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`Due diligence is the business of common sense'

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Investors are responsible for whom they choose to invest with. Red flags can be waving in the faces of people but they are convinced that the investment is good because they want to believe the hype about the amazing returns over a short period of time. There is no one as blind as he who will not see. MR BRENDAN HEWSON, PRINCIPAL OF GLOBAL RISK ADVISORY SERVICES

Mr Brendan Hewson is the Principal of Global Risk Advisory Services (www.gra-services.com)

.

This consultancy assists business organisations with training in the fields of financial crime prevention, including money laundering prevention, common frauds and other schemes that can threaten businesses. Travel security advice and Personal Safety and Security training also offered.

A well-known and much requested speaker on international financial crime, at business and fraud conferences around the world, Mr Hewson is a member of the Group of Experts on Commercial Fraud for the United Nations Commission on International Trade Law (UNICTRAL) and the Consultant Financial Crime Editor of

www.gtnews.com.

A Fellow of the Royal Society of Arts and a Member of the Chartered Institute of Personnel and Development, he is the author of

Seizure of Confidential Material

published by Butterworths Law Publishers. He is the founder of the International Financial Fraud Convention, an annual event dedicated to bringing together representatives from the financial services industry of established and emerging economies for the purpose of developing ways to prevent international financial fraud.

Before establishing Global Risk Advisory Services, Mr Hewson was, for more than ten years, responsible for International Corporate Security for one of the largest global financial institutions.

An officer with the Company Fraud Department, New Scotland Yard, London, Mr Hewson developed the system under the United Kingdom legislation (Police and Criminal Evidence Act 1984, Schedule 1), which is used to obtain confidential material that may be evidence in inquiries, using the judicial process.

Excerpts from the interview

What is so new about financial crime? Hasn't it always been around us?

There is nothing new about financial crime. People often consider financial crime as that which relates to cash when in fact it relates to value. Cash money is the accepted representation of value today. I would imagine that in days of old when the exchange commodity was salt or pepper, there were devious people then too, who spent their time trying to devise ways of separating people from their minerals.

From 550 BC, accepting salt from a person was synonymous with receiving a salary, taking pay, or being in that person's service. Being a valuable commodity, pepper was naturally used as payment. Alaric, King of the Visigoths (395-410) who plundered Greece in 395 and attacked Italy, conquering Rome in 410, reportedly demanded 3,000 pounds in weight of pepper as part of a ransom for the city of Rome.

Unfortunately, greed has always been an inherent trait of the human species. Education, upbringing, family values and peer pressure help us control it. Those who choose not to invariably are the self-interested and egotistical type, most likely to succumb to temptation or actively seek opportunities for fraud.

Is there a difference in the nature of financial crime in the developed economies and the emerging ones?

Financial crime is financial crime, whichever way it is examined and from whatever source. It is a global problem with criminals, many of whom are members of organised crime groups, operating from emerging economies attacking established ones and vice-versa.

One current and insidious problem is "phishing." This scheme operating through the Internet deceives people into divulging bank details by email, telephone; or spam email viruses, which access sensitive information on your computer.

Another method is raiding trash bins for card receipts and discarded bills; intercepting mail, and "skimming" credit or debit card details in point of sale or telephone sales frauds. It is not uncommon for a fraudster to set up a sales telephone number and have that forwarded on to ring in another country, where the laws and standards of business ethics are not as regulated as the target's country.

419 frauds originated in Nigeria in the 1970s and are now perpetuated through email. The sender requests help in facilitating the transfer of a substantial sum of money. In return, the sender offers a commission, usually in the range of several millions of dollars. The scammers then request that money be sent to pay for some of the costs associated with the transfer. If money is sent to the scammers, they will either immediately disappear or try to get more money with claims of continued problems with the transfer.

With all the publicity that these obvious and simple scams have received over the decades, people still fall for them. Perhaps this is another manifestation of the greed phenomena. The source jurisdiction is invariably one that is not well regulated.

Honest business and crime-free politics. Are these equally oxymoronic?

Businesses known for their integrity and recognised as being of good repute are not as rare as some would have us believe. The tragedy for these companies is the damage done by the likes of Enron and WorldCom, where innocent employees and investors are, in some cases, ruined by the criminal acts of those in charge.

Politics is a different kind of business, albeit one is often intertwined with the other and frequently with disastrous consequences. The recent scandals of politicians being investigated, indicted and even jailed for crimes in the US and the current scandal in the UK of allegations of sales of Peerages for political loans disguised as gifts, show the link between business interests and the power of politics. This gives even more credence to the saying "Power corrupts and absolute power corrupts absolutely."

The report of the Control Risks Group speaks about the oil, gas, mining and construction sectors as the most vulnerable to corruption globally, because of the high value of the projects. Does it, therefore, become necessary for analysts to heavily discount information from these sectors?

Where there are human beings, money, power and the chance of advantage, greed will flourish thus allowing corruption to take on its poisonous radiance. Analysts, after all, are among the arbiters of the status, position and reputation of a company; it would be very risky indeed if they were to change their approach to these areas.

How does a fraudster's mind work? Do incentives outweigh punishments?

Invariably the power is greed and not need. Often, though, the fraudster engages in his enterprise because he recognises that there are no checks and balances or that he is responsible for carrying them out. The ability to believe that they can get away with it or answer away any queries of their actions is another incentive. The self-delusion of the individual is a powerful driver. There will sometimes be a self-justification for their actions and an ability to try to lay the blame on someone else.

For many years, in some jurisdictions, financial crime has taken second or even third place to violent and anti-social crimes.

Hope springs eternal that politicians will realise that financial crime, and organised financial crime in particular, seriously damages the economic infrastructure of a country and the reputation of that country. This is particularly damaging when cross-border business becomes a consideration.

Do you advise that investors watch out for red flags?

Just as we are responsible for ourselves, that we are careful about what we eat, how we cross the road, who we let into our homes, investors are responsible for whom they choose to invest with.

Red flags can be waving in the faces of people but they are convinced that the investment they probably know nothing about, sold by an individual or company they know nothing about, is good because they want to believe the hype about the amazing returns over a short period of time. There is no one as blind as he who will not see. Investors must get advice from reputable sources and, if in doubt, trust their judgement and say no. Remember the definition of a fraudster: "The person who sells nothing for something to people who want something for nothing."

Can stricter disclosure norms act as deterrents to financial frauds?

The norms for disclosure could be tightened up to the point where it becomes almost impossible to do business. For what purpose?

The benefit of having a sensible and successful disclosure programme is that disclosures are evaluated and, where necessary, investigated. It is pointless filing reports of transactions that are thought suspect (the quality, not just the quantity, must be recognised too) if no action or infrastructure is in place for further action.

Most people don't understand the structure and description of many modern financial products that come with fancy names. Does this mystique provide the first cloak for financial crime?

The idiom "ignorance of the law is no excuse" could arguably also be applied to the acquisition of financial products. People must be aware and be cautious of terms that look or sound right but in fact are just rubbish and gobbledegook.

Examples in some investment scams that are also known as advance fee or high yield investment frauds are terms like "Devisable, assignable and transferable letter of credit (LC)," "Freely negotiable, irrevocable, clear SWIFT (Society for Worldwide Interbank Financial Telecommunication) wire transfers," "Good clean cleared funds of non-criminal origin," "Guaranteed by Top 100 World Prime Bank," and many, many more.

Should the scope of independent audit be widened?

The risk of widening the scope of an examining process is the danger that by extending the available resources, the depth of the examination may be reduced. It is essential that those conducting the evaluation or audit procedures have a full understanding of the subject and an appreciation of the risk areas that may be found but through lack of appreciation of the subject, overlooked.

Has due diligence become more important than ever?

Due diligence is the business of common sense. Due diligence is fundamental to the survival of any corporate risk-based business operation, whether it operates in one or many jurisdictions. In fact, due diligence is essential for financial institutions that want to prevent or minimise losses from fraud and protect themselves from misuse by those with criminal intent. It is always good corporate policy to commit to an ongoing due diligence programme.

http://AccountSpeak.blogspot.com

D. Murali

(This article was published in the Business Line print edition dated December 28, 2006)
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