The business of crime

The world's forensic accountants have their work cut out for them with the huge numbers of corporate financial crimes increasingly being committed. Many reports suggest that if something isn't done now, financial finagling will pose a major danger to businesses around the globe in the coming millennium.

In a special report on money laundering published in The Report on Crime and Profiteering, a privately published newsletter, Bill Dovey, CA who is a partner at Deloitte & Touche based in Toronto and chair of the CICA's Alliance for Excellence in Investigative and Forensic Accounting says that many companies can be enticed or unknowingly drawn into a money laundering operation. One way that this happens is when a small to medium-sized company becomes addicted to the large sums of cash a customer brings in on a regular basis; the firm may factor the money into its cash flow, and into its business plans and projections. The owner or owners can eventually lose control of their business: the supplier of the cash may, for instance, go to them and ask to invest in or purchase half of the business. The owner(s) would feel they have no choice but to comply because if they refuse, the cash supplier will take his money to their competitors.

In this way, says Dovey, the business becomes part of the infrastructure of organized crime. For a firm that relies on its public image, the discovery that it has been part of a money laundering operation can lead to a loss of its reputation - and consumer confidence.

Another article in the newsletter reports that the British press thinks the structure of the Canadian stock market makes it ideal for individual and organized financial criminals. The Observer newspaper revealed that a confidential 1995 British report on Operation Sword - a UK investigation into a money laundering ring - claims that the Canadian stock market was used by the ring to legitimize itself. According to the report, says The Observer, the ring floated a corporation made up of companies whose assets and stocks had been artificially expanded by the profits of crime.

Adrian du Plessis, a Vancouver-based investigator, agrees with the assessment of the British press. Du Plessis wrote a number of articles on the scandal in which TSElisted company YBM-Magnex was alleged to have ties with Russian organized crime. This summer, YBM's Pennsylvania offices were raided by US federal agents, the company's stock was halted on the TSE, and Deloitte & Touche resigned as the firm's auditors. According to du Plessis, two factors that permit such situations to develop in Canada are its geographic expanse, as well as lax officials.

On the positive side, a new book put out by the Institute of Internal Auditors may help companies gain a better understanding of financial fraud. Million-Dollar Frauds, by Gary McKechnie and Nancy Howell, is an examination of 11 case studies of some of the most publicized white-collar crimes of the past decade. The authors give insightful views on what went wrong, why and how. They tell us who is most likely to commit corporate crime: post-secondary educated, professional males who have been promoted in the company to the rank of senior executive. They are usually unsupervised and unrestrained by upper management, and their crimes are often the result of inflated egos run rampant. Two of the key ingredients in most frauds, the authors say, are need and opportunity

The book chronicles and dissects such celebrated crimes as the Kidder Peabody Group's loss of over $250 million as a result of the risky dealings and phantom trades of aptly named trader Joseph Jett, 36, who sped to the top, becoming company superstar just a few months before being exposed as a "rogue trader." There is also the case of Cheating Charles Keating, former chairman of.lmerican Continental Corporation, who "bought" US senators and had them press the Federal Home Loan Bank Board to ignore his shady business practices with Savings & Loan thrifts. People who followed that story will remember that the problems caused by Keating's cheating cost US taxpayers more than $3 billion to fix. The most incredible case involves thoroughly incompetent bond trader Toshihide Iguchi of Japan's Daiwa Bank, who lost the bank $1.1 billion in 11 years, but covered his tracks enough to convince his bosses that he was making millions.

The book gives auditing professionals and management executives inside information on these fraud cases, and provides valuable information on detecting and preventing fraud; clearly, this is a timely book that may help Canadian companies deal with a growing problem. Okey Chigbo