Why Law Enforcement is Not to Blame for Fraud

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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.

www.martinkenney.com |@MKSolicitors

The Romance Scam: The Love Song That Never Was

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AUTHOR'S POST

Mandy Moody, CFE
ACFE Content Manager

Jennifer Lopez once sang that her “love don’t cost a thing.” I can’t remember if this was before or after Ben Affleck bought her a Rolls Royce. Don’t worry, it worked out evenly. She bought him a Bentley.

But, alas, not every romance works out as merrily as Bennifer did. (They almost made it to the chapel.) For some, love really is blind, especially when it happens over the internet.

To remember how much of a battlefield love can be, here are some of the latest news stories about people who give love a bad name:

BBC Promotes Valentine’s Day Awareness Campaign
[Jenny] started communicating online with a "very caring, considerate" man who said he was an IT consultant. "Very early on in the communication he was telling me how much he loved me, how he wanted to be with me, I suppose I got to the point where I believed everything he said," she said. Read the full story.

Secrets: When White-Collar Crime Goes Dirty
In two unrelated but sadly similar cases, Harvey and Larry carried on secret, sexually aberrant lives that were decidedly at variance with their known, socially respectable lives. Unfortunately, Harvey and Larry encountered extortionists who exploited their secrets, which cost each man thousands of dollars and one his life. Read the full story.

‘Prince Charming’ Behind Bars in Romance Scam Case
Olayinka Ilumsa Sunmola, 33, of Nigeria was sentenced to 27 years in federal prison for an international criminal enterprise he ran from 2007 to 2014. Sunmola and his associates targeted hundreds of women across the United States, developing intense online relationships and promising them true love. Instead, Sunmola bilked them for millions of dollars. Read the full story.

As a fraud examiner, you may not wear your trust on your sleeve as many of the victims who fall prey to internet barracudas do. You know to ask questions, be cautious and remain curious. Let’s use these stories to help spread the word that love doesn’t have to cost a thing; it can actually be an endless love that will take your breath away.

How many love song references did you spot? Let me know in the comments. Happy Valentine’s Day from the ACFE!

Naughty or Nice: Who Made the List in 2016?

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Emily Primeaux, CFE
Assistant Editor, Fraud Magazine

He sees you when you're sleeping. He knows when you're awake. He knows when you've been bad or good...

"He," or "she," of course, is the ever present fraud fighter. And in 2016, fraud fighters saw a slew of unsavory characters who clearly ignored the elf on the shelf and instead stole, bribed or colluded to illegally line their own pockets. But for every bad apple, there are unsung heroes — the whistleblowers, journalists, investigators ... the list goes on and on. These heroes go to battle in the trenches every day to root out the crooks and thieves.

In honor of the holiday season, let's ruminate on the past year and the characters that made it onto either the naughty or the nice list.

Naughty

  1. Wells Fargo: On Sept. 9, 2016, Wells Fargo negotiated a deal to settle a lawsuit filed by the U.S. Consumer Financial Protection Bureau, the Office of Comptroller of Currency, and the City and County of Los Angeles. Though Wells Fargo didn't admit to any wrongdoing, it did confirm that employees had opened more than two million checking, savings and credit card accounts without customer approval. And in a stunning turn of events, former employees then came forward to say they had called the ethics hotline to report dubious sales practices. However, according to these accounts, some whistleblowers claimed that the bank's strategy for dealing with whistleblowers was to find ways to fire them in retaliation. Though the case is ongoing, John Stumpf has stepped down as the bank's chief executive.
     
  2. Andrew Caspersen: On Nov. 4, 2016, this disgraced scion of a wealthy Wall Street family was sentenced to four years in prison for robbing his friends, family and a large hedge-fund foundation in a Ponzi-like scheme. The judge who sentenced him? None other than the ACFE's 2016 Cressey Award winner, Senior U.S. District Judge Jed S. Rakoff. Looks like Caspersen most likely received coal in his stocking this year.
     
  3. The Panama Papers: A giant leak of more than 11.5 million financial and legal records from the world's fourth biggest offshore law firm, Mossack Fonseca, detailing financial and attorney-client information for more than 214,488 offshore entities ... otherwise known as the Panama Papers. According to the papers, the leak "exposes a system that enables crime, corruption and wrongdoing, hidden by secretive offshore companies." The leaked documents outed scores of politicians, business leaders and celebrities for fraudulent business practices, including Iceland's Prime Minister, Sigmundur David Gunnlaugsson. He stepped down after documents revealed that he and his wealthy wife had sheltered money offshore.

Nice

  1. The Panama Papers: The papers themselves were a great feat of international cooperation when the International Consortium of Investigative Journalists, the German newspaper Süddeutsche Zeitung and more than 100 news organizations released the Panama Papers. These are the good guys.
     
  2. Tyler Schultz: When he discovered that Theranos, a health technology and blood-testing company, was using proprietary Edison machines that frequently failed quality-control checks and produced widely varying results, Schultz (an employee of the company at the time) decided to speak up. He drafted an email to founder Elizabeth Holmes to complain that Theranos had doctored research and ignored failed quality-control checks. What makes this move even more incredible is that Schultz is the grandson of George Schultz, a Theranos board member. Since then, a major investor has sued Theranos for fraud and the company has had to stop blood tests, shut down labs and cut jobs. 
     
  3. Clare Rewcastle Brown: In 2010, Rewcastle Brown founded The Sarawak Report and Radio Free Sarawak to disseminate news that concerned the Sarawak region of Malaysia and eventually, news surrounding the emerging 1MDB (1Malaysia Development Bhd) scandal. 1MDB is currently being investigated by Swiss, Singh and U.S. authorities. And she's not backing down, despite a Malaysian court issuing a warrant for her arrest for "activities detrimental to parliamentary democracy" and the "dissemination of false reports." She'll be speaking about the scandal at the 2017 ACFE Fraud Conference Europe in London, March 19-21.

The naughty list may never be empty, but at least we have those on the nice list to turn to. And while 2016 saw some pretty egregious schemes, we can enter 2017 knowing that there are those willing to investigate and speak up. Here's to the new year!

Traveling Fraud Museum Looks at Fraud on the Big Screen

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Courtney Babin
ACFE Communications Coordinator

While the Fraud Museum’s permanent home is at ACFE headquarters in Austin, Texas, each year a traveling exhibit featuring selected pieces goes on display at the ACFE Global Fraud Conference. Made up of artifacts, memorabilia, documents, and other pieces of fraud history collected by ACFE founder and Chairman Dr. Joseph T. Wells, CFE, CPA, this year’s Fraud Museum displays financial frauds depicted on Hollywood’s big screen. The pieces reflect on productions like The Wolf of Wall Street, The Big Short and the recent ABC miniseries, Madoff. 

A must-see piece at the 27th Annual ACFE Global Fraud Conference, June 12-17 in Las Vegas is “Fraudulent Russian Investment Notes” from the Russian company MMM. The notes feature a portrait of Sergei Mavrodi, one of three founders of the company. These notes — which are worthless — are a reminder of Russia’s biggest Ponzi scheme. At the peak of its performance, MMM was collecting $11 million daily. Ponzi schemes are distinguished by paying the principal and interest for old investors with money collected from new victims. Because of the multiplier effect, all Ponzi schemes are destined to eventually fail. For this particular scheme, losses eventually reached $1.5 billion, collected from several million investors.

Another piece to check out is the tongue-in-cheek “Wall Street ‘Most Wanted’ Playing Cards” in the Wolves of Wall Street display. This card set hosts caricatures of many corporate titans who have been charged with major accounting frauds. Some of the fraudsters include Ken Lay of Enron, Martha Stewart and Scott Sullivan of WorldCom.

Check out the other fascinating pieces from the far — and recent — past when you stop by the Fraud Museum exhibit. Remember to bring this conference guide with you and take the quiz on the next page. Be sure to submit your answer sheet in the submission box located at the Fraud Museum exhibit and you will be entered to win a $250 gift card (one answer sheet will be drawn at the end of the conference to determine the winner). Good luck! 

Fraud Displaced During EMV Transition

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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.