A Lesson from the Exonerated

GUEST BLOGGERS

Roger Aradi, CFE, ACFE Communications Manager
Ryan Gregory, Risk Analyst, Cinder Staffing

More than 17,895 years lost.

That’s how much prison time innocent people served before subsequently being exonerated, according to the National Registry of Exonerations.* The mission of the registry is “to provide comprehensive information on exonerations of innocent criminal defendants in order to prevent future false convictions by learning from past errors.” Just as we, as anti-fraud professionals, learn to fight fraud by studying fraudsters, are there lessons to be learned from cases where innocents have been convicted of fraud?

Fraud and tax evasion cases make up only 0.02 percent of cases in the registry. This gives us 36 cases of individuals convicted of fraud or tax evasion but later exonerated on some or all charges. In 80 percent of these cases, official misconduct or perjury/false accusations were factors that led to defendants ultimately winning their appeals.

According to the Farlex online legal dictionary, official misconduct is defined as “improper and/or illegal acts by a public official which violate his/her duty to follow the law and act on behalf of the public good.” According to the registry’s own glossary, perjury/false accusation takes place when “A person other than the exoneree committed perjury by making a false statement under oath that incriminated the exoneree in the crime for which the exoneree was later exonerated, or made a similar unsworn statement that would have been perjury if made under oath.”

In other words, in 80% of the cases under consideration, those building/prosecuting the case violated the law or contradicted the truth. A few examples are noted in these quotes from courts involved in these cases:

• “had the government complied with its…..obligations and disclosed SEC transcripts.”
• “prosecution has presented insufficient evidence.”
• “it was discovered that prosecutors failed to disclose.”

These cases provide dramatic examples of why integrity and objectivity are emphasized so strongly in the CFE Code of Professional Standards. The very first standard of conduct states, “Certified Fraud Examiners shall conduct themselves with integrity, knowing that public trust is founded on integrity. CFEs shall not sacrifice integrity to serve the client, their employer or the public interest.” How many of the 36 exonerations would never have resulted in convictions in the first place had the investigators and prosecutors held themselves to this standard?

Perhaps that is the lesson to be derived from the exonerated: professional standards may feel like constraints sometimes, but they serve a vital purpose, and to violate them has a real human cost. Let us aspire to a level of professionalism that prevents any innocents from losing even one year of their life, much less nearly 18,000.

* As of June 29, 2017.

What You Need to Know About the U.K.’s Criminal Finances Act

GUEST BLOGGER

Jordan Underhill, J.D.
Research Specialist

On April 27, the U.K. officially passed the Criminal Finances Act 2017. This law represents the most significant development in U.K. corporate criminal liability since the passage of the Bribery Act in 2010. The Act also strengthens the government’s ability to combat money laundering, terrorist financing and tax evasion. The various provisions of the Act are expected to come into force later this year and will affect both U.K.-based firms and foreign firms conducting business in the U.K.

Tax Evasion
One of the most important sections of the Act expands corporate criminal liability for tax evasion. This expansion represents the U.K.’s latest effort to combat domestic and global tax evasion and to increase its coordination with foreign governments. The Act creates two new strict liability criminal offenses:

1. Failure to prevent the facilitation of U.K. tax evasion offenses
2. Failure to prevent the facilitation of foreign tax evasion offenses

These new offenses are modeled after Section 7 of the Bribery Act, which created a strict liability offense for the failure of commercial organizations to prevent bribery on their behalf. Like Section 7, these new “failure to prevent” offenses have potentially broad applications because no intent is required. A corporation can be held liable for the actions of employees who, in their professional capacity, encourage or assist the tax evasion of others. This is true regardless of whether upper management had knowledge of or directed the actions of the facilitator.

However, the Act does provide a defense for firms that have reasonable prevention measures in place. To successfully assert this defense, the corporation must show that, at the time of the offense, it had reasonable prevention procedures in place to prevent employees from facilitating tax evasion. Alternatively, the corporation can show that it was not reasonable in all circumstances to expect the corporation to have any prevention procedures in place.

Unexplained Wealth Orders
Chapter 1 of the Act creates the “unexplained wealth order” (UWO), which is a new investigatory tool that authorities can use to expose corruption, tax evasion and other illicit activities. UWOs require individuals to explain the origin of funds that appear disproportionate to their reported income. These orders can be issued by a High Court at the request of an enforcement authority to a “politically exposed person” (e.g. public official) or a respondent that the court has reasonable grounds to suspect is involved in a serious crime or is associated with someone involved in a serious crime.

A UWO can be issued to someone not based in the U.K. and may relate to property outside of the U.K. If an individual makes false or misleading statements in response to a UWO, they can be convicted of a criminal offense that carries a maximum penalty of two years’ imprisonment.

Anti-Money Laundering and Terrorist Financing
The Act also enhances the abilities of law enforcement to investigate suspected money laundering and terrorist financing in three key ways:

1. The Act empowers law enforcement to issue disclosure orders during money laundering investigations. These orders compel individuals that authorities suspect may have relevant information to answer questions and disclose documents. Individuals who fail to comply with disclosure orders can be fined up to £5,000.
2. The Act allows for information sharing between various firms when there is suspicion of money laundering. This includes the ability for firms to submit joint suspicious activity reports (rather than a single report for each firm), which combines information from each firm into a single, cohesive document to create a more streamlined investigation for authorities.
3. The Act gives the National Crime Agency (NCA) more time to investigate suspicious activity reports. Ordinarily, when a business submits a suspicious activity report, it requests consent from the NCA to proceed with the reported transaction or activity. The NCA can deny consent, creating a 31-day moratorium period during which investigators can gather evidence on the reported activity and determine if further action is required. However, this window is often too short for a thorough investigation. The Act allows the NCA to petition a court for up to six 31-day extensions to the moratorium period, providing more time for a careful analysis of the suspicious activity.

The Criminal Finances Act represents another step in the fight against fraud. Affected businesses should conduct risk assessments to ensure that they are in compliance with the Act before it comes into force later this year. In particular, special attention should be paid to procedures designed to prevent employees from facilitating tax evasion. Likewise, employees should be educated about the Act and any changes in internal policies.

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.