Fraud Displaced During EMV Transition

GUEST BLOGGER

Zach Capers, CFE
ACFE Research Specialist

Last year, I wrote about the U.S.’s transition to EMV credit cards and the associated fraud liability shift from card issuers to merchants. The article mentioned the possible side effect of fraud being displaced from in-store to online transactions as has happened in many countries that have undergone similar transitions; one year later, the initial data is in and that possibility is now a reality.

A new report from ACI Worldwide shows that online credit card fraud during the 2015 holiday season increased by 8 percent over the 2014 holiday season. Furthermore, the report shows that 1 out of every 67 online credit card payments was a fraudulent attempt compared to 1 out of 72 the year previous. While there are many factors at play and online purchases continue to increase year over year, the findings correspond with increases expected by industry experts and follow the trends previously experienced by other countries.

Meanwhile, the transition to EMV credit cards has resulted in other forms of turmoil for merchants big and small. Visa was recently sued by Wal-Mart over the card issuer’s insistence on a signature verification system rather than a PIN requirement that Wal-Mart and many others claim would significantly increase security for customers while reducing fraud. Wal-Mart’s central claim is that Visa makes more money by processing signature based transactions than they would with a chip and PIN system, thus profiting at the expense of retailers and their customers.

Another complication wrought by the adoption of the new credit card systems is the slow certification process for new credit card terminals required by last year’s liability shift. A New York Times report in March documented the plight of mid-sized business that were still waiting for their new payment terminals to be certified despite having them in place since the November 2015 deadline. Some merchants argue that relationships between financial institutions and certification firms leave little motivation to speed up this process since uncertified merchants must continue to pay for any fraudulent activity incurred on their terminals.

On Capitol Hill, Wal-Mart and others seem to have an ally in U.S. Senator Dick Durbin who recently assailed the credit card industry’s refusal to allow PIN based transactions and the delayed certification process. The senator also echoed the frustration of many consumers regarding long waits at retail checkout counters caused by slow software processing in new card terminals.

As more consumers adapt to their new EMV credit cards and new merchant terminals are certified and updated with improved software, some of the unexpected issues with EMV adoption will be resolved. Unfortunately, many of the most significant problems with the transition were either widely predicted or entirely avoidable.

Martin Kenney on the Panama Papers

AUTHOR'S POST

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.

My Lunch With Andy Fastow

GUEST BLOGGER

Emily Primeaux
Assistant Editor, Fraud Magazine

It was on a hot, muggy day in Singapore, at a corner table in Beijing Number One — one of the many restaurants in the Marina Bay Sands Hotel mall — that I sat down with Andrew Fastow, former Enron CFO, to talk about one of the most infamous fraud schemes of the past 15 years. We were the only ones in the restaurant — just two unassuming people in the corner of a traditional Asian eatery. Andy asked if I’d be interested in sharing a whole Peking duck. When in Singapore, right?

While we waited for our roasted duck, I pulled out my two recorders, set them on the table and said, “Now I know you’re typically against being recorded in any way, but I have to record this so that I quote you accurately. Are you comfortable with this?” Andy looked me in the eye and replied, “That’s fine. I trust you.”

Trust.

What a short and seemingly simple word. It can be tough to gain and very simple to lose. Trust is present every day in so many aspects of our lives. We trust our significant others to fulfill their promised duties. We trust our employers to pay us the amount we’re owed and on time. Many of us innately believe people will make just and ethical decisions, no matter how hard.

And here in my little corner of Singapore, I was about to pry into the unsavory parts of his past. I was going to poke and prod and ask him to reveal things that, until this point, he’d never truly opened up about. Sure, he’s spoken at conferences, but I had free reign to delve into the true machinations of the Enron scandal and for the first time he didn’t have time to completely prepare.

In his interview with Fraud Magazine, Andy explained that he tried to technically follow the rules, but he also undermined the principle of the rule by finding the loophole. "I think we were all overly aggressive,” he said. “If we ever had a deal structure where the accountant said, 'The accounting doesn't work,' then we wouldn't do those deals. We simply kept changing the structure until we came up with one that technically worked within the rules.” He now calls his machinations fraud.

“I was the gatekeeper. I should have been making the tough calls and I didn’t. I just abdicated,” Andy told me. “We had senior executives, like myself, who were doing deals that sent a bad ethical message.”

To read the full interview, visit Fraud-Magazine.com.

Why Hollywood Loves Fraud

GUEST BLOGGER

Sarah Hofmann
ACFE Public Relations Specialist

On the big screen and small screen alike, it appears that there’s a new villain in town — fraud. From ABC’s miniseries Madoff, Oscar winner The Big Short, Showtime’s thriller Billions and many more projects in production, fraud seems to be the new hot topic for studios to explore.

The timing of pop culture tackling fraud is undoubtedly tied in some way to the Great Recession of 2008. While fraud is a crime that, by definition, is mainly hidden, the entire world saw how far-reaching the effects can be when big banks began to fail. Script analyst Mars Incrucio explained, “The subprime mortgage crisis in the states left the American public in a state of outrage, and it needed someone to blame. The words ‘banker’ and ‘Wall Street’ suddenly became even more vile and rapacious than they had before. All of this is to say, bankers, brokers, hedge fund managers, and any one percent figures now make for a great bad guy.”

As the dust began to settle on the destruction caused by unethical businessmen, there was another side of human nature that lent itself to being interested in stories of fraud and corruption. Vice President of Education for the ACFE, John Gill, J.D., CFE, explained that movies and shows about fraud can also appeal to a basic curiosity in people. “I think part of it is [the audience asking], ‘Would I ever do something like that?’... People find themselves facing ethical dilemmas more than they think.”

Luckily, Hollywood is beginning to pay attention not only to the greedy villains responsible for fraud; they are celebrating the men and women who uncover these schemes. Incrucio said, “Be on the lookout for the new hero motif, the investigator. These characters use research, wit and hard work to bring down ostensibly greedy and negligent corporate figures. Films such as Spotlight and Truth utilize this character as a direct challenge to the villains beget by the same public outrage.”

In addition to raising awareness about the investigators that ferret out these crimes, seeing more tales of fraud on the screen can lead to the public having an increased awareness of what to lookout for. Gill said, “Many stories are real and the ones that aren’t show an accurate depiction … they’re very helpful to get the word out about some of these schemes … [they] put a face to some of the realities of fraud.”

Whether they serve as PSAs for the general public on red flags to avoid or show entertaining tales of dogged investigators defeating the “evil fraudster,” it’s a safe assumption to make that there will be even more movies and shows in the coming years that show what we already know: fraud is a real issue that needs to be tackled.

If the Supreme Court Won't Help Stop Insider Trading, Who Will?

ONLINE EXCLUSIVE

Bruce Dorris, J.D., CFE, CPA, CVA
Vice President and Program Director at the ACFE

The Supreme Court's decision not to review a recent insider trading case produces a cloudy precedent for white-collar prosecutions.

The U.S. Supreme Court recently decided that they would not hear the Justice Department's challenge of a major appeals court decision, United States v. Newman, which overturned two counts of insider trading in 2014. The case against former hedge fund managers Todd Newman, of Diamondback Capital Management, and Anthony Chiasson, of Level Global Investors, was initially brought by the U.S Attorney's Office for the Southern District of New York. The government alleged that Newman and Chiasson used a round-robin ring of insider trading tips to earn a combined total of $72 million for their funds.

After a six-week trial on securities-related charges in 2012, a federal district court jury found the defendants guilty on all counts. Newman was sentenced to 54 months in prison, and Chiasson received a sentence of 78 months. In 2014, a three-judge panel of the U.S. Court of Appeals for the Second Circuit overturned the convictions. The Justice Department filed a petition to the Supreme Court to review the case in July 2015.

A conviction for insider trading requires proof that the person who disclosed the information, the tipper, received a "personal benefit." Under some circumstances, a "personal benefit" may be proven if there is a "meaningfully close personal relationship" between the tipper and the tippee. The Second Circuit reversed the convictions based on a very narrow interpretation of the term "personal benefit." The court also found that the Justice Department had not established that there was a "meaningfully close personal relationship" between either Newman or Chiasson (the tippees), and the providers of the insider trading tips (the tippers). The Second Circuit interpreted the 1983 case Dirks v. SEC to mean that for insider trading to have occurred, the providers of the tips must have benefitted from sharing the tips, which, the appellate court wrote, could not be proven.

The jury heard a lot of evidence in six weeks, enough to convict on all counts for each defendant. The Dirks decision gave the fact-finder fair latitude regarding the "objective facts and circumstances" to determine culpability in the case. But the Second Circuit's interpretation will create problems for prosecutors in future cases, as the margin for that connection just shrank. It seems illogical to think that both the tippers and tippees did not see the potential for misuse of the confidential information repeatedly provided over the span in this case. These are not your average investors. These are really smart, sophisticated traders, who understand the nuances in securities law and now appear to have a more vague definition to use as a defense.

Read the full article at Fraud-Magazine.com.