4 Ways to Protect Your Company’s Pot of Gold

AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

Don’t worry; I’m not going to go all Lucky Charms on you this St. Patrick’s Day and toss out a bunch of thinly veiled Irish puns. You would only be so lucky…sorry, I couldn’t resist.

But, I did want to take this opportunity to remind you about the cost of fraud to your organization and how to add four easy best practices that will help protect your company’s hard-earned pot of gold. Organizations worldwide lose an estimated 5 percent of their annual revenues to fraud, according to the ACFE’s 2016 Report to the Nations on Occupational Fraud and Abuse. A single instance of fraud can be devastating: the median loss per fraud case was $145,000, and more than a fifth of the cases involved losses of at least $1 million.

The good news? There are some basic steps your organization can take to lessen your vulnerability to fraud:

1. Adopt a Code of Ethics.
Be proactive in setting a tone for management and employees. Evaluate your internal controls for effectiveness and identify areas of the business that are vulnerable to fraud.

2. Establish Hiring Procedures.
When hiring staff, conduct thorough background investigations. Check educational, credit and employment history (as permitted by law), as well as references.

3. Implement a Fraud Hotline.
Fraud is still most likely to be detected by a tip. Providing an anonymous reporting system for your employees, contractors and clients will help uncover more fraud.

4. Increase the Perception of Detection.
Communicate regularly to staff about anti-fraud policies, ways to report suspicions of misconduct, and the potential consequences (including termination and prosecution) of fraudulent behavior.

Implementing these tips could help prevent your organization from becoming a statistic, and help keep your pot of gold safe and secure. I leave you with this Irish blessing: “Here’s to you and yours, And to mine and ours, And if mine and ours ever come across you and yours, I hope you and yours will do as much for mine and ours as mine and ours have done for you and yours!” Cheers, everyone!

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.