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Who Commits Fraud?

That is the question KPMG addresses in this recent report “Who Is The Typical Fraudster?”  The study seeks to “identify patterns among individuals who have committed acts of fraud” and is based on research from “348 actual fraud investigations conducted by KPMG member firms in 69 countries.” Although not FCPA specific, the KPMG report identifies several fraud trends and indicators relevant to FCPA compliance.

The KPMG report notes that  “typically, a fraudster is perceived as someone who is greedy and deceitful by nature,” however KPMG’s analysis found that “many fraudsters work within entities for several years without committing any fraud, before an influencing factor – financial worries, job dissatisfaction, aggressive targets, or simply an opportunity to commit fraud – tips the balance.”

According to the study, the “typical fraudster” is between the ages of 36 and 45, followed next by individuals between 46 and 55 years old.  In terms of gender, men are the more likely perpetrators of detected fraud.  According to KPMG, “the survey’s finding that men commit more fraud than women seems a reflection on the gender make-up of companies generally” and the “gender gap in fraud perpetration may reflect women’s under-representation in senior management positions and, as a consequence, fewer opportunities to commit fraud.”

In terms of job function, the KPMG report finds that people most often entrusted with a company’s sensitive information are able to override controls and thus are statistically more likely to become perpetrators.  The report found that “most people involved in committing fraud work in the finance function” followed by those in the “chief executive’s / managing director’s office,” followed by those in “operations and sales.”

Other findings of note from the KPMG report include the following. 

“One of the most significant findings of this survey is the very large increase in cases involving the exploitation of weak internal controls by fraudsters – up from 49 percent in 2007 to 74 percent in 2011.  The difficult economic climate may be partially to blame.  Tighter budgets are forcing some companies to cut costs in their control environments.  Less robust controls, and fewer resources to monitor controls, allow for greater exploitation by fraudsters.  Although necessary to preserve profits, such cost cutting should be balanced with effective risk management.”

“Many frauds continue to be exposed by formal or informal whistleblowing mechanisms.  In 2007, companies were alerted to fraud by whistleblowers in one-quarter of cases, with complaints coming from customers or suppliers accounting for a further 13 percent.  In 2011, formal internal whistleblower reports accounted for 10 percent of detections while anonymous tip-offs were responsible for uncovering 14 percent of frauds.  A further 8 percent of frauds were identified due to customer or supplier complaints while 6 percent came in response to issues raised by third parties, including banks, tax authorities, regulators, competitors, or investors.  That one in seven frauds is now discovered by chance puts question marks over the effectiveness of controls and management review at detecting and preventing fraud.  […]  The upshot is that companies seem to depend increasingly on the good conscience of staff or third parties, on accidental discovery or, in a few cases, on confessions, to identify potential fraud.”

“The number of fraud cases preceded by a red flags rose to 56 percent of cases in 2011, from 45 percent in 2007.  However, instances where action was taken following the initial red flag fell massively.  Just 6 percent of initial red flags were acted on in the 2011 analysis, compared with almost one-quarter (24 percent) in 2007.  Companies are failing to read and to act quickly on the warning signs.  Ignored red flags are a license for perpetrators to carry on operating and a missed opportunity for the business to detect or prevent fraud and to reduce losses and associated costs.”

“Fraud now takes longer to detect – up from an average 2.9 years from inception to detection in 2007 to 3.4 years in the 2011 analysis.”  “In Asia […] the duration of fraud prior to detection is longest – on average five years – with 16 percent of frauds going undetected for ten years or more.  This is possibly because employees in Asia tend not to challenge their superiors or to rock the boat as much as in Western Europe or North America …”.

Breuer On The DOJ’s “Comprehensive Approach To Fighting Corruption”

Last month, Assistant Attorney General Lanny Breuer delivered the Franz-Hermann Brüner Memorial Lecture at the World Bank and focused his remarks on the DOJ Criminal Division’s “comprehensive approach to fighting corruption.” (See here for the transcript).

This post provides an overview of Breuer’s remarks.

*****

“Corruption corrodes the public trust in countries rich and poor, and has particularly negative effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer tremendously. At a concrete level, roads are not built, schools lie in ruin, and basic public services go unprovided. At a more abstract, but no less important, level, political institutions lose legitimacy, threatening democratic stability and the rule of law, and people begin to lose hope that they will ever be able to improve their lot. As the President put it last week, you cannot reach your potential when you “cannot start a business without paying a bribe.””

“There are of course many ways in which the U.S. government addresses the problem of corruption abroad. As the head of Criminal Division, I want to focus on three: our criminal prosecution efforts; our work to build the prosecutorial and law enforcement capacity of foreign nations; and our emerging focus on recovering and repatriating the proceeds of foreign official corruption.”

As to criminal prosecution efforts, after highlighting recent corruption cases involving federal, state, and local officials, Breuer talked about the FCPA. He stated as follows.

“The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the Watergate scandal, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government.”

“In 1976, following certain prosecutions for illegal use of corporate funds arising out of Watergate, the U.S. Securities and Exchange Commission issued a report in which it determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the Senate concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the Senate Banking Committee said in its report on the legislation. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.””

“That was true then, and it’s true now. And over the two-plus years of this Administration, we have dramatically increased our enforcement of the FCPA. The numbers speak for themselves. In 2004, the Justice Department charged two individuals under the Act and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16½ million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.”

“And we are only moving forward. Earlier this month, we secured the first jury conviction ever against a corporation in an FCPA case. The case, which also resulted in trial verdicts against the company’s president and its CFO, involved a scheme to pay bribes to Mexican government officials at CFE, a state-owned utility company.”

“Last week, the former CEO of a Miami-based telecommunications company pleaded guilty to conspiring to pay bribes to government officials in Honduras in connection with a scheme to secure contracts from Hondutel, the state-owned telecommunications authority. Last month, the former vice-president of sales for Europe, Africa, and the Middle East at the multi-national valve company Control Components Inc., or CCI, pleaded guilty to conspiring to bribe government officials in Saudi Arabia, Qatar, and other countries.”

” … [T]he point is this: FCPA enforcement matters. When U.S. businesspersons, foreign executives, and even foreign officials know that they risk liability under the FCPA and related statutes, behavior changes. In addition to motivating U.S. and foreign corporations to change the way they do business – something that I believe is already happening – the threat of liability can help corporations resist corrupt demands from foreign officials, which can lead the officials themselves to alter their practices. Beyond that, through our FCPA enforcement, we are also sending a signal to ordinary people – […] across the globe – that we stand with you: we support you in your desire to have fair and transparent institutions, and to have the chance to compete in marketplaces large and small.”

As to the DOJ’s “emerging focus on recovering and repatriating the proceeds of foreign official corruption,” Breuer talked about the DOJ’s “new Kleptocracy Asset Recovery Initiative.”

He stated as follows.

“The goal of the Kleptocracy Asset Recovery Initiative, which Attorney General Holder announced last July and which my team and I have been working to build over the past year, is to identify the proceeds of foreign official corruption, forfeit them, and repatriate the recouped funds for the benefit of the people harmed.”

“In the context of a criminal prosecution, a court can order forfeiture, upon conviction, as part of the defendant’s sentence. Thus, for example, if we were to bring a criminal case against a kleptocrat in the United States, we would be able to seek criminal forfeiture of his or her stolen assets.”

“Often, however, it may be impractical or impossible to bring a criminal prosecution against a kleptocrat. He or she may be immune from prosecution, beyond the jurisdiction of the United States, or otherwise unavailable. In these circumstances, the Kleptocracy Team can bring a civil forfeiture action to recover the stolen property. This is sometimes referred to internationally as non-conviction based confiscation.”

“The Kleptocracy Team recently brought its first cases, and we expect more to come in the near future. Let me provide a specific example. Diepreye Solomon Peter Alamieyeseigha, also known as DSP, was the elected governor of the oil-producing Bayelsa State in Nigeria from 1999 until his impeachment in 2005. According to court papers, DSP’s official salary for this entire period was approximately $81,000, and his declared income from all sources during the period was approximately $248,000. Nevertheless, as governor, DSP accumulated enormous wealth through corruption and other illegal activities. He acquired at least four properties in the United Kingdom worth approximately $8.8 million, he had money in bank accounts around the world, and he also acquired property in the United States. When he was ultimately arrested at Heathrow Airport in 2005, the Metropolitan Police Service in London found approximately $1.6 million in cash in his house.”

“In March and April of this year, we brought two separate civil forfeiture actions to recover over $1,000,000 in what we allege are DSP’s ill-gotten gains. In Maryland, we are seeking forfeiture of a private residence worth more than $600,000, and in Massachusetts we are seeking forfeiture of close to $400,000 in a Fidelity brokerage account.”

“We were able to bring these cases, even though DSP long ago absconded to Nigeria, because the law permits us to bring a civil action against the corrupt proceeds themselves rather than against the person to whom they belong.”

*****

A good weekend to all.

Survey Says …

KPMG Forensic recently released (here) its 2011 “Global Anti-Bribery and Corruption Survey.” KPMG “surveyed 214 executives in the U.S. and U.K. to identify their most vexing anti-bribery and corruption (“AB&C”) compliance challenges and to understand how companies are preventing, detecting and responding to AB&C risk.” In summary form, the KPMG survey found that “despite a greater awareness of the business and legal imperatives for well-developed AB&C compliance programs among survey respondents, many compliance programs lack sufficient depth and breadth to effectively mitigate AB&C risk around the world.”

According to the survey, “the three most significant AB&C compliance challenges cited by both U.S. and U.K. respondents are auditing third parties for compliance, difficulty in performing effective due diligence on foreign agents/third parties, and variations in country requirements and local laws on issues such as data privacy and facilitating payments.”

Some survey results that caught my eye.

Nearly 60% of survey respondents said it was “not at all challenging” to “continue to run business while managing investigations.”

Even though third-party (agent, distributor, joint venture partner, etc) risk ranked high in the survey results, only approximately 60% of respondents actually distribute AB&C policies and procedures to third parties and 60% of respondents said that most third party agents are not required to take AB&C training (in 2008 the U.S. response was 93%). Of further interest regarding third-parties, nearly 60% of respondents have “right to audit” clauses in contracts with third parties, but approximately 65% of respondents indicated that they have not exercised their “right to audit.”

Even though facilitating payments are exempted under the FCPA (they are not under the U.K. Bribery Act or the OECD Convention) only 13% of U.S. respondents allow such payments (in 2008, 24% of U.S. respondents said they allowed such payments).

“More than 70% or respondents (73% in the U.K. and 70% in the U.S.) agreed there are places in the world where business cannot be done without engaging in bribery and corruption.”

“To mitigate the risk of doing business in countries in which bribery and corruption is perceived to be endemic, respondents’ favored strategy was to provide additional training (43% of UK and 49% of US respondents), with enhanced internal controls, more closely monitoring operations, conducting due diligence on third parties, and obtaining compliance certifications all following closely.”

“An additional risk mitigation strategy – selected by 32% of U.K. and 25% of U.S. respondents – was to not do business in certain countries.” The survey results do not breakdown this response in any detail, but it would be interesting to know which countries the 25% of U.S. respondents were not willing to do business in because of corruption concerns. My guess is that these countries are not high-growth, high-potential markets.

The KPMG survey was conducted via telephone between October-November 2010 and included 214 executives (106 in the U.S., 108 in the U.K.) who identified themselves as “one of the most senior persons in charge of day-to-day AB&C matters at their company.”

KPMG Forensic assists “clients in achieving the highest levels of business integrity through the prevention, detection, and investigation of fraud and misconduct …”.

UK Bribery Act – Sensible and Senseless

The U.K. Bribery Act, set to go live on July 1st after much delay, has been the focus of much prognostication and the foundation for many marketing initiatives.

In this post, I highlight two recent events – one sensible, the other senseless.

Sensible

Mark Miller (a partner at Baker Botts – see here) recently published “The U.K. Bribery Act 2010 – Enforcement is the Rest of the Story” in BNA’s White Collar Crime Report. See here.

Miller sensibly notes as follows.

“Much of the commentary about the new U.K. Bribery Act 2010 has been filled with alarm that the new law will be even stricter—and therefore more dangerous—than the U.S. Foreign Corrupt Practices Act. Although there are ways in which the Bribery Act is stricter than the FCPA, that is not the whole story. The real measure of how dangerous the Bribery Act will be is not the provisions of the law itself but how that law will be enforced, and from indications so far, that is a big unknown.”

Countering alarmist commentary of the Bribery Act – including that it represents a major change in law because facilitating payments are not allowed – Miller rightly points out “the predecessors to the Bribery Act (the Prevention of Corruption Acts 1889 to 1916 and the Anti-Terrorism, Crime and Security Act 2001) did not have exceptions for facilitating payments either …”.

Indeed this same point was noted by the U.K. Ministry of Justice in its March 30th guidance (see here). Can anyone point to a prior U.K. enforcement action concerning facilitating payments?

Miller also notes as follows. “The other Bribery Act provision usually pointed to as being stricter than the FCPA is the new offense described in Section 7, failure of commercial organizations to prevent bribery.” However, Miller again sensibly notes as follows. “This appears to create a strict liability standard for companies whose employees, officers, or agents engage in bribery on their behalf. Although the FCPA itself contains no analogous provision, the standard in U.S. law for attributing criminal liability to corporate entities is similar. The more important distinction between the Bribery Act and U.S. law is that the former contains a defense for when the corporation is able to “prove that [it] had in place adequate procedures designed to prevent persons associated with [the corporation] from undertaking such conduct.'”

As to the Bribery Act’s coverage of purely commercial bribery, Miller states as follows. “Another aspect of the Bribery Act has been pointed to as being broader than the FCPA: its prohibition against bribery of nongovernmental officials.” Here again, Miller sensibly points out as follows. “True, the FCPA itself does not contain such a provision, but U.S. law does. The federal government routinely uses other statutes—such as the Travel Act and the mail and wire fraud statutes—to prosecute conduct that would not fall strictly within the FCPA’s prohibitions.”

Miller then notes as follows. “The real story here is not the Bribery Act itself, because there is nothing truly revolutionary about it – except possibly the publicity it has generated. The real story is enforcement, and how the SFO will carry out its duties remains a big question mark.” Miller then identifies several “reasons to believe that the SFO’s enforcement of the Bribery Act will turn out to be a less serious threat than U.S. enforcement.”

All sensible observations and consistent with my own observations that “the Bribery Act may turn out to be more lenient than the FCPA” (see here) and that “enforcement of the U.K. Bribery Act will be disciplined and measured.” (See here).

Senseless

The alarmist commentary Miller spoke of in the above article was on display last week as Deloitte issued a press release (here) stating that “few business professionals are familiar with UK Bribery Act taking effect July 1.”

According to Deloitte’s own survey results – results not actually released – 73% of “business professionals” participating in a Deloitte webcast “earlier this year” said “they are not familiar with provisions in the U.K. Bribery Act.” The leader of Deloitte’s FCPA “consulting services practice” is quoted as saying that “organizations should focus on expanding their anti-corruption programs beyond FCPA to fully address the new Bribery Act 2010 provisions.”

What Deloitte’s release doesn’t mention is that its own survey took place on January 18th (see here) – a time when it was uncertain if or when the Bribery Act would ever go live and a full two months before the U.K. Ministry of Justice released (here) extensive guidance and case studies on the Bribery Act.

Against this backdrop, it is surprising not that 73% of “business professionals” were not “familiar” with the Bribery Act, but that 27% of “business professionals” were familiar with the Bribery Act.

Is it often that the majority of “business professionals” are “familiar” with a foreign law months before the law is scheduled to go live?

Assistant Attorney General Lanny Breuer On ….

Earlier this week, Assistant Attorney General Lanny Breuer spoke at the 3rd Russia and Commonwealth of Independent States Summit on Anti-Corruption. See here for his remarks.

Breuer’s remarks touched upon a number of topics including the following as excerpted below.

On Corruption Generally

“Corruption affects countries rich and poor, large and small, and it has particularly harmful effects on emerging economies. When a developing country’s public officials routinely abuse their power for personal gain, its people suffer. Roads are not built, schools lie in ruin, and basic public services go unprovided. And when corruption takes hold in any nation, its political institutions tend to lose legitimacy, threatening democratic stability and the rule of law. Corruption undermines the health of international markets, stifling competition and repelling foreign investment. Moreover, corruption is a ‘gateway crime, allowing money laundering, gang violence, terrorism and other crimes to thrive.”

On the FCPA’s Legislative History

“The FCPA was the first effort of any nation to specifically criminalize the act of bribing foreign officials. The statute was enacted in the wake of the “Watergate” scandal in the United States, which led to the resignation of President Richard Nixon in 1974 and resulted in a dramatic plunge in Americans’ overall trust in government. In 1976, following certain prosecutions for illegal use of corporate funds arising out of the Watergate scandal, the U.S. Securities and Exchange Commission, or S.E.C., which regulates the securities industry in the United States, issued a “Report on Questionable and Illegal Corporate Payments and Practices.” In its report, the S.E.C. determined that foreign bribery by U.S. corporations was “serious and sufficiently widespread to be a cause for deep concern.” S.E.C. investigations revealed that hundreds of U.S. companies had made corrupt foreign payments involving hundreds of millions of dollars. With this background, the U.S. Senate Banking Committee concluded that there was a strong need for anti-bribery legislation in the United States. “Corporate bribery is bad business,” the committee said in its Report. “In our free market system it is basic that the sale of products should take place on the basis of price, quality, and service. Corporate bribery is fundamentally destructive of this basic tenet.””

“As the U.S. House of Representatives’ Report on the FCPA put it, a strong anti-bribery law can “help U.S. corporations resist corrupt demands.” In the words of the former chairman of a major oil company, quoted in the report, “If we could cite our law which says we just may not do it, we would be in a better position to resist” the pressure that sometimes comes from foreign officials. That was true in 1977, and it’s true now.”

On FCPA Enforcement

“The passage of the FCPA was a milestone. But the Act did not become a strong enforcement mechanism overnight. Indeed, in the first decades immediately following the law’s enactment, many saw the FCPA as a slumbering statute. That is no longer the case. In recent years, the Criminal Division has dramatically increased its FCPA enforcement efforts. To give you a sense: in 2004, we charged two individuals under the FCPA and collected around $11 million in criminal fines. In 2005, we charged five individuals and collected around $16.5 million. By contrast, in 2009 and 2010 combined, we charged over 50 individuals and collected nearly $2 billion.”

“The FCPA is a strong enforcement mechanism, and we are not shy about using it.”

On Holding Non-U.S. Actors Accountable

“We have traditionally also pursued foreign executives who work for U.S. corporations or for foreign corporations that trade on U.S. exchanges, as well as the foreign corporations themselves. For example, in 2007, Christian Sapsizian, a French citizen and former executive at Alcatel, pleaded guilty to two counts of violating the FCPA, and in 2008 he was sentenced to 30 months in prison on those charges. In addition, we recently resolved a wide-ranging investigation against the Swiss-based freight-forwarding company Panalpina World Transport (Holding) Ltd., its U.S. subsidiary, and several foreign and domestic oil and gas service providers. Thus, as the Sapsizian and Panalpina cases show, any Russian citizen working for an American company in Russia or for a Russian company that trades on an American exchange, as well as any Russian company that trades on such an exchange, are also within our reach.”

“We have on more than one occasion brought charges against foreign officials under U.S. money laundering statutes, alleging that those officials laundered the proceeds of foreign bribery through U.S. financial institutions. In 2009, for example, we indicted two former Haitian government officials on money laundering charges for their alleged roles in a scheme to bribe officials of Haiti’s state-owned national telecommunications company. Thus, as the Haiti Teleco case shows, Russian officials who launder the proceeds of foreign bribes through U.S. financial institutions could also be liable for FCPA-related offenses.”

On the Kleptocracy Asset Recovery Initiative

“… Last year our Asset Forfeiture and Money Laundering Section initiated a Kleptocracy Asset Recovery Initiative, which is designed to target and recover the proceeds of foreign official corruption that have been laundered into or through the United States. In November of 2009, at the Global Forum on Fighting Corruption and Safeguarding Integrity, in Qatar, Attorney General Holder pledged to redouble the United States’ commitment to recovering foreign corruption proceeds. The Kleptocracy Initiative represents a concrete step toward fulfilling that commitment; and once the initiative is fully implemented, it will allow the Justice Department to recover assets on behalf of countries victimized by high-level corruption.”

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