The 1MBD Scandal Moves Apace

The 1MBD Scandal Moves Apace

“The name of the game — moving the money from your client’s pocket to your pocket,” said actor Matthew McConaughey, playing fraudster Mark Hannah in the Hollywood blockbuster The Wolf of Wall Street. The irony of this quote is not lost on the people of Malaysia.

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Why Law Enforcement is Not to Blame for Fraud


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

“Fraud is alive and well in Canada,” wrote Jessica Lewis of the Canadian law firm Bennett Jones LLP in Financier Worldwide magazine this month. “It is thriving and fraudsters are innovating,” she said. “The ongoing boom in white-collar crime is partly the result of Canada’s lack of a uniform regulatory system and ineffective law enforcement.”

I agree. There are regulatory frailties in Canada, particularly the absence of Ultimate Beneficial Ownership (UBO) identification during corporate registration. These regulatory anomalies and loopholes need to be addressed. But fraud is also on the increase globally.

Whenever austerity measures are put in place, fraudsters come to the fore to prey on the desperate and needy (not to mention the greedy). The U.K., for example, recorded a whopping 25 percent increase in 2016 for reported fraud in general, much of this fueled by banking and online scams.

Policing and austerity
As Lewis alludes, law enforcement in Canada does not come out well in these situations. Similarly in the U.K., The Guardian reported that “….the police have not been interested in investigating such cases even though the losses have been as much as £25,000.”

On the face of it, the police appear to be neglecting their roles as investigators and prosecutors of those committing such crimes. The U.K.’s Prime Minister (and then Home Secretary) Teresa May, said only last year, “Fraud shames our financial system.” But I don’t believe that criticizing the police for their perceived failings really touches on the root of this problem. It’s a much larger issue.

Most police forces across the Western world have borne the brunt of austerity measures imposed by their governments. The problem is that, as a consequence, they have inadequate resources and frontline policing must take priority. The U.K. has seen its fraud squads dismantled and specialist fraud investigators deployed elsewhere.

Investigating fraud is a highly specialized discipline, requiring significant training and ongoing courses designed to try to ensure that concerned detectives keep pace with a highly dynamic crime that is constantly evolving. In particular, fraud perpetrated by cyber criminals is extremely difficult to police. Not only does it require an added expertise that only few detectives possess, it also introduces cross-jurisdictional issues typically associated with this form of deception.

Cross-border fraud
Fraudsters are not stupid. They understand that if they are in Russia, the Ukraine or China (for example), then attacking victims in other countries, such as the U.K., Canada or the U.S., makes perfect sense. By inserting the buffer of international borders, there is little likelihood of Western law enforcement agencies receiving sufficient levels of cooperation required to bring the culprits to book (especially given the current political climate).

Sadly, there is little prospect of this status quo changing anytime soon. The political differences make for uneasy relationships between the law enforcement agencies concerned. This means that criminals operating out of the Eastern Hemisphere can effectively attack their Western victims online with impunity. If we add to the mix the realistic prospect of corruption and its impact on the overall scenario, it is obvious why Eastern bloc criminals are confident in their doubtful activities going unhindered. They can simply pay off local law enforcement officers (who should be apprehending them).

Law enforcement agencies (and police in particular) are being blamed for failures to investigate fraud. In an ideal world, police forces would be able to open a “new box of detectives” and deploy them as demand requires. Unfortunately, this is not the case. So until there is a reinvestment in the police, fraud will continue to grow and go unpunished.

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. Mr. Kenney was recently selected as one of the Top 40 Thought Leaders of the Legal Profession in 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 practice areas. |@MKSolicitors

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


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 |@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.

India Makes Advances in the Fight Against Fraud and Corruption


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

When news began filtering through to our network of international fraud and asset recovery lawyers that India was in the latter stages of drafting a Bankruptcy Bill, our ears immediately pricked up.

At ICC FraudNet, we know how important bankruptcy laws can be in preventing and tackling corrupt practices. Therefore in terms of engendering confidence from both investors as well as providing remedy for financial malpractice, the importance of the Bill cannot be underestimated. While India is one of the fastest growing economies in the world, it is no secret that it has struggled to overcome historically high levels of bribery and corruption.

We studied the draft Bill and on a pro-bono basis we set about compiling our own white paper detailing suggestions that would increase the Bill’s effectiveness. 

One of the amendments suggested was the addition of a chapter on cross-border insolvency cooperation. We recommended moderating some aspects of the Bill to bring it in line with current international standards. These amendments would enable Indian insolvency office holders to recover assets squirrelled away abroad, outside the Indian jurisdiction: an imperative move for justice. In fact, UNCITRAL (United Nations Commission for International Trade Law) has created an excellent Model Law on Cross-Border Insolvency (1997) and a Legislative Guide on Insolvency Law (2004). Recently, the UNCITRAL National Coordination Committee for India was established to deepen its engagement and be more receptive to views from India.

Much of India now knows the case of Kingfisher magnate Vijay Mallya, who has attracted international interest. Indian media has reported official sources stating the Central Bureau of Investigation (CBI) had filed various charges, including money laundering, and that an arrest warrant had been issued. Mallya left the subcontinent for the U.K. in March, owing about $1 billion to creditors. The Indian authorities are seeking his extradition.

Mallya sought to take advantage of the old, flawed Indian insolvency laws to delay and avoid creditor actions. In light of this case and others like it, India’s government acknowledged the need to address the failings with this new legislation.

Yes, the subject of bankruptcy is far from being chic. Yes, it is complicated and appears to be of interest to just the few specialists who work within its legislative constraints. But nothing could be further from the truth. Bankruptcy is of massive public interest and a central part of the legal infrastructure of any healthy and successful economy.

Indeed, World Bank figures suggest that in India creditors take 4.7 years to recover 25 percent of dues from a bankrupt firm, while in the U.S. they get 80 percent and without the inordinate wait. It is rumored that there are 60,000 ongoing bankruptcies in India awaiting resolution.

The new legislation will make those running companies take their liabilities seriously, and see unviable businesses wound up speedily, saving shareholders and creditors from greater loss. This natural selection process will ensure survival of the fittest and investment is available for those enterprises seeking to grow.

To take on the daunting task of writing this new legislation is a testament to those involved. To recognize that there may be scope to improve the draft is evidence of their determination to make the Bill as effective as possible, and we are honored to be able to assist.

On May 5, the Lok Sabha lower house passed the draft Bill, whereupon it moved to the upper house, Rajya Sabha. On May 11 it was passed by the Rajya Sabha and will soon be enacted. We hope that some of our suggestions will make it into one of the Bill’s subsequent amendments.

These are exciting times for the Indian business community, who will now be able to conduct their commerce safe in the knowledge that they will have the support and protection afforded by a piece of modern, fit-for-purpose legislation. A strong bankruptcy law for India, that prevents tactical bankruptcies and garners confidence within the international community, will buoy investor confidence. This is a classic example of how the private and public sectors can come together and work as one with mutually complimentary goals and ambitions.

Martin Kenney is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative & asset recovery practice focused on multi-jurisdictional fraud & grand corruption cases. He is Co-Chair of ICC FraudNet's Task Force India | @MKSolicitors

Shreyas Jayasimha is Advocate and Co-Founder of AARNA LAW, Bangalore and New Delhi, and National Co-ordinator, UNCCI. He is Co-Chair of ICC FraudNet's Task Force India

Martin Kenney on the Panama Papers


Mandy Moody, CFE
ACFE Media Manager

Since the International Consortium of Investigative Journalists published the Panama Papers on Monday, the term "shell company" has taken on a life of its own. These entities have been around for years, but with the news of the data surrounding their use, it is almost assumed that where secrecy hides, fraud will also. 

The Associated of Certified Fraud Examiners' Fraud Examiner Manual states that "shell companies have become common tools for money laundering primarily because they have the ability to hide ownership and mask financial details, and because money launderers can create them with minimal public disclosure of personal information regarding controlling interests and ownership.” But, shell companies do have legitimate uses. The manual goes on to explain that shell companies can be used for "holding the stock or intellectual property rights of another business, facilitating domestic and cross-border currency and asset transfers, and fostering domestic or cross-border currency corporate mergers.” Just like with many other instances of fraud, the real trouble begins when a tool, a program, a database or an account is abused and used for an illegal or deceptive purpose.  

I thought we would share a recent op/ed from one of our guest bloggers and former keynote speakers about the data release in hopes of further explaining much of what you have been and will be hearing about for weeks to come.

From The Globe and Mail:
Martin Kenney, Managing Partner of Martin Kenney & Co., Solicitors of the British Virgin Islands, a specialist investigative and asset recovery practice focused on multi–jurisdictional fraud and grand corruption cases
The Panama Papers leak has been described as the biggest dump of confidential offshore company ownership data ever: 2.6 terabytes of electronic data; 11.5 million documents; 200,000-plus offshore companies. That’s 10 per cent of the world’s population of two million active offshore companies.
The offshore industry is complex in nature. Most commentators struggle to understand and accurately describe its purpose. As a result, many observers latch onto the word “secrecy” and spin that to mean something suspicious and corrupt. This is not the case. Only a small proportion of offshore entities are vehicles used for money laundering, fraudulent asset concealment or tax evasion.
Yes, there will always be skulduggery. Criminals will seek to manipulate the system to gain advantage. And I understand those who express moral outrage against large corporations or wealthy individuals who use offshore companies to avoid tax. But tax avoidance is entirely legal.
Of course, there is an ethical consideration when a multinational company appears to have paid less tax than the average person on the street. But it’s a public-policy issue, not a legal one, unless aggressive tax planning crosses the line from avoidance to evasion.
These so-called fat cats (as the media loves to call them) employ vast numbers of the working population. Without them, their countries’ unemployment figures would be depressing and their economies would suffer. Mudslinging at successful entrepreneurs will only drive them away into the waiting arms of another country.
The tax systems of developed countries have their derivation in the 1970s. The issue now is that we now have a global economy and our tax laws need to reflect this scenario more accurately. This is why large coffee-shop chains, for example, have been able to avoid taxation – legally.
Still, the aforementioned skulduggery is manifest across the globe. It includes the rapidly growing offshore services provided by Scotland. Added to this list are jurisdictions that fraud investigators see as black holes – the U.S. states of Nevada and Delaware. No investigative material is collected regarding the ownership or control of Nevada or Delaware companies, unlike offshore jurisdictions, where regulations require this material to be collected and housed. It can very quickly be seen that dodgy dealing is a worldwide problem, not limited to, say, the British Overseas Territories.

Continue reading Martin's full op/ed in The Globe and Mail.