Fraud and Corruption on the Loose Agenda

Fraud and Corruption on the Loose Agenda • FCPA, AML, Organized Crime, Terrorism – Fraud is a Common Thread: : Impacting Compliance • Introductions • Terrorist and Criminal Groups • Fraud and Money Laundering • Securities Fraud • Ponzi Schemes • FCPA • Conclusions 21 st Annual ECI Conference

Fraud and Corruption on the Loose • Martin Biegelman – Director, Financial Integrity Unit, Microsoft – Former Inspector in Charge, US Postal Inspectors • Dennis Lormel – President & CEO, Lormel Associates – Former Chief Financial Crimes Section – FBI • Dan Wachtler – President & CEO IPSA International, Inc. 21 st Annual ECI Conference

Terrorist and Criminal Groups • Must Have Continuous Stream Of Funds Available – Must Have Capacity to Raise Funds • Fraud and Money Laundering Often Key – Nexus Between Fraud and Money Laundering • Drug Trafficking the Most Lucrative Criminal Activity • Must Have Immediate Access to Funds • Pose Threat to National Security and Economy – Importance of Disruptive And Preventive Measures 21 st Annual ECI Conference

Exploitation of Systemic Vulnerabilities • Terrorist and Criminal Organizations Constantly Exploit Systemic Vulnerabilities • Vulnerabilities or High Risk Areas in the Financial Services Sector October 3, 2001* October 19, 2010 ▫ Wire Transfer ▫ Fraud ▫ Correspondent banking ▫ Money Laundering ▫ Fraud Wire Transfer ▫ MSBs Correspondent Banking Illegal Money Remitters/Hawalas * Lormel Testimony Before House Committee on Financial Services 21 st Annual ECI Conference Shell Companies Electronic Payments

OC - Terrorism Nexus • Organized Crime Groups are Incorporating Characteristics And Methods of Operations from Terrorist Groups • Terrorist Groups are Adopting Strategies Learned from Organized Crime • This Evolution Makes Both Groups Stronger and More Flexible • Tri-border Region Example 21 st Annual ECI Conference

Fraud and Money Laundering are Interconnected • The Proceeds of Fraud and Other Criminal Activities Need to be Laundered • Gives Appearance of Legitimacy • Groups Must Have Sources (Fraud) and Availability (Laundering) of Funds to Succeed 21 st Annual ECI Conference

Fraud and Money Laundering Who are We Dealing With? • Individuals or Groups Engaged in Fraud • Gangs • Drug Dealers, Organizations or Cartels • Ethnic Organized Crime Groups • Terrorists or Terrorist Groups 21 st Annual ECI Conference

Laundering through Securities… …Fact or Fiction? 21 st Annual ECI Conference

FACT Testimony in the Stratton Oakmont case supports the premise that sophisticated criminals have used the financial markets to launder funds. An FBI agent taping informants as part of the case witnessed an accountant explaining how funds would be laundered through a series of trades which increased the price of the security and transferred the funds between parties. The crumbled yellow legal paper is included as evidence in the case file. 21 st Annual ECI Conference

FACT On an anecdotal basis, arms dealers, drug traffickers and parties alleged to be associated with organized crime continue to show up in association with securities trading on the less regulated securities exchanges. A convicted Indo-Canadian gangster with links to the Air India bombing case has been a shareholder in three U. S. shell companies whose founding director remains under police investigation, The Vancouver Sun has learned. Jethinder Singh (Roman) Narwal is listed in corporate annual reports as owning a million shares in each of Super Ventures, Multimod Investments Ltd. and Easy Com Inc. , registered in Nevada as shell companies to be used for Internet gambling opportunities. Both Karin Sidhu and Jaswinder Parmar were in B. C. Supreme Court March 9 to support Roman Narwal as Justice Sunni Stromberg-Stein found him guilty on 13 of 15 counts in three brutal drug-related kidnappings and extortions. The three 2005 abductions were in retaliation for ripoffs of marijuana stockpiles worth more than $1 million during the first four months of last year, according to testimony at Roman Narwal's criminal trial. (EXCERPT, Vancouver Sun, Kim Bolan, 3/27/2006) 21 st Annual ECI Conference

Challenges • Lack of Transparency and/or accessibility of information related to Pink Sheet Only and Grey Market securities • Lack of filings or ability to validate # of investors and/or total shares outstanding • No Common “Penny Stock Bad Guys” list - penny stock , officer & director bars • Transaction monitoring rules in many systems may not be sophisticated enough to build scenarios of concern 21 st Annual ECI Conference

Dilemmas • Appropriate Control Points • Bad Idea vs. Fraudulent Intent • Determining Association vs. Participation • Victim vs. Participant • Practical & Reasonable Surveillance & Controls • Surveillance vs. Investigation 21 st Annual ECI Conference

FATF Global ML/TF Threat Assessment • Released July 2010 • Based on Typologies and Threat Assessment – Strategic Surveillance Initiative • Detailed Questionnaire Responded to By FATF Members • 2009 Strategic Surveillance Survey – Main Source tor Money Laundering • White Collar Crimes • Drug Related Crimes – Main Source of Terrorist Financing • Financial Crimes (Particularly Fraud) • Trafficking in Narcotics, Cigarettes, Weapons, Human Beings or Diamonds • Petty Crimes – Identifiable Global Trends • A Noteworthy Proportion of ML/TF Activity Involves Cash • Increased Use of Internet and New Payment Mechanisms 21 st Annual ECI Conference

Emergence of Ponzi Schemes • Bernard Madoff – $65 Billion Fraud • The Mini-madoffs – Proliferation of Large Multi-million Dollar Fraud Schemes Emerging Since January 2009 • Arthur Nadel • Darren Palmer • Nicholas Cosmos • Marcus Schrenker • Joseph Forte • George Theodule • Paul Greenwood • Stephen Walsh • James Nicholson • Mark Bloom • Stanford Financial Group – $8 Billion Investment Scam • R. Allen Stanford • James M. Davis • Laura Pendergest-holt 21 st Annual ECI Conference

Investment Fraud Detection • The Economic Boom Made Investors Susceptible to Investment Fraud Schemes – Promise/Lure of High Returns • Schemes Were Exposed in Part Because of Economic Downturn – More People Attempted to Cash in Their Investments – Lack of New Investors to Cover / Perpetuate the Frauds • Media Coverage of High Profile Fraud Cases – Fostered Sense of Awareness / Concern 21 st Annual ECI Conference

Investment Fraud Indicators • If it Seems Too Good to Be True, IT USUALLY IS – Unusually High Investment Returns – Consistently High Investment Returns • Lack of Transparency – Madoff – Stanford • Lack of Oversight – Circumvention of Controls • Select Individuals With Unfettered Access to Funds • Fraud Triangle – Opportunity – Incentive /Pressure – Rationalization/Attitude 21 st Annual ECI Conference Lack Of Controls Lifestyle Greed/Entitlement

ACFE’s 2010 Global Fraud Study • Most schemes are detected by tips • Employees are most common source of tips • Existence of hotlines increase number of tips • Corruption schemes were most commonly reported in mining, oil and gas, and construction industries www. acfe. com 21 st Annual ECI Conference

Corruption Perceptions Index 2009 21 st Annual ECI Conference

Impact of the FCPA • For the first time in the history of the world, a measure for bribery was introduced into law that was universal as far as those subjected to the law were concerned. For the first time, a country made it criminal to corrupt the officials of another country. America’s ambassadors— that is, its businessmen—were to show American purity throughout the globe. - John T. Noonan, Bribes, 1987 21 st Annual ECI Conference

Top Ten FCPA Settlements 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Siemens - $800 million (2008) KBR/Halliburton - $579 million (2009) BAE - $400 million (2010) Snamprogetti Netherlands P. V. /ENI S. p. A. - $365 million (2010) Technip S. A. - $338 million (2010) Daimler AG - $185 million (2010) Baker Hughes - $44. 1 million (2007) Willbros - $32. 3 million (2008) Chevron - $30 million (2007) Titan Corporation $28. 5 million (2005) Source: FCPA Blog 21 st Annual ECI Conference

Wall Street Reform and the FCPA 21 st Annual ECI Conference

Dodd-Frank Wall Street Reform & Consumer Protection Act • Section 922 = Bounty Hunting • Incentivizes Corporate Whistleblowers to Report Securities Violations Including FCPA • Authorizes SEC to Pay Between 10 - 30% of Money Collected Exceeding $1 Million • Voluntary Disclosure of Original Information Leading to Successful Enforcement Action • Contains Anti-retaliation Measures Including Private Cause of Action for Retaliation 21 st Annual ECI Conference

UK Bribery Act 2010 • Passed by Parliament April ‘ 10, Eff. April ‘ 11 • Two New Bribery Offenses – Bribery of Foreign Public Official – Corporate Offense of Failure of Commercial Organization to Prevent Bribery • Criminalizes Both Public and Private Bribery • Liability for Criminal Conduct of an “Associated Person” • Defense to Liability if “Adequate Procedures” to Detect and Deter Corruption are in Place 21 st Annual ECI Conference

Fraud and Corruption on the Loose Conclusion: : The Tip of the Iceberg 21 st Annual ECI Conference

Fraud and Corruption on the Loose Conclusion: : • Regulatory Mandates are Increasing and Many Have a Nexus to Fraud. • Despite Best Efforts, Fraud And Corruption are Here to Stay – Our Best Hope is Awareness, Prevention Programs and Thorough Response. • Public Sector Does Not and Will Not Have The Resources To Solve an Unsolvable Problem – Private Sector Must Participate. • Job Security… 21 st Annual ECI Conference

Fraud and Corruption on the Loose Questions • Martin Biegelman – martinbi@microsoft. com • Dennis Lormel – dlormel@lormelassocllc. com • Dan Wachtler – dwachtler@ipsaintl. com 21 st Annual ECI Conference