Tag Archives: due diligence

Massive Betrayal of Trust

7198648678_7a3c5905d8_b

Photo by Mamnaimie Piotr

On September 8, the Consumer Financial Protection Bureau (CFPB) put out a press release that it was fining Wells Fargo Bank $100 million for secretly opening deposit and credit card accounts, without customer approval. In addition to the CFPB fine, Wells Fargo was fined $35 million by the Office of the Comptroller of the Currency, $50 million by the City and Country of Los Angeles and will have to pay approximately $5 million in restitution to customers. This fraudulent behavior occurred on a massive scale and, based on the CFPB’s investigation, resulted in:

  • Employees opening 1,534,280 unauthorized deposit accounts;
  • Employees submitting applications for 565,443 credit-card accounts, without the knowledge or consent of the people in whose names the applications were made;
  • Employees creating fake email addresses in order to enroll consumers in online-banking services;
  • Employees requesting debit cards for customers, without the customers’ knowledge or consent, and creating PINs to activate these cards.

All of the above has happened only since January 1, 2011. That is about five years in which these shenanigans were going on. During this time, Wells Fargo fired about 5,300 employees but it does not appear that the bank did a lot more than that to change the culture and systems in order to keep these practices from recurring, or that it took any steps to do right by the customers who were affected. To boot, the executive who oversaw the unit where this all happened left without having to pay back any of the almost $125 million that she earned with the bank. To understand why employees engaged in these dishonest practices, it is important to understand how they benefitted.

Wells Fargo is valued at over $250 billion, making it the most valuable bank in United States, by this yardstick. Wells Fargo was also considered to be the king of cross-selling. Cross-selling is a practice where banks sell more than one service to a customer. For instance, say you open a checking account with Wells Fargo. If the person that you open your account with convinces you to then open a savings account, a credit card account and a mortgage, all of that is cross-selling. At Wells Fargo, employees were paid and received bonuses based on the number of different services they were able to sell to customers. At times, employees would have to work unpaid overtime hours in order to reach these goals and would be threatened with losing their jobs if they did not do enough cross-selling. These employees were told to do “whatever it takes” in order to meet sales goals and this turned out to include engaging in the fraudulent behaviors I noted above.

With the pressure to perform in order to increase earnings, through bonuses, or merely keep a job, the retail employees, at least 5,300 of them, found many opportunities to game the system. Controls at Wells Fargo, when it came to ensuring accounts were valid and authorized by customers, appears to have been very lax. For instance:

  • Employees were able to sign up customers for banking services and would use fake email addresses that used wellsfargo.com as the domain name, such as 1234@wellsfargo.com or none@wellsfargo.com. Doesn’t that seem rather brazen? It also seems like a security shortfall on the part of the bank, that the application process wouldn’t flag an email that doesn’t exist in your own system.
  • When employees opened fake deposit accounts, they would fund these accounts by transferring a customers money from an authorized account to the fake account. Sometimes, as a result of the transfer, the authorized account would incur insufficient balance and overdraft fees. Also, the fake accounts would also incur fees and Wells Fargo would withdraw money from the authorized accounts in order to pay these fees.
  • In a similar manner, credit card accounts opened, without the approval or knowledge of customers, would incur annual and other fees. At times, these customers would find that they were in collections and their credit scores had been affected by accounts that they did not even know they had.
  • Some customers actually received credit cards for accounts that they had not authorized. When these customers contacted Wells Fargo to complain about these cards, they were told to simply destroy the cards. Destroying a credit card does not close the credit card account, nor does the shredding of a card do anything as far as the shredding that your credit profile may have taken.
  • In order to meet quarterly goals, employees would hold back applications for account openings. The manual applications, that included sensitive personal information, would be stockpiled in an unsecured manner and the accounts would only be opened in the next sales goal period, in a practice referred to as sandbagging.
  • Wells Fargo also misled customers by telling them that they could not get one service without getting a bundle of other included services. That would be like opening a checking account and being told that you cannot do so unless you open a savings account and get a credit card with the bank.

With how widespread these practices were, it seems that employees were sharing knowledge about how to best bulk up their cross-selling numbers, without actually cross-selling. Also, when customers complained about fees, it is unclear how much of a follow-up there was to discover if what had happened was a mistake or not. Then, when Wells Fargo discovered this behavior and fired an employee, the bank did not take any steps to let the impacted customers know that their information had been used to open accounts in their name and, if applicable, charge them fees. The bank did not go back and refund customers the fees they had been charged, unless the customer raised a stink about them. When I was discussing this case with my husband and explaining how customers were negatively affected, he had a tale of his own. He has a credit card (not Wells Fargo) and the company changed his credit card information, without letting him know. When he sent payment on his account, they accepted the payment, without telling him that the account was closed, and then charged him interest and fees on the balance that had been moved to a new account. He, not the credit card company, had to figure out what had happened and he, not the credit card company had to calculate the monies that needed to be refunded to him and make sure that the company was not just holding money on a nonexistent account but actually crediting it to his account.

As a result of this case, in addition to the fines that Wells Fargo has been ordered to pay, there are steps the bank has been ordered to take in order to improve the culture and strengthen the system so that this kind of behavior can be prevented, detected and corrected in the future. This includes:

  • Employee training to prevent “Improper Sales Practices” and improve integrity at the bank;
  • Creating monitoring processes and policies to effectively deal with customer complaints;
  • Creating systems to ensure that customer approval is received before accounts are opened on their behalf;
  • Revising the basis for how employees are paid and reviewing sales goals to ensure that they are not unrealistic and do not impose unreasonable pressure on employees.

Wells Fargo will continue to be monitored for five years, to make sure that they comply with the CFPB’s consent order.

On your part, with all your accounts, you can check to make sure that they accounts that you have are ones that you have authorized and that transactions made in your name are valid. Some steps that you can take are:

  • Review your credit report on a regular basis to make sure that all accounts listed are ones that you know about. Several financial institutions offer free credit reports to customers. If this is not an option for you, you can visit the Annual Credit Report website. On this website, you are entitled to credit report per year, from each of the three major credit reporting companies. A strategy to employ is to check a report with one agency every four months;
  • Check your bank statements regularly (at least monthly) for any transactions that are incorrect. Even if it is a small amount, look into a transaction. That small amount could be an indication of something bigger;
  • If you receive a card in the mail that you did not apply for it, follow-up on it and make sure that it is cancelled. Then check your credit report again.

On the Wells Fargo website, the Chairman and CEO states that “Everything we do is built on trust.” It seems that many employees have been playing lip service to that value and we know that, even with trust, it is important to verify. Take the time to check in on your finances. There may be mistakes that need fixing and there may also be pressured employees who are trying to get ahead or merely hold onto their jobs by engaging in dishonest practices.

Advertisements
Tagged , , , , , , , , , , , ,

Two Hours… And Counting

woman-1447084_1920

Oh man! I may need treatment to recover from working out my health care expenses. For several years now, my shoulder has hurt. I have had it looked at by a doctor and I went through physical therapy until I had used up all that I was allowed to use, and treatment didn’t really work. My shoulder still hurt a lot. I then got sidetracked by all kinds of other things going on in my life and so I pretty much lived with the pain (eased a bit by massage, ibuprofen and Salonpas). Finally, I decided that enough was enough and that life should not be lived in pain, so I went to see the doctor who helped me out when I fractured my knee. I love his guy. He is absolutely awesome. And it is a great and special thing when you establish and relationship where you are treated like an adult with a brain and all your questions are answered and things are good. You feel great, until you start to talk money. Then you feel all kinds of unwell again.

I am a person with health insurance and I believe it is pretty good insurance because it is pretty widely accepted and my co-payments are decent. I understand that choosing an out of network doctor is bound to be very pricey. However, several years ago, I had some pretty terrible experiences when I went with in-network doctors that were recommended to me by my insurance website and not by a fellow medical profession. Now, when I find someone who treats me with respect and seems to have a vested interest in my being healthy and fully recovered, I tend to stick with that person. I understand that this can come with a premium; I just wanted to know what this premium might be. So, there I was, discussing a treatment plan and then payment plans. The treatment plan ended up being the easier part of things to understand. Let me tell my tale…

Looking at a schedule of my health insurance benefits is like solving a complex math problem, where suddenly I need my calculator and a whole lot of patience. I have to factor in a deductible and then calculate the split between what insurance will then cover and what I have as an out-of-pocket expense. I sat down with the office manager at my doctor’s office and he went through the various costs of my treatment and then he pulled up the Fair Health Consumer website. The office manager then explained to me that, because my doctor was out of network, we should go over what the treatment could, potentially, cost me. He explained to me that even though my insurance would cover a percentage of my “eligible expenses”, what that meant could make a huge difference to my wallet. I found out, this week, that things can get very complicated and expensive.

First of all, the health insurance company will determine the reasonable and customary cost of a procedure. This is the average fee charged in a particular geographic area. Then, for out of network providers, regardless of what the provider charges, the health insurance company will cover costs based on the reasonable and customary cost. However, a health insurance plan may determine what they will cover, based on a published rate allowed by Medicare. This rate has nothing to do with the average cost of a procedure in the part of the country where your treatment occurs. This rate can be wildly different from the reasonable and customary rate and this can result in a big difference in how your wallet looks at the end of the day. For example, you could have a procedure that has a reasonable and customary cost of $10,000. If your health insurance covers 60% of this rate, your out-of-pocket expense will be $4,000 or 40% (I am, for the sake of simplicity, assuming that there is no deductible). Now, if your health insurance uses the Medicare based rate, they could reimburse you only about $300 (this is a comparison that I actually did on the Fair Health Consumer website, and not something that I made up, as extreme as the difference is). That means here, your out-of-pocket expense will be $9,700. That is a significant difference. So it is very important to have an idea of what you are going to pay beforehand, Otherwise the doctor’s bill may give you a heart attack, in addition to all your other issues. The health insurance companies say that they have switched to the Medicare rate in order to push out of network doctors to become in network doctors in order to get better reimbursement rates from them, but what I have read of how this rate came about does not appear to support that claim. However, it seems to me that the patients are the ones who are suffering, being that they are the ones who then get the gigantic bills from the provider that they have chosen to use. And this could be because they have looked at their explanation of benefits and calculated their out-of-pocket based a reasonable cost. Imagine that.

With this in mind, the office manager gave me a list of information, including the codes for the treatment and suggested that, beyond visiting my insurer’s website and reading their explanation of benefits, I actually call and have conversations about what exactly the explanations mean. So began my adventures in telephone conversations regarding my health insurance benefits. I made my first call, thinking I would be on the phone for a few minutes but I didn’t hang up until over an hour later and I was still clueless. The man I spoke to was very friendly and polite and he took my information but then as we got into what I should expect my out-of-pocket expense to be, things became very murky and confusing. It appeared that he could not access out of network information for what my cost would be and, he was not clear on what rate my out-of-pocket expenses would be based. After an hour of us hanging out on the phone, trying to figure things out, he found a form that I could submit in order to get a quote from the health insurer but he seemed to not know how to get it to me. So he said he would call me back or email me before the end of the day. He did neither.

The next morning I called again and, even though this particular insurance company representative seemed to have access to a little more information, she too was very vague and kept telling me that she could not tell me how much things might cost me or what would be reimbursed. That is a bit scary since I was calling to make sure that I would have as few surprises as possible. About an hour into a very frustrating and circular conversation, I mentioned that the day before, the representative had mentioned a form and a client advocate. She claimed she had never heard of such a thing but she put me on hold as she went to investigate. She came back on the line and said she had found this form but she could only either fax it to me or send it via snail mail (I could go into a whole rant about why, in 2016, people can’t email you something and, instead, you have to figure out how to get your hands on a fax machine).

So, now I am at a point where I have sent information in to the insurance company and I am now waiting (for 2-3 business days, per the form) for a response on the eligible expense for my treatment – the first step in calculating out-of-pocket expenses. I am hoping that my future does not hold more protracted conversations where things end up even more confusing than they were going in. I would feel dumb, but the health insurance representatives seemed to know about as much as I did about what my insurance policy does and does not cover. I hope that I can get to a point where I can make an informed decision about what to do next. And my lesson, almost, learnt that I am sharing here – don’t take the website blurb at face value; don’t take the information booklet at face value; don’t assume you know what is going on. Keep asking questions, even if you get so frustrated that you want to throw your phone across the room. If what you are being told about your insurance doesn’t make sense, ask to speak to someone else. I could tell you what I think about all of this, but I am going to stick with telling you to ask the questions until you get clarity (even if it is very expensive clarity). Insurance is a very murky space and those dark spots could turn out to be a lot of money coming out of your pocket.

 

Tagged , ,

I Trust You, But…

Image

Last Saturday, my husband showed off some of his work in an open studios event at Industry City. He did the lion’s share of the work but, on Friday evening, he asked me to come over and help him a little. He assigned me the job of placing 5×7 prints of some of his work in 5×7 frames. It sounds straightforward enough and I am sure that my husband trusts me and has great confidence in my abilities. Nevertheless, after I had framed a few photos, he came over and checked my work. It turned out that some of the photos were not quite centered in their frames. He handed them to me, offered me some tips on how best to center photos in frames, and asked me to redo them.

This reminded me of when I was a kid and my parents would check my homework. I know that they felt that I could do it. I know this because they would say things like, “You can do better than this; try again.”Most of the time the issue was that my handwriting was barely legible on a good day. Knowing that my work would be reviewed, on days when I was tempted to rush through my homework, maybe because I wanted to play or watch TV, I willed myself to slow down and get it done correctly the first time around. I did not want to get into trouble and I definitely did not want to have to do my homework over again.

Recently, I have been reading stories about people in charge of a business’s finances perpetuating fraud. These people carried on their shenanigans and were not caught until the businesses they were employees of were practically going under. You know why? Because no one ever checked their work. Ever. In the cases that I read, the business owners were all charmed by the charismatic and capable people that they hired to manage their finance departments. The business owners gave these managers unfettered access to the companies’ bank and credit accounts and, boy, did those managers take full advantage of this access. They opened new credit accounts, they maxed out existing accounts and they went shopping! These business owners only found out what was going on when purchases they were trying to make were declined because their accounts were wiped out. In every case, the owners had left the finances up to the managers that they had hired so that they could focus on operations. They seemed to forget that an essential part of a business is the money needed to run it. They did not keep tabs on where the money went after it came in.

Because none of us is infallible and because too many among us are not always honest, it is vital that work is checked by someone else. Depending on the size and complexity of an entity, there are various ways in which to incorporate checks into a system to prevent and detect error and fraud.

  • There must always be a review of another party’s work. In a very small business, this may mean that the business owner is periodically reviewing bank and credit card statements. It may mean that the business owner will check incoming mail on a random basis, to make sure that unauthorized statements have not been opened in the name of the business. In larger businesses, there should be processes where the work done by one employee is reviewed by another employee for error and misstatement.
  • Someone other than the person booking cash entries in the ledger should perform reconciliations of the bank and credit accounts. Reviews and reconciliations of payable and receivable accounts should also be performed.
  • Make sure that staff take vacations and that, while they are on vacation, someone else does their work. In this way if anything is amiss, a new pair of eyes may catch mistakes or other missteps that are being made. In addition to this, having someone else do the work also means that one person does not have exclusive knowledge of a process in a business. In this way, no employee is indispensable. Also, when more people understand a process, and employee is less likely to try hide fraud in the process.
  • If possible, move work around among employees, again, so that more people in a department have a greater understanding of what is going on. The saying is familiarity breeds contempt; it can also breed careless errors. People operating in autopilot can become too comfortable with the work that they are doing and make careless mistakes because they are not paying close enough attention to the work.

Check, check and check again. If people know that there are effective checks in a system, they are likely to be discouraged from trying to steal from an entity. If people know that their work will be checked, they are more likely to pay attention to details so that they don’t have to do the work over again. Even when I was frustrated because the photographs seemed to shift all by themselves when I tried to secure them in the frames, I growled, I complained, and I started over and over again until I got it right. You know why? Well, because I like to do a job well AND I didn’t want my husband handing the work back to me and calling me out on getting it wrong.

Tagged , , , , , , , , ,

‘Tis The Season

13748394-bear-in-a-mask-who-runs-away-with-a-big-bag-of-money

A recent typhoon ripped through parts of the Philippines, causing unimaginable damage. People lost their homes, they lost their livelihoods and some even lost their lives. This tragedy has inspired many around the world to do what they can to help those affected by this typhoon. This tragedy has also inspired those with less noble intentions to do what they can to exploit the moment for financial gain. It is very important, therefore, when giving to give not only generously, but also smartly. As we are in the midst of the holiday season, which is also the time of the year when most charitable giving occurs, a lot of these pointers will apply to any giving that you do. I am sure that you would not want to find out that what you thought was a charitable gift was actually going to fund an ignoble stranger’s lavish lifestyle.

First, it is vital to know to whom your donation is going. At a time like this, you are very likely to be inundated with pleas from organizations. The pleas will be very good at laying out how dire things are right now; that is because things are dire. And because things are so dire, it is all the more important to know that any donation you are sending is actually going to help. Not all charities are created or managed equally. And, depending on the cause, not all charities will spend funds in the way that you would like them to. For example, some charities have funds that are dedicated to helping those affected by Typhoon Haiyan, while others may solicit funds using the typhoon as a draw, but not actually spend the money on that. Also, some charities spend a greater portion on their nonprofit work than others do. Fortunately for you, there are several resources that you can use in order to research charities so that you can make an informed decision about where you want to send your money. Examples are Charity Navigator, CharityWatch and GuideStar. Here, you can find tax return information, ratings in various categories and find out more about the leadership of the nonprofit.

Make sure your money is going where you think it is going. Recently, it came to light that many calls that appeared to be coming from a charity were actually coming from a for-profit telemarketer hired by the charity. What makes this a less than ideal manner in which to give to a cause is the fact that the telemarketing companies charge very high fees and, at times, the charity ends up handing over just about all the funds raised by the phone call campaigns and very little, if any, of the donations solicited are used for charitable causes. With this in mind, it makes more sense to cut out the middleman on the phone and donate directly to the charity, either via their website, by sending them a check directly or by calling them and making your donation. In this way, you will know that the majority of the money that you give will be used for good. And when you do give, be sure, also, that you are giving to the charity that you think you are giving to. Sometimes fraudsters will use a name that sounds similar to a legitimate charity and even so far as to create fake websites. Again researching the charity can go a long way to not getting scammed. It would be tragic to find out that you gave your money to The Rad Cross, not the Red Cross. Just be sure you know exactly who is getting your money, not kinda sorta.

When your donation is in response to a tragedy or disaster, find out what the most effective way to give is. Most of the time, with time being of the essence and the needs of those affected being so diverse, sending cash to a charity that is providing relief is the smartest option. There will be news reports of how people have lost everything and need food and clothing, among other things. If you pack a box of food and clothing, it may create logistical issues and delays. Sending clothing means that the charity will have to sort through the clothing, separating it by gender and size. They may have to clean this clothing and then determine how to get the clothing to people who it will actually fit. All this takes up a lot of time and money to do. Nothing is more mobile than money and this money can then be used to get exactly what is needed. Food has similar challenges, including navigating food safety issues. Of course, there is a time and a place where food and clothing donations are appropriate – around the holidays there are often coat and food drives. With these, it is helpful to know that a lot of clothing donation bins that you may see actually belong to for profit entities that then sell your donations for their personal gain. Be aware of this as you give and check to make sure that the bin belongs to a non-for-profit organization.

There are causes and issues that will greatly benefit from your gifts and donations this holiday. It may feel tedious that you need to research the causes that you wish to give to but that is because we live in a world where we need to be on the lookout for greedy scam artists. If you can give, give with your heart but don’t forget to consult with your head first.

Tagged , , , , , ,

Back in the Day… Today

Image

After my father passed away in late 2003, I went to Zimbabwe for a few months to spend time with my family, mostly my mother and sister. A lot of this spending time with my mother involved driving. Before my father passed, with his retirement looming, my mother had decided that she wanted to fulfill her childhood dream and become a farmer. They had bought a farm but they were still renovating the farmhouse. As a result, every day, my mother and I would drive from my grandmother’s home to the farm, hang out doing farm stuff, and then head back to my grandmother’s. Even though I was quite useless on the farm (I am allergic to nature) my mother let me tag along as we spent at least an hour on the road, daily. The car that my mother drove came with a tape deck and a shortwave radio. I am not sure why we never listened to cassette tapes; all I know is that we listened to a whole lot of BBC World Service. During one of these Coca Cola fueled drives, the story of the Parmalat bankruptcy broke on BBC. The reporter mentioned that, among many things, Parmalat had given their auditors fake bank confirmations. The confirmation fraud was a simple “cut and paste” fraud. Here, pasted a Bank of America letterhead onto a document confirming that a bank account held almost $5 billion (yes billion with a ‘b’). The document was then passed through a fax machine several times so that it looked authentic.

As I listened to the story, I started yelling, at no one in particular, “A faxed confirmation? You can’t accept a confirmation that is faxed to the client! Plus, you really want the original document. Faxes are so dangerous.” My mother looked at me as though I had lost my mind – I don’t think she had ever heard me get so worked up about auditing. But what had happened was quite unbelievable to me. When I worked in audit, the partners I reported to and my study materials, emphasized the importance of third party confirmations especially when it came to cash.

It does not matter how much you like a client or coworker, you should still practice professional skepticism and, although it is nice to trust, it is always smart to verify. Verification from an independent third party is the method that gives the most comfort but in order for the confirmation to be effective, it must be done correctly. Some ways to help ensure this are:

  • Begin by knowing what your goals are in the verification process. Are you trying to find out about assets, liabilities or both? Are you looking to find out if there are hidden accounts that you did not know about? Are you looking to find out balances on a particular date?
  • You should maintain control over the entire process. Do not let whomever you are verifying get involved in any part of the process, no matter how small. Do not let them give you the contact information, or let them send the confirmation out for you. You should know exactly what is going on every step of the way.
  • Do not let the confirmation be sent to the client or coworker whose information you are trying to verify. Have it sent back to you, preferably as an original. Photocopies and faxes are ways that counterfeiters try to hide the signs that a document is forged.
  • When I was an auditor, all my confirmations arrived via snail mail. Nowadays, balances and banks can be checked online. Because it is so convenient and easy, it is essential to ensure that you are getting your information from a valid source. If you can, verify a company’s website independently. Do not click on a link that client or coworker has provided – enter it manually. It is simple and relatively inexpensive to create a fake website so be vigilant.

It may feel a bit tedious to go through the steps of the confirmation but the information and level of comfort that you can get from a confirmation that is done correctly are very worth it.

If a company is trying to make its books look good and they know that no one is checking or that they can foil attempts at third party confirmation, it then becomes relatively easy to hide cash fraud. According to the Association of Certified Fraud Examiner’s, in frauds involving the misappropriation of assets, cash is the targeted asset 93.4% of the time.  I am not sure how the city of Dixon’s auditors confirmed bank balances, but they were not doing a good job. The discovery of its comptroller’s multi-year theft of over $53 million began with a confirmation sent by an employee to the city’s bank. People who steal, really like to steal money – shouldn’t you make sure that what you think is there really is?

Tagged , , , ,

Step Away From The Dice

Image

I just spent a lovely weekend in Atlantic City, celebrating a friend’s birthday. During this time I ran past several casinos, I walked through a casino but, happily, I did not spend any time at all gambling at the casino. I say happily because I am a terrible gambler. The mere thought of gambling fills me with anxiety because I have no idea what I’m doing out there. The only thing I do know is that the odds are stacked against me, more so because I don’t know what I am doing. I never learned how to play poker, beyond yelling “big money, big money” I don’t know the rules of roulette and even when sitting in front of a one-armed bandit, I am pretty sure that I am not quite doing it correctly.  The one thing I do know, when I am in a casino, is who to NOT consult for help. The pit manager. Because the allegiance of pit managers is to the casino so I know that helping me win money is not a priority for them. In fact, in order for the pit managers to keep working, we the gamblers need to lose more than we win.

This brought to mind an article I read about Philip Ramatlhware who walked into a Philadelphia Citibank branch to open a regular bank account where he could deposit the proceeds from a settlement with Greyhound. He had been injured in a bus accident and received $225,000 and wanted to keep his money safe. All he wanted was a savings account but he was referred to a broker who assured Mr. Ramatlhware, a man with limited English skills and without a college education, that his money was going into “guaranteed” funds. Instead, in less than six months, he lost $40,000. This is not an isolated case. Digging into the archives of the Financial Industry Regulatory Authority (FINRA), which is an independent regulator of security firms doing business with the public, you can find several cases where individuals walked into commercial banks, seeking a safe, FDIC insured place to put their savings and ended up losing money through risky investments that they could not understand. That they could not understand the risky investments was not only because these investments were complex ones but also because the brokers they met with misrepresented the risks involved and was not clear about where the money was going. It is, to a certain extent, understandable that these customers were easily misled – they believed they were going to a commercial bank and not an investment bank.

Back in 1933, the Banking Act of 1933 was enacted and it included four provisions that are what is generally meant when people speak of  the Glass-Steagall Act. The provisions served to, in essence, separate commercial banking and investment banking. They kept commercial banks from dealing in securities for their customers. The funds that customers deposited into commercial banks, as I mentioned before, were insured by the FDIC and were not to be used for speculation. They were to be considered safe by the banks’ customers. Conversely, risk-taking investment banks were not to take in deposits. So, you may be wondering how, with Glass-Steagall in effect, Mr. Ramtlhware and walked into a commercial bank and ended up investing with an investment bank broker. This is because Glass-Steagall was repealed in 1999, leaving banks able to deal in both commercial and investment banking at the same time. This means that investments that are complicated and very risky and should be reserved for so-called sophisticated investors are being marketed and sold to people who think they are dealing with the relatively safe offerings of a commercial bank, do not fully comprehend what they are getting into and who generally cannot afford to lose the money they end up investing in risky offerings.

As long as the wall between commercial and investment banks continues to be virtually non-existent, potential customers walking into commercial banks are going to have to start asking more questions at the bank:

  • Is my deposit insured by the FDIC?
  • Are you a broker?
  • If I am just depositing money into a risk-free guaranteed account, why does it come with all of this complicated paperwork?

Should you find that you have been taken for a ride by your bank, know that you have resources you can turn to in order to have your case heard. FINRA offers advice to investors that probably will not turn you into a sophisticated investor but may go a long to helping you recognize some of the strategies an unscrupulous broker may employ. Also you can take your case to FINRA or, in the case of fraud, the Department of Justice. Though you may believe that you are walking into a commercial bank and dealing with a customer service representative who wants to help you, you should be careful in the banks for sometimes you may come across a pit manager who is trying to make as much money as possible for the investment bank casino.

Tagged , , , , , , ,

All Over This One

Image

In the United States, bribery of a public official is illegal. Public officials, on a state, local or national level, tend to hold a lot of power. It would not be right to allow those among us with deep pockets to use the contents of said pockets to get unfair benefits, such as no-bid contracts, tax breaks and “get out of jail free” passes. In 1977, the Foreign Corrupt Practices Act (FCPA) made it illegal for U.S. persons, companies and their subsidiaries to bribe foreign government officials. The FCPA was further amended in 1998 to apply to foreign people and companies whose payments pass through the United States. The FCPA also applies if a foreign party authorizes a bribe via an email that is stored on a server in the United States. It is a far-reaching law with two main provisions – an anti-bribery provision that is generally enforced by the U.S. Department of Justice (DOJ) and accounting and record-keeping provision that is generally enforced by the Securities and Exchange Commission (SEC).

A huge incentive to not violate the FCPA is the severity of the punishment. The criminal and civil fines for violating the FCPA apply to companies and individuals alike. Companies can be fined up to a maximum of twice the benefits sought by the bribe. For individuals, fines can be up to $5 million and 20 years in jail. Fines and jail time can apply for either the corrupt payment or violation of the books and records provision. In addition to the fines, companies may also receive sanctions such as the loss of export licenses and disqualification from U.S. government contracting. For example, in 2008, Siemens was fined more than $1.3 billion by the DOJ, the SEC and German regulators and, more recently, Walmart is under investigation for bribery of officials in Mexico, China and elsewhere.

To avoid the fines and jail time, individuals and firms must comply with both provisions of the FCPA. The first, bribery, seems straightforward but I shall go over it so we are clear.

  1. Do not make payments to public officials in order to get special favors. An officer at state-owned entity is also considered a public official. It is safest, and ethical, to not pay bribes to anyone. However, be mindful of the fact that bribes of public officials will get you into the most trouble.
  2. If you invite public officials on a trip to show off your business or to a conference, do not throw in extras, such as a trip to Disneyland for their family. Keep it all above-board and about business.
  3. “Gifts” such as watches that costs thousands of dollars or a suitcase of cash are taboo.
  4. Payments related to the political campaigns of foreign governments are also not allowed.

The accounting provisions are where the forensic accountant is very active, working for both the companies and for the DOJ and SEC. Corporations covered by the FCPA are required to make and maintain books and records that accurately and fairly reflect their transactions and to devise and keep a sufficient system of internal controls. This is so that government agencies inspecting the books and records of the corporation will be able to easily see that the corporation is in compliance with the anti-bribery laws. The controls are so that the employees of the corporation do have the opportunity to commit fraud or bribery. When companies and individuals are paying bribes to public officials, it is highly likely that they will try to hide these transactions in their ledgers so they are not immediately identifiable as illegal transactions.

Companies with international operations will often have a department that review the books and internal control systems to ensure that they are complying with FCPA provisions. From time to time, the company may call in a forensic accountant to perform an internal investigation. This may happen either because the company suspects that untoward behavior has occurred or as a periodic review of their books and systems.

The DOJ and SEC will also employ the services of forensic accountants when they investigate companies and individuals that they suspect of violating the FCPA. When cases like this happen, there will be forensic accountants working for both the government agencies and the entity being investigated. In addition to discovering whether or not bribery has occurred, the company and the government agencies seek to determine the extent of the violations and determine the value of the gains realized and, therefore, the fines and other penalties to be levied by the government and avoided by the corporation. These investigations can be very extensive and span several continents, depending on the size and reach of the corporation. Financial forensic experts are instrumental and very involved in these investigations, tracing payments and working diligently to find what the corporation has tried to hide both on and off its books.

Often, an element of a FCPA settlement is the appointment of a multi-year monitor. This happens after the investigation and is an area where forensic accountants can use their expertise to examine the company’s control environment and record-keeping and assess the progress the company has made toward compliance with the law.

In recent years, the DOJ and the SEC have become very aggressive about enforcing the FCPA. In addition to this, other nations have enacted their own anti-bribery laws; the U.K. Bribery Act of 2010 has been in force since July 2011 and criminalizes bribe payments to private individuals as well as government officials. Also, there is more and more international cooperation in the investigation and enforcement of this law. Through it all, the work and expertise of financial forensic experts are extensive and vital. A lot of big firm lawyers think of the FCPA when they think of forensic accountants. It is indeed one of the many places you will find the financial forensic expert.

Tagged , , , , , , , , ,

Regular Check-Ups

Image

Several years ago, I received a phone call from my bank. I was surprised to receive this phone call as I was probably this bank’s least profitable customer. I had recently moved to New York, it was my first bank account there and the account was remarkable only in how low its balances could get, especially just after I paid my rent check. The very nice woman on the line was calling to let me know that the bank believed that they had discovered fraudulent activity in my account. The bank noticed that, at least once a week, between $9.95 and $14.95 was being withdrawn from my account. The withdrawals were regular and, every time it happened, the name of the company making the withdrawal was slightly different from before. The regularity of the withdrawals, along with the amounts and the slight name changes, were all red flags for the bank. I was very grateful that the bank had spotted this and, quite frankly, rather shocked. I had assumed two things – first, that I was too poor to rob and, second, that the small transactions going through my account, on the rare occasions that I actually noticed them, were trips to the pharmacy or a lunch that I had forgotten about. It turned out that I was wrong on both accounts and an unscrupulous party took advantage of the lax attitude I had toward my finances. For over three months, at least once a week, money had trickled out of my account. Luckily for me, the bank helped me trace the amounts and credited my account. It seems that, in more recent times, banks are more likely to allow this kind of fraud to continue. They have decided to earn fees from these transactions instead of alerting their customers of these possible frauds.

After this incident, feeling violated by this invasion of my space (and funds) I became very diligent about checking my money. I had been very lucky. Yes, my money was being taken without my knowledge, but I was able to recover most of the funds and I had the bank looking out for me. Not many are so fortunate these days. It is important, therefore, to take steps to minimize the chances of unauthorized access to your bank account or, at the very least, to be able to quickly spot, stop and dispute transactions that you don’t recognize.

  • Be very careful about who you give your personal and financial information to, especially when this request comes via a cold call. Even if the person on the line sounds official, check the credentials. If need be, hang up and call up the organization that claims to be on the phone, using the contact number that you have in your records. If the person on the phone is a valid representative, they will not mind you checking to make sure things are above-board.
  • Check your bank and credit card balances often – at least once a week, if you can. Just about every bank has online banking facilities available to customers. Here, you can review recent transactions and make sure you know what happened with each one.
  • Be aware of the risks to seniors that you know, be they relatives or friends. Because of programs that tend to affect seniors, such as medicare and social security, they are particular targets for the unscrupulous. Fraudsters will call senior citizens and either cajole or scare them into giving up their information. Check in with those who may be vulnerable, either because of advancing age or lack of computer savvy, and make sure no one is raiding their accounts.
  • Safeguard the physical information you have on your accounts. Keep statements and account numbers in a safe place. The last thing you want is to find out that a guest or someone who has worked in your home, has taken your information and used it to gain access to your money. Don’t leave the temptation out in the open – that is only asking for trouble.
  • Should you come across odd activity in your account, be sure to call your financial institution and look into the matter. Time is of the essence here as, often, after a time, it becomes near impossible to reverse a transaction, even if you can show that it was unauthorized.

Once keeping track of your money becomes a habit, it also becomes a very simple exercise. If you check-in regularly, there are only a few transactions to remember at a time. Also if you check-in regularly, you will also become more familiar with your own spending patterns and be better able to spot irregularities. As a bonus, if you check-in regularly, you may also realize that you have bad spending habits that need some rehabilitation. It doesn’t matter how much or how little money you believe you have, there is always enough for someone to take away from you. All of this monitoring of finances may sound a touch paranoid, but paranoid is often better than broke.

Tagged , , , , , , , , , ,

Money Trails

20130526-124947.jpg

I mentioned, last week, that I traveled to Zimbabwe and Mozambique. After my experiences during this, and our previous trip, in 2010, I am now pretty convinced that the government system and most companies were created by old school accountants and that very little has changed since then. It is a great reminder of how important having a good financial control system is. In our mostly virtual and paperless modern transactions, people tend to think less about how a transaction can be traced. Not so long ago, when business was more manual, it was easier to see the path a transaction took from inception to completion. One could refer to a stack of papers to see who gave their okay to a process. The separation of duties was also much clearer as documents tended to be manually moved from one place to another, or employees had physical custody over paperwork. These days, as these systems and documents have disappeared into the computer and cloud, it has become more challenging for those running corporations and institutions to think through a process and determine adequate controls and paper trails, virtual though they may be.

However, in Zimbabwe, often transactions are quite manual and, even when they are not, they are quite involved and can involve a lot of paperwork. I mentioned getting my prepaid phone line – let me tell you the process:

  1. I first had to provide a copy of my identification and fill out an application form for a SIM card. This means that it would be pretty impossible to have one of those crime show episodes where the trail for a criminal goes cold because everything was done using prepaid phones and so no one knows who the line was purchased by.
  2. I took this form to the cashier who gave me a receipt for the one dollar I had to pay in order to buy the phone line.
  3. I then took my receipt to a customer service representative, who was sitting in the booth next to the cashier’s. The representative gave us a SIM card and activated the phone line for us. We then needed air time.
  4. With proof of our activated phone line, we then went back to the cashier and paid for air time.
  5. We left the phone store with a phone line, air time and a bunch of receipts.

Our experience was similar at the border, when traveling from Mozambique to Zimbabwe – we gave payment to one person, were issued a receipt and then and received our visa from another person. As frustrating as it was to walk back and forth in order to get through the process, it was fascinating for me to see the clear separation of duties and the generation of a paper trail.

Most fun was when we received our gifts after our wedding. The afternoon after the wedding, my aunt and cousin came by with an envelope of money and the personalized gift receipt book you see above. It turns out that, during the reception, a team of wonderful volunteers, sat at a desk and received gifts from wedding guests. They then placed a piece of carbon paper (who knew that still existed) between two pages of the receipt book. After filling out the details of the receipt, they tore out and gave the original to the guest (as proof that the volunteers had received the funds) and the carbon copy remained in the prenumbered guest receipt book. Yes, numbered receipts for wedding gifts – who knew?

It is fantastic that many processes have become automated and that transactions are now completely more quickly and, hopefully, more efficiently than years ago. It is important, however, to make sure that controls and safeguards are not sacrificed in the name of efficiency. The separation of duties may feel tedious but having more than one person involved in a process means that, if one person is flouting the system and perhaps even misappropriating assets, there is at least one other person to blow the whistle on what is going on. Having an audit trail (paper or virtual) can seem overly meticulous until one needs to determine whether a transaction is valid. Creating, monitoring and maintaining a strong financial system is a much better proposition than trying to recover assets and rebuild a business after a fraud has occurred.

Also, you could get a lovely, personalized gift receipt book as part of the deal.

Tagged , , , , , ,

I Told Two Friends…

Image

When I was about ten years old, I received the first chain letter that I remember. At that point in my life, I had not received much mail so I was really excited to receive a letter. However, when I opened it, my excitement faded very quickly. This letter declared, with a descriptive diagram, that I could stand to gain a bunch of money and it was all very simple. There were four names, listed vertically at the bottom of the page. I was to give twenty cents (a decent amount of money to the non-earning kid that I was) to the person whose name was at the top of the list. I was then to make ten copies of the letter, putting my name in at the bottom of the list and moving the remaining three names one place up on the list. My instructions were to pass these copies out to ten friends and then wait for money to come my way, once my name got to the top of the list. The diagram very helpfully showed me just how much money I stood to receive. I can’t  remember how much it was but I do remember that it was enough to get my friends and classmates chatting excitedly about all the things they could buy with the money they were going to get. There was was a high energy buzz in our class and I remember seeing classmates, writing out copies of the letter, as they prepared to keep the chain going.

Me? I was too busy being sad to get in on the letter writing. Why? Well, because, first of all, I did not have ten friends. All my life, I thought I was doing really well with the four very close friends that I spent just about all my free time with. Until the moment I received the letter, I had never felt that I lacked in the friendship department. But, once I got that letter I got to thinking:

  • Why did I only have four close friends? Why didn’t more people want to hang out with us? Was there something wrong with us?
  • What about the other people in my class? Could I consider them to be close enough friends for the purposes of this letter? I mean, we did go to each others birthday parties and sometimes we hung out? Could they be friends?
  • But those other kids had friends too who were probably going to send them a letter. Could I send them a letter too? Was it okay to get more than one letter and end up in more than one chain? (That question was answered pretty quickly, as I received several letters over the next few days.)
  • Who were my friends going to give their letters to, if not me and each other? Who did they know that, that I did not know, and they were friends with? Why had they not introduced me to them so we could all be friends? Was something wrong with me?
  • If we were only friends with each other, this chain was going to end up being a tight circle, where we could not fulfill the the ten person rule and ended up just passing the letter amongst ourselves?

So, while others were making copies, I was feeling miserable (and receiving a few more letters). I was miserable because I didn’t know enough people to keep the chain going. So, I ended up being the person where chain letters came to die – something I also felt terrible about.

I didn’t know it then but that so-called chain letter was actually the first pyramid scheme that I came into contact with. It turns out that, once people get to thinking about it, no one knows enough people to keep the chain going. If a pyramid scheme is sold well, you can very easily miss that there are not enough people on the planet to keep the scheme going more than a few rounds. Sadly, pyramid schemes tend be be sold very well and that is why they are often so successful for those who start them. Sometimes the person selling you the idea will even tell you that your risk is nothing; that you can come back to them and get your money back if you have second thoughts (those tend to come when you realize that no one is sending you any money or that you have no one to recruit to this scheme). The person selling you the scheme will wax lyrical about all the money you stand to make just by putting in a little bit of money and basically sitting back and waiting on your network to do the rest. It all sounds very tempting – who doesn’t want a lot of return for a little effort? The truth, though, is that, just as the laws of physics dictate, so it is with money matters – it generally takes a lot of effort to get a little return. So, learn to protect yourself against potential pyramid schemes:

  • Even when a trusted friend suggests putting your money into an investment, do some of your own investigating into the proposed investment. Try to find out how solid an investment it really is.
  • Especially when the returns are supposed to be very high, be very careful. Great rewards come with great risks – decide how much you are willing to lose and how willing you are to do so.
  • If someone tries to talk you into a program that requires recruiting people to put money into a fund so you can get a payout, think about how many people you would need to know in order to keep that program going. For example, if each cycle requires ten new recruits, after only six cycles, you would need one million recruits. That is unsustainable.
  • You know the saying – if it sounds too good to be true, it probably is not true. You really do get nothing for nothing. So when someone comes to you with a get rich quick scheme, recognize that the person who will get rich from that scheme is mostly likely not you.

Pyramid schemes are illegal in the United States, with good reason. However, illegality has never stopped anyone from trying to run a scam. Know to recognize the red flags and remember that the few friends you have are probably what are keeping your money in your pocket.

Tagged , , , , , ,