www CAProfession net Financial Crimes Scams Frauds

www. CAProfession. net

Financial Crimes (Scams, Frauds & White Collar Offences) - Prevention, Detection & Investigation Chartered Accountants Services for the Police

DEFINITION OF FRAUD A Fraud is: u A representation (usually of fact) u About a material point (important enough to make a difference) u which is False as Truth or Correct u Intentionally and knowingly so (some cases recklessly) u Which is believed and u Acted upon by the victim u 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

CRIME SCALE Situational Pressures High Crime Scale Opportunities To Commit High Low Low High No Personal Integrity High

Telemarketing Frauds Consumer Scams & Schemes Business Opportunities Kinds of Frauds & Scams Criminal Operations Investment Frauds Business Scams Money Laundering

Investment Frauds Affinity Ponzi Financial Planners Pump & Dump Forex / Currency Touting Bait & Switch Real Estate 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 attorney / power of Few Cases v G T C Fund – Good Till Cancelled v 4 ME 2 SPEND – For me to spend v GSC (Government Securities Fund) – Giant Service Fee

Money Laundering Placement Integration Layering Tax Heavens Flight Capital Enforcement A criminal’s objective in laundering illicit proceeds is to : Get it out; cover it up; bring it back

Techniques in Money Laundering Placement Layering Getting Currency into the financial system so as to convert illicit funds from cash straight into a financial instrument or bank account The movement of funds from institution to hide the source and ownership of the funds, obscure the audit trail and sever the link with the original crime Integration The 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 Placement • Smurfing • Shipping Money Abroad • Placement through Banks • Use of “Pass Through” or “Payable Through” Accounts Layering • Tax Havens & Offshore Banks • Use of haven bank credit cards • Bank Secrecy Law as a layering tool • Receiving as consulting or directors fee • Corporations & Shell Companies as a layering tool • Arrangement of corporate loans • Use of trusts • Real estate transactions • Electronic Wire Transfers • Use of walking accounts • Insurance Products • Establishing self owned bank • Investment Related Transactions • NBFCs Integration • Use of intermediaries • Proceeds of gambling • Stock Purchase • Use of business • International importing and exporting • Use of free trade zones

Factors which severely hamper law enforcement efforts Ø Acceptance of flight capital by western countries Ø Laws and limitations of other countries Ø Jurisdictional conflicts and lack of international coordination Ø Bankings’ role in facilitation of the activity Ø Bank Secrecy Ø Volume and complexity of international transfers of funds Ø Internet based banking Ø Tax heavens as sanctuaries Ø Offshore corporations Ø Having to prove fraudulent transfer Ø Shortfall of reporting requirements Ø Criminals influencing Government and Bank support Ø The widespread use and acceptance of trade mis-pricing

Business Opportunities Bulk e-mail Inventions / Patents Multi Level Marketing Vanity Press Publishing Vending Machines Franchises

Money Problem scams Credit Analysis Credit Card Offers Credit Repair Credit reports Identity Theft Loan Brokers Advance Fee

Business Scams Bank Fraud Business Loans Internet Services Cheque Fraud Counterfeiting Cramming Fake Ads & Directories Fraudulent Orders Supply Scams

Work-at-home Assembly Projects Reading Books Computer Work Product Testing Stuffing Envelops

Criminal Operations Corporate Entities Recovery Operations Reloaders

Consumer scams Chain Letters Toll free Numbers Diet / Weight Loss Internet Fraud Local Pyramid Clubs Dinner Party / Gifting Clubs Modeling School Pay-per-call Multi Level Marketing

Consumer Scams Pyramid Schemes Travel Clubs Time Shares Opportunity Seminars Travel & Vacation Offers Sweet Heart Seminars

How-to-manuals Abandoned / Lost Money Employment Inheritance Scholarships / Diplomas

Tele Marketing Frauds Lotteries Magazine Subscribers Fund raising Charities/Donations Gimmie Gifts Recovery Scams Advance Fee Sweeps

RED FLAGS – DEFINITION What Does “Red Flags” Mean “RED FLAGS” are the signals, signs or symptoms which are reflected while certain types of fraud are taking place.

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 documentation • Claims of Authority / Registered in a different country • Urgency in collecting finances • Flouting of Laws • Short cut formulae / No formal approvals or

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 Should be taken SERIOUSLY i ng is in c reas u Creates significant behavioural issues u Disrupts productivity u Losses have a multiplier effect making them much more expensive than the actual amount lost. u Kills Good Organisations u Responsibility of regulators for prevention and detection of fraud has increased u Fraud

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 ü Identification of red flags ü Conduct of pre-enquiries ü Study of the methodology of scam / fraud ü Assisting in documentation / verification of documentation ü Investigation Report / Forensic Accounting Report ü Expert Advisory Services ü Witness services ü Training the officers on latest trends in global scenario