Slide2: Australia


Slide3: Wollongong


Transnational Crime, Money Laundering, Corruption, Forensic Accounting and Developing Nations: Transnational Crime, Money Laundering, Corruption, Forensic Accounting and Developing Nations emerging nations: Indonesia: World Bank Study China: Olympic Games 2008 United Arab Emirates: confidence building


What is the role of the University of Wollongong in support of these countries: What is the role of the University of Wollongong in support of these countries Indonesia: (School of Accounting and Finance and Centre for Transnational Crime Prevention) anti-corruption education/training program for government auditors Ernst and Young: training program In-house training program (20 – 30 students, 2 week intensive in Jakarta) Flexible delivery (30 students using web-based program plus intensive program conducted by the Forensic Studies Program (School of Accounting and Finance and Centre for Transnational Crime Prevention (CTCP) University of Wollongong)


Slide9: China: Collaboration and establishment of Beijing Centre for Transnational Crime Prevention Active participation in transnational crime preventation conferences and seminars


Slide10: Dubai: Short courses and seminars in conjunction with the University of Wollongong in Dubai Proposed additional short courses on fraud investigation and anti-money laundering


Fraud, Money Laundering and Corruption: why is training/education necessary?: Fraud, Money Laundering and Corruption: why is training/education necessary? accountants have not been trained to identify and investigate fraud and similar activities training has traditionally focused on technical and procedural issues within national boundaries globalisation and technology are forcing change eg international accounting standards, transnational crime prevention and anti-money laundering initiatives


fraud, money laundering and corruption: why is training/education necessary? (contd): fraud, money laundering and corruption: why is training/education necessary? (contd) police and other law enforcement officers, court officers including prosecutors do not have specific training in financial investigations, practice and procedures audit and assurance services banking and finance the use of complex corporate structures and transactions (national and transnational)


What is the University of Wollongong doing to address this?: What is the University of Wollongong doing to address this? 1. Master of Forensic Accounting a national and transnational approach to investigative techniques criminology legal, criminal and civil matters preparation of expert reports appearance as an expert witness


What is the University of Wollongong doing to address this? (contd): What is the University of Wollongong doing to address this? (contd) 2. Centre for Transnational Crime Prevention international and comparative criminal law and justice investigating transnational financial transactions including banking transnational corporate and organised crime international cooperation to combat transnational crime prosecution of national and transnational crime


Forensic Accounting vs fraud examination: Forensic Accounting vs fraud examination what is forensic accounting 1. analysis of underlying characteristics of corporate entities and activities eg why this transaction at this time and with this entity? does the transaction have a sound economic basis? complex transactions and corporate structures


what is forensic accounting? (contd): what is forensic accounting? (contd) 2. corporate governance and ethics management, board and executive characteristics attitudes towards fraud, corruption, mismanagement internal controls dominant personalities sound management vs ego-driven management


what is forensic accounting? (contd): what is forensic accounting? (contd) 3. industry characteristics supply and demand rapidly changing technology transnational forces and implications


Forensic investigation processes: Forensic investigation processes forensic means collection, analysis and preparation of material to be used in a public forum or debate including criminal prosecutions and civil litigation includes meeting legal and regulatory requirements maintaining the integrity of ‘evidence’ documentation and chain of custody of evidence report writing expert witness


Forensic investigation processes (contd): Forensic investigation processes (contd) risk assessment (reactive and proactive) dispute resolution asset valuation negligence mismanagement fraud corruption misappropriation


Fraud recognition, detection, prevention and deterrence: Fraud recognition, detection, prevention and deterrence 1. fraud typology what is fraud, who commits fraud and why? 2. fraud detection identifying ‘red flags’ making connections (responses) resolving suspicions and acquisitions proof and reverse proof


Fraud recognition, detection, prevention and deterrence (contd): Fraud recognition, detection, prevention and deterrence (contd) fraud prevention internal controls corporate governance fraud deterrence crime should not pay


Other considerations: Other considerations fraud is prevalent and pervasive knows no boundaries ie all companies, organisations, countries are susceptible fraud schemes are limitless ie simple to complex; ‘accident’ to carefully planned and executed there is no classic perpetrator ie no unique demographic characteristics eg age, marital status, education perpetrators are often trusted, long-term, employees (trust vs internal controls)


Criminology: fraud theory: Criminology: fraud theory the fraud triangle – Donald Cressey the fraud diamond – Wolfe and Hermanson differential association - Sutherland “red flags”: perpetrator and - Steve Albrecht organisational


Slide24: Fraud Triangle Opportunity Motivation Rationalisation often a trusted long serving employee; lack of internal or other controls; vague/ambiguous regulation controllable uncontrollable uncontrollable not criminal activity; they owe it to me; I’ll pay it back financial difficulties; need; perceived lack of equity or management honesty; greed


Slide25: the triangle extended: the fraud diamond - Capability motivation capability opportunity rationalisation knowledge = forewarning???


capability: capability dominant personality override internal controls influence others Examples: HIH and WorldCom, Allfirst Bank


Red flags: Red flags situational pressures eg high personal debts perceived opportunity eg non-existent or inadequate internal controls personal integrity eg it is not really a crime; beating the system


Fraud Prevention: Fraud Prevention willingness to commit a crime is inversely proportional to the perceived risk of being caught (and punished) ie the greater the risk of detection and punishment the less the risk of committing a crime including fraud


Slide29: prevention is better than cure internal controls deterrence – crime does not pay proactive measures zero tolerance you will be caught you will be prosecuted you will lose your job


Slide30: pressure/motivation opportunity/capability eg weak internal controls identify opportunity; act upon it; neutralise will I be caught; punished? No commit fraud or crime Yes don’t do it maybe caught not punished do it or


Slide31: any questions?


Example: mail, credit card and internet fraud and identity theft: Example: mail, credit card and internet fraud and identity theft Perpetrator, Iftikhar, situated in Karachi, Pakistan, borrowed money from his father and set up a business selling used electrical equipment to people in the United Arab Emirates. Products were shipped through Singapore started as legitimate business but failed – motive?


Slide33: Opportunity and capability: learned about shipping routes and freight-forwarding operations is Asia, Europe and USA on-line auction sites facilitated theft of credit card numbers


The scam: The scam ‘auctioned’ non-existent equipment (internet fraud) equipment was never delivered (mail fraud ie failure to deliver) ‘stole’ credit card details of purchasers (identify theft) used the credit card details to order equipment on-line


Slide35: layering: goods delivered to Pakistan via the USA, Canada, Singapore and the United Arab Emirates using several freight-forwarding companies faxed bogus photo ID to freight-forwarding companies plus prepaid and addressed shipping labels


Discovery: Discovery fraudulent transactions using stolen credit cards reported in the USA fraud alert issued by one of the freight-forwarding companies fraudulent transactions identified and goods returned to sellers investigation showed that the perpetrator accessed the internet from sites in Pakistan and the United Arab Emirates


Investigation and findings: Investigation and findings step 1 looking for common factors among those whose credit card details had been stolen all had bought goods via on-line auction sites credit card details were used to purchase goods on-line shortly after the auction purchases


Key finding number 1: Key finding number 1 the auctions were scams (internet fraud) set up solely for the purpose of stealing credit card details (identity theft)


Slide39: step 2 set up procedures to capture the on-line addresses of purchasers and trace transaction over the internet Key finding 2 orders were coming from Dubai and Pakistan money transfers to freight-forwarding companies also came from Dubai


Slide40: step 3 some 60 shipments of merchandise purchased with stolen credit cards were shipped from Singapore, assistance sought from Singapore Police and Singapore freight-forwarding company Key finding 3 goods shipped from Singapore by Emirates Airlines to a company in Dubai and then forwarded to another company in Karachi, Pakistan


a transnational response: a transnational response USA, Singapore and Pakistan police; customs officials and consular staff internet transactions traced search of freight-forwarding facility in Singapore Key finding 4 the customers name, Iftikhar


a transnational response continues: a transnational response continues step 4 in Karachie, Dubai Federal Investigation Agency (Karachi) intercepted and seized 2 shipments sent from Dubai shipments were under consignment to a Karachi company owned by Iftikhar


Slide43: step 5 connecting the dots searches of 4 sites owned by Iftikhar Key finding 5 200 computer-related items 100 printers 4 arrested


Example: Regulatory Failure: Example: Regulatory Failure regulatory framework is weak nature of legislation accounting standards enforcement administration


Sykes, McQueen, Rogers, Bosch: Sykes, McQueen, Rogers, Bosch corporate collapses: a recurrent malaise and endemic to the private enterprise system recurrent in Australia since 1870s recurring cycle of booms and collapses arising from the regulatory system’s inability to institute effective measures to halt the cycle sharp practices flourish during booms leading to reforms in the wake of collapse of the boom


accounting standards: Chambers; Clarke and Dean: accounting standards: Chambers; Clarke and Dean accounting practices are permissive and laws, regulations and rules “vague, toothless and … self-contrary” misleading financial statements as much result of compliance with accounting standards as non-compliance (eg HIH and Enron)


Dubnick and Gitelson; McCraw: Dubnick and Gitelson; McCraw regulation is a conceptual quagmire ie cannot be defined regulation is best understood as an institution capable of serving diverse, even contradictory, ends, some economic, some political, some cultural capture theory ie political economy of regulation


Slide48: public interest theory eg Stigler interest or pressure groups “capture” regulation or regulatory body to administer the regulation of a particular industry or industry in general impetus for a given regulatory measure comes from a particular (eg the USA accounting profession lobbied for audit of financial reports be included in SEC Legislation)


Slide49: eg: accounts have the expertise and knowledge to establish accounting and audit standards professional accountants/auditors should set accounting/audit standards ie in the public interest Posner: capture theory – regulatory initiatives confer control or domination of regulatory to a particular industry eg professional accountants set accounting and audit standards


Slide50: Walker: Australian accounting professional bodies “captured” the ASRB within two years of its establishment ASRB not independent – all members had affiliations with professional bodies and large accounting firms USA (Metcalf Report) standards benefited the “Big Eight” and their corporate clients (ie preferential treatment)


Political Economy Theory: Political Economy Theory ‘big business’ controls the institutions of society including regulation Marxist theory: “The capitalist possesses this power not on account of his personal or human properties but insofar as he is an owner of capital. His power is the purchasing power of his capital, which nothing can withstand”


Slide52: ie business enlists the support of the State, including the regulatory system, by virtue of the pressures they are able to bring to bear in pursuit of their own objectives to the exclusion (eg Parmalat) the ruling class maintains its dominant position power-elite: dominant groups in society are able to achieve political ends at the expense of other less powerful groups (eg Parmalat; TEA report of special inquiry embargo until after the statute of limitations lapsed)


Slide53: political nature of regulation ie how regulation is developed and implemented promotes the regulatory failure, regulatory reform cycle ie every thing old is new again Weaver: regulation is a political exercise of subversion and injustice


Slide54: “the real bias of regulatory agencies is not that they favour the regulated but that they have an enormous stake in regulating per se, and that the “special interests” the agencies really serve are those involved in the regulatory process itself – lawyers, judges, environmental consultants, business lobbyists …”


Areas of regulatory weakness: Areas of regulatory weakness legislation vague cannot be enforced prosecutions/civil actions compromised motives – never intended to work: “it is fallacious to assume that the forces dominant in formulating business regulation really intended to make any dent on commercial practices …


Slide56: … business regulation may be characterised as symbolic, since from the outset the purpose may simply have been to assuage public opinion or to divert its attention”


legislative shortcomings: legislative shortcomings frequent changes in legislation/legislators lack of authority vested in regulatory agencies lack of funding ambiguous or flexible statutes and standards


Slide58: Cranston: forces giving rise to regulatory failure include the manner in which regulation emerged and the operation of regulatory agencies


Slide59: Doyle: “Where laws relating to a subject-matter are frequently altered … it becomes difficult to persuade those who are ruled that “regulation” ie technical, neutral implementation of a law, is possible … the law is in “disrepute” because parties know that the values are not settled and the “law” is as temporary as the present configuration of law-makers”


Slide60: Walker: “The reshuffling of portfolios in both State and Commonwealth arenas … led to a lack of continuity of involvement of leading participants in the government sector, and … volatility in policies. On the other hand, … a high level of continuity in the … two professional accountancy bodies [meant] the profession … did not need to take ‘no’ for an answer”


Lack of authority eg layering: separation of investigators and prosecutors: Lack of authority eg layering: separation of investigators and prosecutors Grabosky and Braithwaite: “The most common complaints were the failure of prosecutors to understand technical problems, according low priority to regulatory work compared to ‘cops and robbers’ cases, entering into plea bargains without consulting the agency, delays, and failure to come to grips with the regulatory strategy of the agency”


examples: examples Cambridge Credit Bond Yannon (a $2 shelf company established to purchase $25 million preference shares in Premier Investments, owned by Solomon Lew. The shares were used in an acquisition of $450 million Coles Myer shares. Yannon subsequently suffered a loss of $18 million on the transaction. The loss was covered by Coles Myer as guarantor for Yannon. Coles Myer subsequently reimbursed $12 million)


Lack of funding: Lack of funding Cambridge Credit – ill-equipped, rudderless ship sailing without a competent master .. NCSC – only able to consider one-tenth of matters brought to its attention cost of Yannon investigation was $10 million only to be dropped because case was too complex


Senator Conroy: Senator Conroy throw enough money … enough legal road blocks as long as you are prepared to talk tough back to ASIC, they will wimp out, give you a bit of a slap on the wrist, say, ‘Don’t do it again” and you will say, ‘Okay, I won’t do it again”


West: West “The poor level of funding from the federal Government coupled with its distinct lack of interest about white collar crime are disturbing. Instead of chasing the big transgressors these days, ASIC is content to bring actions against peripheral players. Inexpensive actions. Risk averse actions”


McLean: McLean “Lack of funding has pushed ASIC into slashing some areas of activities including their Small Business Section. Shareholders and creditors involved with small companies will be particularly vulnerable as directors will be encouraged to avoid the provisions of the Corporations Law and the level of insider trading, fraud and fraudulent gifting will increase”


Ambiguity and ‘weasel words”: Ambiguity and ‘weasel words” Theodore Roosevelt: “When a weasel sucks eggs, the meat is sucked out of the egg. If you use a weasel word after another, there is nothing left of the other” Humpty Dumpty: “When I use a word … it means just what I choose it to mean – neither more nor less” example: true and fair view


Bosch etc: professional failure: Bosch etc: professional failure … without their cooperation and without the belief in the ethics and the efficacy of all of the players in the corporate world, it does not matter how many millions of dollars we give to the Australian Security Commission, it does not matter how hard nosed the head of the Australian Securities Commission is … we will not achieve the results that we all desire … in rebuilding the integrity in Australia’s commercial sector and security sector.


Slide69: the state-accounting alliance is important in regulating transnational entities, but governance processes are shrouded in secrecy, and promote and foster the interests of capital at the expense of the public interest


Slide70: politics limits and shapes state actions through corporate lobby groups and attempts by governments to secure inward investment by facilitating capitalist development


Slide71: fraud and money laundering thrive on secrecy and the services of knowledgeable elites cannot easily be carried out without the (direct or indirect) involvement of accountants is an activity undertaken by organized groups, corporations and elite occupations which operate within the values of capitalism


Slide72: includes abuse of position, power, drug trafficking, insider trading, fraud, poverty wages, violation of laws, theft, exploitation and concealment, resulting in financial, physical, psychological damage to some individuals and disruption to the economic, political and social institutions and values


Slide73: Example: Barings Bank Was it all Nick Leeson’s fault? What could management have done to prevent Leeson’s actions? What role did the auditors play?


Slide74: Corporate culture Based on British class system ie Aristocracy infallible (‘gentlemen’ do not make mistakes) Maintaining public stature more important than commercial considerations Upstairs/downstairs: executive/senior management upstairs; mid- and lower- level management downstairs: no communication between the two


Slide75: Commercial networks built on ‘gentlemanly capitalism’ ie we do not need a formal agreement, my word is my bond – providing you had the appropriate lineage! Reputations built on with whom you did business rather than how well you performed Traditionally risk averse – business characterised by caution, restraint, probity and prudence – Barings move to Singapore and into futures, derivatives and arbitrage markets was a departure from this


Slide76: Leeson goes to Asia – the beginning of the end for Barings. Why? Opportunity Barings had no experience in markets in which Leeson was operating – Leeson was supposed to engage in hedging only ie low risk ‘gentlemanly capitalism’ > Bank of England allowed Barings to transfer funds above the statutory limit offshore and thereafter, did not monitor such transactions Tight accountability structure ‘at home’ but different structure in Singapore Leeson was in charge of two departments: trading and settlements (usually separated for internal control purposes ie segregation of incompatible tasks)


Slide77: No clear chain of command: as a ‘trader’ Leeson was answerable to SJ (Singapore) SJ was answerable to JB (Singapore) JB thought he should not interfere with Leeson’s activities because Leeson was in charge of settlements and therefore answerable to GB in London SJ and JB thought the other was supervising Leeson - Leeson was effectively unsupervised in what turned out to be high risk activity for which he had no formal training


Slide78: common practice in futures trading to have an “error account” ie disputed trades were recorded here until resolved – usually within 24 hours error account was supposed to be reconciled on a daily basis and forwarded to London with all other reconciled accounts as part of daily management reports Leeson was authorised to engage in low risk trading activity – but began dealing in high risk trades


Slide79: used the “error account” to hide unauthorised trades that had resulted in losses but reported those that were profitable how was Leeson able to do this without detection? Leeson did not reconcile the error account because he was too busy dealing with ever increasing trading volumes Motivation for increasing trading volumes? To try to cover losses from previous unauthorised trading activities


Slide80: Leeson had the software changed so that the error account was not included in the reconciled accounts sent to London used fraudulent entries to reduce the balance in the error account to zero at month-ends Issued false statements to the Singapore Exchange to reduce margin paymens


Slide81: Red flags: Leeson was reporting “exceptional” profits – such profits were uncharacteristic for ‘risk free trades’ ie profits are usually a reflection of risk, the greater the risk, the greater the potential profits/losses Why didn’t management see this as a problem? Management remuneration packages and bonuses were based on Leeson’s “profits” Open-ended bonus payments and commissions invite fraud ie the higher the profit, the higher the bonus or commission


Slide82: Causes of Barings Collapse? corporate culture – gentlemanly capitalism = arrogance and minimal supervision from both the regulators and within Barings poor internal controls Leeson in charge of incompatible functions ie the fox was guarding the hen house confused responsibility, accountability and controls lack of communication (part of gentlemanly capitalism) Greed – bonus and commission payments based on profits with no upper limit


Some recent bank ‘scandals’: Some recent bank ‘scandals’ Riggs Bank 2004 under investigation as a “troubled institution” for failing to file “suspicious activity’ reports on large withdrawals from personal accounts of Saudi Arabian diplomats in the USA including 2001-2002: $US20million in cash withdrawals made with sequentially numbered cheques


Slide84: estimated cash withdrawals, often in excess of $US1 million at a time, totaling $US50 million from personal, diplomatic and employee accounts before relationship terminated in 2004 most withdrawals made by embassy chauffeur on the basis of photo ID only ie no other documentation other “suspicious activities” involving in excess of $US300 million and some 60 different accounts in Equatorial Guinea including payments from Exxon Mobil Corp and ChevronTexaco Corp to government officials


Slide85: other single transactions of between $US400 million and $US700 million suspected of being the proceeds of foreign corruption were processed but not reported $US35 million in oil receipts were wired to 2 companies unknown to the bank in countries known to have strict bank secrecy laws served as personal banker to Gen Pinochet (Chile), disguised the relationship in order to help conceal and move assets that were the subject of a world-wide court order freezing the assets


2. ABN Amro: 2. ABN Amro 2004: under investigation for allegedly improperly moving funds through some 100 banks in Russia, Eastern Europe and the Carribean and ties with banks in ‘loosely regulated’ jurisdictions large number of accounts ‘migrated’ from Bank of New York Co to ABN Amro when that bank was under investigation for similar activities


3. Citigroup (Japan): 3. Citigroup (Japan) 2004: sanctions including closure of 4 offices bank employees has failed to report suspected money laundering transactions extended loans to enable the manipulation of publicly traded shares misled customers in terms of the risk associated with financial products obstructed investigation