The Volcker Rule and Fraud

GUEST BLOGGER

Bruce Dorris, J.D., CFE, CPA
ACFE VP and Program Director

There has been tremendous press (most recently in Reuters and Bloomberg) in the last few months on the latest release by U.S. financial regulators concerning the Volcker rule. The rule, part of the Dodd Frank Act reforms, is designed to limit certain trading activities, in particular derivatives, of banks. The theory is that if riskier trades are prohibited, the financial system will be safer.

While the effects of the Volcker rule remain to be seen, one thing is certain – there are many more regulations (71 pages with 882 pages of support as of now) that financial institutions now must comply with. 

My fear is that as these regulations are promulgated, rogue bankers looking to continue trading and booking these prohibited derivatives will find ways to bend the rules or exploit loopholes in them.

Additionally, not only do banks have another set of rules to comply with, but regulators will now carry a new workload as these rules are rolled out. Education and training for those examiners implementing and enforcing the rules will be critical. If regulators and examiners don’t know what they are looking for, then the spirit of the rule will never be met. We must equip the agencies and overseers with adequate resources to isolate complex derivatives and ferret out those banks continuing these prohibited trades.

For example, since the swap market is now under the purview of the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), these groups must make certain their staff can isolate trades and instruments that are in violation of these rules. If the staff is unfamiliar with these derivatives and not adequately trained what to look for and analyze, Volcker becomes all bark and no bite. Unethical traders will take advantage of any weakness in the system.

Again, training to know what to look for is imperative. For a diver, if the water is murky, visibility is nil. The sea of new regulations will make things murky enough; providing future training and education for those responsible will make things clearer.

Riding the Anti-Fraud Career Wave

GUEST BLOGGER

Kathy Lavinder
Owner and Executive Director of Security & Investigative Placement Consultants 

As 2014 begins, it’s a good time to consider the outlook for anti-fraud professionals. As a recruiter, I see the professional opportunities as abundant and improving. Here’s why:

1) There are still a lot of messes to clean up from the financial sector meltdown. As injured parties seek restitution, investigators who can determine if assets still exist, and find them if they’re hidden, are in demand. Professional services firms are doing pre-litigation asset searches across the globe and probing the wreckage of failed businesses and relationships for recoverable funds. Aggrieved parties, stung by Ponzi schemes and other criminal activities, are turning to fraud investigators to ferret out information. 

2) Enforcement activity has ratcheted up and will continue to be aggressive. The Securities and Exchange Commission made it clear that it intends to pursue more cases against individuals, not just corporations, and it will litigate more cases in court, and pursue larger fines against companies. The U.S. Dodd-Frank Act will present new challenges for businesses and new enforcement avenues. 

3) The playing field is global. Internet frauds obliterate boundaries and will continue to proliferate. If anything, online fraudsters exhibit extreme creativity and are usually several steps ahead of even the most cautious of consumers and most aggressive investigators and law enforcement personnel.

In tandem, corporations looking for growth in new international markets have hurdled into problematic areas that are rife with audacious frauds and endemic corruption, which increase corporate exposures and put financial and reputational assets at risk. As a result, multi-nationals are confronting substantial operating issues and potential landmines relative to fraud and potential violations of the U.S. Foreign Corrupt Practices Act and the UK Bribery Act. 

4) Data is leaking all over the place. There’s no need to rob a bank when you can get more information, and therefore more funds, by stealing electronic data. Criminals know this and are exploiting weak defenses everywhere they can. With so much data being stored in the cloud, expect this trend to intensify. And hackers aren’t just attacking big businesses. They are hacking networks of small businesses and stealing proprietary data for fraudulent uses. Don’t expect that to change. There are too many potential targets to attack, and the barricades are too easy to overrun. 

As a fraud fighter, you’ll need to stay abreast of developments in this dynamic landscape in real time. Certainly there are geographical and industry variation as the marketplace calls for more specialized knowledge, education and experience. Therefore, continuing education, specialized training, networking with peers, and monitoring relevant publications and websites will be critically important in the year ahead. The key to long-term career success as a fraud expert is to remain highly engaged in the professional community and to be alert to emerging trends and systemic vulnerabilities.

Reporting Misconduct Internally

SPECIAL TO THE WEB

Richard H. Girgenti, CFE; Meghan V. Meehan, CAMS
Contributing Writers, Fraud Magazine

With the passage of the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act and subsequent enabling rules, corporations face greater challenges in maintaining effective compliance programs. A key provision of the law allows whistleblowers to reap possible multimillion-dollar rewards for providing the Securities and Exchange Commission (SEC) with original information on alleged corporate wrongdoing.

After much public debate, the new law and related rules don't require whistleblowers to report knowledge of wrongdoing to their companies as a condition of eligibility for rewards. What's more, research shows that, despite the best efforts of many entities, most corporate environments usually fall short in alerting their employees of the importance of reporting misconduct internally and making them comfortable when doing so. With the U.S. federal government opening a reporting path straight to the SEC and adding a monetary incentive for employees to take that approach, many companies have strengthened their compliance programs and ensured that their cultures encourage employees to raise their hands high when they know something is amiss.

THE RULE

The SEC board members voted three to two on Aug. 12, 2011 to make the rule effective. The government can now consider a whistleblower for a reward if he or she voluntarily provides the SEC with original information, which leads to successful enforcement of a federal court or administrative action that includes monetary sanctions of more than $1 million. That reward is 10 percent to 30 percent of the total monetary sanctions.

The SEC considers the nature and severity of the misconduct to determine if the whistleblower may collect an award. With a few exceptions, the rule excludes the reward eligibility of senior managers with legal, compliance, audit, supervisory or governance responsibilities who may have learned of a reportable issue during the course of their duties. A whistleblower who may have engaged in wrongdoing may still be eligible for an award.

The SEC noted in the Annual Report on the Dodd-Frank Whistleblower Program that it had received 334 whistleblower tips on a variety of financial issues between Aug. 12 and Sept. 30, 2011, the most recent data available.

WHAT CAN COMPANIES DO?

Faced with the prospects of any fraud or misconduct issue becoming a federal case —possibly even before the organization itself learns of the problem — most companies have launched a reassessment of their internal fraud prevention and compliance programs with a particular emphasis on the adequacy of internal reporting mechanisms and incentives. 

Read the rest of this article and discover the 10 things companies are doing to ensure they have an efficient internal reporting system on Fraud-Magazine.com.