10 Infamous Fraud Cases of the 21st Century

FROM THE RESOURCE GUIDE

ACFE Staff

A seemingly endless stream of fraud stories hits the headlines every day. On Monday you could read that an Ivy league-educated financier defrauded his victims of more than $38 million and by Friday, a European soccer star is spending his day in court.

It can be disheartening to see these stories splayed across your computer or TV screens. There is, however, a silver lining. If we’ve learned anything from taking history classes in school it’s that understanding the past helps to avoid repeating it. 

In a new ACFE online self-study course, 10 Infamous Fraud Cases of the 21st Century, we do just that. By exploring 10 notable fraud cases of the 21st century, fraud examiners can identify the methods the major players used to conduct their schemes, and analyze the aftermath and impacts of various frauds. Learning from past cases means you can help protect your clients, employers and the general public from similar schemes in the future.

WorldCom
In 2002, the WorldCom scandal became one of the largest accounting frauds in history when the company revealed its wrongdoing and was subsequently forced to file bankruptcy and write off $50 billion in losses. The scandal began when WorldCom CEO Bernie Ebbers employed a business strategy of achieving growth through acquisitions. He acquired MCI Communications and then proposed a merger with Sprint, but was forced to abandon the Sprint merger in 2000. Determined to show increased revenue despite a slow-down in mergers and acquisitions, Ebbers manipulated the books to satisfy Wall Street’s expectations. The scheme was detected when a capital expenditures audit revealed suspicious journal entries. WorldCom’s internal audit team discovered improper accounting in expenses over five quarters. The WorldCom accounting scandal was a situation in which corporate governance failed and the board of directors were caught unaware. WorldCom’s accounting system was faulty and Ebbers’ close relationship with external accounting firm Arthur Andersen presented a conflict of interest in which the auditors were unable to exercise professional skepticism when performing their audits.

FIFA
High-profile sports are big business in many countries. Unfortunately for the International Federation of Association Football (FIFA), alleged corruption and money laundering means its big business operated with little or no oversight. The FIFA scandal involved the collusion between FIFA executives, sports marketing executives and officials of continental football bodies. The scandal erupted in May 2015 when Swiss authorities raided a hotel in Zurich and several FIFA executives were arrested. The U.S. Department of Justice (DOJ) has cited more than 40 defendants in the FIFA scandal. Some charges involved bids for World Cups and for marketing and broadcast deals that amounted to nearly $150 million. Future World Cups are now in question — the scandal has caused the bidding process for the 2026 World Cup to be suspended. Proposed changes have been made, but only time will tell in an organization that has historically dealt with bribery and corruption.

GlaxoSmithKline
In 2012, British pharmaceutical company GlaxoSmithKline (GSK) was at the center of the largest health care fraud settlement in history when the company agreed to pay $3 billion in fines to U.S. regulators. The crime? According to the U.S. Justice Department, GSK unlawfully promoted certain prescription drugs, failed to report safety data, paid kickbacks to health care professionals and engaged in fraudulent pricing practices. The settlement arose from a number of GSK policies and practices that largely involved the promotion of prescription drugs, like Paxil and Wellbutrin, for off-label use. While doctors may prescribe drugs for off-label use, it’s illegal for pharmaceutical companies to promote or market off-label uses. The U.S. government also claimed that GSK paid unlawful kickbacks to health care professionals to encourage them to prescribe certain drugs. Although much of GSK’s misconduct was unique to the pharmaceutical and health care industries, the case contains broad lessons. A company’s culture should stress compliance and ethical conduct. The nature and prevalence of GSK’s misconduct suggest that its culture rewarded profit rather than compliance and patient safety. That type of culture is a recipe for fraud. 

Target
The Target data breach in late 2013 was the largest in U.S. retail history and resulted in the exposure of approximately 40 million credit card numbers and the personal information of 70 million customers. Unidentified hackers — thought to be from Eastern Europe or Russia — surreptitiously installed malware into Target’s computer networks. The hackers accessed Target’s systems using the credentials of a third-party heating and air conditioning contractor.

Before the company was hacked, Target had installed a security system that caught five instances of malware graded at the highest severity. Members of corporate headquarters were notified, but apparently ignored the alerts. In this day and age when cybersecurity has become a hot topic thanks to the increasing advancements in technology, the Target debacle shows that companies need a strong response plan to deal with alerts of possible network intrusions.

Olympus
The Olympus financial scandal exploded in late 2011 when then president and CEO Michael Woodford came forward with information exposing fraudulent accounting practices in the organization. Woodford had only served as CEO for two weeks when he revealed the financial malfeasance. The fraud is one of the most significant corporate corruption scandals in the history of Japan. In 2000, standards in Japan changed significantly after the failure of Yamaguchi Securities in 1997. The new accounting standards required losses on certain assets to be noted at the end of each accounting period. Rather than comply with the standards and disclose mounting losses, Olympus constructed a complicated system of hiding its bad assets. The company began selling bad assets for exorbitant prices to newly created entities under its control without recognizing losses from the sales. The Olympus fraud shows that tone at the top matters. Woodford wrote letters to the board about his concerns and was subsequently fired. This exemplified the company’s unethical culture. C-level executives must act according to the principles expected of employees at all levels and across the enterprise.

Learning by Example
These are just five of the 10 cases covered, and here we only scratch the surface of what can be learned from these schemes. 10 Infamous Fraud Cases of the 21st Century contains analysis from experts and experienced fraud fighters. It dives deep into each case to interactively explore the pressures, opportunities and rationalizations of the fraudsters, and how fraud examiners can take these lessons into the field.

Find more products and events in the latest ACFE Resource Guide. 

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Bribery, Corruption and Money Laundering at FIFA: What Did Banks Know?

GUEST BLOGGER

Dennis Lawrence, CFE

Lawrence is a former U.S. Army Counterintelligence Special Agent, Investigations Manager at a publicly traded software company and member of a Big Four forensic investigations team. He currently works as a Denver-based risk consultant.

A lengthy Department of Justice indictment released in late May recounted an orgy of corruption at FIFA. Soccer officials allegedly spent years pocketing an estimated $150 million in dirty money while selling media and marketing rights of major sporting events along with voting on federation issues including the selection of host countries for World Cup tournaments. At one point, former FIFA vice president and executive committee member Jack Warner went so far as to direct a family member to fly to Paris and meet in a hotel room with a high ranking South African World Cup bid committee official to collect a cash-filled briefcase meant for Warner as part of a World Cup vote scheme. When it comes to untraceable transfers of money, however, this example appears to be the exception rather than the rule, as most illicit payments purportedly involved bank transactions. Although the allegations of wrongdoing at an international sports federation may not come as a surprise to some, the extent to which the global banking system was apparently leveraged to transmit an abundance of bribes raises the question: What did banks know, and what were they reporting to authorities?

According to court documents, foreign bank accounts and secretive banking jurisdictions were routinely leveraged by defendants in order to mask corrupt payments. In January 2008, for instance, a FIFA official in Switzerland wired $616,000 in misappropriated funds to an account held in the name of various FIFA affiliate organizations, but controlled by defendant Jack Warner at Republic Bank in Trinidad and Tobago. Warner then instructed Republic Bank to apply $200,000 of the funds from the organizations’ account to a personal loan account held in his name. Such an unusual transfer would have likely caught the attention of anti-money laundering (AML) staff at a U.S. bank, but is likely to have gone unnoticed in the black hole of Caribbean banking culture at the time of occurrence. To create additional layers of obfuscation, defendants and co-conspirators are reported to have also used intermediaries and shell companies to funnel money to bribe recipients, making cross-border money transfers even more difficult to examine for anyone who did happen to be looking.

Not all transactions can be readily explained away by the involvement of bank secrecy havens and intermediaries. In May 2011, a soccer official and member of the FIFA congress received an envelope containing $40,000 in cash as part of a campaign to secure votes for an upcoming FIFA presidential election. Days later, the official deposited the entire cash sum into a bank account in the U.S. Any reputable Know Your Customer (KYC) program would have presumably established that the official was a politically exposed person. As such, the handsome cash deposit would have likely set off an alert requiring a review by AML staff, possibly resulting in a Suspicious Activity Report being sent to FinCEN. Other reports indicate that while soccer officials receiving corrupt payments were advised to refrain from using bank accounts in their own names, they did not always follow this common sense suggestion and would have consequently left a trail of footprints for AML teams.

While it may be too soon to know whether banks were aware of bribes and may have tipped off law enforcement to what was occurring, the FIFA scandal serves as a reminder that financial institutions often hold the power to uncover many small clues to big crimes long before governments become aware that a law has even been broken in the first place.