Fraud Richter August, 2012 edition

7/31/2019 Fraud Richter August, 2012 edition

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The Fraud Richter, August 2012 Edition

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The Fraud Richter

Your monthly dose of fraud news

Compiled by

The Fraud Richter Team

[email protected]

+91-9566083416
mailto:[email protected]:[email protected]:[email protected]


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Gentle Request

Please do not take a print out of this newsletter. Save paper. Save trees.

Please think before you print.

The views expressed in this publication are personal views of the respective authors.

Dedicated to my beloved brother

CA KVS RAJANI KANTH

Compiled by

The Fraud Richter Team

August 1, 2012


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Inside

Page Content Author

3. Inside

4. Greetings

5. Case StudyDeviant behaviors of employees at the work-place. Subramanya Bhagirath K

9. Article - Olympus- The Fraud That Lasted For Two & Half Decades Deepak EHN

12. Fraud TerminologyA Glossary of fraud terms and words.

13. Feedback forum

13. Gentle Request

13. Disclaimer.


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Greetings!!

It fills my heart with great happiness to know that some of my close friends have

cleared CA Examinations. I heart fully congratulate them for their success and wish them all

the best in their future endeavors. And for those who didnt clear, I can say only one thing

Keep your spirits intact, you will be a success too, if not now, later.

I am very happy to see the amount of feedback we have been receiving all this month

about the Pilot Edition Fraud Richter. I really thank you for that. Your encouragement

makes us do more and more work to make this magazine a successful media for anti-fraudprofessionals and aspirants. It made our Fraud Richter Team to take an important decision.

We have now decided to release the magazine monthly, instead of every two months as

planned in the first place. We planned as a by-monthly magazine, as our team is a group of

professional (CA, MBA, CMA, CWA etc.,) students and it will be difficult for us to balance

study-work and interests. But, your feedback and appraisals gave us the confidence to face

it!! Thanks again!!

Also, I am pleased to say that some new members, young and determined

professional aspirants have joined our small team. They will be helping our team to collect,

compile, analyze and edit the recent fraud case studies, articles to feed your fraud fighting

brains. I heartily welcome them aboard.

This months edition will introduce you with some new areas of fraud detection, case

studies, and article about Olympus fraud trial, and lots of fraud stuff!! I also hope that you

like the new look of the magazine. We dont want you to feel monotonous while reading and

hence, we will try to change the style in regular intervals.

So, just explore around to share and learn the fraud education!!

With Best Regards

Subramanya Bhagirath K

Compilor

Fraud Richter

01stAugust, 2012.


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Article

Deviant Behaviors of Employees at

Work-place.

The Sams Case:

Sam was working in a Software

company. He was a young engineer with

hardly two years of project experience. He

was very reserved, rarely used to be in

interaction with his co-techies. He often

spends his time in his cubicle office space.

His colleagues never minded his alien

behavior until one day, when they were

informed of Cyber fraud alleged to be

committed by Sam. As the Investigators

dug through the past of Sam along with

the data, they noticed astonishing facts.

Sams colleagues knew the reason for

sams behavior for a very long time. They

quoted Sam was a gambler, womanizer

and an alcohol addict.He used to spend some

20,000 bucks every

week on his illicit

interests. Three

questions raise from

this statement. Firstly, how did a regular

techie, able to spend so much? Secondly,

Who helped him? And finally, (This is most

important question) Why did not the

colleagues reported the deviant behavior

of Sam beforehand. The answer is simple,

remember the fraud triangle that we

discussed in pilot edition (Motive ->

Opportunity -> Rationalization). Sams

motive is to earn easy money for his illicit

interests. His colleagues never cared about

what he does at office, or what was his

behavior at the workplace. They simply

ignored Sam. This is his opportunity as

there is no one on his back watching him

about his daily routine. And, when he

finallyconvicted, he said, I was addicted,

I could not help it! This is rationalization.

What Sam did was simple, he leaked the

patented program codes of the

organization to their competitors for want

of money. It is a case of Information theft,

a branch of cyber fraud. The investigatorsalso found some illicit content in the office

system of Sam. These are all the traces,

which lead to the motive of Sam. He, sold

the organizations information for just Rs.

10,00,000 / - which was actually

invaluable to the organisation. This might

look like a small amount, but, the effects

of this are vast. The company lost

potential revenue as a

result of this fraud. The

employees might get

sacked, for the loss of

revenue. If only could

the colleagues have

reported of the Sams behavior

beforehand, the potential disaster could

have been averted.

What Loss can Deviant Behavior Cause?

More serious cases of deviant

behavior harmful to an organization

concern is property deviance. Property

deviance is where employees either

damage or acquire tangible

assetswithout authorization. This type


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of deviance typically involves theft but

may include sabotage, intentional errors

in work, misusing expense accounts,

among other examples.

Deviant behavior can be much

more extreme, involving sexual

harassmentand even violence. All these

deviant behaviors create problems for the

organization. It is costly for an

organization to pay employees who are

not working efficiently.

So, is one of your employeeslooking very tired- out these days,

although there is no increase in his work-

volume? Is one of your employees

behaving differently than before, suddenly

without any reason? Is one of your

employees appearance and etiquettes

had a drastic change these days? If your

answer is YES, then, YES your organization

might be in trouble. Not because of low

workforce performance, but because of

occupational fraud!! This might be

surprising to know, but the facts of this

theory are not as surprising as one might

expect after reading this article.

Using deviant behavior as a technique of

fraud detection:-

As discussed in the Pilot Edition of

THE FRAUD RICHTER, the ways of

committing fraud and miss-appropriation

of the companys assets had undergone an

evolution. Along with that, fraud detection

theories also evolved. Thanks to the rising

intention towards control of financial

fraud in the minds of professionals as well

as the business organizations. But, this is

not the end, but a beginning of a new era

of fraud fighting. One such modern

theories now being used extensively is to

identify potential fraudsters throughobservation on DEVIANT BEHAVIORS OF

EMPLOYEES.

A corrupt employee is as good as a

disgruntled employee. To be more clearer,

a corrupt employee has a better motive to

defraud the organization. Take an

example of a drunkard. A drunkard leaves

no exception for dwindling the money to

get drunk. This instance needs no further

explanation as this is very common in a

place like India. The same is the case of a

fraudster. The fraudsters desire for

corrupt practices is a sufficient motive to

commit fraud.

A drunkard behaves differently, even at

times of utter soundness. This is because;

the effects of alcohol are such that it

leaves a person only at his death in major

cases. Likewise, a corrupt employee shows

some behavioral signs at workplace, like

being too reserved, often trying to be

alone at work place or not in much

interaction with colleagues. Of course,

what is the need to talk to someone whenhe is silently able to milk away the

organizations assets?

These kind of fraudsters doesnt want to

talk to anyone usually. Because, they fear

they might slip away their tongue.
http://en.wikipedia.org/wiki/Sexual_harassmenthttp://en.wikipedia.org/wiki/Sexual_harassmenthttp://en.wikipedia.org/wiki/Workplace_violencehttp://en.wikipedia.org/wiki/Workplace_violencehttp://en.wikipedia.org/wiki/Sexual_harassmenthttp://en.wikipedia.org/wiki/Sexual_harassment


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Some Behavioral Signs of deviant

behavior:-

1. An employee in a dominating position

(i.e. holding a top authoritative position in

an organization), often complained off by

the colleagues or sub-ordinates.

2. An employee who has a criminal record

in the past.

3. An employee who spends lavishly, even

though he is not financially sound.

4. An employee who never takes a leave.(This might sound strange, but, just

assume, if he is absent in the workplace,

someone who takes care of his work for

that day might be able to find out the

fraud he has been concealing).

5. An employee who regularly works over

time and on weekends. (This is a sign of

payroll fraud).

6. An employee who skips the periodic

assessment reviews of the company.

7. An employee complained by the staff

that often he involves in non-work related

issues like Social Networking, chats etc.,

8. An employee who shows some violent

and aggressive attitude.

9. An employee having a record in the past

for unethical and immoral behavior

towards collegues.

These are just a few signs. You can find

these deviant behaviors in various forms,

which depends on the organizations work

culture.

Now that we know the crux of the theory,

its time for learning some simple

preventive measures. Because, as an

English idiom says, Prevention is better

than cure.

Preventive Steps :-

- Prepare a comprehensive employee

fraud policy. Make the new hires and the

existing employees as well to sign and

agree to the terms. This creates

awareness in the employees about the

aftereffects of fraud.

- Take periodical reviews of the employee

performances, not only on the

quantitative parameters but also on the

qualitative issues.

- Conduct surprise checks and inspection

on the office automation systems and the

organizations assets.

- Establish fraud hotlines. This is a very

good source of anonymous tips about

fraud to the organization. ACFEs Report

to the nation reports that 49% of the

frauds are detected through anonymous

tips and most of them are from

organizations employees.

- Also establish an information security

policy and review them periodically and

also educate the employees about them

regularly.

- Conduct all-round background checks of

the employees. It is better to conduct a

due diligence on the employees having

criminal record before inducting them into

the organization.


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- Keep a track of overtime and weekend

workouts of the employees. Do PARETO

analysis on the different teams of

employees to know the key performance

indicators and the bottleneck processes.Often fraud is found out in bottle neck

processes.

- Take the review of internal controls

periodically and swap the functions of the

employees in top authority at regular

intervals. This controls white-collar crimes.

- Conduct regular social events in theoffice. This will make the silent employees

to speak out unintentionally.

- Establishment of surveillance equipment

will keep track of the employees at the

work place, but it is complained by the

employees that it is compromising their

working privacy and personal privacy too.

So, better place them only in key securityconcern places viz., cash vaults, document

rooms, server rooms etc.,

Although this new technique or

new way of fraud detection gives good

results and path-breaking outcomes, we

cannot be Assurant about the success of

this technique in some cases. So, this can

be an add-on, but cannot be used as aregular procedure of Fraud detection due

to uncertainity.

These are some of the excerpts of the

preventive checklist. But, the list is

exhaustive. But, again, something is better

than nothing! Isnt it?

- Subramanya Bhagirath K

*****


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OLYMPUS- THE FRAUD THAT LASTED FOR

TWO & HALF DECADES

Thanks to the whistle blower, ex-CEO

of the Olympus Corporation, Michael

Woodford, else the fraud duration wouldve

been enhanced. We shall now glaze into how

JPY117.7B of fraud was actually planned and

implemented. Let us bifurcate the fraud event

into two major criteria:

1) Funds outflow 2) Funds inflow.Further, therell be three routes covering both

the divisions, through which the passage of

funds can be observed.

1) Europe route2) Singapore route3) Domestic route

Terms and Companies

Involved

If you look intothe receiver funds

(companies) that were setup for the purpose:-

1) GCI caymann setup in the caymannislands

2) Central forest corporation (CFC)3) Quick progress company (QP)4) TEAO limited (TEAO)5) Neo strategic ventures (NEO)6) Twenty first century global fixed

income fund limited (21C)7) G.C. New Vision Ventures (GCNVV)8) Class fund IT Ventures (ITV)9) Dynamic Dragon II SPC (DD)10)Global Targets SPC (GT)11)SG Bond plus fund (SG Bond)12)Easterside Investments Limited

(EASTERSIDE)

13)Creative Dragon SPC (CD)14)PS Global Investable Markets (GIM)15)GPA Investments Limited (GPAI)

Two of the Olympus subsidiaries involved are:-

1) Olympus Finance Hongkong limited(OFH)

2) Olympus Asset Management (OAM)

The three domestic companies, whose shares

are transferred by inflating the prices, are:-

1) Altis2) Humalabo3) News Chef

Consultancy firms that involved are:-

1) Axes America (AXES)2) Axam Investments Limited (AXAM)

As you are

familiar with the receiver

funds and the

terminologies, we shall

move onto the details of

origin of loss and

separation scheme.

ORIGIN OF LOSS:-

In the late 1980s, Olympus has

suffered low operating income due to sharp

rise in the Japan yen. In the mean time,

Zaiteku* was prevailing in the Japan. Stock

and Real estate prices were having a bull run.

Olympus adopted Zaiteku as principle business

strategy. However due to the burst of the

bubble economy in the 1990, the loss has

increased substantially. Olympus started

investing in High Risk-High Return financial

instruments to compensate the huge loss.

Unfortunately, the financial statements didnt

pickup and Olympus got struck in the pit of

losses, which amounted to 100B.


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The then president Mr.Kishimoto left the

problem to the portfolio department. The

former full time auditor Hideo Yamada and

the Hisashi Mori took the charge of settling

the loss.

During 1997-98, when the unrealized

loss was reaching the peak, Japan made an

amendment to the statute, which required thecompanies to recognize the financial

instruments at fair value rather than the

historical cost basis. Since the unrealized loss

would be uncovered, Yamada and Mori

approached the president of Axes America to

draft and implement the TOBASHI^ scheme

and transfer the loss to other receiver funds,

which need not be consolidated in the

financial statements of the former one.

TOBASHI:-

Tobashi means to fly away. In Tobashi

scheme, loss bearing financial instruments are

transferred to fake clients or absorbed by the

investment firm itself.

Yamada and Mori, with the assistance

of the President of Axes America, has setup

the first receiver fund in caymann

islands.(Cayman islands is a tax Heaven

Island). Further they worked out on the routes.

Lets examine the routes.

FUNDS OUTFLOW:-

Yamada and Mori planned of setting

up receiver funds and transfer the loss by

incorporating them in the financial

instruments. For the purpose, receiver funds

are to be financed.

EUROPE ROUTE:-

1. Olympus pledged 35 billionof deposits in LGT bank andobtained a loan and provided

the same to CFC. Further CFC

bought the loss bearing

financial instruments from

Olympus.

2. Olympus through OAMinvested 35.5 billion in LGT

bank. LGT bank provided 31

billion loan to TEAO and

further TEAO invested 30billion in NEO, which in turn

forwarded to QP.QP

purchased the loss bearing

financial instruments from

Olympus.

Overall, 64 billion of loss was transferred to

CFC and 32B of loss to QP.

SINGAPORE ROUTE:-

Olympus approached

commerz bank and pledged the bonds and

forwarded loan to SG Bond, an amount of 45

billion. But later the scheme was modified and

the loan was transferred to CFC via,

EASTERSIDE, Twenty first century global fixed

income fund limited (21C).

DOMESTIC ROUTE:-

Olympus invested 30 billion in

GCNVV and the entrepreneurial ventures

invested 9 billion in GCNVV. It was reported

that there was regular flow of funds between

QP and GCNVV.

THE BACKDROP:-


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Three domestic companies Altis,

Humalabo, News chef were setup. The loss

was to be transformed to goodwill by

overvaluing the transactions. Further goodwill

which aroused from the exaggeratedtransactions would be amortized over a period

or written off considering as an impairment

loss.

Now ITV, NEO came into the action and

bought the shares of ALTIS and HUMALABO

for 50000 share and that of news chef for

200000 share. GCNVV bought the shares from

NEO and ITV at an escalated price, Altis for

5.79 Million share, Humalabo for 14.75Million share, News chef for 4.45 Million

share.

Also GT and DD bought the

shares from NEO, pricing

5.57 Million, 14.1 Million

, and 4.45 Million for

Altis, Humalabo, and news

chef respectively.

FUNDS INFLOW:-

Now comes the major part of the scheme.

Since the loan was to be repaid sooner or

later, Olympus needs funds to repay. So

Yamada and Mori made a scheme for the

reimbursement of the funds. Olympus bought

the shares of domestic companies at a sum of

31.9 billion from NEO and 15.2 billion from

ITV. Further these funds flowed to TEAO

through QP and NEO. Ultimately, TEAO

cleared the loan to LGT bank and LGT bank

released the 15.9 billion bonds of the

Olympus. Olympus through its subsidiary OFH

purchased the shares of domestic companies

from DD for 9.6 billion and GT 4.1 billion.

These funds finally reached the TEAO through

EASTERSIDE, CD, GPAI, and CFC. TEAO

reimbursed the loan to LGT bank and the

latter one released the 21billion deposits of

Olympus making the Europe route settled.

Now the acquisition of Gyrus came into

light. The mediator and the consultancy firm

AXAM was paid huge fee ($ 50 Million for the

FA agreement and $620 Million for the

purchase of gyrus preference shares) for

assisting in the acquisition of gyrus, which was

questioned by the auditor KPMG AZSA LLC.

The auditor was immediately changed;

Yamada and Mori discussed the accounting

issues with the new auditor Ernst and Young

Shinhon LLC. These funds as per the secretagreement flowed to GPAI, CD. CD forwarded

the huge amounts of money of 58 billion to

EASTERSIDE and the latter one forwarded to

SG Bond, which in turn

reimbursed to Olympus,

making the Singapore

route settled. A part of the

loss was separated using

Tobashi scheme and a partof the loss was

transformed to the goodwill by the

exaggerated transactions and huge fees to

mediators in the acquisition. This complex loss

separation scheme and the receiver funds

involved and the transactions made this

117.7 billion scandal, a remarkable one in the

history.

- E.H.N. DEEPAK


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Fraud terminology

Note: The Fraud Terminology is extract of Fraud terms from various books and articles

related to Fraud Investigation and Forensic Accounting. In order to maintain the grace and

the professionalism of the book authors, the matter is copy pasted instead of re-writing it.


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Gentle Request

Small and little efforts make a big success. Please donate small amounts towards the

education of poor. Indias future should not be remained in the ruins of poor and illiterate

citizens.

Our team plans to establish a small fund towards this objective. You will soon get the details

about the same.

Disclaimer

All the information, contents in this magazine are the personal views of Fraud Richter Team.

No part of this publication is a copy or imitation of any matter published in any media. Only,

extracts have been taken for providing the readers with better information.
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