Security Briefing - 25 March 2009

28 workers of the Yilin Wood Company were jailed on 23 March for involvement in Beijing’s largest ever pyramid-selling case. The $246 million fraud affected 22,000 investors who were promised high returns on the purchase and maintenance of forest plantations. The scam’s leader, Zhao Pengyun, was jailed for 15 years and fined 300 million ($44 million).

‘Rampant’ problem of pyramid selling in China

Although pyramid-selling was banned in China in 1998, such scams have become increasingly common during China’s transition to a free market economy. The State Administration for Industry and Commerce announced on 15 March that nearly 20,000 pyramid-selling hideouts had been destroyed in 2008. China’s leaders are fearful that pyramid-selling schemes and the associated large scale losses of money will cause social unrest, especially during the current financial crisis. Official estimates in February 2009 stated that around 20 million of China’s 130 million migrant workers have lost their jobs during the economic downturn.

International Operations Group - Analysis

Security Briefing – 24 March 2009

The fact that frauds the magnitude of those perpetrated by Bernard Madoff and, allegedly, Sir Allen Stanford can continue for so many years is a worrying security development for investors globally. Madoff pleaded guilty on 12 March to his involvement in a $65 billion Ponzi fraud scheme (which had been running since at least the early 1990s) while Sir Stanford is currently facing charges relating to a decade-old $8 billion Ponzi scheme.

Bart Chilton, commissioner of the US Commodity Futures Trading Commission (CFTC), stated on 20 March that the Madoff and Stanford cases highlight the increasing problem of ‘rampant Ponzimonium’ sweeping the United States. The CFTC have already uncovered 19 Ponzi scheme scams in 2009, in comparison with 13 in the whole of 2008.

Lori Richards, Director of the Security and Exchange Commission’s (SEC) Office of Compliance Inspections and Examinations, has announced that increased training will be given to staff with regards to fraud detection. However, such promises of training improvements will do little to alleviate the heavy criticism being levelled at the SEC for failing to pick up the Madoff fraud earlier.

Meanwhile, the after-effects of the Madoff trial promise to be far-reaching and complicated with Internal Revenue Service Commissioner, Douglas Shulman, admitting that the case raises ‘numerous issues’ with regards to victims of Ponzi schemes.

Security Briefing - 18 March 2009

Mortgage fraud increased by 26 percent to record highs in the United States in 2008, despite fewer home loan transactions, according to the Mortgage Asset Research Institute (MARI). MARI analysed 600 cases from lenders, mortgage insurance firms, mortgage investors and federal data, and their findings suggest that mortgage fraud is likely to increase further as the economy worsens.

Security Briefing - 16 March 2009

Switzerland offered to relax its famed banking secrecy laws on 13 March, in order to assist foreign governments investigating tax evasion cases. Finance Minister Hans-Rudolf Merz stated that the move was necessary to prevent the country appearing on the Organisation for Economic Cooperation and Development (OECD) ‘black list’ of tax havens. International pressure and possible OECD sanctions have also led to Belgium, Andorra, Luxembourg, Liechtenstein, Austria, Monaco, Singapore and Hong Kong signalling their intentions to abide by Article 26 of the OECD’s Model tax convention, which requires authorities to provide information if tax evasion fraud is suspected.

Analytical Briefing – 11 March 2009

Dubai’s new anti-corruption legislation and business security framework is being tested, after seven businessmen were charged with fraud amounting to $501 million against the Dubai Investment Bank (DIB). The suspects, two British, two Pakistani, a Turk and an American, have been indicted with embezzlement, forging documents and invoices, executing fake deals, and bribery. Two men were former employees of DIB and the remaining five have alleged links to a trade finance company called CHH, which exposed the Islamic bank to $330 million in losses.

Current situation

This case is the latest development in an ongoing 12-month investigation into fraud against DIB and state-linked companies (in particular DIB’s real estate subsidiary Deyaar Development Company). Other fraud cases currently being tried relate to financial irregularities at property developers Sama Dubair and Mizinare.

Dubai has recently made attempts to heighten business security in the financial and commercial markets. The city-state established anti-corruption legislation in August 2008, which has also seen part or outright nationalisation of major companies in an effort to enforce greater regulation.

International Operations Group - Analysis

Media Update - AccountancyAge 12 February 2009

Fraud on the increase as recession takes hold. By Judith Tydd

Last year's total fraud value was the second highest in 21 years, says KPMG

Finance directors need to ensure their internal controls and risk management systems are robust as experts predict the level of corporate fraud will escalate as the economy worsens.

Last year, company managers, employees and customers were tried in UK courts for £300m worth of fraud, three times more than in 2007, according to Big Four firm KPMG.

Professional gangs accounted for £800m worth of fraud court cases, taking the total fraud value to £1.1bn, the second highest level in 21 years.