Examining fraud in developing countries

With the multiplicity of dialects, less structured legal systems, destroyed or nonexistent documentation, and differences in cultural expectations, fraud examiners should equip themselves with specific tools when conducting investigations in developing countries. 

Communication and documentation
Fraud examinations in any country can involve obstacles to communication. But in developing countries barriers to communication can become insurmountable. "The biggest impediment in many parts of the world is that few people speak English," says W. Michael Kramer, JD, CFE, specialist in corruption and fraud investigations. "The senior witnesses may be conversant but those involved at lower levels may only know one of sometimes 200 local dialects."

Language differences manifest more often in the poorest countries, particularly former French colonies like those in Western Africa and Southeast Asia, according to Kramer. "We had one case in Senegal where we were never able to communicate with an important witness because we were unable to find an interpreter for his unique dialect," says Kramer, who is also a Regent Emeritus of the ACFE.

Less developed technological infrastructure adds obstacles when dealing with printed or electronic communication. Documents for instance can be recorded in a local dialect, making translation difficult. Nonexistent electronic means of conversation slows the process. "In some very undeveloped places, communication by e-mail or phone is difficult or even impossible," says Kramer. "Likewise, getting access to records. In the U.S. we rely on public record systems most of which are online. Within 10 minutes we've got information on anyone like where they were born, what properties they own, the vehicles they drive, and any complaints against them."

In many developing countries the public records may not be readily available and if they do exist, they're usually only printed on paper, according to Andres Antonius, global head of business intelligence and investigation services for Kroll, New York, N.Y. "Documents might be filed in various jurisdictions and physically pulling the documents is laborious and time intensive," says Antonius. "Sometimes years of documents are missing because a disaster like fire or flood wiped out the building where they had been stored."

CFEs might still find high-tech frauds in developing countries, however. The rapid growth of the Internet has eliminated the traditional borders of financial crimes and provided opportunities for criminals to engage in computer-based fraud. The recently announced law enforcement takeover of a Web site highlights the challenges fraud professionals face on the other end of the technology spectrum. "Perpetrators operated 24 hours a day 7 days a week (on the Web site) from eight states and six foreign countries," says Anthony Chapas, special agent in charge, Department of Homeland Security, U.S. Secret Service in Los Angeles, Calif. "After a year of investigating we had to coordinate simultaneous entry in each location from Los Angeles to Sophia, Bulgaria, because any one of the locations could have shut down the operation."

While developing economies depend on basic industries, Chapas' investigation demanded new knowledge of the meanings of phishing and pharming. Using methods of highjacking e-mails and browser redirect techniques, these high-tech criminals stole personal identifying information, credit card and debit card numbers, and produced and sold false identification documents. The loosely-knit, highly organized international organizations named Shadowcrew, Carderplanet, and Darkprofits not only shared information on how to commit fraud but also provided a forum by which to purchase the stolen data.

Investigators and agents tracked down clues from Web sites and archived consensual private messages, online chats, and e-mail. Evidence occupied approximately two terabytes of storage, or the equivalent of an entire university's academic library.

Legal differences and cultural responses
Complicating the Web-site investigation were the number of jurisdictions. Even within the U.S., different rules applied to obtaining warrants. Globally the first task was to determine in which countries the investigation would be eased by the existence of the Mutual Legal Assistance in Criminal Matters Treaties (MLAT). (According to the U.S. Department of State, MLATs are relatively recent agreements among a group of nations designed to improve the effectiveness of judicial assistance and to regularize and facilitate its procedures.) Cooperating in the investigation and enforcement actions were the United Kingdom's National Hi-Tech Crimes Unit; the Vancouver (British Columbia, Canada) Police Department; the Royal Canadian Mounted Police; Europol; the secretary general of Bulgaria; and the U.S. Department of State in Argentina, Belarus, Bulgaria, Belarus, Estonia, Poland, Russia, Sweden, the Netherlands, and the Ukraine. "We had to coordinate the investigation as well as the law enforcement response," says Chapas. "We had to consider what we could share of the highly technical information, how much, and where."

Legal systems in developing countries remain less formal than in developed countries. The differences both challenge the fraud examiner accustomed to more formalized systems, and hinder the investigative process once underway. "Understanding the differences in legal systems are very important to fraud professionals," says Antonius. "In developing countries, fraud laws are often not well written, the laws as written are sometimes not enforced, and overburdened systems slow down discoveries."

Differences in employment laws complicate cases of fraud perpetrated by employees. "Labor laws can be even more restrictive and written with loopholes," says Antonius. "This makes companies more likely to terminate and pay a nice severance, too. That takes away the ability to use the threat of enforcement to induce a confession or gain additional information."

Beyond the visible challenges of language and law, more subtle cultural differences can derail CFEs if ignored. Where legal systems are less formalized, personal relationships become paramount. "Perpetrators of frauds are often tight linked networks of relatives or people from the same town or clan," says Antonius. "We find networks of people like this especially in Asia and China, and it's difficult to get one link to break."

Negative feelings toward outsiders exacerbate barriers of language and family ties. "Native employees sometimes take the 'us versus them' attitude and cast us as evil imperialists," says Antonius.

The closeness of clans and fear of outsiders enforces a strict code of silence. According to Kramer, an even more severe challenge facing CFEs is that witnesses are legitimately afraid to become involved. "In developed countries witnesses may be reluctant to talk but in the developing world, witnesses may fear for their lives so getting people to talk at all can sometimes be a tremendous hurdle," says Kramer.

Overcoming obstacles
To succeed in developing countries, fraud professionals develop a new toolbox of skills. Gaining information in the absence of documentation might mean interviewing more people and in different ways. "Generally we end up in local environments relying heavily on informants," says Kramer. "In the poorest countries we sometimes fly people to a favored location like Paris or Vienna all expenses paid, to get them to meet with us at all."

The ability to do more investigative work, fraud investigations, and financial analysis over a larger amount of time overcomes many of the obstacles in emerging societies, according to Antonius. "You have to have an on-ground presence that's familiar with local customs and has local sources," he says. "You also need a multidisciplinary group including fraud examiners, forensic accountants, and adept investigators all familiar with the specific locale."

Anti-fraud professionals need to manage the cultural differences carefully. "One has to be more delicate and be aware of the political implications of what one says and does," says Antonius.

Once the CFE gets past the differences in language, culture, and legal systems, the investigative work is about the same as in developed countries, according to Kramer. "At first I thought a home boy from the suburbs couldn't walk into these countries and do investigations," he says. "But I've always found honest people who want to help."

Kramer points out that finding local people to help is central to most fraud investigations because a confidential complaint initiated the project. "The complainant is usually upset at the occurrence of the scheme," says Kramer. "They'll usually share what they know as well as telling you who else is knowledgeable about any details."

The additional informants may provide most of the necessary evidence. "For example in a bribery case we need witnesses to identify what property the suspect owns, to show he's living beyond his means," says Kramer. "Getting that information might mean finding a local person who built a home or the suspect's driver to add or verify facts."

CFEs charged with preventing fraud for companies doing business in emerging countries can heed these professionals' warnings. "Doing business in some parts of the world means the risks of corruption petty and large is virtually systemic," says Kramer. "Fraud examiners that have never been in that situation have to be realistic and know they face greater risks."

Rigorous scrutiny accompanied by training and monitoring of work is critical to preventing fraud in the Third World, Kramer emphasizes. He advises due diligence inquiries into an employee's or vendor's reputation, checking to make sure a local agent has an established office and staff, and making sure that the local agent in fact creates a useful work product. "Sometimes the local rep suggests hiring a consultant who turns out to be no more than a bag man for a corrupt government official," says Kramer. "Even the honest people need to be trained on what is fraudulent. They may think it's acceptable to hire their extended families to provide goods and services for the employer."

Antonius points out the particular challenge with China. Companies locate facilities in the cheaper labor market but enter the area not understanding the culture and framework and end up getting defrauded. "Generally companies place the business in the hands of a local operator who may or may not be acting in their best interests," says Antonius. "Instead of the expected halving of costs, expenses are the same and sometimes higher and they can't figure out why."

Veterans of Third World investigations rely on these extraordinary measures of collecting the evidence. But like Kramer's Senegalese informant, sometimes the obstacle is insurmountable. "Sometimes we just have to work without a complete picture," says Antonius. "And that also explains why there's more fraud in the Third World than elsewhere."

Clarification
In the article, "SOX becoming timesaver for fraud examiners," by Cynthia Harrington, in the January/February 2005 issue, the second paragraph on page 27 refers to regulations for not-for-profits enacted in the state of New York. While both houses of the New York legislature passed versions of bills to increase governance at not-for-profits, state legislatures including New York placed non-for-Profit governance bills on hold once the U.S. Congress introduced legislation. The U.S. Senate Finance Committee staff released a set of proposals for nationwide changes.  

Cynthia Harrington, CFE, CFA, is a freelance writer for Fraud Magazine.