders drawn from 16 different practise areas.

The opinions expressed in this blog are not necessarily those of the ACFE.

Wine Fraud: The Grapes Do Fall Far From the Tree

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Emily Primeaux, CFE
Associate Editor, Fraud Magazine

A friend of mine recently hosted a wine-tasting party at her home. The premise was simple: bring two bottles of a single varietal that our generous host would bag and number. She gave each of us a numbered sheet of paper and, thankfully, a list of the wines hidden in the bags (in no particular order) to help us during the guessing game. We blindly tasted each wine and then took a guess at the varietal.

Full disclosure: my team and I did terribly. While I’m certain my palate would appreciate a finer wine instead of “two buck chuck,” the evening was certainly a learning experience.

So when I heard only a couple of weeks later that the ACFE’s Austin Chapter would feature “Wine and Fraud” as the topic for their March event, I knew I wanted to learn more. Presented by Cecily Raiborn, CFE, CMA, professor at Texas State University, the session covered the many ways in which wine fraud can be committed.

“We like to think of wine as something pretty and sweet and outstanding,” said Raiborn. “But really, a vineyard is just a farm. A winery is a manufacturing plant and wine is the product.” And she explained that there are at least four ways in which wine fraud can occur.

  • Employee theft                                      

At the Kendall-Jackson Winery, a low value placed on accounting was most likely the contributing factor when a service rep stole thousands of bottles and resold them for sporting tickets. He was found out because the bottles he resold weren’t even on the market yet.

  • Upstream supply chain

In 1993, Bronco Wine Company and Fred Franzia, one of the owners, were indicted on federal charges of conspiracy to defraud by misrepresenting cheaper grapes as premium Zinfandel and Cabernet Sauvignon.

Franzia lied about where the oak barrels had come from. The problem is that an oak barrel from France will make the wine taste differently than an oak from the U.S. Raiborn explained that one new French oak barrel costs around $1,400, but the fraudster used a U.S. barrel that should’ve cost much less. Of course, he didn’t charge less.

How do you prevent this kind of fraud from happening? Know your suppliers.

  • Downstream supply chain

Mark Anderson made headlines in Sausalito when he set fire to a wine warehouse. The wine arsonist was facing embezzlement charges after stealing more than 5,700 bottles of his clients’ collections. He’d take a bottle here and there from the warehouse where he stored wine for wineries and collectors. To cover his tracks, Anderson burned down $6 million of wine.

Unfortunately, because of insurance quirks pertaining to the movement of wine, the affected wineries were unable to claim the loss. Raiborn’s advice in this scenario is to properly insure your property and know your customer.

  • Frauds by wineries

Two cases really stood out to me in this example. In one, an Austrian winery added antifreeze to its wine to make it sweeter for their German customers, who prefer a sweeter wine. And in 2008, 20 Italian companies added hydraulic acid, manure and fertilizer to their wines. These attempts to cut costs endangered lives.

According to Raiborn, it’s a little trickier to prevent this kind of tampering. Compositional analysis is an option, but it’s very expensive and most wouldn’t be able to afford the cost. The best control here is to, again, know your supplier.

“But it’s still wine!”

According to Raiborn, 20 percent of wines sold worldwide are counterfeit. Yet the first person ever prosecuted for counterfeiting wine was Rudy Kurniawan in 2013. Why?

Wine fraud goes unreported because the fear of what it will do to the industry is overwhelming. There’s a lack of prosecution because many hire friends and family and don’t want to seek retribution. And worst of all, it may not seem like a big deal. Raiborn said that many fraudsters would argue that at the end of the day, it’s still wine.

The best defense is to employ sound internal controls and to know that even in such a glamorous industry, there are many ways in which people can con others.

Read more about wine fraud in the Fraud Magazine article, “A bitter tasting: Serving up three cases of wine fraud,” by Donn LeVie Jr.

8 Underrated Critical Types of Evidence in Email Reviews

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Sundaraparipurnan Narayanan
Associate Director of Forensic Services, SKP Business Consulting

In the current electronic age, e-discovery is considered one of the key approaches for gathering evidence in litigation and investigations into misconduct. With new tools being created to help uncover and understand electronic data, the industry is evolving to new heights. When there is a large amount of data to review, the process requires a purpose-led approach to ensure the evidence is compiled objectively and accurately.

E-discovery reviews are based on keywords, timelines and communication patterns relevant to a purpose or defined objective. Amidst multiple aspects — like the nature of email threading, parent-child linkages, text analytics and communication patterns considered for review — the following eight elements are essential types of email evidence to not overlook in your examinations:

  • Calendar: A potential subject may schedule meetings that are contextually important to a case.
    Example: In a Foreign Corrupt Practices Act investigation, a calendar appointment with an individual at a posh restaurant a few days prior to the approval for a regulatory license may be relevant if the individual’s name in the appointment and the name of the public official providing the license are the same or similar.
  • Automatic email: Dates mentioned in an automated out of office response may be important for connecting a chain of events associated with a concerned individual.
    Example: If the dates of out of office responses sent during a vacation conflict with contract negotiation dates with a third party it may be a red flag to look into.
  • Travel and hotel information: Travel and hotel booking information can contain vital evidence.
    Example: In a kickback investigation, payment details as part of a travel or hotel booking voucher that contain the name of a payee/credit card holder may be relevant to correlate an employee’s relations with a suspected vendor/third party.
  • E-commerce purchases/email alerts: Alerts from e-commerce sites or courier agencies can play key roles in examinations.
    Example: A dispatch intimation from a shipper from a suspected third party to an employee’s personal address may be relevant for further enquiry in a conflict of interest or kickback investigation. Similarly, banks and financial institutions send alerts (on cash deposits, exceeding limits, swipe of card in unusual locations, etc.) as email alerts. These email alerts may be relevant in a chain of events to correlate and corroborate with the available information in the context of a review.
  • Group/other registrations: Email IDs registered with certain sites (gambling, pornographic or dating) and emails received from such sites may be relevant during investigations into misconduct.
  • Task classification (flagging): Task classification and completion are used for the convenience of tracking key activities/communications. Such tagging may highlight certain patterns.
    Example: A pattern of prioritizing the approval of third party invoices over others along with task classification by a user department representative, who is using the services of the concerned third party, may show possible indications of favoritism by the employee.
  • Self-emails, notes/task listing: Many individuals send emails to themselves as a reminder, notification, to-do list, etc.
    Example: A self-email by an accountant containing the phrase ”change estimations” may be relevant in a financial statement fraud. It is necessary to understand that some of the content mentioned in self-emails may not necessarily have the keywords identified as relevant for the case. Similarly, subjects may update their tasks/notes as part of their email service, which may contain messages of evidentiary value.
  • Folder structures: Every individual has a way of organizing their email communications. This includes the way the individual has classified their folders within their email service or the archival methodology they had adopted. These aspects provide necessary insights in understanding which folders contain relevant information.

Reviewing digital data for evidence requires objective-driven searches in order to understand and interpret a given circumstance. Awareness of possible alternative evidence provides the ability to anticipate and look for some of the above categories of communications in search of evidence. While not all these categories may be relevant in every case, these are vital ways to find the evidence needed to detect fraud.

"Energy is Opportunity" the Foundation for Saudi Aramco’s Commitment to Fighting Fraud

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ACFE Staff

For the past 80 years, Saudi Aramco has worked to establish itself as a leader in energy, and oil and gas production. Most recently, the company has also taken steps to lead fraud detection and prevention efforts in the Middle East. More than just a company tagline, “energy is opportunity” is only a stepping stone to the larger principles of integrity, citizenship and ethics.

"While 'energy is opportunity' to us at Saudi Aramco, the company can only capitalize on its opportunities when the basic underlying business processes are all in place and functioning effectively," said Waheed Alkahtani, CFE and CCEP-I, head of the Internal Auditing Advisory Services Group at Saudi Aramco. "The culture has to be one that values and upholds core principles of high integrity, while each employee demonstrates good corporate citizenship. In this regard, being a leader in both fraud detection and also prevention, such as through greater ethics and fraud awareness, surely contributes to the success of Saudi Aramco."

Headquartered in Dhahran, Saudi Arabia, and employing more than 65,000 workers worldwide, Saudi Aramco is one of the largest oil companies in the world. The oil and gas producer leads the industry in production, operational reliability and technical advances. It is currently the world’s largest crude oil exporter, producing roughly one in every eight barrels of the world’s oil supply. With this great responsibility of service, comes an even greater responsibility of ensuring the businesses’ processes and values stay true to the vision of creating opportunity through integrity.

According to Alkahtani, Saudi Aramco has had a history of valued partnership with the ACFE. It established an ACFE Saudi Arabia Chapter in 1997, and most recently joined the Corporate Alliance Program. "When we realized the many benefits of the program, joining the Corporate Alliance became a natural transition for us," he said. "It allows our sizable complement of investigative professionals to have direct access into ACFE’s many resources."

Saudi Aramco decided to join the Corporate Alliance during a difficult time for oil prices, a bold step that could have been viewed risky. But according to Alkahtani, it was actually more cost-effective for Saudi Aramco to administer a group membership as opposed to individual memberships. “At a time of cost-containment and focus on efficiency due to budgetary tightening across the oil industry, the Corporate Alliance offered a positive solution for us, while maintaining valued access to ACFE for our professionals," he said. "We are also able to use ACFE research studies and reports to benchmark our anti-fraud efforts against best-in-class practices. The Corporate Alliance provides cost-effective tools that support our anti-fraud efforts, while keeping us abreast of the latest industry developments and training opportunities."

Affiliates are located in China, Japan, India, the Netherlands, the Republic of Korea, Singapore, the U.K. and the U.S. Like many large corporations, even though the company is headquartered in a central location, its reach is global. Saudi Aramco has designated organizations to effectively manage and investigate suspected fraud cases. “Fraud case profiles tend to be surprisingly similar across global locations,” said Alkahtani. “Saudi Aramco uses a consistent fraud investigation and reporting process to ensure that the General Auditor can reliably provide a comprehensive view to the Board Audit Committee. The two key departments that are involved in investigations of suspected fraud: Special Audits (SAD) and Corporate Security Services (CSSD). Their reports are issued to two corporate executive committees, such that the company acts fairly, ethically and responsibly.”

Perhaps a benefit of joining the ACFE’s Corporate Alliance that may seem obvious, yet understated, is something that Alkahtani is most enthusiastic about: he, and Saudi Aramco, are not alone. "We are all in this fight together! The fact is, no organization operates alone, and we must rely on each other’s efforts to stamp out fraud and corruption," he said. "No government can do it alone either. Regulatory pronouncements must be complemented by corporate policies that work hand-in-hand to enhance transparency and promote integrity. The company has taken a proactive stance in this matter to lead by example. By doing so, we hope that the benefits of a higher integrity business culture will accrue to every citizen and to Saudi Aramco itself."

To find out more about the ACFE's Corporate Alliance Program and hear more about how Saudi Aramco is committed to preventing and detecting fraud, visit ACFE.com.

Pacemaker Data Betrays Host in Fraud Case

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Jeremy Clopton, CFE, CPA, ACDA, CIDA
Director, Big Data & Analytics, Digital Forensics
BKD, LLP | Forensics & Valuation Services

As the world of unique ways to investigate fraud expands, investigators in Middletown, Ohio, have given us the latest in ways of using data to solve a case. Not data from an accounting system, building access records or an Amazon Echo (see last month’s post) — this time it was data from a pacemaker. According to the article, a man was “charged for arson and fraud after law enforcement used data gleaned from his pacemaker to uncover an alleged plot to cheat his insurance company.” The man in question was attempting to collect more than $400,000 in damages caused by a fire at his home. However, the story he told of the exertion he underwent to pack suitcases and throw them out a window didn’t quite line up with the story his heart told. Police obtained a search warrant and went after the electronic records of his pacemaker. They quickly discovered that the heart doesn’t, in fact, lie. When I first read this story, I was initially shocked a pacemaker could be used this way. The more I thought about it, however, I quickly realized that it is an obvious application of analytics.

Using analytics to detect fraud often involves the application of pattern recognition technology. That can mean looking for specific patterns indicative of a fraud, looking for patterns contrary to your expectations or finding patterns where you wouldn’t expect. In this particular case, it was the absence of a pattern where one was expected. So, how does one go about applying analytics to a case like this? The same way you apply analytics in any situation — following a predictable framework.

Strategic question: Is Mr. Compton’s story plausible?

Objective: Identify indications of exertion of effort consistent with description of actions.

Data: Pacemaker electronic records.

Procedures: Trend analysis of heart rate, demand on pacemaker and heart rhythms before, during and subsequent to actions in story.

Analyze results: Patterns don’t show signs of increased exertion that would have been present based on story.

Manage results: Investigate other possible reasons for inconsistent pattern.

At its core, this is the same framework and application methodology for analyzing trends in financial or other data. What differentiates this from typical applications of analytics in investigations is the willingness to get data outside of traditional systems. As the Internet of Things grows and expands, the opportunities to go outside these traditional systems will also grow. More devices — wearables, virtual assistant devices, vehicles, etc. — will generate more data than ever before. Each of these will provide an opportunity to evaluate patterns in data compared to expectations. 

The challenge is this — how will you begin to leverage these non-traditional data systems in your investigations?