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8/14/2019 Madoff scam
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,Fraud Schemes
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Part 1The Madoff Era:
Ponzi chemes & The New Wave of Fraud
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Red Flags :
xper warn ngs y o er mar e ana ys s e.g. eWorlds Largest Hedge Fund is a Fraudby HarryMarkopolos)
"Bernie Madoff is running the world's largest
unregistered hedge fund... Harry Markopolos nusua us ness pract ces
Reputation of the auditor
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Definition :
A Ponzi scheme is an investment fraud wherein theoperator promises high financial returns or dividends.
Instead of investing victims' funds, the operator pays
"dividends" to initial investors using the principleamounts " nveste " y su sequent nvestors.
Source: fbi.gov
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History :
Ponzi schemes are named for Charles Ponzi, whodeceived thousands of New England residents into.
thought he could take advantage of differences
between U.S. and foreign currencies used to buy andse nternat ona ma coupons. onz to nvestorsthat he could provide a 40-50% return in just 90 dayscom ared to the interest rates for bank savin s
accounts, stocks and bonds.
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How to protect against a Ponzi Scheme:
Be skeptical about investments Be skeptical about reputations
Diversification of investments
Due diligence
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Proliferation of advertisement videos for
business opportunities structured as Ponzischemes (i.e. YouTube.com).
The Better Business Bureau identified nearly
23,000 videos. promo ng cas g ng or g ng c u programs nearly 60 million views
,
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Lessons Learned or Notfrom the Madoff Case
- Scheme based on trust, reputation, fueled by lackof diligence and regulatory failure
What failed
- Common sense, individual diligence ands ep c sm, regu a ory an nves ga ve o yoversight and follow-up
- Fraud wont go away, diligence and attention tored-flags is key
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Technology and Fraud:e ew ave
Many fraud schemes have been the same for centuries butnew technology has provided those seeking to commit fraudwith more tools and options:
Email hoaxes that go out to millions of people
Websites that collect data from unsuspecting victims Greater anonymity
Email and the web can provide a cloak of anonymity for those thatcommit fraud
Increased complexity (or at least apparent complexity) Many people arent technologically savvy, and those that commit
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Accordin to the ACFE Re ort to the Nation on
Occupational Fraud and Abuse for 2008, US businesseswill lose an estimated $994 billion in fraud losses (7% of
Instances of fraud will likely increase during this period of
duress
Companies are facing issues concerning valuation ofassets such as asset-backed securities held as
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urren conom c
Investment Scams
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Current Economic Environment The Fraud Triangle
-
current economic crisis
Pressure / Incentive
Rationalization O ortunit
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2008OccupationalFraudsbyCategory MedianLoss
Fraudulent
Statements $2,000,000
ofF
raud
Corruption $375,000
Type
Asset
Misappropriation$150,000
$0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000
Median Loss
Data obtained from the ACFE 2008 Report to the Nation on Occupational Fraud & Abuse (based on 959 cases of occupational fraud).
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Ps cholo of Investment Scams 2006 Consumer Fraud Research Group study funded by
the FINRA Investor Education Foundation revealed thefollowing common tactics used by fraudsters as part of theirapproach:
- e an om c es ac c - ang ng e prospec o wea ,enticing you with something you want but can't have. These gas
wells are guaranteed to produce $6,800 a month in income.- The "Source Credibility" Tactic - trying to build credibility by
claiming to be with a reputable firm or to have a specialcredential or experience. Believe me, as a senior vice president
of XYZ Firm, I would never sell an investment that doesn'tproduce.
. .
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Ps cholo of Investment ScamsThe "Social Consensus" Tacticleading you to believethat other savvy investors have already invested. "This ishow ___ got his start. I know it's a lot of money, but I'minand so is my mom and half her churchand it'sworth every dime.
The "Reciprocity" Tacticoffering to do a small favor for
you in return for a big favor. "I'll give you a break on mycommission if you buy nowhalf off.
The "Scarcity" Tacticcreating a false sense of urgency
by claiming limited supply. "There are only two units left,so I'd sign today if I were you.
. .
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Securities Re ulation
Federal Regulation:
Securities Act of 1934
Rule 10b Anti-fraud provisions
Investment Advisor Act of 1940
Investment Company Act of 1940
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Sarbanes-Oxley Act of 2002:
er ca on o ga ons or s an s
New standards for audit committee independence
New protections for corporate whistleblowers
Other criminal enalties: Document destruction
Freezing of assets
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Be cautious of "opportunities" to invest your money in franchises
or investments that re uire ou to brin in subse uent investors
to increase your profit or get back your initial investment. If the offer of an "opportunity" appears too good to be true, it. . ,
legitimate business is rarely conducted in cash on a street
corner. now w o s e promo er e n e ransac on. you ave no
heard of a person or company that you intend to do businesswith, learn more about them. Depending on the amount of money
that you intend to spend, you may want to visit the businesslocation, check with the Better Business Bureau, or consult withyour bank, an attorney, or the police.
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Be cautious of business deals that require you to sign
nondisclosure or non-circumvention a reements desi ned to
prevent the investor from independently verifying thebackground and credentials of people with whom you intend to
Do not invest in anything unless you understand the deal. Con
artists rely on complex transactions and faulty logic to "explain".
As with any investment perform due diligence. Independentlyverify the identity of the people involved, the authenticity of the
deal, and the existence of the security in which you plan toinvest.
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pressures and cause fraud to rise
A little fraud soon becomes larger if left togrow
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42.3%
46.2%Tip
InitialDetectionMethodforMillionDollarSchemes
22.8%
19.4%
20.0%ByAccident
on
16.7%
.
23.3%InternalControls
InternalAudit
T
ypeofDetecti
AllCases$1,000,000+
6.0%
15.8%
3.2%
9.1%
NotifiedbyPolice
ExternalAudit
Data obtained from the ACFE 2008 Report to the Nation on Occupational Fraud & Abuse (based on 237 cases of occupational fraudinvolving $1 million or more).
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%PercentofCases
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Characteristics of Fraud (cont.)
Business Approximately 6% of TotalAnnual Revenue
Fraud Costs U. S. Businesses More than
$400 Billion Annually en omm o epor e rau ases
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- -
o omm s rau
10% of any Workforce Would Never TakeAn thin
80% of any Workforce Would Take
Somethin if the Circumstances Were Ri ht
10% of any Workforce Would Take
Source: The Association of Certified Fraud ExaminersSource: The Association of Certified Fraud Examiners
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Motive: Unshareable Need(Usually Financial)
Bad Investments Impatience for the Good Life = High Debt
Drug and/or Alcohol Abuse
Family Debt x ramar a a rs
Need to Meet Productivity Targets
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O ortunit : An O ortunit to Commit Fraud Can BeReal or Perceived. Those Who Think TheyWill Get Caught Rarely Commit Fraud.
Lack of Segregation of Duties (Do More
Lack of Controlled Access to Vendor Master
Lack of Accounts Payable Controls
Fox in Char e of the Hen House
The Out Post Effect
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Rationalization: Most Fraud Offenders Have to Be Ableto Rationalize Their Behavior asSomething Other Than a Crime
Im Only Borrowing the Money Ever one Else is Doin it
The Company Owes Me
Im Underpaid I Didnt get my Bonus Because My Boss
Took Credit for my Work
m ore
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Red Flags:The Keys to Fraud Detection
Time Fraud Affects the Bottom Line Ethics Must Start at the Top and Flow Downward Exposure to Fraud Can Be Limited by Restricting
O ortunities Throu h Effective Internal Controls Fraud is Present Within Every Organization -
Challenge - Identify and Minimize Nearly All Frauds Could be Detected More Quickly if
e ags are no gnore