Non Compliance for Noble Causes – What not to do!!Wayne GilbertDirector, NSW/ACT/WARISQ Group

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INVESTIGATIONS & FORENSICS • BUSINESS INTELLIGENCE • CRISIS & SECURITY MANAGEMENT • RISK CONSULTING & TECHNOLOGY

About Today’s Presentation

• What is Fraud, Corruption & Bribery• Why worry about fraud & corruption• Some Regional Trends • Some of the Risk Factors• Some fraud/corruption types• Red Flags• Mitigation Strategies• Noble Cause Fraud/Corruption• The Future of Financial Advice• Questions

People are as honest as the circumstances allow

What is Fraud, Corruption and Employee Misconduct

• Let’s discuss what constitutes– Fraud– Corruption– Bribery

Why Worry about Fraud or Corruption?

• Accountant steals nearly $20m– (Clive Peeters 2009)

• UBS’s rogue trader bets up to $10bn before his losses detected

– (The Australian—19/09/2011)

• Insulation fraud claims already with auditor – (ABC 05/03/2010)

• Big cases of fraud sting Australian business to the tune of $2m each (28/05/2010)

Why Worry? (cont...)

• Reputation• $$$$ (bottom line)• Regulatory breaches• Remediation• Investigation• People

• Alleged rogue trader Kweku Adoboli arrested in September 2011 and charged with fraud and false accounting

• Hid trading positions in the amount of US$10 billion—false hedges

• Loss to UBS US$2.3 billion• Large financial institution with numerous

controls, including Internal Audit, External Audit and Regulators

Some Recent Examples

• July 2012 CSC identified an attempted a potentially fraudulent request to transfer client funds

• Request came from third person (possibly daughter) and funds to be directed to a specific Bank Account

• When providing evidence to support this transaction, person supplied details of a Bank Account from another financial institution

• Good work by CSC prevented funds from being transferred

Some Recent Examples (cont...)

• 5% loss of organisations’ annual revenue

• Median loss $300,000 (global $160K)• Median of 12 months before fraud is

detected• Asset misappropriations account for

80% of an organisation’s fraud• Financial statement fraud most

expensive with median loss of $3.4m

The following highlights are extracted from a survey of respondents of the Asia – Pacific region (2010):

Fraud Trends in AsiaPac

• Tips uncover the majority of frauds • Most offenders have no criminal record• Surprise audits and the hotline have greatest

impact on fraud control• Fraud losses tend to rise with the authority of

the perpetrator in the organisation• 76% of occupational frauds committed by

individuals in sales, accounting, operations, executive/upper management and purchasing

Fraud Trends in AsiaPac (cont...)

AN OPPORTUNITY

MOTIVATEDOFFENDERS

SUITABLE TARGET /ABSENCE OF GUARDIANS

Internal ControlsInternal Controls

Ethical CultureEthical Culture

SOURCE: Graycar, A. 2000, “Fraud prevention and control in Australia”, paper presented at the Australian Institute of Criminology Fraud Prevention Conference, Gold Coast, 24 August.

Fraud Control

Plan

Whistleblower Policy

Fraud Incident Response Plan

Organisational Members as Guardians

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What can we control?

People are the Number One Fraud Risk Factor

Don’t ignore the obvious!

1. Override of controls

2. Lack of segregation of duties

3. Lack of exception reporting

4. Failure to secure static data

5. Failure to follow BU procedures

6. Failure to follow Standard Operating Procedures

7. Poor on-line banking security

8. Sharing passwords

Process Weaknesses Leading to Fraud

Proactive Fraud Risk Management Plan

Proactive Fraud Risk Management Plan

Internal ControlsInternal Controls

Reporting MechanismsReporting

MechanismsEthical CultureEthical Culture

InvestigationInvestigation

Management Commitment

Management Commitment

Pre-employmentScreening

Pre-employmentScreening

AwarenessAwarenessInternalAudit

InternalAudit

Fraud Risk AssessmentFraud Risk Assessment

InsuranceInsurance

Line ManagementResponsibility

Line ManagementResponsibility

Fraud DetectionFraud Detection

Strategic Approach to Fraud Risk Management

Employees/Management:1.Failure to take leave, share duties/information

2.Resistant to change and/or accountability

3.“Always has an answer”

4.Appears to live beyond their means

External parties:5.Asking a lot of questions

6.Failure to provide documentation

7.“Rush jobs”

Red Flags to Look Out For

Bribe

• Offering an advantage intending to persuade or reward a party to perform a function or activity improperly

• Examples include –• Accepting a kickback to

approve finance, credit card etc.

• Offering reward for improper purposes – eg. securing a new client etc.

What is Bribery?

Former Securency CFO, David Ellery, pleaded guilty to falsifying accounting relating to “commission” payments in Malaysia

Some Recent Examples of Bribery

• Alcoa: $10m bribery allegations• Leighton Holdings: AFP

investigation• Walmart: Alleged bribery

Some Recent Examples of Bribery (cont)

Collusion

Kickbacks and

Commissions

False Documents

Employment Fraud

Identity Fraud

Non-arms length

Transactions

Valuation Fraud

Types of Fraud

Common Types of Fraud

Valuation Fraud

• A valuation that looks valid may be completely fictitious

• Valuation may be received from a valuation company that is not registered or authorised

• Real valuation may be altered• The value of the property may be

intentionally inflated

Red Flags – Valuation Fraud

Valuation is from an unknown company or does not exist through ASIC searches

Different font or character size

Evidence of cut and paste or the use of whiteout

Price of property appears high for property in that area

Example – Valuation Fraud

Market value is stated at

$215, 000 and later $450,000

Example – Valuation Fraud

Questionable Valuation

• Without the intervention of an agent• Vendor, Developers, Agent and/or Conveyancing

solicitor related• Vendor is the Agent and/or Conveyancing solicitor • Same solicitor acting for both parties• Vendor and Introducer are one in the same or related• It is essential to request proof rather than rely on

verbal or written statements.

Non arms-length Transactions

Property purchases without agents

Excessive funds to complete being a non repayable gift

Unsubstantiated other assets

Value of net assets compared to applicant’s age

Assets appear over inflated and/or liabilities appear understated

Red Flags – Non arms-length Transactions

Identity Fraud

• Identity Fraud may involve the hijacking of a real person’s identity or the creation of a totally false identity.

• Impacts of Identity fraud :– Dramatic effect on real estate– Can cause a family to lose their house or ruin a person’s

ability to obtain a loan– Major source of organised crime and terrorism

Yahoo, Gmail or Hotmail email addresses No landline phone number Minimal credit history with credit check Employment or residential address history different

to credit report Date of birth differs to credit check Incorrect spelling/grammar on supporting

documentation Inconsistent information between supporting

documentation

Red Flags for Identity Fraud

Hospital spelt incorrectly

Electrician spelt

incorrectly

Example – Identity Fraud

Suspect Information

Example – Identity Fraud

Example – Identity Fraud

Document Number does not match!

Notation should be 080616

• Employment history and salary—key components for success of application

• Employment Letters and pay slips (ACN/ABN)• Verify ABN’s• False self employment/secondary employment • Scrutinise for inconsistencies

Employment Fraud

Tax documents containing rounded numbers Generic appearance of payslip or expensive payroll

system for small company. Pay dates fall on a Saturday/Sunday Employment letters. ABN not quoted or only a mobile

contact. Employer not listed in the white or yellow pages. Spelling or grammatical errors, inconsistent information

e.g. earning Salary inconsistent with job position No Superannuation appearing on payslips

Red Flags for Employment Fraud

Bank statements – Are deposits made by the employer?– Are living expenses accounted for? – Are there any credit card payments appearing on the statements that do not

appear on the liabilities section on the application? – Are balances incorrect? Fonts and alignment of information?

Certificate of Title is marked a duplicate First home owners grant applied for but not part of the

funds to complete the purchase Statutory declaration of non-returnable gift with no

evidence of deposit or withdrawal Documentary anomalies Different handwriting on application

Red Flags for Document Fraud

Kickbacks and illegal corrupt commissions

• There is no such thing as a “white lie” or a “helping hand”.

• It is a serious criminal offence to accept or offer money or a financial advantage to “look the other way” or “give it a little push”.

Lender’s Obligations

• Your Employer – to ensure all documents are real documents and a true representation of the borrower’s situation

• Mortgage Insurer – to ensure all documents are real as they may reject any potential claims if fraudulent representations have been made.

• Police – any person involved in the processing of a fraudulent loan can be called upon to give evidence.

• Borrower – approving a loan that is destined to fail, disadvantages both lender and borrower and may add to someone’s financial hardship.

• Fraud Awareness Training and “Know Your Customer”• Advise staff when instances of fraud are detected• Encourage staff to communicate fraud trends with

management and each other• Ensure fraud prevention issues are discussed at staff

meetings• Conduct regular reviews of processes to ensure good fraud

risk management• Establish a rewards program for vigilant staff• Maintain an awareness of increasing regulatory

requirements and expectations

What can you do?

• Do checks on the company through ASIC or ABR. i.e. to ascertain period company has been registered.

• Check to see if the company is registered for GST • Obtain original bank statements• Have borrower provide supporting documentation

evidencing the origin of the deposit• Obtain original documentation evidencing assets i.e.

portfolio statements for shares, valuation certificates for jewellery or antiques

• Telephone Tax Agent to verify figures on self-employed tax returns and examine document for errors

What can you do day to day?

Noble Cause Corruption

• How do you measure success• Rewards for success at any cost• Do you walk the walk• Not necessarily the “rotten apples”• Culture where the end justifies the means• Losing ones moral compass

Noble Cause Corruption (cont)

• Corruption is Corruption• Turning a “blind eye” is participation• Accountability and Supervision• Adherence to compliance framework• May have life long impacts

• Australian legislation aimed at ensuring financial advice is in the best interests of the client and free from conflicts of interest

• Ban on conflicted remuneration including commissions and volume based payments for a range of retail investment products

• Conflicted Remuneration means any benefit, whether monetary or non monetary, given to a financial services licensee, or a representative…, who provides financial product advice to persons as retail clients that…

a) Could reasonably be expected to influence the choice of financial product recommended by the licensee…to retail clients; or

b) Could reasonably be expected to influence the financial product advice given to retail clients by the licensee or representative

The Future of Financial Advice

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