Current Hot Topics in Bribery and Corruption Investigations · 2016-11-17 · Current Hot Topics in...

Current Hot Topics in Bribery and Corruption Investigations

Current Hot Topics in Bribery and

Corruption Investigations

Gerry Zack, CFE, CPA, CIA

Severina Ostrovsky

BDO USA, LLP, a Delaware limited liability partnership, is the U.S.

member of BDO International Limited, a UK company limited by

guarantee, and forms part of the international BDO network of

independent member firms. BDO is the brand name for the BDO

network and for each of the BDO Member Firms.

Current Hot Topics in

Bribery and Corruption Investigations

Presented for the ACFE’s Law Enforcement and Government Anti-Fraud Summit

Gerry Zack

Managing Director – Global Forensics

Severina Ostrovsky

Senior Manager – Global Forensics

BDO USA, LLP

Washington, DC


Agenda

1. Recent Developments and Trends

2. The Evolving Nature of Bribery and Corruption Schemes

3. Asset Tracing – A Key to Investigation

4. Forensic Data Analytics to Detect and Investigate Bribery and

Corruption

Recent Developments and Trends

Legislative

Enforcement

Investigative


Bribery and Corruption

According to the ACFE 2016 Report to the Nations on

Occupational Fraud and Abuse:

• Globally, 35.4% of the cases investigated involved corruption,

with a median loss of $200,000.

• But just 9% of cases involved only corruption.

• The remaining 26% involved corruption and asset

misappropriation.

The red flags of bribery in the accounting records may be

identical to other types of frauds – an important key to

detection; For example:

• What appears to be a shell company established by an employee

as a method of stealing funds from the company might actually

be with management’s consent as a conduit for paying bribes.

e 5


Key Recent Developments

Countries enacting new B&C legislation

• Brazil, Mexico, France, New Zealand, Colombia, India, etc.

Use of DPAs and NPAs

International nature of schemes

• Cross-border investigations

• Increased cooperation among government agencies

Focus on individual accountability in addition to

organizational liability

• Yates memo


Yates Memo

September 9, 2015 memo from Deputy Attorney General Yates

Establishes as written policy a practice that has been emerging in recent

years

Requires a focus on “individual accountability” in connection with

corporate wrongdoing

Outlines six steps to be taken by DoJ:

1) In order to qualify for any cooperation credit, corporations must provide to the

Department all relevant facts relating to the individuals responsible for the

misconduct.

2) Criminal and civil corporate investigations should focus on individuals from

the inception of the investigation.

3) Criminal and civil attorneys handling corporate investigations should be in

routine communication with one another.


Yates Memo – cont’d

Six steps to be taken by DoJ – cont’d:

4) Absent extraordinary circumstances or approved departmental policy, the

Department will not release culpable individuals from civil or criminal liability

when resolving a matter with a corporation.

5) Department attorneys should not resolve matters with a corporation without a

clear plan to resolve related individual cases, and should memorialize any

declinations as to individuals in such cases.

6) Civil attorneys should consistently focus on individuals as well as the

company and evaluate whether to bring suit against an individual based on

considerations beyond that individual's ability to pay.

Client name - Event - Presentation title

Click to edit Master title styleThe Evolving Nature of

Bribery & Corruption Schemes

VimpelCom Case Study

Single vs. Multiple Transaction Schemes

On-book vs. Off-book Schemes


Complexity of Bribery and Corruption Schemes

Single transaction schemes

• The corrupt transaction is on the books

Multiple transaction schemes

• The initial step is usually on the books

• There can be many layers

• Often involve multiple entities

Consider the VimpelCom case


VimpelCom - The Objective

Company to pay bribes to the daughter of the president of

Uzbekistan, who has influence over certain government actions

involving the telecom industry

In order to obtain mobile licenses for Unitel LLC, VimpelCom’s

subsidiary in Uzbekistan

But how best to disguise the bribes?

VimpelCom ?Daughter of Uzbekistan

Official


The Structure

Unitel would be the holder of the licenses.

VimpelCom owns Unitel via two holding companies, neither of

which have any operations other than holding Unitel.

VimpelCom ?Daughter of Uzbekistan

Official

Freevale Silkway

Unitel LLC

Daughter uses her

influence to obtain

licenses for Unitel


Create a Slush Fund

Takilant Ltd. is created in Gibraltar – company is controlled by

Gulnara Karimova, the daughter of the president of Uzbekistan.

Takilant is basically a shell company, a front for the receipt of

bribes from VimpelCom intended for the benefit of Karimova.

Dutch prosecutors allege more than $385 million in bribes were

paid to Karimova in this manner from 2007 to 2015.

But there’s much more to this slush fund.

• How best to move funds from VimpelCom to Takilant without raising

suspicions? This is where it gets interesting!

VimpelCom Takilant Ltd. Karimova


Payments to Takilant

Passed through accounts in more than a dozen countries

Charged in VimpelCom’s accounting records to a variety of

accounts, including:

• Equity transactions

• Charitable contributions and sponsorships

• Consulting fees

• Property

Page 14


Slush Fund Accounted for as Equity

June 2007 – VimpelCom sells a 33% interest in one of the two holding

companies through which Unitel is held (Freevale Enterprises) to

Takilant for $20 million.

• Freevale is a British Virgin Islands company and a wholly-owned

subsidiary of VimpelCom (until the June 2007 agreement).

• Freevale is one of two holding companies of Unitel.

But the agreement includes a put option allowing Takilant to sell the

interest in Freevale back to VimpelCom in 2009 for a minimum price of

$57.5 million.

Option exercised in September 2009, resulting in $37.5 million of

profits to Takilant (bribes for Karimova).

• And VimpelCom’s ownership interest in Freevale is inflated in its financial

statements.


Fake/Inflated Construction Costs

VimpelCom and Unitel also used a multi-layered

construction vendor scheme to funnel $10 million in bribes

to Karimova.

This involved inflated billings for real services and some

billings that were entirely fake.

• i.e. The bribes ultimately are reported as property and equipment in

the financial statements of VimpelCom under this scheme.


Fake/Inflated Construction Costs

Unitel LLC

Vendors

Affiliates of Vendors

Takilant

Karimova

Vendors subcontract with

their own affiliates

Unitel pays vendors in

Uzbek currency

Subcontracts to Takilant

and paid in U.S. currency

Karimova draws funds out

from Takilant


Bribes Can Be:

On Book

Partially On Book

Off Book

No evidence of

the fund or

bribe remains

on the books.

A fund for bribes

is off the books,

but evidence of its

ongoing funding

exists.

The bribe or a

fund for bribes

remains on the

organization’s

books.

The Role of Asset Tracing

Asset Tracing Applications in the Modern Investigative World

Asset Tracing Categories of Research

Resources

Best Practices


Asset Tracing: Different Applications

Different scenarios that could prompt an asset trace

Things to know before starting

• Domestic vs. international

• Business vs. individual

• Purpose

Private sector vs. public sector

• Common private sector cases

• Common public sector cases

• Examples

Page 20


Asset Tracing: Categories of Research

Categories of Research

• Stocks and bonds

• Real estate

• Boats

• Airplanes

• Vehicles

• Corporate directorships

• Intellectual property rights

• Other possessions

• Related party transactions

Page 21


Asset Tracing: Where to Look

Differing resources

• Online

• Open source

• On-the-ground

Location-specific differences

• Domestic vs. international

• State vs. county

Page 22


Asset Tracing: Where to Look Example

Broward County, FL

• Real estate information

o Broward County Appraiser Property Search

o Broward County Records, Taxes and Treasury Division Tax Search

o Broward County Official Records Search

o Broward County Certificates of Title Search

• Official records search

o Broward County Official Records – other information:

Page 23


Asset Tracing: Where to Look Example

Page 24

(AFF) Affidavit

(AGD) Agreement for Deed

(AGR) Agreement

(AST) Assignment

(ASTX) Assignment

(CDO) Condominium Documents

(CER) Certificate

(CET) Certificate of Title

(CFJ) Certified Final Judgment

(CJF) Certified Judgment -

Foreign(CJFX) Certified Judgment

- Foreign Hide from Web

(CMV) Certificate of Compliance

Sale Motor Vehicle

(COP) Certificate of Payment to

Contractor

(CP) Court Paper

(CPALIE) Cancel Property

Appraiser Lien

(CPX) Court Papers Hidden from

Web

(D) Deed Transfers of Real

Property

(DC) Death Certificate

(DPR) Domestic Partnership

(EAS) Easement Related

(EXP) Expunged Record

(FJ) Final Judgment

(FJX) Family Court Hidden from Web

(FS UCC) Financing Statement Related

(GOV) Gov Orders Ordinances Petitions &

Resolutions

(LIE) Lien

(LIEN CORP) Corporate Lien Warrant

Exempt

(LIEX) See FJX Hidden from Web

(LNP) Land Patent

(LP) Lis Pendens

(M) Mortgage/Modifications &

Assumptions

(M EXEMPT) Mortgage Tax Exempt

(M INTG EXEMPT) Mortgage Tax Exempt

(MAP) Miscellaneous Maps

(MIL) Military Discharge

(MOD) Modification

(MODX) Modification Hidden from Web

(NCL) Notice of Contest of Lien

(NCP) Notice of Contest of Payment

(NIP) Notice of Interest in Property

(NOB) Notice of Bond

(NOC) Notice of Commencement

(NOH) Notice of Homestead/Homestead

Affidavit

(NOP) Notice of Permit

(NOT) Notice

(NPD) Notice of Preservation of

Declaration

(OAMD) Order to Amend

(OEXP) Order to Expunge

(ORT) Order of Taking

(OSEAL) Order to Seal

(PALIE) Property Tax Lien

(PCS) Public Construction Security

(PLAT) Plat

(PLAT REL) Plat Related

(PR) Partial Release

(PRO) Probate

(REL CORP) Release Corp Lien

Warrant Exempt

(RES) Restrictions & Related Docs

(RST) Release/Revoke/Satisfy or

Terminate

(RSTX) Release/Revoke/Satisfy or

Terminate Hidden from Web

(RW MAP) Right of Way Maps

(SPALIE) Satisfaction/Release of

Property Appraiser Lien

(TBLIE) Transfer Lien to Bond

(TCLIE) Transfer Lien to Cash Deposit

(TSD) Time Share/Interval Deed


Asset Tracing: Real Estate Abroad

Country-specific information

UK Land Registry

• Title Register

o Full address of the property (to search you only need the

house number and postal code), the price paid, the

registered owners, and the lender name:

Page 25

Client name - Event - Presentation title

Click to edit Master title styleUsing Data Analytics to Detect and Investigate

Bribery and Corruption

Methods of Concealment

Direct and Indirect Evidence of Bribery

Examples of On-Book and Off-Book Bribery

Methods of Establishing Funds for Paying Bribes

Framework for Data Analytics

Red Flags of Bribery and Corruption

Sources of Data That May Be Useful in Detecting Bribery


Concealment Methods in Corruption Cases

1. Creating fraudulent physical documents – 60.7% of cases

2. Altering physical documents – 52.9%

3. Creating fraudulent transactions in the accounting system – 42.9%

4. Altered transactions in the accounting system – 36.4%

5. Destruction of physical documents – 35.0%

6. Creating fraudulent electronic documents or files – 30.7%

7. Altered account balances in accounting system – 30.7%

8. Altering electronic documents or files – 30.0%

9. Creating fraudulent journal entries – 27.9%

10.Altered account reconciliations – 25.7%

11.Deleting electronic documents or files – 24.3%

Source: ACFE 2016 Report to the Nations on Occupational Fraud and Abuse


Focus Data Mining on Discovering:

Direct evidence of the payment of bribes

Direct evidence of payments made to an intermediary

through which bribes are paid

Direct evidence of the creation (funding) of a fund out of

which bribes are paid

Indirect evidence of the existence of the scheme

Page 28


Direct Evidence of Bribery

Common Accounts to Mine

Entertainment

Travel

Gifts

Charitable contributions

Training

Business development

Promotional items

Page 29


Bribes Can Be:

On Book

Partially On Book

Off Book

No evidence of

the fund

remains on the

books.

A fund for bribes

is off the books,

but evidence of its

ongoing funding

exists.

The bribe or a

fund for bribes

remains on the

organization’s

books.


Anatomy of an “On-Book” Slush Fund

BK Medical – Danish subsidiary of Analogic Corporation (a U.S.

company)

Sells ultrasound products:

1. Directly to end users

2. Indirectly to end users through distributors

One of the distributors is a Russian company.

This Russian distributor wanted to pay bribes to Russian officials

associated with government-owned hospitals in exchange for ordering

products from the distributor.

Page 31


Anatomy of an “On-Book” Fund

Russian Distributor pays BK Medical inflated amounts

for products

• BK and Distributor agree on a price for equipment.

• Distributor then requests a specific, inflated amount, on a second invoice and provides invoice template to BK.

BK Medical retains proper sale

amount, holds difference as slush fund for distributor

• Excess funds received by BK were also credited to accounts receivable, often resulting in a negative (credit) balance in A/R from the Russian distributor.

BK Transfers funds in accordance with

Distributor’s instructions

• Distributor directs BK to make payment from excess funds to unknown third parties.


BK Medical

Although BK Medical itself did not initiate the bribery scheme with

officials of the end users (the Russian distributor did), it clearly also

benefited from the scheme.

In this case, the slush fund remained on BK’s accounting records.

• Evidence of the slush fund’s existence was the negative balance in accounts

receivable from the Russian distributor.

BK only recorded the proper, agreed-upon amount as revenue.

• As a result, when the bribe payments were made, there was no trail left on

the income statement, as the payment was debited to accounts receivable,

relieving the negative balance due from the Russian distributor.

A total of 180 payments were made to unknown third parties from 2001 to

2011 at the direction of the Russian Distributor – total amount was $16.1

million.

• Total revenue BK earned from the distributor during this time = $21.6 million.

BK engaged in similar arrangements with distributors in Ghana, Israel,

Kazakhstan, Ukraine, and Vietnam.

Page 33


Methods of Funding Bribes

Through Payroll:

Creation of a ghost employee

Inflated wages to a real employee

Bonuses and other extra payments to a real employee

Through Sales People (employee or third parties)

Inflated commissions

Fraudulent bonuses

Special awards for exceptional performance

Inflated expense reimbursements

Allowances for training


Methods of Funding Bribery

Through Accounts Payable:

Creation of a shell company

Inflated invoices of real vendors (inflated prices, goods or services

not delivered)

Fraudulent additional charges on vendor invoices (delivery charges,

etc.)

Fake subcontractors to real vendors

Fraudulent change orders on contracts with vendors

Through Customers:

Above-normal discounts provided to customers/distributors

Fraudulent rebates to customers

Payments to customers for purported “marketing,” “training,” or other

programs

Falsified returns (resulting in credits to the customer’s account)


Methods of Funding Bribery

Through Other Third-Party Intermediaries:

Payments fraudulently characterized as investments

Inflated amounts paid in connection with acquisitions of other

businesses

Transfers purportedly “held in trust” for the company

Other Off-Book Methods:

Failing to record funds received from non-recurring or unusual

transactions (e.g., insurance proceeds, sales of property and

equipment or other assets, etc.)


Goal – Pay bribes to Panamanian government officials in

connection with sales to the Panamanian social security

agency.

The sale by SAP Mexico went through a local partner in

Panama.

Slush fund for the bribes was funded via a deep discount

on the price SAP Mexico charged its local partner.

• In effect, “netting” what would have been the proper revenue

with the payment of bribes, and pushing the bribe payment

responsibilities down to the local partner

Example of Inflated Discounts (1)


Individual who orchestrated the scheme hides it from

others at SAP by misstating the reasons for the larger

than normal discounts.

Local partner sells to government agency at significantly

higher prices.

Excess profits earned by local partner used to pay the

bribes.

Lessons learned:

• The bribes may be accounted for by netting with another

transaction.

• Red flag was the large discount.

Inflated Discounts (2)


Bribes paid to customers in Angola were funded by

inflating costs of its tires.

Phony freight and customs clearing costs were added

to its invoice price.

As tires were sold, the phony costs were reclassified to

a liability on the balance sheet account.

As bribes were paid, the liability was reduced, falsely

characterizing the amounts transferred as payments to

vendors for freight or clearing customs clearing costs.

During the entire time the scheme was created and

operated, evidence of the slush fund remained on the

books.

Goodyear (on book)


Bribes paid to customers in Kenya using cash.

Payments approved for purported promotional

products.

Manager would direct staff to make the check payable

to “cash.”

Manager directed staff to cash the checks.

Off-book slush fund of cash then used to pay bribes.

Once the slush fund was funded, no further evidence

of its operation existed on the books.

Goodyear (off book)


A Framework for Detection

Using Data Analytics (1)

1. Perform a risk assessment to identify the corruption risks your

organization faces, considering:

• Structural risk factors (e.g., do we work through subsidiaries,

distributors, consultants, agents, other third parties etc.)

• Geographic/political risk factors (e.g., regions and industries in which

we operate)

• Scheme-specific risk factors (i.e., based on the preceding, what specific

slush fund schemes are we at risk for?)

2. Identify what the red flags are for each type of scheme (perhaps

using the list of 20+ methods of creating slush funds provided earlier).

3. Determine which data would be affected by each (i.e., is data outside

of financial and accounting data affected, such as inventory, delivery,

etc.).


A Framework for Detection

Using Data Analytics (2)

4. Determine what anomaly in that data might exist if a slush fund was

involved (what affect on the data would a slush fund have?).

5. Consider multi-factor data analytics:

• Performing tests that only focus on a single data anomaly often results

in a large quantity of false positives, since most anomalies associated

with fraud or corruption also have honest explanations.

• Multi-factor testing assesses more than one risk factor, perhaps

assigning weights or scores to each.

• Only flag transactions for follow-up that achieve a certain score or that

possess multiple risk factors.

6. Investigate all flagged transactions/activities further to determine

whether corruption exists vs. a “false positive” (a non-corrupt

transaction that has some of the hallmark characteristics of

corruption).


Red Flags to Identify Through Data Analytics

• Customer name or address equals vendor name or address

• Vendor address equals employee address (or bank

information)

• Vendor payment to address in country of customer

• Vendor Address = PO Box

• Incomplete vendor master file (i.e., missing information

normally on file for a legitimate vendor, like telephone number)

• Unusually large one-time payment

• Payments in round monetary amounts

• Several round monetary payments to a vendor within a short

time frame

• Payments slightly under authorization protocols

• Several payments for identical amounts



• Authorizing party inconsistent with classification of expenditure

• Excessive payments to intermediaries

• Payments in excess of budget

• Payee inconsistent with GL classification

• Excessive charitable contributions, T&E, and gifts

• Vendor address in different country than location of services

• Vague, non-specific description for payments made in entries

• Payment descriptions that do not correspond to accounting

classification

• General purpose or miscellaneous accounts with significant

activity

• Missing invoices or other documentation

• Travel and expense requests with incomplete information



• Sales transactions with customers with discounts in excess of

other customers

• Unexplained rebates or other credits posted to customer

accounts

• Credit balances in customer accounts receivable accounts

• Bank accounts in tax havens (Luxembourg, Switzerland, British

Virgin Islands)

• Transactions routed through unconsolidated or nominee

companies

• Violation or avoidance of internal controls (payment amounts

slightly below authorization limits, manual checks, missing or

incorrect approvals)


What Data Is Typically Considered?

Accounting and other financial:

• Accounting system (general ledger, etc.)

• Billing data

• Time management

• Vendor management

• Payroll

• Inventory

Customer:

• Customer relationship management software

• Customer service logs/messages

• Delivery information

Communications:

• Email, text, IM

• Social media


Challenges with Data Analytics

Can be technically challenging to properly extract and analyse

data

Tools to be used can become expensive

Diverse locations and types of data

Access to data is often limited

Legal considerations – possible liability

False positives

Volume of anomalies to research


Addressing the Risk of False Positives

For our purposes, “false positive” means that the transaction or activity

flagged is NOT corrupt.

Keys to minimizing false positives:

• Careful design in the planning stages

• Consider using multifactor analysis, assigning weights or scores to each,

so that no single factor would trigger investigation

In addition, not corrupt does not mean it is not valuable to identify; it

could identify some other operational problem.

Accordingly, pushing elements of data analytics out to operational

personnel and having them consider it adds tremendous value to the

organization.

Consider using visual analytics when pushing data out to operational

personnel.

Finally, once a strong data analytics procedure has been established,

it should be performed on a recurring or continuous basis to monitor

for corruption.

Questions ?

Contact information:

[email protected]

[email protected]


Current Hot Topics in Bribery and

Corruption Investigations

Gerry Zack, CFE, CPA, CIA

Severina Ostrovsky

Current Hot Topics in Bribery and Corruption Investigations · 2016-11-17 · Current Hot Topics in...

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