Episode Notes for Fraud Talk Podcast: Mailing Madoff

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Sarah Hofmann
ACFE Public Information Officer

When you think of pen pals, you usually think of kids staying in touch after friendships forged at summer camp. In stark contrast of that sunny scene, for David Weber, J.D., CFE, his pen pal was the result of a U.S. Securities and Exchange Commission (SEC) investigation. Weber, academic director of fraud management programs at the Smith School of Business at the University of Maryland, regularly corresponds with infamous fraudster Bernie Madoff.

In the latest episode of Fraud Talk, Weber describes how the two first crossed paths when Weber was working as the assistant inspector general for the SEC and directed the reporting of misconduct in the Madoff case. After leaving the SEC, and becoming a professor, Weber received an email from none other than Madoff. The two began talking on a regular basis and Madoff even answers questions posed by Weber’s students. “He’s very direct in the emails; he’s not a man that minces words,” Weber said. “He really does express remorse, and he does continue to be of the view, and I agree with him, that the regulatory agencies really failed to do their jobs.”

His close relationship with a man who cheated hundreds of people and organizations out of billions may raise eyebrows, but Weber believes there is more to be gained from talking to convicted fraudsters than refusing to on hear their stories.  

“There’s no question that we can learn from fraudsters,” he said. “As fraud fighters, we are frequently in a position where clearly being proactive is part of our role, but in many cases, when there is spectacular fraud, we are not learning of the fraud until the incident has finally occurred. We are part of the response team.”

Weber likened investigating fraud to coming to the scene of a car crash after the fact. “There are injured people, there are people who need to be triaged, there are cars that are damaged, there is debris in the road,” he said. “Many times, it’s hard to figure out through the victims what transpired, so having any person on the scene who is still able to speak is helpful, even if they were a drunk driver. Even if they were somebody who drove recklessly, hearing what they have to say is very important to reconstructing the scene.”

Weber acknowledges that hearing from fraudsters may be controversial, as anti-fraud professionals understandably don’t want to glamourize their actions. “I have been at the fraud conference many times where I have heard some of these convicted felons speak … and I agree it can put some of them on a pedestal,” he said. “But anything we can get from these people to help us reconstruct the scene, and build a better mousetrap in the future — we should embrace the ability to speak to them.”

To hear more from Weber, register for the 28th Annual ACFE Global Fraud Conference June 18-23 in Nashville where he will be teaching a session on the Panama Papers.

Bribery Not Limited to Envelopes of Cash: BNY Mellon Internships Violated the FCPA

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Ron Cresswell, J.D., CFE
ACFE Research Specialist

On August 18, 2015, the Securities and Exchange Commission (SEC) announced a $14.8 million settlement with Bank of New York Mellon (BNY Mellon). According to the SEC, the bank violated the Foreign Corrupt Practices Act (FCPA) by giving valuable internships to the relatives of foreign officials. This case is a good reminder that bribery can take many forms. It is not limited to envelopes of cash. Under the FCPA, companies may not offer “anything of value” to improperly influence a foreign public official. Violations may result from expensive gifts, travel and entertainment expenses, charitable contributions or even internships.

The BNY Mellon Case
The case arose from an existing business relationship between BNY Mellon and the sovereign wealth fund of an unnamed Middle Eastern country. A sovereign wealth fund is a government-owned investment fund. BNY Mellon managed and serviced the fund, which held more than $55 billion in assets.

Two officials of the fund repeatedly and aggressively requested student internships for their relatives (two sons and one nephew). BNY Mellon hired the three relatives as interns, even though they did not meet the rigorous admissions criteria for the bank’s internship program. Two of the internships were paid, and one was unpaid. The paid internships were paid at a higher rate than was customary. In addition, the internships were longer than usual, and they were customized to provide a uniquely valuable work experience for the recipients. In emails, high-level BNY Mellon employees made it clear that the relatives were hired in an effort to retain and increase the bank’s business with the fund. One email stated that BNY Mellon “was not in a position to reject the request from a commercial point of view.” Based on this evidence, the SEC found that the internships violated the anti-bribery provisions of the FCPA.

The SEC also determined that BNY Mellon violated the FCPA’s internal controls requirement. While BNY Mellon had a broad FCPA policy, the bank failed to ensure that its employees understood the policy and received appropriate training, especially with respect to hiring. Human resources personnel were not trained to flag potentially problematic hires. Senior managers had the authority to hire individuals without any review by legal or compliance staff. The SEC found that BNY Mellon’s internal controls were not tailored to address the specific corruption risks inherent in the bank’s business.

The settlement with the SEC included $8.3 million in disgorgement and $1.5 million in prejudgment interest. It also included a $5 million penalty. The penalty probably would have been higher if BNY Mellon had not cooperated with the SEC’s investigation.

Takeaways
The BNY Mellon case is an important reminder that bribery is not limited to cash payments. The FCPA prohibits companies from offering anything of value to improperly influence foreign officials, including jobs or internships.

Since the SEC has signaled that hiring practices will be subject to scrutiny, companies must have hiring policies and procedures that take into account FCPA risks. These policies and procedures should include appropriate FCPA training for all employees. Human resources personnel should be trained to flag unusual hires, which should then be reviewed by legal or compliance staff.

As evidenced by the actions of BNY Mellon, broad FCPA policies are insufficient. Businesses should take care to specifically tailor internal controls to the corruption risks faced by their individual business.