Criminal minds - Hong Kong Institute of Certified Public Accountants

White-collar crimes
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November 2009
atching the
premiere of “The
Informant!” – the
Matt Damon movie about a high-level
FBI mole at a large multinational
company – was the mole himself,
Mark Whitacre.
The movie is a dark comic take on
the three years Whitacre – a former
divisional president of Archer Daniels
Midland, the U.S.-based food additive
giant – spent working undercover to
break a global price-fixing conspiracy.
Whitacre recognized real episodes in
his life on the big screen, such as trying to
fix a hidden tape player during a meeting
and his delusional belief he would be
made chief executive of the company as a
reward for his undercover work.
But what you won’t see in the movie
are the events of 9 August 1995, six
weeks after an FBI raid blew the case
into public attention. It was two days
after ADM fired Whitacre and accused
him of embezzling millions from the
company. His FBI partners for the
previous three years would no longer
speak to him.
On that day, Whitacre sat alone
in his car with its engine running
inside a closed garage and slowly lost
consciousness. He was hoping to end his
life as surely as he had ended his career.
A gardener found him unconscious.
Some scenes just can’t be played for
laughs. “There was nothing comical in
the reality of the story,” says Whitacre,
who eventually spent nearly nine years
in prison for his role in the price-fixing
scheme and revelations he siphoned off
US$9 million from the company while
he was working for the FBI.
Although the events took place over
a decade ago, “The Informant!” has a
deep resonance today. In the receding
waves of affluence, the financial crisis is
revealing a stony shore of scams such as
the billions bilked by Bernard Madoff.
When the economy goes down, there is
always an upswing in fraud, says Kim
Frisinger, a former FBI accounting
fraud investigator and now managing
director of LECG Hong Kong, a
consulting firm. “It’s like the ocean
going out and you can see everything
that was hidden under water.”
In September, the accounting
profession in Hong Kong was startled
by a courtroom bombshell that an Ernst
& Young partner had falsified audit
documents. The discovery caused E&Y
to settle a US$1 billion negligence claim
for an undisclosed sum; Hong Kong
police seized documents and detained
the partner, who has been suspended
by the company. Also in September, a
KPMG executive in London was sent to
prison for four years for taking nearly
US$900,000 in falsified expense claims.
As fraud grows, so does the business
for people who investigate fraud.
The Association of Certified Fraud
Examiners, which trains accountants
and other professionals in fraud
investigation, has 47,000 members
across the world – more than 20 percent
of its membership joined last year.
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White-collar crimes
The fraud triangle
Unfortunately, a lot of fraud stems from
a company’s own employees.
Although there are “millions of ways
to commit fraud, there are always three
common elements in any employee
fraud case – incentive, opportunity and
rationalization,” says Gary Zeune, a U.S.
accountant who specializes in fraud. He
runs a speakers’ bureau called “The Pros
and the Cons,” which puts professional
accountants and white-collar criminals
together to give lectures about fraud.
Incentives to steal don’t necessarily
involve greed – often there are more
esoteric underlying reasons. For
example, Zeune referred to the Société
Générale trader who nearly put the
bank under by hiding and growing
US$7 billion in trading losses. “He
didn’t make a cent of that,” Zeune says.
Instead he was trying to show he was a
“smart securities trader.”
Opportunities for fraud abound,
says Frisinger. Fraudulent statements,
misappropriating assets, kickbacks,
billing schemes, payroll schemes, cheque
tampering, extortion – the list goes on
and on, he says.
Over time, culprits feel there is a low
likelihood of getting caught, especially
if there are poor internal controls. “The
average fraud in a public company is
US$175,000, but the average fraud in a
private company is US$200,000,” says
Zeune. “Public companies typically have
more processes in place that catch fraud.”
People who slide into white-collar
crimes inevitably rationalize why they are
doing it, especially during a downturn.
“There is downsizing, people are not
getting raises but they’re being asked to
do more,” Zeune says. “People will only
obey laws and internal controls they
think are fair.”
Catching a crook with crooks
But sometimes a crook is just a crook,
says Sam Antar, who employed a
number of accounting tricks when
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November 2009
cooking the books for his company.
The chicanery went beyond false
accounts and into psychology.
“[The auditors] are always young,
single and just a few years out of
college,” he says. To spice things up –
and to distract the auditors – he would
always pair them with “cute hot female”
employees. It would be difficult for the
auditors to find fault with the company
if it has a “sexy face,” he says.
Antar was at the centre of a multimillion dollar fraud 20 years ago but
avoided jail time by working with the
U.S. government. He likens accounting
tricks to professional magicians. “It’s
like David Copperfield, it’s an illusion...
I want you to look over here so you
don’t see what I’m doing over there.”
Other tactics would be to delay
giving the auditors information
required for as long as possible so that
they have to either rush the job or ask
fewer additional questions, Antar says.
It’s difficult to detect fraud, often
because fraudulent books are done in
reverse – so of course the numbers are
going to add up, says Mark Morze, who
spent five years in U.S. prisons for a
billion-dollar stock fraud in the 1990s.
“The judge in my case actually said the
books looked too good, which is right
there a cause to be suspicious,” says
Morze, who like Antar now works with
accountants to fight fraud.
Because fraud is done the other way
round, it’s helpful to look at the books
in reverse – starting with the footnotes,
Antar says. Compare footnotes over
time and see how they have changed.
Any differences should be a red flag to
starting digging for fraud.
How fraud is found out
Fraudsters escalate their activity for a
simple reason – they don’t get caught.
“According to statistics, 60 percent of
crimes are found out by fellow employees
who turn them in,” says Zeune. “The next
most common reason – by accident.”
Antar’s fraud unravelled as a result
of a feud between fellow Antar family
members who owned the business – when
lawsuits started to fly and authorities
began looking into the accounts, the
depth of the deception began to unwind.
Morze’s deception was discovered when
a small-town reporter was writing a “fluff
piece” on his company and found that the
company wasn’t properly licensed – again,
bringing authorities in to snoop about.
The massive case against Archer
Daniels Midland began when Mark
Whitacre lied – problems with a new
plant caused delays, and Whitacre
falsely said he had received a note
saying saboteurs from a Japanese
competitor were in the plant and
had demanded US$10 million to
cease operations. The FBI came in to
investigate the false crime and were
told about the real crime the company
was involved with – a massive pricefixing conspiracy.
“If senior management is involved
in cooking books and records, it’s very
difficult to detect,” says Frisinger, the
Hong Kong fraud specialist.
Antar and Morze say fraudsters
surround themselves with “legitimacy”
to create a strong, upright impression.
“I didn’t miss synagogue,” Antar says.
“Guys like Madoff are very, very likeable
guys. You do a good deed in one aspect
of life, [which] cancels out the bad deeds
[on] the other side. You build a false wall
of integrity around yourself.”
The fix is in
For Whitacre, “The Informant!” is a
study of his own mental illness, as he
was diagnosed with bipolar disorder
after hospitalization for his suicide
attempt. His meeting with Damon
at the premiere was the first time the
pair met and Damon told him he
hoped they portrayed his illness in a
sensitive way.
“He didn’t want to talk to a
52-year-old Mark Whitacre while
preparing for the role, the Mark
Whitacre who went to prison, who has
been treated for bipolar disorder, who
is now COO (chief operating officer)
of a company,” says Whitacre, who
works for a small food supplement
maker. “He wanted to portray the
35-year-old Mark Whitacre, otherwise
it would make it difficult to portray
the delusions I had at that time.”
For companies and regulators,
the 1997 conviction of ADM was a
landmark event, the first antitrust action
in the United States since World War II
and a case that has spurred price-fixing
investigations around the world. “As
a result of this case, the Department
of Justice and the FBI started looking
around to see if they could find any
other cases like this,” says Dean Paisley,
a retired FBI agent who supervised the
undercover ADM work.
“This used to be relatively unusual
until the (ADM) case came to light,”
says John Connor, a Purdue University
researcher on cartel activity and an expert
witness in the government’s case against
ADM. “Back in 1993, you’d see maybe
one or two global [price-fixing schemes]
being discovered... in the past three years
or so, there are about 50 a year.”
Price-fixing schemes – where a cartel
of manufacturers or services providers
inflate prices against market demand –
cost consumers untold millions each
year. In the ADM case, investigators
found that the company’s cartel activity
with manufacturers in Japan and Korea
inflated prices by at least US$200 million
during the three years of investigation.
The case resulted in a record US$100
million fine in 1997 – a figure long since
dwarfed. In August, Japanese company
Epson agreed to pay US$26 million for
its role in price-fixing LCD panels used
in mobile phones in the United States.
Several other companies, including
Sharp, LG and Hitachi, have already
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White-collar crimes
pleaded guilty in the case and paid
fines of more than US$600 million. In
September, the Hungarian government
fined Visa Europe, MasterCard and
seven commercial banks a total of
US$10.4 million for price-fixing bank
fees (Visa and MasterCard are appealing
that decision).
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November 2009
Flawed heroes
A sign of cartel activity is usually a
sharp and uniform increase in price
with a contraction in demand. “But,
in fact, in the last 15 or 20 years
[governments] have relied almost
exclusively on whistle-blowers to make
their cases,” Connor says.
And as Whitacre showed, whistleblowers often don’t have noble motives.
“The movie should be taken very, very
seriously,” Sam Antar says. “In whitecollar cases, the governments have to
rely on informants... in effect relying on
unsavoury characters to make their case.
“What happened in “The Informant!”
is he had an agenda to become head
honcho of the company,” Antar says.
“The mistake the FBI agents made in
the movie is they fell in love with their
witness. It turned out there was a dark
side they didn’t know about.”
Whitacre says he began stealing
millions from the company while working for the FBI, in part as a financial
backstop in case things went wrong. In
short, he rationalized his crime: “I had
this sense of false entitlement, like they
owe me this... after all, the company
was stealing hundreds of millions.”
The stress of Whitacre’s doublelife undoubtedly added to his mental
woes, says Paisley, the original FBI
supervisor in the case. He points out
that undercover FBI agents receive
surveillance training and are pulled for
psychological evaluation once a year –
Whitacre received none of that.
“There were no provisions for similar
checks and balances with Whitacre,”
Paisley says. “He had no idea what he
was getting into when he agreed to
cooperate... we had no idea it would last
three years.”
Although Whitacre has served his
time, Paisley and other agents involved
in his case are seeking a presidential
pardon. “He really screwed up by
stealing,” Paisley says. “Be that as it
may, how many hundreds of millions
would have been stolen if (ADM)
wasn’t stopped by Mark Whitacre? He
is a national hero, in my eyes.”