Tim Harvey, CFE, head of global chapter development for the ACFE, recently shared a story with me about a networking event he held for the U.K. Chapter called "Find a Fraudster." The objective of the event was to move around the room and network with as many people as possible all the while trying to identify a fraudster in the room.Read More
FROM FRAUD MAGAZINE
Courtney Howell, ACFE Community Manager
On Sept. 9, 2016, Audible released the first episode of “Ponzi Supernova: Madoff Speaks,” a six-part series hosted and reported by Steve Fishman. The series focuses on the $65 billion Ponzi scheme at Bernard L. Madoff Investment Securities LLC, spearheaded by Madoff, which crumbled with the 2008 financial crisis. The last episode aired in February, and I waited until they were all available before diving in and devouring them in less than two days. As many have said before me, this is a great series for fans of the “Serial” podcast, but for anti-fraud professionals this also serves as an in-depth look into a disturbing case of widespread, unchecked fraud.
The series starts with Fishman’s exclusive telephone interviews with an imprisoned Madoff. It then works through the mechanics of the scheme and finishes with Fishman speaking to both perpetrators and victims of the crime. The most shocking aspect of the Madoff scheme is the sheer scope of it. When I first heard about it years ago, the two biggest questions I found myself asking were “how?” and “why?” But as I continued to listen, and as Fishman interviewed several peripherally involved in the scheme, I found myself asking a much tougher question — what would I do if I’d been an investor interested in Madoff’s scheme?
With that in mind, I’ve put together a list of three tough life lessons from the Madoff Ponzi scheme that fraud fighters can implement right now to improve future fraud examinations.
Lesson No. 1: Trust your instincts and don’t ignore red flags
Cynthia Keuppers, one of Fishman’s investigation subjects, once worked in the investment world and now owns a Japanese-Brazilian fast-food restaurant called Uma Temakeria. Fishman wanted to know how a scheme of this magnitude could persist for such a long period of time (more than 40 years) without anyone detecting it. This led him to Keuppers.
In 2006, Keuppers worked for Presidio, a wealth management firm in San Francisco. Some clients came to her asking about Madoff’s fund — they’d heard good things and wanted her to take a look at it. Initially she was impressed by the consistency of the returns, but before she could recommend buying in, she wanted to make sure she understood how the Madoff investment strategy worked.
“If I can’t understand it, I’m not someone that sort of says, ‘Well, if I can’t get it, somebody else must be able to get it, and I’m just not going to get there,’ ” Keuppers tells Fishman. “You have to be able to understand all the way down to where something is coming from. You might have to do a little work to get there, but you should be able to understand what a certain driver is.” This unwavering certainty in her own skills and knowledge is notable. When faced with such a highly regarded investment entity, she didn’t back down or doubt herself.
Keuppers wasn’t dealing with Madoff himself. She was working with Fairfield, the largest of the Madoff feeder funds. She had a meeting with Fairfield’s chief risk officer, and she asked him question after question, trying to drill down into the Madoff strategy. She didn’t need to understand the secret to Madoff’s success. She just needed to know why and how it was so consistent. Her objective was to see data from five years ago, but as Fishman reports, “Fairfield wouldn’t give her anything — red flag.”
The CRO assured her that he’d done the work that she was wanting to do, but he wasn’t at liberty to share the actual data with her. Basically, he wanted her to trust him. Keuppers says, “That right there was also a red flag.”
The final nail in the coffin was when Fairfield told Keuppers that the Madoff fund was closed and wasn’t accepting more investors, but he liked working with Presidio so much that they’d be willing to sell some of its holdings to Keuppers’ investors. You can hear the skepticism in Keuppers’ voice when she rhetorically asks, “Why would you sell me something that you’re not going to sell to anyone else? What makes me special?” Then she laughs and says, “Usually, you’re not that special in this industry.”
Although it wasn’t the information she was looking for, Keuppers had all the information she needed to decide. She advised against investing in the Madoff fund. As anti-fraud professionals, you might be put in similar situations. Clients push you one way, but your gut tells you to go in another. How do you make the hard decision when you know it will disappoint, or even anger, someone?
In “4 Reasons Why People Ignore Red Flags,” Jeffrey Aucoin, CFE, says that trust “is probably the biggest reason why owners and executives ignore red flags.” Keuppers made the right decision not recommending the Madoff shares to her client. Keuppers couldn’t place her trust in the validity of this investment because of Fairfield’s lack of transparency. It might have been a disappointment to her clients in the short run, but in the long run, I’m going to safely assume they’re happy with her recommendation.
Want more? Read Courtney's other two life lessons in the full article on Fraud-Magazine.com.
Mary Breslin, CFE, CIA
President, Empower Audit
I sat in front of my boss, the general counsel for the organization I worked for, waiting for our meeting to begin. I was still searching for the right words to explain to him why I wanted to widen the scope of an audit in Zambia and conduct some specific fraud auditing techniques. I wasn’t sure whether or not I should admit that while my team had found some exceptions on day one of the audit, my real suspicions had arisen from the Zambia general manager’s personal behavior.
Two issues had been identified: First, a cash advance had been taken out by an employee on behalf of the general manager and given to an individual who was not an employee. After some careful questioning, it was revealed that the individual was the general manager’s mistress, who needed money to pay her rent while he was out of the country on a business trip. The advance had been repaid by the general manager immediately upon his return. As a part of that conversation, it was also revealed that he requested the cash advance because he didn’t want his wife to see a large cash withdrawal from his bank account. Okay, not a great guy, but nothing I hadn’t seen before. It was a clear policy violation for use of the funds, but it had been repaid.
The second issue came later that day during a payroll and benefits review. Apparently the general manager had added a new dependent that year to his benefits, and we assumed he and his wife had adopted a child while living in Africa. When I asked accounting, they introduced me to this “dependent” who happened to be in the office — his wife. And I mean his “other” wife. In many parts of Africa polygamy is still practiced, however this gentleman was from England and I knew he had a wife and two children — also his dependents — still in England. Add the mistress to this cozy arrangement and I was starting to get pretty concerned. Wouldn’t you?
After having dinner with the general manager and, I admit, a few beers later, he confessed his love for women, pretty much all women, and admitted there might be other wives. Wait, what?
I explained my concerns regarding the general manager’s character to my boss, and we dug a little deeper and crossed over into a true fraud audit. Based on what we found, that quickly turned into a fraud investigation.
So what did we find? To start, we found four wives in four countries… and a couple of mistresses. We also found a company he owned with a wife in South Africa that was established strictly as a pass-through scheme for supplies. We found $18 million worth of tax payments that were misappropriated — not used to pay taxes. The tax authorities had actually been getting ready to take action against us. And there was more. In addition to the obvious issues — all of the women — and the financial pressure those issues caused him, there were other red flags. The general manager was a micromanager and a control freak. He required his staff to bring him every file and document we requested for his review before they would give it to my team. I generally call that a “clue.” Luckily for the organization, this was a profitable location. By bringing in a skilled executive to control the money, the company was quickly able to get the location back on track. So what happened to the general manager? I’m not sure, maybe I could ask one of his wives. Actually, because he was such a profitable general manager, he was “counseled” and he kept his job. It happens.
Mary Breslin, CFE, CIA
President, Empower Audit
I recently returned from Jordan where I conducted a data analytics training for an internal audit banking group. As is often the case when learning to use data analytics within internal audit, people wanted to skip right to finding fraud. I wish it were that easy. While I sometimes feel like I could never conduct a fraud investigation without my data analytics tools, I've learned that I can never rely solely on analytics. We must continue to be students of the business and hone traditional methods while enhancing them with analytics.
Many of my cases have been discovered and initiated by simply walking around and talking to people. One example is a recently settled federal case. Several years ago I was in Belgium at a factory location of an American company I worked for. I asked for a tour of the facility even though I knew most of my time would be spent with accounting records and documents. I wanted to understand the business. During my tour I spotted a large crate ready to be shipped. The core product was made in the U.S. and finished in Belgium before delivery to the customer. The crate was stamped “Made in the USA” in six-inch letters. Directly beneath that stamp was another that read “Ship to the Islamic Republic of Iran.” I did a double take. Iran was (and is) an embargoed nation — it was illegal to sell goods of any kind to Iran.
I assumed this was a lack of training, and the Belgian team wasn’t aware of the restrictions, and I proceeded as such. My team requested all sales to that customer, as well as to any other countries that were embargoed at the time for the prior 18 months. Much to my dismay, it was a long list of sales.
In conversations with the general manager I reviewed the Code of Conduct and Handbook, where it explicitly forbade sales to those countries. I then reported the issue to the executive team and went about preparing the information that would be needed for counsel to self-report the issues to the necessary regulatory agencies. The situation was under control, right? But of course before my team and I went home, I added the location to our follow-up action plan for internal audit.
Three months later I returned to Belgium for an unannounced visit to the factory. Who stops by to see me? The general manager. She hands me a manila folder stuffed with evidence of the many sales to embargoed countries that had occurred since my departure just 90 days earlier, when it had seemed the executive team was clear on the problem and ready to make things right. As I flipped through the folder's contents I saw document after document that contained the written approval via email of every one of those sales by the COO himself. I was shocked. I immediately reported back to the executive team and was surprisingly met with the response, “We need those sales.” In their quest for revenue, executive management chose to break the law and go against legal counsel and internal audit’s recommendations.
In the following week, our inability to agree on the handling of the issue resulted in my termination — as well as the termination of my entire team. The issue was then reported to the Securities and Exchange Commission (SEC) and appropriate regulatory agencies and a federal investigation ensued. In October of this year the case finally settled in court. The company pleaded guilty and paid a large fine. The executive management team has since been replaced.
If I had not walked the facility that day, the issue may have never been identified. The likelihood of finding those illegal sales buried in all the sales for the year was minimal using normal audit techniques unless I knew to look specifically for that issue. While analytical tools can be invaluable, they should not replace understanding the business and the traditional methods — especially simply talking to people and touring a facility.
Dennis Lawrence, CFE
Lawrence is a former U.S. Army Counterintelligence Special Agent and Investigations Manager at a publicly traded software company. He is a graduate of The Johns Hopkins University.
Whether vetting a new employee or an expert witness, we’re all familiar with the basic components of a background check. The industry standard includes a comprehensive criminal records search along with verification of educational credentials, employment history and professional licenses. Perhaps civil litigation searches and a credit report are thrown in as well. But are your background checks exploring the issues below that aren’t as easy to discover and could do the most damage?
- Secret companies and conflicts of interest
Side businesses are becoming increasingly common as it is simpler today than it has ever been to set up your own website and LLC. However, these entrepreneurial projects aimed at earning extra income can potentially lead to conflicts of interest or outright fraud. How valuable would it be to learn that the new head of your IT department is purchasing marked up equipment and services from a company he quietly owns but is managed by a seemingly unrelated party? If you’re serious about boosting your capabilities in this arena, try testing out an investigative database offered by one of the big name legal research providers.
- Shell companies used to backstop employment history
Individuals who have been let go from an employer may sometimes conceal a subsequent period of unemployment by representing on their résumé that they started their own business. Curiously, however, the business was only in operation until they found a new job six months later. I once observed a particularly clever Wall Street professional who had recently been released from prison create an LLC to backstop his employment history during his one-year jail sentence and used a co-conspirator as a professional reference. The bottom line is that all self-employment should be verified using state business records to prove the company’s legitimacy (when available), and copies of 1099s should be collected to verify that the company was actually earning money.
- Unverified military career with extraordinary claims
As a federal employee who served in Afghanistan, I have a healthy respect for our veterans. Since joining Corporate America, however, I have been astounded at the number of background checks I have run on people falsely claiming to be decorated war heroes. In all cases, the purported military experience on their résumés fell outside the seven year scope which they knew was automatically subject to verification. It seemed as if they were hoping no one would bother to go further back and check their military service record. When in doubt about a particularly spectacular representation, request a copy of the individual’s DD-214 (Certificate of Release or Discharge from Active Duty) and follow up with an employment verification. You could learn a lot about someone’s credibility and state of mind.
- Recently issued social security number
Social security number (SSN) validations tend to be overlooked even when they are included in a background check report. But what if your senior consultant purportedly born and raised in Ohio was only issued an SSN five years ago? A change in SSN, which is often accompanied by a name change, is a great way to start over in life, especially if your intent is to evade public records searches. A licensed attorney once vetted by our team went to extraordinary lengths to cover up his former life by using precisely this formula, albeit without success. The Social Security Administration offers a free SSN validator for registered users, so there is no excuse to refrain from conducting this basic due diligence and taking a moment to review the results.
- Inappropriate behavior on internet message boards and social media sites
With the amount of time and resources spent verifying an individual’s résumé and searching online databases, it is ironic how often we forego using free sources of intelligence online. Facebook and LinkedIn searches are common sense, but what about slightly less obvious internet footprints? Reverse tracing a phone number on Google can lead to a scandalous internet message board posting, and searching for an email address can reveal a blog with loyalties to causes that may be of value in a litigation or investigative context.
Use your creativity when examining someone else’s life – you never know when they could be using their creativity to undermine your job as an investigator.
Author’s Note: This article is for informational purposes only. It is the reader’s responsibility to ensure compliance with all applicable laws when conducting investigative activities.