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The Fraud Richter
Your monthly dose of fraud news
Compiled by
The Fraud Richter Team
+91-9566083416
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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_harassment7/31/2019 Fraud Richter August, 2012 edition
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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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Disclaimer
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No part of this publication is a copy or imitation of any matter published in any media. Only,
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