In today’s world, corporate fraud is like a leak the plumber never got around to fixing. What was once only a small drip from America’s financial faucet has developed into a full-scale flood. Twenty-five years ago, a typical major single act of fraud involved losses of $5 to $10 million. In the past few years, the losses have escalated into the billions. This dynamic growth is an indication that fraudsters are changing, becoming bolder and much more sophisticated. By taking advantage of the shifting corporate and political climates, fraudsters are finding new ways to crack the company pipes.
Perpetrators of fraud recognize that America’s corporate culture is always evolving. The way Americans work today is quite different from how they worked in years past. One of the most significant changes has been the loss of company loyalty. Most workers no longer stay at a single company for the duration of their careers, but choose instead to hop from job to job in search of new opportunities and higher pay checks. Fraudsters have capitalized on this trend because with a high turnover rate in positions, it is harder to track where and how corporate assets and privileged information are distributed.
Additionally, fraudsters have harnessed the fear of lawsuits to facilitate their crimes. In order to avoid litigation and embarrassment due to the incident, companies may terminate an employee who has perpetuated a fraud, but will not publicly disclose the truth surrounding his or her dismissal. Fearing defamation suits, the company will also fall to warn the perpetrator’s new employer. By keeping these acts secret, defrauded companies enable fraudsters to strike again and again.
Recently, lawmakers have taken a stronger stance on white collar crime by passing legislation, such as the Sarbanes Oxley Act, aimed at combating fraud by increasing the pressure on public companies to perform internal investigations or face severe penalties. Despite these penalties, corporate malfeasance continues to flourish. This is true because the government’s ability to enforce these new policies is questionable at best, and, perhaps worse, the regulations create the facade of safety for companies who comply. Believing that they are now protected, compliant institutions are less likely to be on guard, which in turn, allows fraudsters to operate more easily under the radar. Conversely, industries that were once closely supervised by the government, like defense contractors, have entered an era of deregulation. The reduced scrutiny has left industries that were seemingly immune to fraud suddenly susceptible.
Along with changes to domestic policy, the widespread implementation of strict secrecy laws abroad has made engaging in fraudulent acts all the more attractive. Jurisdictions such as Switzerland and the Cayman Islands are no longer the world’s only popular financial safe-havens; in recent years, Nevis, Dutch Antilles, the Cook Islands, Gibraltar, Cyprus and Singapore have all enacted asset protection legislation. When searching for a country to stash funds, hide documents or open secured bank accounts, fraudsters now have more choices than ever before. Thus, the assets can be divided up among various locations making them harder to trace, more expensive to recover, and it is substantially more likely that the fraudsters will get away with their schemes.
The most significant change to the face of fraud, however, is that of the perpetrators themselves. The average fraudster is increasingly more sophisticated; he or she is well-educated, well-spoken, well-traveled and wellconnected. Gone are the days of sneaking petty cash into one’s pockets. Today’s white collar criminals treat their fraud schemes like business ventures. They hire attorneys and financial professionals to aid and abet their schemes by establishing offshore trusts or shell corporations to conceal misappropriated assets. Take the recent story of a major Wall Street trader who convinced his employer, an investment bank, to wire millions of dollars in insurance payments to a company as part of an energy trade. It was later discovered that both the trade and the company were fictitious; the trader had wired the payments through a shell corporation and deposited the money into his own Swiss bank account. Individuals such as these are willing to spend a lot of money to hide their ill-gotten gains.
Therefore, as the business of fraud continues to grow, how can companies combat these latest trends? By employing a good offense, companies have the best chance at a successful defense. It is imperative that all institutions take a proactive role in protecting themselves. Continuous internal investigations are a must, especially on employees who handle financial transactions or authorize payment of substantial invoices. Auditor reviews should be kept confidential to prevent investigations from becoming compromised by tipping off the wrong-doers. Companies should watch foreign subsidiaries closely; executives in these offices may be more tempted to engage in theft because they are not subject to daily scrutiny. Finally, the expertise of outside specialists should not be overlooked or underestimated. Fraud examiners and corporate investigation firms are trained to spot red flags and differentiate false-positives from truly suspicious activities. Fraudsters often use the same tricks over and over when they are successful. Professional fraud investigators know what to look for; they’ve seen it all before.
Fraud never rests; it is a twenty-four hour, seven day a week business that is growing. But unlike a great flood that submerges an entire community, fraud can be prevented or at least contained before causing irreparable damage. The trick is to stay proactive, stay involved and know when it is time to call the plumber.
If you would like to learn more about our security and investigative services, or if you have a specific matter you would like to discuss, please call our office at 212-605-0375, or visit our website at http://www.interforinternational.com/