The Security and Utility of Blockchain Technology

FROM THE ARCHIVES

Zach Capers, CFE
Contributing Author, Association of Certified Fraud Examiners        

The technology underlying the virtual currency bitcoin has the potential to disrupt several industries while significantly reducing fraud. Known as blockchain, the technology was created to ensure the legitimacy of every bitcoin transaction by tracking them in a distributed public ledger. Bitcoin has endured a divisive reputation due to its volatile value fluctuations and use in illicit transactions on the Deep Web; however, the security and utility offered by its blockchain is anything but controversial.

Any addition to bitcoin’s chain of information represents a new block that must be validated by every copy of the ledger spread across a worldwide computer network. Because the ledger is permanent, public and decentralized, it is incredibly difficult to defraud. These characteristics have resulted in an influx of investment and research aimed at adapting the blockchain concept to a diverse array of new applications.

Illuminating Supply Chains
The information in a blockchain can consist of anything that can be represented digitally. As such, blockchain technology can be used to ensure the authenticity and source of any number of products from organic produce to jewelry. For example, a start-up named Everledger is betting that a diamond’s myriad attributes can be recorded and tracked using an inscribed serial number and a digital blockchain to ensure that the stone being purchased is authentic.

This idea can be applied to a host of high-end goods that have typically relied on paperwork and certificates of authenticity that can be faked far more easily than a blockchain can be manipulated. Furthermore, stolen goods that are recovered can be re-authenticated to regain their value, which is important to former owners and insurance companies that have paid claims on stolen goods. 

The Rise of Smart Contracts
One of the most heralded potential uses of blockchain technology is its ability to facilitate smart contracts. Rather than a standard legal contract that must be litigated or otherwise disputed if breached, a smart contract can enforce itself through digital means when preset terms are met, and revoke the contract automatically if the terms are breached.

Ethereum, a crowd-funded smart contract platform, might foretell the future of smart contracts. The network allows users to input virtually any stipulations (e.g., if this, then that) into the smart contract's blockchain and exchange value using virtual currency. For example, if one were to purchase an item from an online seller, a smart contract could be employed to hold the payment in escrow until a tracking system confirms that the item has been delivered.

Another example of a smart contract platform applies to the streaming music industry. Renowned English singer-songwriter Imogen Heap recently released a new single on Ujo Music, a company that allows artists to register and track their creations on a blockchain using associated smart contracts that allow the listener to stream the song only after specified conditions (e.g., payment, terms of use) have been satisfied. The idea is to foster an equitable method of music distribution that provides artists with more control over how their music is shared and for how much it is sold.

Impact on Financial Institutions
A key advantage of blockchain is its ability to allow two entities that do not necessarily trust one another to trust one another. Because a blockchain can only be updated when there is consensus among the participants, the need for a third party to mediate a transaction is lessened or removed. This can alleviate many factors that complicate financial transactions (e.g., need for collateral, time required for settlements) and automate many banking processes currently requiring human interactions that add time, costs, and opportunities to commit fraud.

Stock exchanges around the world have begun to experiment with blockchains. The Japan Exchange Group announced a collaboration with IBM to test securities trading in a blockchain environment. The Australian Stock Exchange has partnered with Digital Asset Holdings, a blockchain start-up founded by well-known former JP Morgan executive Blythe Masters, to increase efficiencies related to post-trade settlements. To keep pace, the Toronto Stock Exchange hired the co-founder of aforementioned smart contract platform Ethereum to serve as the organization's first chief digital officer.

Conclusion
While blockchain technology is still in its infancy, it is not too early to see bitcoin as the first use case of a versatile and potentially revolutionary concept. From proving an asset’s origin to the streamlining of high finance, various new uses for blockchain continue to emerge. And while applications might vary greatly, what they all have in common are enhanced audit trails, increased efficiency and improved transparency — each of which is a known foe of fraud.

*For background on bitcoin, I recommend listening to this Fraud Talk podcast by Jacob Parks , J.D., CFE.

**This article was originally published in the ACFE's members-only monthly newsletter, The Fraud Examiner in April of 2016.

28th Annual ACFE Global Fraud Conference in Nashville — Like a Fine Wine

Summerford and ACFE President James D. Ratley, CFE

GUEST BLOGGER

Ralph Summerford, CFE
President, Forensic Strategic Solutions

The premier annual conference for anti-fraud professionals just concluded in Nashville at Music City Center. Nashville has every reason to beat its chest about this new venue — it is just fantastic. It’s as good as, if not better than, any conference center in any major city across the country.

The ACFE Global Fraud Conference just gets better and better every year. The ACFE now has more than 80,000 members, more than 3,100 of which attended this conference. These members allow the conference to grow exponentially each year, making it the place to be for anyone serious about the detection and prevention of fraud.

The world of fraud is rapidly changing, making the ACFE Global Fraud Conference a necessity. For example, nowadays a bank robber can remain in his basement and commit 15,000 robberies through his computer. He doesn’t even have to go to the bank, and he can cover his tracks through the Dark Web of the internet. Internet 2.0 is coming — it looks great and security will be better for everyone, but it will take some time.

Meanwhile back at the ranch, computer hacking, ransomware and theft through the computer continue to grow exponentially. These trending topics and more were covered extensively at the immeasurably valuable conference.

Specialists in the multifarious ways of fraud detection and prevention shared the latest and greatest methods to find and investigate fraud in today’s environment. Anti-fraud specialists know our world functions best through personal networking. The conference gives attendees the chance to connect with peers from around the world. I continue to connect with peers I met more than 20 years ago, as well as those I have met in the last few years. My new connections will be just as valuable as the old ones.

Speaking at the conference is a gratifying experience. The ACFE selects only speakers who can teach and offer valuable insights on their selected subject matter because the members are not timid about offering criticism and feedback. This year marked my 15th year to speak, and I presented two sessions on the auditor’s responsibility to detect fraud. The main takeaway for the presentation was that if fraud is committed and the auditor does not detect that fraud, there is likely a 99 percent chance the auditor will be sued. I shared information on professional standards and the devastating consequences of the auditor’s failure to discover a fraud scheme.

What a treat to attend and speak at one of the most professional, informative and well-organized conferences in the world. I look forward to returning to the conference in Las Vegas next year!

Be sure to register for next year's conference by August 31 to lock in 2017 pricing!

Policing Fraud: An Excerpt from Jim Ratley's New Autobiography

AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

I have had the honor of working for and with ACFE President James D. Ratley, CFE, or as many of us know him, Jim, for almost seven years. (His mama calls him Jimmy Don, but don't tell him I told you that). I still remember the first time I met him. It was July of 2010 and "hot as all get out" (one of his quotes) in Austin, Texas. We were preparing for the 21st Annual ACFE Global Fraud Conference and we had just had a meeting to go over everyone's duties. Jim came up to me at my desk and told me the first of many (tall) tales. He said, "I am the janitor here, so any time you need anything removed or taken out, you just let me know." I knew of his photo from the website, but I was still left speechless because I didn't know what to say. Did I remember his name and face wrong? Was he really the janitor? Do places even have a 24-hour janitor? So many questions ran through my mind in the 30 seconds it took for him to reveal a big grin and a somewhat shy cackle. 

I have been listening to his stories ever since, and I am excited to share this exclusive look at his recently released autobiography, Policing Fraud: My Journey from Street Cop to Anti-Fraud Leader. Here is just a small taste of the many stories that make up Jim Ratley:

"When I worked in Internal Affairs, I often wondered how police officers could commit frauds that jeopardized their careers, livelihood, and ability to support a family. In some ways, it’s an unanswerable question. We all are, to a large extent, mysteries to ourselves and each other. But this much I knew: Because actions matter more than intentions, there could be no justification for betraying those who rely on you. So my actions at home and on the job were going to be as good as I could make them. I was no saint, and still am not, as you’ll learn in the following pages. But I try to learn from my mistakes, and when I make a commitment to my family, my friends, my colleagues, or my employer, I honor it.

It was therefore a shock and a deep disappointment to me that DPD [Dallas Police Department] did little about the time-card fraud that a couple dozen officers in the motorcycle and street patrol units had committed. A few of the officers involved were transferred to other units; most of the offenders, however, were reprimanded but not disciplined or penalized.

A cynic would have said the results were predictable. But you didn’t have to be a starry-eyed optimist to think the department would enforce its own regulations. These requirements supposedly were equivalent to the word of God, and they spelled out everything from when to draw your weapon and how to file arrest warrants and expense reports to what meritorious citation ribbons you could wear above your badge. Although these rules numbered in the hundreds, if you didn’t adhere to them, you’d be cited for noncompliance, which would negatively affect your pay, chances for promotion, duty station, assignments, working partners, and days off—in short, your entire professional life. So I followed these sensible rules and expected the department to enforce them fairly without exception.

But for the dozens of officers implicated in the time-card frauds, there was safety in numbers. Prosecuting so many of them would have severely tarnished the department’s public image and was therefore politically unacceptable to the top brass. So, despite my lieutenant’s and my protests, the case was hushed up and forgotten as quickly as possible. But it was clear to me—and to any crook in DPD—that the bigger the fraud, the smaller the punishment would be."

Read more stories from Ratley's life as a fraud fighter and get your copy today at ACFE.com. 

Using Social Media to Give You an Edge in Investigations

LIVE FROM THE ACFE GLOBAL FRAUD CONFERENCE

A quick search on my social media networks would tell you where I work, who my family members are, where I went to college and who my 5 year-old claims to be her “boyfriend.” Yes, social media is full of seemingly useless information like cat memes and time-lapsed cooking videos. But, what if all of those small, meaningless pieces of information added up to something bigger? According to Diana Ngo, those “crumbs” can each or all lead to that competitive edge you need when working on a fraud examination. “Social media gives me that competitive edge in investigations,” Ngo said. “It gives you a crumb that you can follow.”

Ngo is an Associate Director at Blackpeak Group, where she manages complex reputational and investigative enhanced due diligence projects. She also led the breakout session at the 28th Annual ACFE Global Fraud Conference titled, “Using Social Media for Investigative Purposes” where she highlighted the following ways you can use social media in your investigations:

• Source of wealth research for on-boarding clients
• Asset identification research for asset-seizing court orders
• Whistleblower investigations for employees having undisclosed interests via family members
• Investigating misrepresented personal or business relationships

According to Ngo, law enforcement uses social media for 80 percent of its investigations. While there may seem like an endless list of sites to consider, she highlighted the top areas of coverage to pay specific attention to:

• WeChat: China’s Facebook. Best for finding sources. Pro Tip: You can use keyword searches for all public accounts.
• Weibo: China’s Twitter. Pro Tip: Look at followers of a person and the people they follow for connections.
• Instagram: A photo-sharing network. Fastest-growing application with most active users 18-29 years old. It is extremely popular in the Philippines and Singapore. Pro Tip: Every single photo has a timeline, so you can build timelines around posts.
• Facebook: Members have the most active internet users. Pay close attention to the privacy settings: they are complicated and change frequently. Pro Tip: Use their strong search engine. You can search down to “men who went to the UCLA, live in New York and work at Deloitte.”
• LinkedIn: Professional networking site. Made up of more males than females, people of higher incomes and higher education levels. Pro Tip: You can change the settings on your account to search anonymously.

Ngo reminded attendees to not solely rely on the information you find while scrolling and searching. According to Ngo, you still have to confirm everything you find because social media is managed by individuals. And those individuals, like us, want to represent themselves in the best way possible online. I mean, no one is going to post a video of themselves with piles of jewels and brag about a crime they committed, right?

The Power of Knowing, Accepting and Using Your Professional Strengths and Weaknesses

AUTHOR’S POST

Mandy Moody, CFE
ACFE Content Manager

Do micromanagers know they are micromanagers? Are coworkers who are not replying to emails intentionally ignoring you? Does that mean they don’t like you or they don’t value your time and energy? Do people who don’t speak up in meetings not care about the topic at hand? I would guess that the answer to most of these questions is no. In reality, they are each behaving in a manner that is most comfortable for them. They are not aware that others, who have their own and different way of doing things, are not connecting or understanding them.

Jean O’Brien, executive coach, trainer and speaker, is one of the career coaches at this year’s 28th Annual ACFE Global Fraud Conference. In the Career Connection booth in the Exhibit Hall, she will be administering one of the most beneficial personality assessments one can take when addressing professional awareness — the Myers-Briggs Type Indicator (MBTI). I caught up with Jean last week and asked her to break down the importance of the MBTI and explain just how valuable it can be for career development. “The MBTI provides skills to 'talk' another’s language, and confidently step out of your comfort zone to best interact and communicate with different personalities,” she said. “Without this insight and awareness, we miss opportunities every day to build a successful business-leadership expertise.”   

What exactly is the Myers-Briggs Type Indicator and why is it so valuable?
The MBTI assessment is a series of questions that reveals our preference for the way we collect information, make decisions and what attitude we prefer to use as we interact with the world. An example such as, “Do you take initiative in making contact with others or do you let others initiate first contact and begin conversations?” conveys insight into the way you prefer to act, make decisions or manage conflict. This information identifies the tools you need to clearly and effectively communicate with others.

Why do you think this personality test is so beneficial for fraud examiners?
Fraud examiners have specific, specialized skills that are highly valued for observing and communicating information that may not be apparent. They prepare evidence, testify in court, interview witnesses, coordinate investigative efforts and advise businesses on ways to improve fraud detection to justify actions. The MBTI will enhance their skills in situations for career development, interviewing and networking that may be out of their comfort zones. It will help them be confident in environments that may be challenging or stressful.

Do you have a story that conveys why this exercise is so valuable?
In my experience, every MBTI situation has made a significant difference, increased awareness, provided an avenue to adapt when appropriate and to make changes for improved relationships. In one example, an organization referred a person to me for coaching who was going to be terminated if he did not become more aware, learn new skills and make adjustments necessary for his success as a valued employee. Good people were leaving because of him and behaviors had to change. He completed the MBTI assessment and we explored every detail, observing how and why his micromanagement style of telling people what to do impeded employees rather than allowing their capable knowledge, experience and expertise to be effective for the team. Through examples seen from the other person’s perspective, he began to see how he was limiting growth and success. It took patience and practice for him to observe his behaviors and the reactions of others. He worked hard, and with appropriate changes, open conversations and actions he was able to regain his leadership, confident that he and his team were preforming well. He was recognized by the company, sought out as an expert as someone who learned to combine knowledge, confidence and power to represent the organization internally and publicly.    

You can find Jean at the Career Connection Booth in the Exhibit Hall at the upcoming ACFE Global Fraud Conference in Nashville, June 18-23. She will be administering MBTI assessments and providing coaching for $50 per session. Register for a session today!