Fool Me Once, Shame on You; Fool Me Twice…

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Sheila Keefe, CFE, CPA
Principal, BDR Advisors LLC

Lousy Tone at the Top Breeds Fraud

Pamrapo Savings Bank of New Jersey first made headlines last March when pleading guilty to conspiracy to commit Bank Secrecy Act (BSA) violations and forfeiting $5 million. Pamrapo admitted it had willfully violated the BSA to avoid the expenses associated with compliance (those pesky compliance expenses). It concealed its customers’ illegal or suspicious activities by failing to file Currency Transaction Reports (CTRs) and Suspicious Activity Reports (SARs) and willfully failed to maintain adequate anti-money laundering programs.

Per Assistant Attorney General Lanny A. Breuer, DOJ Criminal Division, “This case is a good example of how disregarding reporting and compliance can turn into a crime. [The] guilty plea by Pamrapo Savings Bank should remind financial institutions, large and small across the country, of the high price they will pay for ignoring the law.” Read the full article here.

Well, perhaps the DOJ enforcement action did remind other financial institutions of the importance of ethical business practices, but unfortunately for Pamrapo Savings Bank, the lessons were quickly forgotten. Within a year of the DOJ settlement, a Pamrapo Savings Bank affiliate, Pamrapo Service Corporation, was in the news when a former managing director embezzled more than $600,000 in commissions and was convicted of 33 counts of mail fraud.

Lousy tone-at-the-top was definitely the culprit with the Pamrapo Service Corporation embezzlement, with the ill-gotten gains in the form of ‘commissions’ approved by the bank founder and fraud perpetrator’s father. The ‘commission’ compensation arrangement was developed when the son went to the father seeking additional income in response to a pay cut.  The ‘commissions’ were deemed fraudulent because: (a) the commissions represented a change in accounting treatment for ongoing business activities for which the son had previous received no personal economic benefit and (b) no other officer or director of either the bank or the subsidiary was aware of the new arrangement. 

Other organizations have suffered similar losses due to unreported conflicts-of-interest and improper related party transactions. It is notable with the Pamrapo organization because they had so recently been reprimanded and apparently made little effort to change their ways.  In the aftermath of a fraud detection, it is crucial that organizations take action to prevent additional fraud. Lousy tone-at-the-top can be especially difficult for companies to correct.  However, little can change without it.

Read more of Sheila's insights on her blog, Business Done Right.

Found: Proof the Good Guys Finish First

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Sheila Keefe, CFE, CPA
Principal, BDR Advisors LLC

Growing evidence makes it clear that doing the wrong thing will cost companies dearly both in the marketplace and with law enforcement. Recent news shows that fraudulent business practices are bad for business. To wit,

• The 2010 COSO Report—Fraudulent Financial Reporting: 1998–2007, An Analysis of U.S. Public Companies reported that companies experienced a 16.7 percent drop in stock price within two days of reporting fraud. 
• The SEC’s 2010 Performance and Accountability Report announced that the SEC brought 681 enforcement cases covering a broad spectrum of financial wrongdoing in FY 2010. Those enforcement cases resulted in $2.8 billion in penalties and disgorgement.

At the same time, evidence is mounting that companies that do the right thing enjoy considerably higher returns. As reported by the Ethisphere Insitute, companies that qualified for the ‘ethics index’ outperformed the S&P 500 before, during and after the economic crisis of 2008.    

Such data provides the necessary ammunition in the fight against fraud, starting with cultivating an ethical work environment. Techniques and strategies may vary among ethical companies; there are a handful of tenets, however, common to all ethical companies. Those tenets include:

• Free information flow to board: organizations should strive to have their top compliance officer designated as a C-suite position. Board directors should ensure that direct lines of communication exist for the top compliance officer.
• Anonymous reporting mechanisms:  Anonymous tips are the leading detection tool for fraud, with the 2010 Report to the Nations on Occupational Fraud and Abuse reporting that 40 percent of frauds are initially detected through tips. 
• Leadership by example: Employees watch top management very closely. When top management does not exemplify the highest ethical standards such conduct plants the seeds of rationalization for committing fraud.
• Enforce superb ethics policies: Non-enforcement of known violations or inconsistent, seemingly surreptitious enforcement of company policies breeds confusion and possibly discontent strong enough to fuel rationalization for committing fraud.
• Inspired training programs: Orientation and ongoing training programs educate, empower and motivate the workforce to report fraud.
• Alignment of incentives with organizations values and goals: ‘buy-in’ mechanisms such as stock options and bonus pools can benefit organizations by reducing conflicts between personal gains and corporate success. However, incentives can illicit dysfunctional business processes and financial statement fraud. Organizations should look for ways to use incentives to reward acts of integrity as well as revenue-generating business activity.

As shown by the Ethisphere’s report that shows higher returns for ethical companies, creating a culture of shared success can help organizations reach both their economic and ethical goals. Add to that the penalties for fraudulent behavior dispensed by both law enforcement and the marketplace, it is clear that good guys do indeed finish first.

Read more of Sheila's insights on her blog, Business Done Right.

Global Corruption: Not a Victimless Crime

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Sheila Keefe, CFE, CPA
Principal, BDR Advisors, LLC
Lake Geneva, WI

Bribes and grease payments to foreign officials used to be considered standard operating procedure for many global enterprises. Much of that came to an end during the tenure of Mark Mendolsohn, former deputy chief of the fraud section at the U.S. Department of Justice (DOJ). Mendolsohn’s zealous prosecution of corporate corruption, under the Foreign Corrupt Practices Act (FCPA), prompted many organizations to ramp up compliance budgets in order to be spared the multi-million dollar fines Mendolsohn managed to get. 

Mendolsohn recently left the DOJ to focus on litigation in the private sector. In an interview last month with the Wall Street Journal (subscription only), Mendolsohn discussed how the DOJ’s campaign against foreign corruption paved the way for broader, social, political and economic reforms in foreign countries doing business with the United States.

To wit, Mendolsohn stated, “People are more appreciating the connections to corruption and other issues of grave concern to people, such as democracy building and our efforts in Afghanistan and Iraq. It’s gone from being a taboo topic to a widely discussed topic.”

Looking forward, Mendolsohn suggested that the Dodd-Frank Act could act as a major accelerant to FCPA enforcement as whistleblowers look to profit from reporting violations. Additionally, Mendolsohn believes that increased cooperation between U.S. and foreign authorities, as well as additional funding to the DOJ and SEC, could create an environment of continued ardent FCPA prosecution. Mendolsohn went on to predict that “the oil-and-gas industry and pharmaceutical industry will continue to face challenges because of the nature of their businesses.” 

The connection Mendolsohn makes between foreign corruption and democratic reform demonstrates the manner in which FCPA enforcement extends beyond the economic arena. Per Mendolsohn, “There is a growing recognition of what people commonly call the corrosive effects of corruption on development and democracy and democratic institutions. There is, at some level, a growing intolerance for corruption.”

Some may view bribes as a victimless crime, especially when there’s an attitude that “everybody’s doing it” and bribes are “just a cost of doing business” in certain foreign countries. The comments provided by Mendolsohn in the Wall Street Journal suggest a causal relationship between corruption enforcement and democratic reform, illustrating that foreign corruption is most definitely not a victimless crime.

FCPA compliance is just one of the compliance topics discussed in the ACFE’s courses on Fraud-Related Compliance and Fraud Risk Management.

Find more of Sheila's commentary on her blog, Business Done Right Press.

ACFE Urges Incorporation of Anti-Fraud Components into GRC Program

LETTER FROM THE PRESIDENT, FRAUD MAGAZINE

James D. Ratley
ACFE President and CEO

Global fraud losses are estimated in the ACFE’s 2010 Report to the Nations at 5 percent of the world’s gross domestic product (GDP). In the United States, that comes to $700 billion. But in these days of a $14 trillion U.S. national debt, bad news denominated in billions no longer commands everyone’s attention. And that in itself is a serious problem.

Looked at another way, $700 billion is the combined GDP of, for example, Hungary, Kuwait, New Zealand, Nigeria and Peru. In other words, fraudsters are stealing from American businesses and individuals the equivalent of these five nations' entire economic output.

And because the 5 percent fraud ratio is based on the median of estimates by CFEs around the world, the “typical” nation suffers from this scourge more or less as much as America does. In fact, it was precisely because of fraud’s soaring global dimensions that the ACFE in 2010 broadened the scope of the Report to the Nations to present a comprehensive overview of fraud everywhere.

As always, the ACFE has been assessing the effectiveness of methodologies that can facilitate fraud prevention, detection and deterrence. Of particular interest to many members is the Governance, Risk Management and Compliance (GRC) approach, which aims to integrate organizational management, asset protection and regulatory adherence under one operational umbrella. Nearly two-fifths (38 percent) of ACFE members count GRC as one of their primary interests, and approximately 8 percent list GRC as their primary or secondary occupational specialty — the fourth-largest and fastest-growing segment of the ACFE membership.

Read the full Letter from the President here.

Corporate Governance: Who’s Getting It Right?

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Sheila Keefe, CFE
Principal, BDR Advisors, LLC
Lake Geneva, WI

Best Buy a Leader in Corporate Responsibility

Additional public scrutiny and shareholder activism have made ‘corporate governance’ the new buzz words, as many companies resolve to avoid repeating mistakes of the past. Even so, many struggle on how to implement corporate governance reform in an effective and efficient manner.

One of the companies that is getting it right is Best Buy. Best Buy has received numerous awards and appeared on several “best of” lists, including Corporate Responsibility Officer’s (CRO) list of the Best Corporate Citizens and Ethisphere’s list of the World’s Most Ethical Companies. 

Those kudos are well deserved. Best Buy has implemented many of the emerging best practices, which has allowed them to achieve an enviable “tone at the top,” necessary for true reform. Here are just a few of their achievements in corporate governance reform:

• Best Buy has assigned a C-level executive, Kathleen Edmond, as Chief Ethics Officer. Edmond is an attorney/MBA dynamo who has interjected a strong dose of candor and transparency.
• Best Buy uses an online chat room to air out ethical violations and pose interactive questions that fosters eager replies from team members, indicating a strong adoption of corporate ethics in workplace culture. Most recently, Edmond used her personal page to discuss the $40 million fraud perpetrated by a former Best Buy employee and a vendor, The Chip Factory. 
• Best Buy has a 52-page Code of Business Ethics. The document is beautifully laid out and easy to read. It starts with a list of questions to help team members tackle situational ethics, addressing head-on one of most difficult challenges to implementing a code of ethics.
• Best Buy takes its role as a corporate citizen seriously.  As evidenced by Best Buy’s Corporate Responsibility Report, it’s clear that Best Buy understands the importance of corporate consciousness as an essential business process. Specifically, Best Buy lays out corporate responsibility goals in their Corporate Responsibility Report.

Individually, any of these initiatives would be impressive and would signal to all of Best Buy’s trade partners that it takes corporate governance seriously. Taken together, they put Best Buy ahead of the pack.

You can find Sheila in Austin, Texas, this month teaching a new ACFE course entitled, "Fraud Risk Management." Read more.

Who have you seen getting corporate governance right? Leave us your comments below.