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

Why No Top Execs Prosecuted After the Great Recession?

LETTER FROM THE PRESIDENT

James D. Ratley, CFE
ACFE President

In the last 30 years, we've seen top executives prosecuted during the S&L debacle, the junk bond scandal, Enron, WorldCom, Tyco and other monumental crimes. However, we never saw prosecutions of any high-level execs after the recent Great Recession. Why?

Jed S. Rakoff, U.S. district judge for the Southern District of New York, says in Fraud Magazine's most recent cover article that the reasons for the government's lack of prosecutions ranged "from the diversion of FBI agents to other priorities to prosecutors' increasing unfamiliarity with how to pursue such cases."

But two primary reasons stand out, he says. "First, beginning in the late 1990s, the Department of Justice became increasingly enamored with the vague — and in my view misguided — notion that prosecuting corporations instead of individuals would affect a change in ‘corporate culture' that would make companies more law-abiding," says Rakoff, a keynoter at the upcoming 27th Annual ACFE Global Fraud Conference, June 12-17 in Las Vegas.

"Second, and probably most important, prosecuting companies is easy — because companies ultimately have to settle or face potential ruin — and enables prosecutors to trumpet quick successes without employing substantial resources or courting defeat," he says.

In a November 2011 ruling, Rakoff tossed out a settlement between the Securities and Exchange Commission (SEC) and Citigroup that allowed the firm, without admitting guilt, to pay a $285 million fine for allegedly selling a billion-dollar fund filled with toxic mortgage debt. On June 4, 2011, the Second Circuit Court of Appeals overturned the Citigroup ruling. But Rakoff was able to say his piece.

In his opinion, he wrote, "The SEC's long-standing policy — hallowed by history, but not by reason — of allowing defendants to enter into consent judgments without admitting or denying the underlying allegations, deprives the court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact. …

"In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth," Rakoff wrote.

Read Rakoff's full interview on Fraud-Magazine.com.

The ACFE, during the 27th Annual ACFE Global Fraud Conference, will present Rakoff with the Cressey Award.

Not in My House: Companies Take a Proactive Stand Against Fraud

GLOBAL SPOTLIGHT

Mandy Moody, CFE
ACFE Social Media Specialist

With the changing mindset towards the subject of white-collar crime, corporations around the world are interested in making it clear to shareholders, regulators, the media and investors that they are taking proactive measures to prevent, detect and deter fraud. And it’s no wonder, as a recent COSO study found that news of an alleged fraud resulted in a 17 percent stock price decline in the two days surrounding the announcement. It is only imaginable what a fraud conviction’s effects are on a company. Think Enron, Olympus, Parmalat and WorldCom. 

Just as the effects are becoming more profound, so are the proactive steps companies are taking to prevent fraud from happening in the first place. As the ACFE’s Marketing and Business Development Director Kevin Taparauskas, CFE, said in a blog last year about the evolution of fraud over the past 15 years, “It is no longer a question of whether it is taking place within a company, but rather what are people doing about it?”

One thing companies like Raiffeisen Bank International (RBI) are doing is joining the ACFE’s Corporate Alliance program. The program, which began as a pilot program with anti-fraud teams at USAA and Walmart, provides companies wanting to take a proactive stance against fraud the opportunity to partner with the ACFE to help educate and grow their fraud-fighting teams. Benefits of the program include access to exclusive resources, training and membership pricing.

“Fraud can seriously harm a company,” Dr. Michael Wittenburg, CFE, Head of Risk Quality & Fraud Risk Management at RBI, said. “We need to fight it in every possible manner. We hope that with this alliance we will be able to significantly improve our know-how and get access to global best practices.”

RBI is based in Austria and is one of the most recent companies to join the ACFE’s Corporate Alliance program. RBI is one of the leading banking groups in Austria and Central and Eastern Europe with more than 60,000 employees servicing about 14.2 million customers. According to Wittenburg, they plan on implementing mandatory initial and continuous fraud training to employees and hosting tailor-made advanced trainings. They also plan to make the Certified Fraud Examiner (CFE) credential mandatory for staff in their fraud risk management department. 

Read the full Global Spotlight article.

The Fraud Examiner: Past, Present & Future

GUEST BLOGGER

By Dick Carozza, CFE
Editor-in-Chief, Fraud Magazine

Don’t you love it when a long shot works? You plan a project for months or years, line up your resources, set your launch date and then — omigosh — it succeeds.

That’s how Dr. Joseph T. Wells, James D. Ratley and Kathie Lawrence began the ACFE in 1988: with a novel idea, lots of late nights and a bunch of hope. You know how well that turned out.

To help celebrate the ACFE’s 25th anniversary, I wrote the cover article for the September/October Fraud Magazine, “Second generation creates its own history.” (Part 2 will be in the November/December issue.)

We asked veteran fraud examiners to give us names of young, promising CFEs in their 20s and 30s who are beginning to make a mark in the profession. And we then asked them questions on a wide range of fraud topics.

These young CFEs are impressive! Many are already edging into senior positions and some even own and manage firms. And they know they have advantages that the first generation of CFEs didn’t have.

Back in 1988, lonely auditors and accountants were trying to fight fraud in a system that wouldn’t even recognize the word. In fact, back then fraud was referred to as “irregularity.” Now, young CFEs are steeped in fraud examination principles they’ve learned from their battle-scarred CFE mentors, ACFE training and higher-education classes afforded through the ACFE’s Anti-Fraud Education Partnership.

“Fraud has been on the minds of industry professionals for at least a decade, especially in light of major fraud schemes like Enron, Tyco, Adelphia and WorldCom,” says Chris Ekimoff, CFE, CPA, CGMA, MAFF, vice president with Duff & Phelps, LLC, in the article. “Now that most professionals are more aware of the risks of fraud in their business, the role of this second generation may be to formalize and actualize plans to mitigate those risks.”

I get the sense that these young CFEs thoroughly comprehend that they have a serious responsibility to assume the mantle of the trailblazers. This movement could have died in its genesis. But ACFE leaders and the faithful fought institutional resistance because they knew so much was at stake. The second generation knows they can’t drop the ball.

“The public is fed up with the greed, financial fraud and the abuse of the public trust,” says Jeff Windham, J.D., CFE, senior forensic analyst and general counsel with Forensic Strategic Solutions, P.C. “The ‘golden age of fraud’ from approximately 1980 through 2010 is no longer en vogue. The public is mad, fearful and less trusting than it has ever been. And, thanks largely to the pioneering integrity of the first generation of CFEs, today’s CFEs have a higher position of trust and respect than ever before.”

Get to know these young CFEs. Their views might give you part of the picture of the fraud examination profession in the next quarter century.

Resolution #2: Continue to Go Global

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#2: BROADEN OUR GLOBAL REACH WITH MORE GLOBAL INITIATIVES

GUEST BLOGGER

Anil Narayan

ACFE Global Business Development Manager

Sure, I knew all about Enron, WorldCom and Bernie Madoff. Having worked in international telecommunications for the past 15 years, I was quite familiar with how easily and quickly billions of dollars could be forfeited due to undetected fraudulent activity. However, prior to applying for my newly created position here in the fall of 2012, I wasn’t aware of the ACFE nor of the Certified Fraud Examiner credential. With some research, I quickly learned of the critical role CFEs play in the fight against fraud and the invaluable array of knowledge and skills they bring to their organizations. In accepting this new job, I have taken on the challenges of expanding the ACFE’s reach around the world as well as making my parents understand where I work for a living.

With a couple of months under my belt, I’ve found anti-fraud lingo to be a part of a language that professionals around the world are increasingly learning. Nearly 25 percent of the ACFE’s members reside outside of the U.S. and represent our fastest-growing demographic, with Asia and Africa seeing the largest rise in new membership over the past year. Our CFE Exam Review Course in Singapore last March and the ACFE Asia-Pacific Fraud Conference in Hong Kong in November 2012 were so successful, the events paved the way for ACFE courses to be offered in Melbourne, Jakarta and Shanghai in April 2013.

Historic conferences organized exclusively by ACFE Chapters in South Africa and Greece drew approximately 800 people to each venue, demonstrating the demand for anti-fraud education. Embracing the growth of the ACFE outside of the U.S., our biggest annual conference, projected to attract 2,400 attendees to Las Vegas in June 2013, has been officially renamed the 24th Annual ACFE Global Fraud Conference.

We also recently introduced the Global Spotlight on ACFE.com to celebrate the accomplishments of our members outside of the U.S., with the inaugural feature story showcasing the aforementioned first Hellenic Anti-Fraud Conference in Athens, Greece.

As we start the New Year, our focus is on the ACFE’s global events, beginning with the ACFE European Fraud Conference in Prague, Czech Republic, 17-19 March. By inviting prominent keynote speakers, such as former Europol Director Max-Peter Ratzel and Director-General of European Anti-Fraud Office (OLAF) Giovanni Kessler, we believe the ACFE will continue to draw record attendance to these events.

The ACFE, recognizing the need to enhance and support the growth trend outside of the U.S., launched its latest global initiative at the end of 2012. The first step was to create the Global Business Development Manager position and fill it with me, a product of three distinct cultures: Born and raised in Taiwan as an Indian expatriate, I only moved to the U.S. at the age of 18. I believe I can bring a unique international perspective to the organization and act as the voice of our members around the world, to whom I assure:

我們在聽。

We are listening.