Bernie Madoff - "It was inconceivable that he was a crook"

Bernie Madoff died on 14 April 2021 aged 82. He was in the 12th year of his 150 year prison sentence after committing the biggest Ponzi fraud in US financial history.

In this interview "Bernie Madoff: 'The Wizard of Lies' ", first published in September 2017, Diana Henriques drew on her years of financial journalism and extraordinary access to the title character to write the definitive book about Bernie Madoff. It was turned into an HBO movie in early 2017 starring Robert De Niro, Michelle Pfeiffer and Diana, playing herself. 

This is compelling listening. Hear it rebroadcast on the "Bribe, Swindle or Steal" podcast  HERE.

 

Free Webinar - COVID-19 and the Payments Industry

In just a couple of months, the COVID-19 virus has changed the world. How we work and how we live has changed and probably will never be the same again.

Last May we presented a short Webinar on the effect that the COVID-19 pandemic has had on the Payments Industry and we looked at some possible future outcomes in the areas of banking, fintechs, the cashless society, mobile wallets, online shopping, customer behavior and more.

You can now watch this webinar FREE - Register now - just click HERE

What have we learned from the Wirecard debacle?

There’s no doubt that the demise of Wirecard has shaken the payments industry to its core. For many, it was always assumed that the biggest benefit to businesses having access to large global banking networks was the ability for them to intelligently route payments to get the highest conversion rate and drive higher revenue. That assumption was found lacking. Even in 2020, accepting payments is something one can no longer take for granted. Check out the lessons we have learned HERE.

Wirecard Execs may have hidden $1billion before collapse

In anticipation of its collapse in June, Wirecard AG executives may have raided the German payment company and deposited $1 billion in partner companies while it fought allegations of accounting fraud, the Financial Times reported. 

The Wirecard Story

In just a decade, Wirecard went from a little-known German payment processing company to one of the most valuable financial services firms on the stock market with a valuation of 17.5 billion dollars. The company was so hyped by the investors, that they ignored the allegations of fraud made by the press. However, it all unraveled last week when its former CEO, Markus Braun, was arrested. This is the biggest financial scandal since the collapse of Enron in early 2000s so buckle up, it's going to be a bumpy ride.

Wirecard and the missing €1.9bn

Surveillance, spear phishing and missing billions. 'At times I thought I was going crazy.' Journalist Dan McCrum explains the twists and turns behind the massive fraud.

Big Short: Fintech Fraud Wirecard Explained (EY Accounting Scandal)

Eddie Donmez takes a look at the German Payment processing Fintech- Wirecard. He dives into the 15-year long accounting fraud that saw €1.9bn go missing and draws parallels to previous scandals like Lehman Brothers and Enron. Are there more FinTechs out there that have grown too quickly and let their standard slip?

Wirecard and the missing billions

Payment processing company Wirecard was the darling of Germany’s fintech industry until auditors uncovered a $2 billion hole in its accounting. WSJ explains what we know about the missing money, as investigators are still trying to understand what happened.

Downturns are corporate fraudsters’ worst enemy

Booms help fraudsters paper over cracks in their accounts, from fictitious investment returns to exaggerated sales. Slowdowns rip the covering off.

As Warren Buffett once put it: “You only find out who is swimming naked when the tide goes out.” This time, thanks to the Covid-19 pandemic, the water has whooshed away at record speed.

Read the full Economist article HERE.

Why managing operational risk is so important

By Stanley Epstein

Banks, like any other firm or individual, are exposed to many different forms of risk. So one would not expect it, but the term “risk” still remains one of the most misunderstood terms in the banking industry.

This short article will explain what risk is and some of the different types of risk that banks and other financial institutions are exposed to in their everyday business activities.
The definition of “Risk” as “exposure to the chance of injury or loss” is a typical one (with thanks to Dictionary.com).

There may be other variations on this theme, but what we have is good enough. The key elements of “RISK” are EXPOSURE to the CHANCE of LOSS. Put another way; the possibility that something will cause a financial or other loss. This is the basis for understanding the different types of risks that banks face.

In its basic form, banks take in deposits and lend these deposits out in the form of loans. Should the borrower not repay his loan the bank is faced with what is called “credit risk”. Credit risk is the possibility that a borrower will be unable to make payment of the amount of the loan when it falls due. Credit risk is absolute. It’s the chance that the borrower will never be able to repay the loan. Credit risk and bankruptcy are closely linked.

Liquidity risk is on the other hand not absolute. Liquidity risk is the possibility that a borrower will be unable to make payment of the amount due at the time that it is due. However the reason for this could be cash flow issues. It does not imply that the borrower is insolvent as he may be waiting for funds due to him to arrive. In terms of Liquidity risk the borrower may still be able to repay the loan at a later time.

Between them, Credit risk and Liquidity risk are the major business risks that banks face because they are the major part of the business of banking.

Over the last few years there has been a growing awareness that Operational risk is another source of danger to a bank. This was given “official” voice and form in the Basel Accords, where Operational Risk has been defined as “the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems or from external events”. Take note of this definition – it is very important.

Operational risk in terms of the Basel Accords has been subdivided into seven separate categories. We examine each of these categories and briefly explain what types of risks they cover.

• Internal Fraud. By and large this covers fraud by bank staff such as the stealing of assets, theft of client information, covering up errors, intentional mismarking of positions, bribery etc.
• External Fraud. This occurs where non-bank staff is involved such as in computer hacking, third-party theft, forgery.
• Employment Practices and Workplace Safety. Inequitable staff policies, workers compensation claims, employee health and safety issues.
• Clients, Products and Business Practice. This is a very wide field and generally covers market manipulation, antitrust issues, improper trading activities, bank product defects, fiduciary breaches, account churning. The sub-prime Mortgage debacle is a clear example of a product defect. The huge LIBOR rate rigging scandal which has dominated the news these past few years falls into this category as well.
• Damage to Physical Assets. This covers things like natural disasters, terrorism and vandalism – anything that results in actual damage or destruction of the bank’s physical assets. These actions may be deliberate or purely accidental.
• Business Disruption and Systems Failures. Power failures, computer software and hardware failures. A hurricane or a flood that results in banking services being disrupted also falls into this category.
• Execution, Delivery and Process Management. This covers things like data capture errors, accounting errors, failure to meet legal reporting requirement, negligent loss of client assets.

There are other risks too, such as legal, reputational, market – the list goes on. But that is another story.

Filling Fraud Detection Gaps

 From Bank Director

Banks need to address fraud detection as real-time payments initiatives take root.

Where is cybercrime really comming from?

From TED:

Cybercrime netted a whopping $450 billion in profits last year, with 2 billion records lost or stolen worldwide. Security expert Caleb Barlow calls out the insufficiency of our current strategies to protect our data. His solution? We need to respond to cybercrime with the same collective effort as we apply to a health care crisis, sharing timely information on who is infected and how the disease is spreading. If we're not sharing, he says, then we're part of the problem.
 

The Ugly Unethical Underside of Silicon Valley

As the list of startup scandals grows, it’s time to ask whether entrepreneurs are taking “fake it till you make it” too far.

Recklessness with the financial truth is often a sign of an economic bubble about to deflate—see the dot-bombs and Enron in late 2000 and the banks amid the 2007 subprime mortgage crisis. Scandals don’t cause recessions, but they can help trigger one. As White warned her Stanford audience: “Who loses when the truth behind inflated valuations is revealed? I think we all do.”

READ MORE>>

April Webinars from Compliance OnLine

Compliance Online, the largest GRC network, offer a comprehensive range of Banking & Financial Compliance Webinars.

Check out their April program. For details click on the program title.

REGISTER NOW!!

Use Coupon Code 320934 to get a 10 % Discount

 

6 April 2016

Standby Letters of Credit (for Credit Managers)

8 April 2016

Service Level Agreements (SLAs) - Preparation Guidelines for Effective SLAs

 

SOX: Internal Controls for Accounts Receivable 

 

13 April 

Cyber Incident Response: The Payments Perspective - Threat Intelligence and Best Practices to Manage Threats 

 

15 April

 
Building a World Class Accounts Payable Operation: P2P, AP 

 

28 April

Detecting and Preventing Embezzlement in Your Organization 

 

Understanding Money Laundering

By Stanley Epstein

Money laundering is a subject that often is misunderstood by the general public.

The goal of many criminal acts is to generate a profit for the individual or a group that carries out the crime. Money laundering is the processing of these criminal proceeds to disguise their illegal origin. Once successfully processed it enables the criminal to enjoy these ill-gotten gains without jeopardizing their source.

When a criminal activity generates substantial profits, the individual or group involved must find a way to maintain control the funds without attracting the attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

Through money laundering, these assets can be ‘washed’ so that they appear to have a legitimate origin enabling them to be retained permanently or recycled to fund further crimes.

Money laundering got its name from a string of laundries that the Mafia used in the United States as a front for their illegal business.

Just as soap and water are used for cleaning clothes money laundering uses a three phased process of ‘placement, layering and integration’ to ‘clean’ these illegal proceeds or ‘dirty money’.

Money laundering may look like a polite form of white collar crime, but it is the companion of brutality, deceit and corruption. The process deprives governments of tax revenues, thereby raising the relative burden of honest citizens. Because of rapid movements of large amounts of money, normally stable financial institutions can become undermined, threatening the savings and retirement funds of thousands of innocent people.

According to UNODC (United Nations Office for Drugs and Crime) it is estimated that the annual value of money that is laundered globally is between 2% and 5% of global GDP. In cold hard numbers this puts the amount at between US$800 billion and US$2 trillion. This is a really frightening set of numbers.

So how is money laundered? Well, generally a three stage process is used. These stages are called placement, layering and integration. We now look at these in a little greater detail.
 
Placement

Placement is the physical disposal of the initial proceeds derived from the illegal activity. The first step is to introduce cash into the financial system.

The money launderers use various vehicles to do this e.g. deposits, money transfers, purchases of monetary instruments such as travelers’ cheques, bank cheques or money orders, foreign currency conversions etc. They may also use insurance companies, brokerage accounts, credit cards and other financial services to achieve this.

Layering

Layering is the separating illicit proceeds from their source by creating complex layers of transactions designed to disguise the audit trail and provide anonymity.

Layering is like a shell game - many transactions and conversions take place to blur the trail back to the original crime. This may include investments, purchases of goods and services, cashing cheques, using several smaller cheques to purchase a bank transfer and so on.

Integration

Integration is the provision of apparent legitimacy to criminally derived wealth. The laundered proceeds re-enter the financial system, appearing as normal funds.

Integration is the final stage of the money laundering process. This is when the criminal re-introduces the funds into the legitimate economy with an apparently legitimate origin. Examples include investing in a company, purchasing real estate, luxury goods, etc.

The fight against money laundering

In recent year there have been a number of new developments in the global financial system that have made combating money laundering much more difficult.

These difficulties have been fueled by issues such as ‘dollarization’ (i.e. the use of the US dollar in transactions), black markets, the general trend towards financial deregulation, and the creation of new havens of financial secrecy (though the latter is today being shrunk by a huge international effort to curb tax evasion).

What is Corruption?

By Stanley Epstein

Corruption can be defined quiet simply. It is the abuse of entrusted power for private gain.

Corruption hurts everyone. But even more so it hurts those who lives and livelihood depends on the integrity of people in a position of authority.

Corruption includes many activities like bribery and embezzlement. Corruption occurs at all levels and layers; at a personal, business and government level.

Two particular streams have come under the spotlight in recent years - government, or 'political' corruption, which occurs when an official or other governmental employee acts in an official capacity for personal gain and at a corporate level where activities are undertaken that are aimed at improperly influencing government officials to obtain business.

The problem is widespread. The practice of corporations undertaking activities that are aimed at improperly influencing government officials to secure business has existed for centuries. Though clearly wrong, both morally and ethically, this practice has until recently been silently condoned.

In recent decades there has been a growing disquiet at the activities of many multinational corporations who turn to bribery aimed at influencing foreign government officials to obtain new business, contracts and concessions for themselves. What multinational corporations would never do on their home turf was seen as fair game when it comes to doing business with other countries, especially in the developing world.

These practices, while frowned upon, have only recently become illegal in many jurisdictions. Today over 38 countries are committed by treaty to implement anti-corruption legislation.

There are three recognized ‘Scales’ of corruption – Petty, Grand and Systemic.

Petty corruption – this takes the form of small favors that occur between a number of individuals. Petty corruption occurs at the ‘working’ end of government services. Examples of this type of corruption include the offering and acceptance of small gifts or the use of personal connections to obtain ‘favours’ or a speedy conclusion of routine government procedures. The culprits are usually junior and middle level officials, who generally are considerably underpaid.

Grand corruption – this takes the form of large scale corruption that affects the government on a considerable scale. This type of corruption occurs at the highest levels of government involving senior officials and even government ministers and usually involves significant subversion of the foreign countries political, legal and economic systems.

Systemic corruption - widespread corruption that forms a part of the day-to-day fabric of society often due to the weaknesses of an organization or a process.

There are a number of methods of corruption. We will briefly examine the three most prevalent. These methods are often used concurrently.

Bribery – inappropriate use of gifts and favours in exchange for personal gain. Favours given may include money, gifts, and entertainment or employment benefits.

Embezzlement, theft and fraud – someone who has access to money or other assets illegally taking them for his own use.

Extortion and blackmail - the threat to use violence, false imprisonment, exposure of an individual's secrets or prior crimes if the individual does not do something or act in a certain way. Usually money is demanded in exchange for continued secrecy.

Each of these three categories is in effect a crime and is prohibited and punishable by law in most jurisdictions. There are also a whole range of corrupt practices which may not be illegal, yet their use is questionable. This includes practices such as the misuse of one's powers and decision-making abilities to unfairly favour one party over another or favoritism and nepotism like hiring a family member to a role they are not qualified for or promoting a staff member who belongs to the same political party as you, irrespective of merit.