The Big Apple Delivers

Broadway turned out to be the right way for fraud examiners from around the globe as they converged on the Big Apple for the Eleventh Annual Fraud Conference and Trade Show and got what they needed – practical, meaty instruction seasoned with invaluable networking.

The week in the heart of Manhattan, July 30 – Aug. 4, included a pre-conference, “Billing Schemes in the Electronic Age,” the main conference, and a post-seminar – the Auditors and Investigators Basic Conference. Participants designed their own curriculum by attending one, two, or all three events.

General session speakers during the main conference included former bank attorney and money launderer Kenneth Rijock; Kevin Prendergast, president of Research Associates, who spoke on employee rights; and Robert Pocica, CFE, supervisory special agent with the FBI, who described the Internet Fraud Complaint Center, a new cooperative project between the FBI and the National White Collar Crime Center.

On the first day of the conference, ABC correspondent John Stossel, the 2000 Cressey Award winner, spoke on the need to ease U.S. regulations and let free markets naturally tackle consumer problems and fraud.

Joseph R. Dervaes, CFE, chairman of the Board of Regents, was named the first Association Fellow. The Fellows Program was announced at the last year’s annual fraud conference as a way to recognize and award exceptional service, personal achievement, and continuing contributions to the field of fraud examination and the Association.

The main conference also included 10 workshop tracks on Current Issues, Cyberfraud, Embezzlement, Fraud by Customers, Money Laundering, Inventory and Supply Frauds, Fraud and the Law, Fraud by Vendors, Financial Statement Fraud, and Bribery and Corruption.

Pre-conference Reviews Billing Schemes 

More than 200 participants analyzed “Billing Schemes in the Electronic Age” during the four-hour, small-group, roundtable discussions on Sunday July 30.

The course was organized into three 70-minute sessions: identification of fraudulent billing schemes, investigation of the schemes, and prevention of the schemes.

The group discussed the fact that all businesses, regardless of their sizes, pay out money in the form of checks and other financial instruments. As a result, organizations are especially vulnerable to fictitious billings generated by their employees. And now that electronic payments have become so common, fictitious billing takes on a completely new dimension.

Participants received four hours from pre-conference study of Association materials, and four hours from the actual conference. Using the results of the pre-conference, the Association will prepare a formal position paper for participants. The White Paper will publish a summary of the paper.

Free-market Stossel 

John Stossel, in his Cressey Award message, said that when he started out as a young consumer reporter he felt that “free markets … produce some good stuff for some people but they’re basically evil things and consumers as a result are preyed upon by business and (the public) needs lots of protection.”

But as he covered more consumer fraud stories he realized that government does a terrible job of protecting the consumer. “Private protection is much better,” he concluded. “The government consumes vast amounts of money. The least of it is the money taken from us in taxes to pay the bureaucrats. The real costs are the indirect costs. … The most creative people are becoming lawyers rather than engineers and scientists. All the energy is going into massaging the leviathan that’s grown in state capitals and Washington, D.C.”

Stossel said that regulation doesn’t have much effect on the obvious crooks but the good companies have to spend years of time and thousands of dollars jumping through regulatory hoops, which slows the economy.

He used the example of aspirin companies, which were sued by the U.S. government for making grandiose, false claims in their ads. After nine years of litigation, Stossel said, the companies were forced to clean up their ads. “But what I came to realize,” he said, “is that would have happened anyway. … Maybe the Better Business Bureau would have gotten the call. Maybe companies would have sued each other over the lies. … But the more I watch the market work the more impressed I’ve become with how quick and flexible and reasonable it is in solving the fraud problems compared to government-imposed solutions.”

Taking the Money to the Cleaners 

Kenneth Rijock, in the keynote address, told how as an attorney he laundered money for drug traffickers in Florida in the 1980s. Rijock was eventually caught, received a four-year sentence that was reduced to two when he agreed to be a consultant to U.S. law enforcement agencies.

Rijock got involved in the cash-washing business when one of his clients started dealing in marijuana and he needed a safe tax haven. Rijock contacted another crooked client who suggested Anguilla, a small island in the Caribbean that has 9,000 people and 300 banks. Rijock said 290 of the banks exist only on paper within the 10 actual banks on the island.

Rijock described one typical money-laundering trip to Anguilla. Two weeks prior to bringing the cash down, Rijock went to the island by himself to set up some offshore companies. “The name of the owner of the ‘stock’ (of the offshore company) doesn’t appear on the certificate and whoever holds the stock holds the corporation and therefore holds all its bank accounts,” he said. “Which means if I had $5 million in a bank overseas and I handed that piece of paper with the proper clearances you could take that paper and go to a bank account overseas and withdraw that money.”

After establishing the fictitious companies, Rijock dressed his clients up in blue suits, took them to a general aviation airport in Fort Lauderdale, and hired an independent Lear jet pilot who flew them south. They flew first to St. Martin’s because it’s the only jurisdiction that has no customs department. “In theory you can bring in nuclear weapons, botulism, or anything else!” Rijock said.

They refueled in St. Martin’s and flew to Anguilla. His local attorney – a shady individual who is also the constitutional advisor to her majesty’s government in Anguila – meets them and cleared them through customs along with the $6 million, no questions asked.

They drove to a bank, where the money was counted, checked for counterfeits, and put into certificates of deposit for 5 percent in the names of the offshore companies Rijock set up. The certificates went to the shady lawyer’s office. Rijock and his clients enjoyed a lobster dinner, and then flew back to Florida.

A courier delivered the money to a bank in Manhattan, which facilitates international transactions. The cash then was intermingled with other money so that it’s impossible to tell that its narcotics proceeds, Rijock said. “My clients get 5 percent and the (Manhattan) bank gives the Caribbean bank 6 percent and then immediately lends the money on overnight funds to some Fortune 500 company at 9 percent. Everybody makes out very well except for the Internal Revenue Service,” he said.

For another client he ferried huge amounts of cash to the Caribbean and exchanged it for a “New York draft” – a check signed by a bank president in a tax haven drawn on the bank’s correspondent account in New York. That check was carried into the U.S., Rijock said, and sent by courier on the next available jet to Panama where it was deposited into a corporate account, wired to Taiwan, and then to France, the home country of the crooked client. The client then used the money – which appeared to be coming from a major European financial institution – to purchase a U.S. business or property. The process works, Rijock said, “because no one would have the budget, time, nor inclination to travel all the way around the globe to trace that money back to cocaine proceeds in Miami Beach.”

Rijcok said he laundered money because it was a risky way to make a living, and at the time he believed in the decriminalization of narcotics. (He changed his mind, he said, with the emergence of crack cocaine.)
Ironically, while he was laundering money for his drug-trafficking clients, his girlfriend was an economic crime detective for Metro Dade in Miami, and his buddies were police officers.

Employees Ain’t Misbehavin’? Look Closer 

In the general session, “What Every Fraud Examiner Must Know about Employee Rights,” Kevin Prendergast, J.D., president of Research Associates, said fraud examiners are increasingly investigating employee misconduct.
“Ten years ago, the battleground was whether an employee’s locker or desk could be searched,” he said. “Today, the debate is over hard drives, e-mail messages, and voicemail. Other considerations include polygraph testing, drug and alcohol screening, and electronic surveillance.” Prendergast covered these areas as well as the nature of the employment relationship and the Fair Credit Reporting Act (FCRA).

He said the FCRA imposes a number of requirements upon employers who use “consumer reports” for “employment purposes.”

“A common misconception relates to the definition of the term ‘consumer report,’” he said. “While the term encompasses the traditional credit reports issued by the major credit reporting agencies, the FCRA also applies to other reports such as driving records.”

He said “consumer report”, according to the FCRA, means “any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for … employment purposes.”

“As the definition makes clear,” Prendergast said, “almost any information that an employer receives from a consumer reporting agency – even if it does not relate to credit history – triggers the application of the FCRA.”
Prendergast said the Federal Trade Commission, which has primary responsibility for enforcing the FCRA, has stated that “The terms ‘character, general reputation, personal characteristics, or mode of living’ cover a great deal of non-credit information. For example, driving records, employment records and criminal records all involve these characteristics, although these types of information do not necessarily reflect upon credit-worthiness, credit standing or credit capacity. Those in the business community who believe that the FCRA is limited to credit are misreading the law.”

Internet Fraud Complaint Center 

Robert Pocica, CFE, supervisory special agent for the FBI, described the new Internet Fraud Complaint Center Web site (www.ifccfbi.gov) and the burgeoning fraud problem on the Internet. Pocica duties include operational support for IFCC, liaison to law enforcement and private industry, as well as keeping abreast of legislative issues.

“It’s a changing world not only for the FBI but everybody who’s involved with investigative work,” said Pocica. He quoted one study that said Internet crime has grown 600 percent since 1998. Fraudsters use the Internet, he said, for the same reasons that most of us do: it’s simple, cost-effective, credible, and preserves anonymity. “Never before had we had to look at a crime problem where somebody could be sitting in the Caribbean on a boat with a wireless modem on a laptop and they could commit fraud,” he said.

“ Internet fraud is a challenge that we’re not ready for. (In a traditional case) we’re used to getting a subpoena and gathering 20 boxes of records and taking two years to look at them. … Now you’re dealing with an Internet service provider that keeps records for five to 10 days. You can’t rely on the fact that you’re still going to have records to check in three to six months to a year.”

Many of the fraud schemes already present in the “real” world, according to the IFCC Web site, can now be found on the Internet – fraudulent investment offerings, multi-level marketing schemes and failure-to-render scams (a favorite of unprincipled participants of online auctions). The crucial difference in fraud committed over the Internet, according to the Web site, is that the perpetrator can delete a site in seconds leaving consumers wondering where to turn for help.

The IFCC Web site provides a way for consumers to alert authorities of suspected criminal or civil violations, Pocica said. For law enforcement and regulatory agencies, IFCC offers a central repository for complaints related to Internet fraud, works to quantify fraud patterns, and provides timely statistical data of current fraud trends, he said.

Since its May 8 launch, the IFCC Web site has received 15,279 complaints on the following types of Internet fraud as of September 27:

Twelfth Annual Fraud Conference & Trade Show 

The Twelfth Annual Fraud Conference will be from August 5 through August 10 at the Walt Disney World Dolphin Resort in Orlando, Fla.

The Main Conference consists of three general sessions, two working lunches, and 12 tracks of breakout sessions: Current Issues, Cyberfraud, Embezzlement, Fraud by Customers, Money Laundering, Inventory and Supply Frauds, Fraud and the Law, Fraud by Vendors, Financial Statement Fraud, Bribery and Corruption, Fraud Examination Management, and Practice Development.