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Financial Crimes (Scams, Frauds & White Collar Offences) - Prevention, Detection & Investigation

Chartered Accountants Services for the Police

DEFINITION OF FRAUD

A Fraud is:

A representation (usually of fact)

About a material point (important enough to make a

difference)

which is False as Truth or Correct

Intentionally and knowingly so (some cases recklessly)

Which is believed and

Acted upon by the victim

Caused Damage (Financially or otherwise)

DEFINITION OF SCAM

A Scam is:

A scheme designed with an intent to defraud a group of individuals or an enterprise(s) or a government(s) or a mix thereof, for getting some personal benefit - financial or fame, which requires violation of some law or flouting of certain established controls and involves a team work

Definition Of White Collar Offence

An offence which does not result in any physical injury but results in a financial loss

Personal

IntegrityLow High

Opportunities

To CommitLowHigh

Situational

PressuresHigh Low

Crime

Scale

High No

CRIME SCALE

Kinds of Frauds& Scams

Telemarketing Frauds

Consumer Scams & Schemes

Business Opportunities

Money Laundering

Business Scams

Investment Frauds

Criminal Operations

Investment Frauds

Affinity

Pump & Dump

Bait & Switch

Ponzi

Forex / Currency

Real Estate

Financial Planners

Touting

Stock Markets

Investment Frauds – Ponzi Schemes

o A Ponzi Scheme is basically an investment fraud where investors are enticed with the promise of extremely high returns or dividends over a very short period of time.

o Named after Carl Ponzi, who collected $9.8 million from 10550 people (including

three fourth of the Boston Police Force) and then paid out $7.8 million in just 8 months in the year 1920 at Boston by offering profits of 50% every 45 days

o Ponzi schemes are a simple fraud whereby initial investors are paid exceptional dividends as interest payouts from the deposits of a growing number of new investors. “Profits” to investors are not created by success of the underlying business ventures but instead are derived from capital contribution of other investors. A few people invest in the scheme, then as news of the offer spreads, more investors are drawn in.

Investment Frauds – Unethical Financial Planners

o Misusing a position of trust

o Civic Involvement

o Attire

o Offices

o Notoriety

o Assume control / power of attorney

G T C Fund – Good Till Cancelled

4ME2SPEND – For me to spend

GSC (Government Securities Fund) – Giant Service Fee

Few Cases

Money Laundering

Placement

Flight Capital

Layering

Tax Heavens

Integration

Enforcement

A criminal’s objective in laundering illicit proceeds is to : Get it out; cover it up; bring it back

Techniques in Money Laundering

PlacementGetting Currency into the financial system so as to convert illicit funds from cash straight into a financial instrument or bank account

LayeringThe movement of funds from institution to institution to hide the source and ownership of the funds, obscure the audit trail and sever the link with the original crime

IntegrationThe reinvestment of those funds in an ostensibly legitimate business so that no suspicion of its origins remains and to give the appearance of legitimizing the proceeds

Techniques in Money Laundering

• Smurfing

• Shipping Money Abroad

• Placement through Banks

• Use of “Pass Through” or “Payable Through” Accounts

• Electronic Wire Transfers

• Insurance Products

• Investment Related Transactions

• NBFCs

• Tax Havens & Offshore Banks

• Bank Secrecy Law as a layering tool

• Corporations & Shell Companies as a layering tool

• Use of trusts

• Use of walking accounts

• Establishing self owned bank

• Use of intermediaries

• Use of haven bank credit cards

• Receiving as consulting or directors fee

• Arrangement of corporate loans

• Proceeds of gambling

• Real estate transactions

• Stock Purchase

• Use of business

• International importing and exporting

• Use of free trade zones

Placement Layering Integration

Factors which severely hamper law enforcement efforts

Acceptance of flight capital by western countries

Laws and limitations of other countries

Jurisdictional conflicts and lack of international coordination

Bankings’ role in facilitation of the activity

Bank Secrecy

Volume and complexity of international transfers of funds

Internet based banking

Tax heavens as sanctuaries

Offshore corporations

Having to prove fraudulent transfer

Shortfall of reporting requirements

Criminals influencing Government and Bank support

The widespread use and acceptance of trade mis-pricing

Business Opportunities

Bulk e-mail

Vending Machines

Multi Level Marketing

Franchises

Inventions / Patents

Vanity Press Publishing

Money Problem scams

Credit Analysis

Credit reports

Advance Fee

Credit Card Offers

Identity Theft

Credit Repair

Loan Brokers

Business Scams

Bank Fraud

Cheque Fraud

Fake Ads & Directories

Business Loans

Counterfeiting

Fraudulent Orders

Internet Services

Cramming

Supply Scams

Work-at-home

Assembly Projects

Reading Books

Computer Work

Stuffing Envelops

Product Testing

Criminal Operations

Corporate Entities

Recovery Operations

Reloaders

Consumer scams

Chain Letters

Internet Fraud

Modeling School

Toll freeNumbers

Local Pyramid Clubs

Pay-per-call

Diet / Weight Loss

Dinner Party / Gifting Clubs

Multi Level Marketing

Consumer Scams

Pyramid Schemes

Travel & Vacation Offers

Time Shares

Opportunity Seminars

Travel Clubs

Sweet Heart Seminars

How-to-manuals

Abandoned / Lost Money

Employment

Inheritance

Scholarships / Diplomas

Tele Marketing Frauds

Magazine Subscribers

Fund raising

Lotteries

Gimmie Gifts

Advance Fee Sweeps

Charities/Donations

Recovery Scams

“RED FLAGS” are the signals, signs or symptoms which are reflected while certain types of fraud are taking place.

What Does “Red Flags”“Red Flags” Mean

RED FLAGS – DEFINITION

Early indicators of Fraud (Red Flags)

• Unreasonable returns compared to market rate of returns

• Promise for free money

• Magical solutions / products

• Show off / Affinity

• Clandestine Meetings / Maintenance of Secrecy

• Anonymity / One man / small team officiating

• Oral Representations / No formal approvals or documentation

• Claims of Authority / Registered in a different country

• Urgency in collecting finances

• Flouting of Laws

• Short cut formulae

Techniques in Fraud

• The “Three-Call” Technique

• The Infallible Forecaster

• Baits to Lure in

• Aspect of Risk

• Show of Familiarity

• Doing you a favour

• An understanding of Psychology

• Avoidance of Questions

• High Pressure Sales Tactics

• Fancy Corporate Names

• Howdy Partner

Fraud is increasing Creates significant behavioural issues Disrupts productivity Losses have a multiplier effect making them much more

expensive than the actual amount lost. Kills Good Organisations Responsibility of regulators for prevention and

detection of fraud has increased

Fraud Should be taken SERIOUSLY

Weaknesses in Regulatory System

• Inspector Raj

• Dual Responsibility

• Undue Delay in Processes

• Excessive intervention by Judiciary

• Very less time in law making

• Considering of problem rather than cause of the problem

• More interest before investigation but no interest in concluding the cases

Role of Regulators should be

• Understand the need for creation / modification of laws to

curb / eliminate opportunities for scams / frauds based on the

study of global scenario

• Ensure appropriate powers to law enforcement agencies

• Provide facility for 2/3 levels of appeal before any one

approach the judiciary

• Ensure time bound completion for the cases / designating

case officer

• Announce very severe punishment for committing the crime

• Introduction of Compulsory Operations Audit on a periodical

basis

Role of Police Should be

• Conduct seminars for the benefit of investment

community about different kinds of fraud on a

periodical basis

• Conduct seminars about the repercussions on the

convicted & his / her family

• Utilise services of professionals such as

Chartered Accountants, Advocates & Company

Secretaries for conducting pre-enquiries with

regard to various indicators available from news

media

• Be independent from every business not only on

paper but otherwise

Chartered Accountants Services

Identification of red flags

Conduct of pre-enquiries

Study of the methodology of scam / fraud

Assisting in documentation / verification of

documentation

Investigation Report / Forensic Accounting Report

Expert Advisory Services

Witness services

Training the officers on latest trends in global

scenario