The Fraud Richter, August 2012 Edition

The Fraud Richter

Your monthly dose of fraud news

AUGUST 2012
Compiled by The Fraud Richter Team fraudrichter@gmail.com +91-9566083416

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The Fraud Richter, August 2012 Edition

Gentle Request Please do not take a print out of this newsletter. Save paper. Save trees. Please think before you print.

The views expressed in this publication are personal views of the respective authors.

Dedicated to my beloved brother CA KVS RAJANI KANTH

Compiled by The Fraud Richter Team August 1, 2012

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The Fraud Richter, August 2012 Edition

Inside Page Content

3. 4. 5. 9. 12. 13. 13. 13. Inside Greetings Case Study Deviant behaviors of employees at the work-place. Article - Olympus- The Fraud That Lasted For Two & Half Decades Fraud Terminology A Glossary of fraud terms and words. Feedback forum Gentle Request Disclaimer. Subramanya Bhagirath K Deepak EHN

Author

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The Fraud Richter, August 2012 Edition

Greetings!!

It fills my heart with great happiness to know that some of my close friends have cleared CA Examinations. I heart fully congratulate them for their success and wish them all the best in their future endeavors. And for those who didnt clear, I can say only one thing Keep your spirits intact, you will be a success too, if not now, later. I am very happy to see the amount of feedback we have been receiving all this month about the Pilot Edition Fraud Richter. I really thank you for that. Your encouragement makes us do more and more work to make this magazine a successful media for anti-fraud professionals and aspirants. It made our Fraud Richter Team to take an important decision. We have now decided to release the magazine monthly, instead of every two months as planned in the first place. We planned as a by-monthly magazine, as our team is a group of professional (CA, MBA, CMA, CWA etc.,) students and it will be difficult for us to balance study-work and interests. But, your feedback and appraisals gave us the confidence to face it!! Thanks again!! Also, I am pleased to say that some new members, young and determined professional aspirants have joined our small team. They will be helping our team to collect, compile, analyze and edit the recent fraud case studies, articles to feed your fraud fighting brains. I heartily welcome them aboard. This months edition will introduce you with some new areas of fraud detection, case studies, and article about Olympus fraud trial, and lots of fraud stuff!! I also hope that you like the new look of the magazine. We dont want you to feel monotonous while reading and hence, we will try to change the style in regular intervals. So, just explore around to share and learn the fraud education!!

With Best Regards

Subramanya Bhagirath K Compilor Fraud Richter 01st August, 2012.

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The Fraud Richter, August 2012 Edition

Article Deviant Behaviors of Employees at Work-place. The Sams Case: Sam was working in a Software company. He was a young engineer with hardly two years of project experience. He was very reserved, rarely used to be in interaction with his co-techies. He often spends his time in his cubicle office space. His colleagues never minded his alien behavior until one day, when they were informed of Cyber fraud alleged to be committed by Sam. As the Investigators dug through the past of Sam along with the data, they noticed astonishing facts. Sams colleagues knew the reason for sams behavior for a very long time. They quoted Sam was a gambler, womanizer and an alcohol addict. He used to spend some 20,000 bucks every week on his illicit interests. Three questions raise from this statement. Firstly, how did a regular techie, able to spend so much? Secondly, Who helped him? And finally, (This is most important question) Why did not the colleagues reported the deviant behavior of Sam beforehand. The answer is simple, remember the fraud triangle that we discussed in pilot edition (Motive -> Opportunity -> Rationalization). Sams motive is to earn easy money for his illicit interests. His colleagues never cared about what he does at office, or what was his

behavior at the workplace. They simply ignored Sam. This is his opportunity as there is no one on his back watching him about his daily routine. And, when he finally convicted, he said, I was addicted, I could not help it! This is rationalization. What Sam did was simple, he leaked the patented program codes of the organization to their competitors for want of money. It is a case of Information theft, a branch of cyber fraud. The investigators also found some illicit content in the office system of Sam. These are all the traces, which lead to the motive of Sam. He, sold the organizations information for just Rs. 10,00,000 / - which was actually invaluable to the organisation. This might look like a small amount, but, the effects of this are vast. The company lost potential revenue as a result of this fraud. The employees might get sacked, for the loss of revenue. If only could the colleagues have reported of the Sams behavior beforehand, the potential disaster could have been averted. What Loss can Deviant Behavior Cause? More serious cases of deviant behavior harmful to an organization concern is property deviance. Property deviance is where employees either damage or acquire tangible assetswithout authorization. This type
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The Fraud Richter, August 2012 Edition of deviance typically involves theft but may include sabotage, intentional errors in work, misusing expense accounts, among other examples. Deviant behavior can be much more extreme, involving sexual harassment and even violence. All these deviant behaviors create problems for the organization. It is costly for an organization to pay employees who are not working efficiently. So, is one of your employees looking very tired- out these days, although there is no increase in his workvolume? Is one of your employees behaving differently than before, suddenly without any reason? Is one of your employees appearance and etiquettes had a drastic change these days? If your answer is YES, then, YES your organization might be in trouble. Not because of low workforce performance, but because of occupational fraud!! This might be surprising to know, but the facts of this theory are not as surprising as one might expect after reading this article. Using deviant behavior as a technique of fraud detection:As discussed in the Pilot Edition of THE FRAUD RICHTER, the ways of committing fraud and miss-appropriation of the companys assets had undergone an evolution. Along with that, fraud detection theories also evolved. Thanks to the rising intention towards control of financial fraud in the minds of professionals as well as the business organizations. But, this is not the end, but a beginning of a new era of fraud fighting. One such modern theories now being used extensively is to identify potential fraudsters through observation on DEVIANT BEHAVIORS OF EMPLOYEES. A corrupt employee is as good as a disgruntled employee. To be more clearer, a corrupt employee has a better motive to defraud the organization. Take an example of a drunkard. A drunkard leaves no exception for dwindling the money to get drunk. This instance needs no further explanation as this is very common in a place like India. The same is the case of a fraudster. The fraudsters desire for corrupt practices is a sufficient motive to commit fraud. A drunkard behaves differently, even at times of utter soundness. This is because; the effects of alcohol are such that it leaves a person only at his death in major cases. Likewise, a corrupt employee shows some behavioral signs at workplace, like being too reserved, often trying to be alone at work place or not in much interaction with colleagues. Of course, what is the need to talk to someone when he is silently able to milk away the organizations assets? These kind of fraudsters doesnt want to talk to anyone usually. Because, they fear they might slip away their tongue.

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The Fraud Richter, August 2012 Edition Some Behavioral behavior:Signs of deviant Now that we know the crux of the theory, its time for learning some simple preventive measures. Because, as an English idiom says, Prevention is better than cure. Preventive Steps :- Prepare a comprehensive employee fraud policy. Make the new hires and the existing employees as well to sign and agree to the terms. This creates awareness in the employees about the aftereffects of fraud. - Take periodical reviews of the employee performances, not only on the quantitative parameters but also on the qualitative issues. - Conduct surprise checks and inspection on the office automation systems and the organizations assets. - Establish fraud hotlines. This is a very good source of anonymous tips about fraud to the organization. ACFEs Report to the nation reports that 49% of the frauds are detected through anonymous tips and most of them are from organizations employees. - Also establish an information security policy and review them periodically and also educate the employees about them regularly. - Conduct all-round background checks of the employees. It is better to conduct a due diligence on the employees having criminal record before inducting them into the organization.
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1. An employee in a dominating position (i.e. holding a top authoritative position in an organization), often complained off by the colleagues or sub-ordinates. 2. An employee who has a criminal record in the past. 3. An employee who spends lavishly, even though he is not financially sound. 4. An employee who never takes a leave. (This might sound strange, but, just assume, if he is absent in the workplace, someone who takes care of his work for that day might be able to find out the fraud he has been concealing). 5. An employee who regularly works over time and on weekends. (This is a sign of payroll fraud). 6. An employee who skips the periodic assessment reviews of the company. 7. An employee complained by the staff that often he involves in non-work related issues like Social Networking, chats etc., 8. An employee who shows some violent and aggressive attitude. 9. An employee having a record in the past for unethical and immoral behavior towards collegues. These are just a few signs. You can find these deviant behaviors in various forms, which depends on the organizations work culture.

The Fraud Richter, August 2012 Edition - Keep a track of overtime and weekend workouts of the employees. Do PARETO analysis on the different teams of employees to know the key performance indicators and the bottleneck processes. Often fraud is found out in bottle neck processes. - Take the review of internal controls periodically and swap the functions of the employees in top authority at regular intervals. This controls white-collar crimes. - Conduct regular social events in the office. This will make the silent employees to speak out unintentionally. - Establishment of surveillance equipment will keep track of the employees at the work place, but it is complained by the employees that it is compromising their working privacy and personal privacy too. So, better place them only in key security concern places viz., cash vaults, document rooms, server rooms etc., Although this new technique or new way of fraud detection gives good results and path-breaking outcomes, we cannot be Assurant about the success of this technique in some cases. So, this can be an add-on, but cannot be used as a regular procedure of Fraud detection due to uncertainity. These are some of the excerpts of the preventive checklist. But, the list is exhaustive. But, again, something is better than nothing! Isnt it? - Subramanya Bhagirath K
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The Fraud Richter, August 2012 Edition

Two of the Olympus subsidiaries involved are:OLYMPUS- THE FRAUD THAT LASTED FOR TWO & HALF DECADES Thanks to the whistle blower, ex-CEO of the Olympus Corporation, Michael Woodford, else the fraud duration wouldve been enhanced. We shall now glaze into how JPY117.7B of fraud was actually planned and implemented. Let us bifurcate the fraud event into two major criteria: 1) Funds outflow 2) Funds inflow. Further, therell be three routes covering both the divisions, through which the passage of funds can be observed. 1) Europe route 2) Singapore route 3) Domestic route Terms and Companies Involved If you look into the receiver funds (companies) that were setup for the purpose:1) GCI caymann setup in the caymann islands 2) Central forest corporation (CFC) 3) Quick progress company (QP) 4) TEAO limited (TEAO) 5) Neo strategic ventures (NEO) 6) Twenty first century global fixed income fund limited (21C) 7) G.C. New Vision Ventures (GCNVV) 8) Class fund IT Ventures (ITV) 9) Dynamic Dragon II SPC (DD) 10) Global Targets SPC (GT) 11) SG Bond plus fund (SG Bond) 12) Easterside Investments Limited (EASTERSIDE) 13) Creative Dragon SPC (CD) 14) PS Global Investable Markets (GIM) 15) GPA Investments Limited (GPAI) ORIGIN OF LOSS:In the late 1980s, Olympus has suffered low operating income due to sharp rise in the Japan yen. In the mean time, Zaiteku* was prevailing in the Japan. Stock and Real estate prices were having a bull run. Olympus adopted Zaiteku as principle business strategy. However due to the burst of the bubble economy in the 1990, the loss has increased substantially. Olympus started investing in High Risk-High Return financial instruments to compensate the huge loss. Unfortunately, the financial statements didnt pickup and Olympus got struck in the pit of losses, which amounted to 100B.
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1) Olympus Finance Hongkong limited (OFH) 2) Olympus Asset Management (OAM)

The three domestic companies, whose shares are transferred by inflating the prices, are:-

1) Altis 2) Humalabo 3) News Chef

Consultancy firms that involved are:1) Axes America (AXES) 2) Axam Investments Limited (AXAM) As you are familiar with the receiver funds and the terminologies, we shall move onto the details of origin of loss and separation scheme.

The Fraud Richter, August 2012 Edition

instruments. For the purpose, receiver funds are to be financed. EUROPE ROUTE:1. Olympus pledged 35 billion of deposits in LGT bank and obtained a loan and provided the same to CFC. Further CFC bought the loss bearing financial instruments from Olympus. 2. Olympus through OAM invested 35.5 billion in LGT bank. LGT bank provided 31 billion loan to TEAO and further TEAO invested 30 billion in NEO, which in turn forwarded to QP.QP purchased the loss bearing financial instruments from Olympus.

The then president Mr.Kishimoto left the problem to the portfolio department. The former full time auditor Hideo Yamada and the Hisashi Mori took the charge of settling the loss. During 1997-98, when the unrealized loss was reaching the peak, Japan made an amendment to the statute, which required the companies to recognize the financial instruments at fair value rather than the historical cost basis. Since the unrealized loss would be uncovered, Yamada and Mori approached the president of Axes America to draft and implement the TOBASHI^ scheme and transfer the loss to other receiver funds, which need not be consolidated in the financial statements of the former one. TOBASHI:Tobashi means to fly away. In Tobashi scheme, loss bearing financial instruments are transferred to fake clients or absorbed by the investment firm itself. Yamada and Mori, with the assistance of the President of Axes America, has setup the first receiver fund in caymann islands.(Cayman islands is a tax Heaven Island). Further they worked out on the routes. Lets examine the routes. FUNDS OUTFLOW:Yamada and Mori planned of setting up receiver funds and transfer the loss by incorporating them in the financial

Overall, 64 billion of loss was transferred to CFC and 32B of loss to QP. SINGAPORE ROUTE:Olympus approached commerz bank and pledged the bonds and forwarded loan to SG Bond, an amount of 45 billion. But later the scheme was modified and the loan was transferred to CFC via, EASTERSIDE, Twenty first century global fixed income fund limited (21C). DOMESTIC ROUTE:Olympus invested 30 billion in GCNVV and the entrepreneurial ventures invested 9 billion in GCNVV. It was reported that there was regular flow of funds between QP and GCNVV. THE BACKDROP:-

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The Fraud Richter, August 2012 Edition

Three domestic companies Altis, Humalabo, News chef were setup. The loss was to be transformed to goodwill by overvaluing the transactions. Further goodwill which aroused from the exaggerated transactions would be amortized over a period or written off considering as an impairment loss. Now ITV, NEO came into the action and bought the shares of ALTIS and HUMALABO for 50000 share and that of news chef for 200000 share. GCNVV bought the shares from NEO and ITV at an escalated price, Altis for 5.79 Million share, Humalabo for 14.75 Million share, News chef for 4.45 Million share. Also GT and DD bought the shares from NEO, pricing 5.57 Million, 14.1 Million , and 4.45 Million for Altis, Humalabo, and news chef respectively. FUNDS INFLOW:Now comes the major part of the scheme. Since the loan was to be repaid sooner or later, Olympus needs funds to repay. So Yamada and Mori made a scheme for the reimbursement of the funds. Olympus bought the shares of domestic companies at a sum of 31.9 billion from NEO and 15.2 billion from ITV. Further these funds flowed to TEAO through QP and NEO. Ultimately, TEAO cleared the loan to LGT bank and LGT bank released the 15.9 billion bonds of the Olympus. Olympus through its subsidiary OFH purchased the shares of domestic companies from DD for 9.6 billion and GT 4.1 billion. These funds finally reached the TEAO through EASTERSIDE, CD, GPAI, and CFC. TEAO reimbursed the loan to LGT bank and the latter one released the 21billion deposits of Olympus making the Europe route settled. Now the acquisition of Gyrus came into light. The mediator and the consultancy firm AXAM was paid huge fee ($ 50 Million for the FA agreement and $620 Million for the purchase of gyrus preference shares) for assisting in the acquisition of gyrus, which was questioned by the auditor KPMG AZSA LLC. The auditor was immediately changed; Yamada and Mori discussed the accounting issues with the new auditor Ernst and Young Shinhon LLC. These funds as per the secret agreement flowed to GPAI, CD. CD forwarded the huge amounts of money of 58 billion to EASTERSIDE and the latter one forwarded to SG Bond, which in turn reimbursed to Olympus, making the Singapore route settled. A part of the loss was separated using Tobashi scheme and a part of the loss was transformed to the goodwill by the exaggerated transactions and huge fees to mediators in the acquisition. This complex loss separation scheme and the receiver funds involved and the transactions made this 117.7 billion scandal, a remarkable one in the history. E.H.N. DEEPAK

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The Fraud Richter, August 2012 Edition

Fraud terminology

Note: The Fraud Terminology is extract of Fraud terms from various books and articles related to Fraud Investigation and Forensic Accounting. In order to maintain the grace and the professionalism of the book authors, the matter is copy pasted instead of re-writing it.

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The Fraud Richter, August 2012 Edition

Feedback Forum

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Disclaimer

All the information, contents in this magazine are the personal views of Fraud Richter Team. No part of this publication is a copy or imitation of any matter published in any media. Only, extracts have been taken for providing the readers with better information.

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The Fraud Richter, August 2012 Edition

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