After the events of 11 September, it was hardly surprising that cross-border financial fraud and the huge flows of illegal cash raised by international terrorists were the focus at the sixth International Financial Fraud Convention in Dublin last month.
However, George Bush, Tony Blair and the agencies charged with starving extremist groups of funds are unlikely to have taken much comfort from proceedings in which delegates were told of the many ways in which terrorists and multinational criminal organisations raise and move money.
Richard Parlour, a partner with City law firm Richards Butler, who is an expert on money laundering and one of the organisers of the convention, says the “Bin Laden way of financing terrorism is very difficult to stop”.
He says there are many politically-motivated people in countries such as Saudi Arabia, for whom it is easy to “put money into an underground banking system and keep it away from established banks”. And, worryingly for mainstream institutions, Parlour says it is even difficult to spot the activities of groups that use mainstream banks to hold or move money.
One of the key findings in the wake of 11 September is the need for better use of intelligence, says Parlour.
The scaling down of governments’ intelligence work following the end of the Cold War left them with fewer human intelligence agents and a reliance on gizmos.
At the same time, all the attention on introducing a financial front to the war on terrorism is threatening to make life easier for other criminals.
“Drug runners and international criminal groups are having a whale of a time,” says Parlour. In fact, police and other resources are so stretched that he points to reports that 99.9% of money laundering succeeds as evidence of the scale of the task facing politicians pledging to stamp out financial support for terrorism.
Lack of police training is clearly a key issue. Parlour says that, while there are police officers who can read accounts, he knows of no officer with a Financial Services Authority qualification and therefore an understanding of how a financial institution works. Moreover, only one police force – that in the City of London – has an anti-fraud operation, while the cost of carrying out investigations and taking them to trial can be prohibitive. Large US investigations cost $200m.
All this is made worse by the acute lack of awareness of risks in the business community. Parlour’s firm, Richards Butler, has a strong reputation in litigation and he and his colleagues see many fraud cases. Partly thanks to the financial community’s recent emphasis on internal controls and corporate governance, there are many people in charge of companies’ security, internal audit or compliance departments who know something about the area. But Parlour says: “I still meet many board directors who say, ‘What has money laundering got to do with me? My company doesn’t handle cash.'”
Parlour believes organisations can put such emphasis on share performance and winning new business that insufficient questions are asked about the people with whom new business is conducted. He and his team once came across a company that had done business with somebody for whom the only contact details given were a mobile phone number. Only their experience of similar cases – and, Parlour stresses, a little luck – enabled them to track down the fraudster.
Given business’s tendency to unquestioning trust, fraudsters can be very cocky. In one case, fraudsters relied on the target company having nobody who could speak Spanish. Accordingly, they sent over a piece of paper with Spanish wording that purported to be an official document. When Parlour’s team translated it, it was found to be nothing more than a shopping list.
However, it is not only companies that do business abroad that have their defences breached. While there is a view that fraud is more common in the Far East, Latin America and Africa, it is just as easy to fall victim in the US and western Europe – as, for instance, Allied Irish Bank found.
One well-known UK company recently sat down and for the first time looked at all its commercial relationships, Parlour says. To its consternation it found that – although it did not have a large workforce – 40 staff had authority to sign off deals. As a result, there were contracts with non-existent companies and instances in which money had been paid and people had disappeared.
Parlour’s solution is to go beyond the sorts of controls that are at the heart of good corporate governance. If you combine these with training and awareness packages, the protection is much better, he says. But one of the problems is an unwillingness on the part of many organisations to devote money and resources to training that is not seen as a direct contributor to the bottom line. In one organisation Parlour has come across, the amount of money devoted to training of this sort was one-thousandth of the chief exec’s bonus.
Parlour stresses that companies need to get away from the typical FD focus on the cost of fraud prevention and look at the benefits of finding out more about their businesses and how they perform. He argues that such a cost/benefit analysis ought to be a requirement of all boards.
For more information about the International Financial Fraud Convention see www.iffc.org.
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