Opalesque Article

The following article was published in the April 9, 2013 issue of Opalesque, a Swiss web magazine serving the hedge fund industry:

Opalesque Exclusive: Corporate investigator: there must be a school of fraud somewhere

Benedicte Gravrand, Opalesque Geneva:

If one of the funds of hedge funds that invested in Madoff had decided to dig beneath the Madoff funds’ shiny coating and hired a white collar fraud specialist beforehand, things might have felt different for the many investors who lost out. There are quite a few white collar investigative firms in the U.S. and the heads of one explained to Opalesque what they do, exactly.

Juval Aviv is an Israeli-American security consultant and writer, known among other things for his claim to have worked for the Mossad, the Israeli intelligence service. Since 2003, Juval Aviv has published several non-fiction books (Staying safe, The Complete Terrorism Survival Guide) and fiction books (The Asset, Flight 103, Max, which feature a private investigator called Sam Woolfman in stories that are based on real cases).

But he talked to me as the president and CEO of Interfor, Inc., a corporate investigations firm head-quartered in New York which he founded in 1979. The firm, which has offices worldwide, provides investigative and intelligence services encompassing corporate due diligence, litigation support, asset search and recovery and other services, chiefly for large law firms and institutions worldwide.

“For example, we have been investigators on Enron, WorldCom, Tyco, Conseco, Parmalat, and have investigated Madoff and Stanford,” he says. “Those are very large fraud cases, where billions of dollars were secreted offshore, and our job was to find that money, freeze the assets, help collect them and bring them home. That’s our specialty. However, we do handle a high volume of smaller cases.”

Interfor’s team is multi-lingual and consists of professionals with diverse backgrounds in a broad range of disciplines including law enforcement and intelligence.

School of fraud
When investigating white collar fraudsters, the investigators look at how those individuals, who typically tell the courts they had lost everything and live on handouts, fund their current lifestyle – which can at times be lavish.

“And you find out that people who claim that they have nothing to eat spend $50,000 to $100,000 a month just on their overheads,” Juval Aviv notes. “That money has to come from somewhere.”

“I always say that there must be a school of fraud somewhere that they all go to, I don’t know where it is, but there must be one, because they all try to follow the same model, they copy each other,” he adds.

Aviv deplores the fate of the fraudsters’ family members who in some way get involved, as in for example, the Madoff case: “They move assets under the wife’s name, the ex-wife’s name, the children. When we uncover it and it ends up in court and they go to jail, the kids are involved and they are tainted for life. And this is the sad part.”

The quality of his business, he claims, is down to the contacts that the investigators have.

Don Aviv, his son, who is involved in the running of the investigations and who will take over the business when he retires, tells Opalesque; “At the end of the day, we consider ourselves to be a giant rolodex of contacts and resources. Our sources and contacts are unparalleled in both industry and law enforcement around the world.”

Heavyweight due diligence
Don Aviv explains that the due diligence reports that Interfor produces – usually for fund of funds, high net worth families, law firms – are not lightweight. They don’t focus on the ongoing business deal, he states, but on the people behind the deal.

“Right now, we are doing a due diligence for a very high net worth family in India,” he notes. “We are working for a large high net worth family in Tokyo that’s doing a deal in the United States. We are working for a French family that’s looking to invest in Canada. And we are working for a large Canadian fund that’s looking to invest in France.”

“Our job is to make sure that clients sleep well at night,” his father Juval Aviv continues. “Our job is, before you do the final deal, to look at the people themselves; do they have any problems? Is Interpol looking for them? Are the police or the tax authorities looking for them? Did they do anything that could put you into a problematic situation, say, six months from now…”

Indeed, as is often said, once information has become public, investors have already missed the boat.

“We have hundreds of examples of last minute jobs,” Juval Aviv goes on, “where, for example, a financial institution, a big bank that called us in were about to write a cheque, and we say, stop, the people that you are doing business with, they have bribed some ministers in the Philippines to get some license to build a big project and only to find out that they are not builders, there is no zoning to build the project in this land that they claim they have.”

As for financial institutions, including hedge funds, it is apparently still quite hard to convince them to spend money on such dynamic due diligence services and background checks. According to Don Aviv, many do realize that they have to do something because of local laws and regulations and conduct CYA-type searches – and this is not what Interfor is about.

Don Aviv relates an example involving one of Interfor’s fund of funds client located in New York that invests in emerging markets, and was looking to invest in a Malaysian entity: “They had already signed, they had the preliminary expenditure sent, they cut the initial deal and money was already flowing to this other fund manager. They brought us in because they had a new compliance officer who wanted to do a comprehensive due diligence. What we found within two weeks ended up killing the deal, but they still lost a significant amount of money. We found that the individual that they were doing business with was not the individual they thought they were doing business with. There were two brothers in Malaysia; one is a financial rock star; the other one is barred from doing business by the SEC and had been deported from the United States. The latter was using the former’s identity…”

“So we are not going to say that the deal may not have been beneficial, not every deal is fraudulent, but because they misrepresented themselves, we eventually ended up killing the deal.”

Identifying origination of funds
There is another popular fraudulent scheme going on all over the world that originated in Russia, Juval Aviv continues: “fraudsters in that country opened companies in Switzerland, in Paris, in London. In those companies, they employ “front” people who often are sons and daughters of very prominent, old families in Europe. Those young kids do not realize that they are loaning their family name to fraudsters and gangsters. So when my clients who deal with them don’t know that they are not the owners, the money is not theirs, it’s all fraudulent money that’s come from the Ukraine or come from Russia. And they will find out very late, too late that the real partners are not the people that you met in New York.”

There are many cases of money laundering, as well as FCPA (Foreign Corrupt Practice Acts) – especially in the U.S, the UK and now the rest of Europe, Don Aviv says. There is a lot of money seeking investments nowadays, and clients are very concerned about where it comes from. Due diligence is more important than ever now, he explains, because it has become so easy to created entities, shell corporations and blind operations in safe havens and elsewhere. Business is more globalised, more instantaneous, deals are conducted much quicker. Fund managers think that ‘googling’ a person is enough for preliminary background checks. But “that’s only scratching the surface,” he says. In many countries where privacy laws of sorts make it difficult to obtain information on individuals (as in the UK where one cannot check people’s criminal records for example), one has to rely on industry contacts.

Reporting on reputation
It takes 20 years to build a reputation and five minutes to ruin it; if you think about that, you’ll do things differently, said Warren Buffet. But the reputation of whom you’re doing business with, however important it is, does not always travel far enough to reach you. So Interfor also offers Reputation Reports.

“In a Reputation Report, we study the individuals and the funds that are going to receive the investment or the merger or acquisition and we identify whether that individual is a good person to do business with,” Don Juval explains. “Most of the people we look at don’t have criminal backgrounds; they are well-seasoned professionals. Our clients want to know whether this person they are going to be dealing with is someone who’s going to be difficult in the business environment or amenable to negotiation and so forth. We talk to people around those individuals without anyone’s knowledge, using one of the many entities that we have listed around the world, and we develop a whole profile of that individual so that when our fund managers or home offices are about to close the deal, they have a better understanding of who they are dealing with.”

So before signing the deal, if a doubt is nagging you, it is good to be reminded that you have the choice; you can pay up the corporate private detective to see more clearly what you are stepping into.

Opalesque Article

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