International Accounting
Focus on Fraud…
“Honest stands at the gate and knocks, and bribery enters in”
– Barnabe Rich
“The accomplice to the crime of corruption is frequently our own indifference”
– Bess Myerson
A.S. Fleming
Spring 2009
International Accounting
Focus on Fraud…
Question: “Do you believe in the devil? You know, a supreme evil being
dedicated to the temptation, corruption, and destruction of man?”
Response: “I’m not sure that man needs the help.”
– Calvin & Hobbs
A.S. Fleming
Spring 2009
International Accounting
Focus on Fraud…
“Power corrupts. Knowledge is power. Study hard. Be evil.”
– anonymous
A.S. Fleming
Spring 2009
International Accounting
Topics of Discussion…
• Ethics
• Foreign Corrupt Practices Act of 1977 (FCPA)
• Money Laundering Control Act (MLCA)
• US Patriot Act
A.S. Fleming
Spring 2009
International Accounting
Ethics and Moral Psychology…
Religious Question:
Do you have an obligation to improve society to get into
Heaven? If you fail, does everybody go to Hell?
Or
Do you have to obey individual rules to get into heaven?
A.S. Fleming
Spring 2009
International Accounting
Ethics and Moral Psychology…
Consequentialists
• morally right choices increase the “good”
• often a “black or white” approach
• The greater good may hurt the individual
A Societal or Group Approach
E.g., Old Testament, Prescribed Destruction of
Sodom and Gomorrah
A.S. Fleming
Spring 2009
International Accounting
Ethics and Moral Psychology…
Deontologists
• agent centered
• intention focused
• obligation or duty based
• golden rule
An Individual Approach
E.g., Old Testament, Prescribed Destruction of
Sodom and Gomorrah…but if you find 10 good men?
A.S. Fleming
Spring 2009
International Accounting
A.S. Fleming
Spring 2009
International Accounting
Foreign Corrupt Practices Act 1977…
• Prohibits corrupt payments to foreign officials for the
purpose of obtaining or keeping business, or directing
business to anyone.
• Applies to U.S. firms and citizens working abroad.
• Applies to foreign firms or persons working in the U.S.
• Prohibits payments through intermediaries.
No Facilitating Payments
Too Much Fraud & Corruption For US
Companies To Compete
A.S. Fleming
Spring 2009
International Accounting
Common Methodologies…
1.
Bribes & Kickbacks
2.
Bid Rigging
3.
Defective Pricing
4.
Phantom Vendors
5.
Product Substitution
6.
Conflict of interests
7.
False Claims
8.
Cost mischarging
9.
Contract specification failures
FCPA
10. Duplicate, false, or inflated invoices
11. Split purchases
12. Unnecessary purchases
13. Defective delivery
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Most Likely Violators…
FCPA
China, Russia, Turkey, and India
Least Likely Places for Bribes…
Switzerland and Sweden
-- Transparency International
A.S. Fleming
Spring 2009
International Accounting
FCPA
Provide Something of Value…
Cash, Gifts, Trips,
Merchandise,
Entertainment,
Drugs, Sex, Loans,
Credit Cards, Fees,
Spouse’s high
salary, Discounts
Awarding selection;
higher prices;
excessive quantity;
accepting lower
quality; no, delayed,
or short delivery
…Later Influence an Official Act
In Germany, a sales director once bragged…the
trick was to find out what they liked
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Potential Red Flags of Bribery & Kickbacks…
FCPA
• Lack of standard invoices
• Requests for funds to routed to a foreign bank
• Requests for checks made payable to “cash” or “bearer”
• Commission substantially higher than going rate
• Requests for a large line of credit from a customer
• Insistence by government official to use a particular agent or
supplier
• Lack of staff or facilities to actually perform the service
• Request by local agent for rate increase during negotiations
• Suggest need to use more than one local agent
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Bribery & Kickbacks…
Four Groups:
•Each group develop a method of bribery
and will explain it to the class
•Each group will then critique the method
•How will it be detected (red flags)?
•How will it be proven?
•What control would prevent this
method?
A.S. Fleming
Spring 2009
International Accounting
Price Fixing or Bid Rigging…
A Form of Price Fixing or Collusion
violates the Sherman Act (1890)
Can be a fraudulent within the company (kickback related),
or, primarily, the company bidding
A.S. Fleming
Spring 2009
International Accounting
Price Fixing or Bid Rigging…
Four Groups:
•Each group develop a method of bid
rigging and will explain it to the class
•Each group will then critique the method
•How will it be detected (red flags)?
•How will it be proven?
•What control would prevent this
method?
A.S. Fleming
Spring 2009
International Accounting
Price Fixing or Bid Rigging…
Bid Suppression
Bid Rotation
Cover Bids (not real bids)
Withholding Bids (to be a sub-contractor)
Market Division
Cartels
A.S. Fleming
Spring 2009
International Accounting
Defective Pricing…
Knowingly Submitting False Cost or
Pricing Data on Negotiated Contracts
violates the Truth in Negotiations Act (1962)
and the
False Claims Act (1863, amended 1986, also
known as the whistleblower act)
Again, can be a fraudulent within the company (kickback related),
or, primarily, the company bidding
Often Government Contract Related
A.S. Fleming
Spring 2009
International Accounting
Defective Pricing…
Four Groups:
•Each group develop a method of defective
pricing and will explain it to the class
•Each group will then critique the method
•How will it be detected (red flags)?
•How will it be proven?
•What control would prevent this
method?
A.S. Fleming
Spring 2009
International Accounting
Potential Red Flags of Phantom Vendors…
FCPA
• Invoices for unspecified consulting or other poorly defined services
• Unfamiliar vendors
• Vendors with only post-office-box address
• Rapidly increasing purchases from one vendor
• Vendor billings more than once a month
• Vendor addresses that match employee addresses
• Large billings broken into multiple smaller invoices with amounts
that may not attract attention
• Vendor names consisting only of initials – many are legitimate, but
the practice is favored by fraudsters
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Steps Each Firm Should Take…
FCPA
• Approved Vendor List that has been vetted
• Verification of physical existence, business practices, etc.
• Separation of duties within the organization:
Approval, Custody, Record Keeping
• Anonymous hotline for whistleblowers
• Have insurance protection
• Compare lifestyle to compensation
A.S. Fleming
Spring 2009
International Accounting
Fraud Examples…
FCPA
In March 2007, a Brazilian federal congressman and former
governor of Sao Paulo was charged in New York for stealing more
than $11.5 million from a Brazilian public works project in a
construction kickback scheme.
He allegedly transferred the money to a New York bank and then to
an offshore account.
The scheme involved inflated and false invoices to contractors
involved in the building of a giant highway.
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Fraud Examples…
FCPA
A Greek prosecutor is investigating claims that Siemens Greece
paid up to $550 million in bribes to officials at the defense and
interior ministries in order to win a security contract for the 2004
Olympic games in Athens.
A senior Siemens accountant said bribery was a common practice
at Siemens.
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
FCPA
January 17, 2008
SIEMENS IN FOR A ROUGH RIDE AS MORE FIRST-HAND
ACCOUNTS OF MISCONDUCT EMERGE
It is going to be a bumpy ride... Dozens have apparently come forward,
ready to "unload" what they know. And the trail leads to the top.
January 13, 2008
SHAREHOLDERS ARE PLOTTING AT SIEMENS
On top of their beef list is the proposed re-appointment of KPMG as the
firm's auditor. Sounds like sparks will fly on January 24th at Siemens
annual meetings.
A.S. Fleming
Source: The Dailey Caveat
Spring 2009
International Accounting
Fraud Examples…
FCPA
A Paris judge launched an investigation into allegations that Total, a
French oil and gas group, paid bribes to win a $2 billion gas
contract in Iran.
The investigation stems from the discovery of $82 million in two
Swiss bank accounts, allegedly by Total to an Iranian intermediary
to help the French company consortium to win an Iranian contract.
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Fraud Examples…
FCPA
A lawsuit in February 2007 alleged that Intel provided secret
kickbacks to Dell in order to ensure it remained the computer
maker’s sole microprocessor supplier.
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Companies Under FCPA Investigation…
FCPA
ABB (Switzerland, energy)
Alcatel Lucent (France, communications)
AstraZeneca (UK-Sweden, pharmaceuticals)
BAE Systems (UK, defence)
Daimler (Germany, automotive)
Innospec (UK, chemicals)
Magyar Telekom (Hungary, telecoms)
Norsk Hydro (Norway, energy)
Novo Nordisk (Denmark, health, pharmaceuticals)
Panalpina (Switzerland, transport)
Siemens (Germany, engineering, electronics)
Smith & Nephew (UK, medical devices)
Total (France, energy)
A.S. Fleming
Source: http://www.ethicalcorp.com/content_print.asp?ContentID=5685, 2/8/2008
Spring 2009
International Accounting
Top Three FCPA Fines…
FCPA
Baker Hughes (oil services) – $44 million (2007)
Titan (communications) – $28.5 million (2006)
Vetco International (oil services) – $26 million (2007)
A.S. Fleming
Source: http://www.ethicalcorp.com/content_print.asp?ContentID=5685, 2/8/2008
Spring 2009
International Accounting
Money Laundering Control Act…
MLCA
Money Laundering is essentially taking bad money and
converting it to good money, while trying to obscure its origin
1) Financial transaction or international transportation
2) Specified Unlawful Activities (SUA)
There Must Be Proof of Both
Elements of The Offense
A.S. Fleming
Spring 2009
International Accounting
Simple Flow With Three Opportunities
To Expose…
Crime, Illicit
Activity, Bad
Intent
Conversion
Spending of
Funds
Note: While “Money” is a concept, cash does lend a
degree of anonymity
At The End of the Day, You Must Know Your
Customer
A.S. Fleming
Spring 2009
International Accounting
What Does $1 Million U.S. Dollars Weigh?
$1 U.S. = 0.67415 Euros
$1 Million U.S. Dollars
674,150 Euros
$100 bills
22 pounds
$500 notes
2.97 pounds
$50 bills
44 pounds
$200 notes
7.42 pounds
$20 bills
110 pounds
$100 notes
14.84 pounds
$10 bills
220 pounds
$50 notes
29.69 pounds
$1 bills
2,202 pounds
$10 notes
148.45 pounds
Approximately 0.002202 lbs/bill
$5 notes
296.90 pounds
The Euro Is Gaining In Use In Money
Laundering Popularity
A.S. Fleming
Spring 2009
International Accounting
Money Laundering…
MLCA
Used to hide fraud proceeds
Used to hide bribery proceeds
Tax Evasion
Reduce Income, Repatriate funds, Expatriate funds
Use of cash intensive businesses
Use of banking secrecy in certain locations
(Isle of Man, Austria, Switzerland, Liechtenstein, Luxembourg, The
Channel Islands, Gibraltar, Republic of Nauru, Bahamas, Bermuda,
and the Cayman Islands, to name a few)
There Must Be Proof of Both
Elements of The Offense
A.S. Fleming
Spring 2009
International Accounting
Mechanisms to Effect Laundering…
• Deposits
• Banks
• Withdrawals
• Securities & Commodity
Brokers and Dealers
• Transfers between accounts
• Exchanges of currency
• Loans
• Extensions of credit
• Purchase or sale of any stock,
bonds, certificates of deposit, etc.
A.S. Fleming
MLCA
• Currency Exchanges
• Insurance Companies
• Travel Agencies
• Wire Transmitters
• Vehicle Dealers
• Use of safety deposit boxes
• Realtors
• Commodities
• Postal Service
• Merchandise
• Retail
• Internet
• Hawalas
Spring 2009
International Accounting
Title 18 section 1956…
MLCA
1. A financial transaction was conducted or attempted
2. The defendant knew that the property involved in the financial
transaction represented the proceeds of some form of
unlawful activity
3. The property was in fact the proceeds of a specified unlawful
activity
4. The defendant acted with the intent to do any of the four
prohibited activities listed under section 1956:
Promote SUA; conceal nature, source, location, ownership, or
proceeds of SUA; avoid reporting requirements; evade taxes
Specific in Determination, Yet Broad
in Application
A.S. Fleming
Source: Money Laundering, a guide for criminal investigators, 2nd ed., Madinger
Spring 2009
International Accounting
Title 18 section 1956…
MLCA
• Real property purchased with drug money and resold
• An automobile purchased with counterfeit securities and then
resold
• An inventory acquired in a fraud scheme
• A fraudulently obtained line of credit
• An automobile used to pay an illegal gambling debt
• A stolen diamond
Non-Cash Items That Qualified as Proceeds in
Past Money Laundering Cases
A.S. Fleming
Source: Money Laundering, a guide for criminal investigators, 2nd ed., Madinger
Spring 2009
International Accounting
Title 18 section 1956…
MLCA
• The defendant’s being connected to drug trafficking and paying for a
car with a suitcase full of cash
• The defendant’s receiving cash from someone who said he was a
drug dealer and had no legitimate source of income
• The use of information derived from a net worth analysis, showing
that the defendant had insufficient legitimate income to support large
cash expenditures, to demonstrate that a vehicle purchase was
made with money from marijuana sales
• Large quantities of cash in small, worn bills; large transfers of money
to Columbia, a source for narcotics; a co-conspirator’s statement that
the money was from drug trafficking and money laundering
Circumstantial Evidence Can Be Used To
Establish That The Money Is From An SUA
A.S. Fleming
Source: Money Laundering, a guide for criminal investigators, 2nd ed., Madinger
Spring 2009
International Accounting
Example…
MLCA
• A money launderer wants to set up an online business to launder
monies held in two offshore banks, one in the Cayman Islands and
one in Nauru. The goal is to move money to the U.S.
• Set up web business on a server in Canada, using legitimate ISP,
that accepts credit cards.
• Set up multiple accounts with the two above banks and establish
credit or debit cards for each account.
• Purchase “consulting services” via the web.
• The web company invoices the credit card companies for fictitious
services, and the credit card company invoices the offshore banks.
• The money from the fictitious sales is transferred to a U.S. bank
account established by the money launderers.
All Components Are Separated From Another And Involve CrossBorder Transfers of Financial Information – an Audit In One
Country Would Probably Not Expose The Scam
A.S. Fleming
Source: Money Laundering, a guide for criminal investigators, 2nd ed., Madinger
Spring 2009
International Accounting
US Patriot Act of 2001…
The Act
Money Laundering is essentially taking bad money and
converting it to good money, while trying to obscure its origin;
The Patriot Act is concerned with good money being converted
to bad, where the passers are trying to obscure the
destination.
Related legislation: International Money Laundering
Abatement and Financial Anti-Terrorism Act of 2001
Increased Disclosure Requirement of U.S.
Banks and Their Correspondent Banks
A.S. Fleming
Spring 2009
International Accounting
US Patriot Act of 2001…
Allows U.S. Treasury Department to:
• Require U.S. financial organizations to file specific
information about transactions occurring in countries
identified as primary money laundering havens
• May include a complete description of a specified
transaction, the identity and address of participants,
the relationship of the participants involved in the
transaction, and the beneficial owner of the monies
involved
• Shut down any accounts with countries that are
deemed to be a money laundering risk
“The Bar That Government Agencies Must
Meet for Requests of Information Under MLAA
Has Been Lowered”
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
US Patriot Act of 2001…
Other Noteworthy Requirements / Enhancements:
• Due diligence scrutiny of funds that are deposited for
senior foreign officials or their immediate families (or
close associates)
• Shell banks with no physical presence in any country
are prohibited from using correspondent banking
services in the U.S.
• Elimination of legal liabilities so financial institutions
can share information about account activities and
transactions among themselves
• “Encourages” foreign governments to require the
name of the originator of a wire transfer to be
documented from origin to destination
The Act is Intended to Deter And Close
Loopholes in Financial Procedures
A.S. Fleming
Source: Forensic and Investigative Accounting, 3rd ed., Crumbley, Heitger, Smith
Spring 2009
International Accounting
Missouri Tells PayPal to Pay Up for Patriot Act Violations
eBay said the U.S. Attorney for the Eastern District of Missouri sent a
letter claiming PayPal violated part of the USA PATRIOT Act. eBay
revealed the news in its annual report filed with the U.S. Securities
and Exchange Commission.
eBay's annual report stated the letter, received on March 28, 2003,
contended that PayPal’s provision of services to online gambling
merchants violated 18 U.S.C. ? 1960 of the USA PATRIOT Act,
which prohibits the transmission of funds that are known to have
been derived from a criminal offense or are intended to be used to
promote or support unlawful activity.
A.S. Fleming
Source: http://www.auctionbytes.com/cab/abn/y03/m04/i01/s01; retrieved 2/21/08
Spring 2009
International Accounting
May 25, 2005
ICE Campaign Against Illegal Money Transmitters & Underground
“Hawalas” Yields 140 Arrests & 138 Indictments Nationwide
WASHINGTON, D.C. - Michael J. Garcia, Department of Homeland Security Assistant
Secretary for U.S. Immigration and Customs Enforcement (ICE), today announced that a
nationwide campaign by ICE agents against unlicensed money transmittal businesses and
underground “hawalas” has resulted in the arrest of 140 individuals, 138 criminal
indictments, and the seizure of more than $25.5 million in illicit proceeds since the
enactment of the USA Patriot Act, which requires such businesses to be licensed and
registered.
“Over the past two weeks, ICE has shut down a number of unlicensed money transmittal
businesses that were responsible for the transfer of millions of dollars to Afghanistan,
Pakistan, and Iran," said Assistant Secretary Garcia. "ICE targets these illegal operations
because we know that terrorist and other criminal organizations can use these
underground businesses to move illicit funds anywhere in the world with no questions
asked."
In recent days, ICE has won guilty pleas from two defendants and arrested another on
charges of operating unlicensed money transmittal businesses.
A.S. Fleming
Source: http://www.jihadwatch.org/archives/006330.php; retrieved 2/21/08
Spring 2009