Compliance conference focuses on fraud

“The next white collar criminal that is possibly going to exploit you is in your current business circle, is nice, is friendly, is cooperative, charming and intelligent,” was the message of psychologist Dr. Alden Cass at this year’s Anti-Money Laundering, Compliance and Financial Crime conference, organised by Global Compliance Solutions. Journal journalist Michael Klein reports.

The two-day event held at the Marriott on 15-16 October tackled the issue of compliance with anti-money laundering and financial fraud fighting measures from a variety of angles.
An entertaining strand of presentations focused on white collar-crime from the points of view of the psychologist, the criminal and the regulator.

Profile of a white collar criminal
Cass shared his insights into the profile of the white collar criminal, detailing some of the personality traits and disorders that financial fraudsters commonly share.

He encouraged the audience to be hyper-vigilant and look to the blind spots of human nature to defeat these kinds of fraud.

Aside from being intelligent, successful and male, these financial criminals would typically not have a previous criminal history or a habit of drug or alcohol abuse, he said. In addition many had shown a tendency to cut corners throughout their careers and frequently they were found to have an adulterous past. “These guys are risk takers, so a little affair is not going to bother them,” he stated.

However, most of the Ponzi schemes of the past do not get formed over night, but gradually turn into a scam over time, Cass explained.

Beneath a calm and friendly demeanour these socially adept fraudsters are calculating and manipulative and tend to lull investors into trusting them, sometimes using access to an elite network of relationships as an incentive.

The typical profile of the criminal would show narcissistic, sociopathic and obsessive-compulsive traits.

Cass painted the picture of a criminal whose personality traits include displays of arrogance, omnipotence and invulnerability mixed with a lack of remorse, disregard for others and a sense of being above the law. At the same time Ponzi scheme fraudster are control freaks, who need order in their work and who keep their enemies close, he stated.

Although most fraudsters have these traits, Cass said that he hardly had a client fitting this narcissistic and sociopathic profile, who he did not actually like.

This is also what makes it difficult to spot the white collar criminal, he said.

To detect financial fraudsters, he advised, it is necessary to be aware of the blind spots of human nature, such as greed, fear or the basic needs for safety and status, which white collar criminals use to their advantage.

Cass recommended to those in the compliance industry to make relationships more tangible and more understandable and spend more time in business face to face. He also suggested asking questions that go beneath the surface, including thinking about why a potential customer or business partner is likeable. He urged the audience to look behind the façade and think about what the individual is not saying.

Finally, he advised the attendees to trust the old adage and be sensitive to the hairs on the back of the neck as an alert to one’s instincts.

Husband, father, trader, ex-con
Conference participants were tempted to test their newly-gained profiling knowledge in a presentation by former Citigroup commodity derivatives trader Craig Gile.

He described his journey from honour student, captain of the basketball team, graduate of Vanderbilt and Wharton and naval aviator in Desert Storm to Wall Street trader and ultimately prison inmate.

He spoke about his experience of being sentenced to one year and one day in prison for overstating the profits of his portfolio of exotic commodity derivative transactions in order to obtain a higher bonus.

He argued that the commodity derivatives he traded were perhaps unnecessarily complex, because Citigroup’s sales people could thereby obtain a higher commission.

As a result the non-standard derivatives in his portfolio were thinly traded and thus difficult to value.

When a quantitative analyst was sent to investigate the risk of the derivatives portfolio, which Gile co-managed with his boss David Becker, the analyst found a number of inconsistencies in how some of the spread options were marked in the books.

The analyst uncovered that trades that were effectively the same were marked at different levels.  The irregularities amounted to an overstated value of $7.5 million on the portfolio, “which is not a huge sum relative to the size of the business, but … it was a hit,” Gile remarked.

He said he put it down to flaws in the system and attempted to “fix it” by remarking a number of the transactions “fairly conservatively” and putting in a systems patch.

This tale of the events stands in contrast to media information released by the US Attorney’s office, which states that Gile and Becker input false data into a computer model on several occasions. They had also input fictitious options trades to inflate the profits of the portfolio.

After the analyst complained about the way the commodities desk was run, Gile’s boss attempted to have the analyst fired. This prompted an internal investigation, which saw Gile’s and Becker’s contracts terminated.

Surprised and upset, but not expecting to hear much more about the matter he found a new job managing a hedge fund portfolio, Gile said.

However, federal investigators had become interested in the events. The prosecutor accused Gile of having overstated the financial performance and understated the market risk of the commodity desk in 2003.

He was also charged with conspiracy to deceive the bank’s financial control department, on the basis of the relationship the commodities desk had with an independent inter-dealer broker.

In order to mark the derivatives transactions Gile and Becker had given their valuation of the deals to the broker, who would then obtain quotes from other banks.

The quotes that were reported to Citigroup’s financial control department, charged with monitoring the commodities desk, turned out to be the quotes Gile and his boss had supplied to the broker.

Deliberate or not, the oversight of the financial control department had been undermined.

Facing a jury trial, during which he would have the difficult task of explaining the financial instruments he traded in, as well as the prospect of a maximum five year prison sentence, was a daunting prospect, he explained.

His plan to go to trial anyway was derailed however when Decker pleaded guilty and stated that he and Gile inflated the value of positions they had taken “to overcome unusually large losses incurred by another trader within their group”.

Becker also offered to volunteer information on other cases, where traders had overstated the value of their transactions to hide big losses.
Gile took a plea deal and spent one year at the Federal prison camp in Jesup, Georgia.

He maintained that he still did not know what he could have done differently, in spite of the obvious conflict of interest of traders valuing the transactions, on the basis of which their bonuses are calculated.

He argued that bringing other people in to determine the market value of his portfolio would have been either flawed, if they had been junior or too expensive if they had sufficient experience.

While this argument is questionable in light of the subprime crisis, Gile’s case points to general oversight issues that exist both in the unregulated and opaque market for complex over-the-counter derivatives and in the compensation and bonus schemes that financial institutions employ. 

In any case Gile’s perpetrations were minor in comparison to the high profile Ponzi schemes of Bernard Madoff and Allen Stanford that have come to light in the past two years and which were all too present in the presentations at the conference.

Jamaican UFOs
George Roper, the deputy executive director of Jamaica’s Financial Services Commission, provided an insight into the Ponzi and pyramid schemes that operate in Jamaica.

He described how, what he termed, UFOs or unregulated financial organisations, were able to exploit widespread investor ignorance, gullibility and a general acceptance of informal investment arrangements in Jamaica.

The investment schemes promised unrealistically high returns from either foreign exchange trades or fixed interest debentures. However, the UFOs were bolstered by an image of success and a prominent public profile, through the sponsorship of top sports and music events.

Fabricated stories about the schemes’ founders and their abilities contributed to the favourable image and attraction of the investment schemes.
The regulator struggled as legal manoeuvres by the schemes exposed untested financial laws and potential loopholes, Roper explained. The regulator itself was also not very popular with investors, who were largely suspicious of public authorities including the Financial Services Commission.

In his presentation Roper advocated a strict enforcement of the existing laws and an aggressive education of the public on how Ponzi and pyramid schemes operate to counter the widespread activities.

Political and regulatory framework
Global Compliance Solutions ensured that the event also addressed compliance with regard to the political and regulatory framework, from a legal and law enforcement perspective and in terms of technical issues and practical advice.

The conference featured presentations on the latest legal and regulatory developments in Cayman, in particular the implications of the Proceeds of Crime Law and The Anti-Corruption Law for compliance professionals.

The relatively new Proceeds of Crime Law (2008) has provided enforcement agencies with wider reaching powers to seize property or assets that derived either from a criminal lifestyle or criminal activity.

Laura Hatfield of Solomon Harris explained that a specific benefit no longer has to be connected to a specific crime, but that the notion of criminal lifestyle, introduced by the law, was sufficient to confiscate any criminal proceeds.

She further summarised the various conditions and exceptions for confiscation, restraint, recovery and investigation under the law.

Of particular importance to compliance professionals were the conditions for providing customer information during an investigation under the law. In this context a court can order financial institutions to provide customer information on a person under investigation to a specified officer in such a manner and such a time as the officer requires. As such the investigation powers are very wide and override duties of confidentiality.

OECD measures to introduce a peer review system for the exchange of information relevant to tax investigations were discussed in a debate of Caribbean issues.

Lorna Smith, an adviser to the government of the British Virgin Islands, said that she sees the OECD as a mechanism of the G20 countries, which have their own agenda. She mentioned that the OECD at the last meeting of the Global Tax Forum “sneaked” the term tax avoidance into the wording of the final communiqué.

Only after the intervention by some of the countries, which pointed out that the issue of tax avoidance, was never discussed, the wording was changed.
“I hope I am wrong, but I think that we are going to move to an automatic exchange of [tax] information at some point,” she said with regard to current form of bilateral tax information exchange agreements that provide information on request only.

Other speakers included Anthony Travers, chairman of Cayman Finance, who outlined the policy position of the financial services industry organisation, and Police Commissioner David Baines.

Name filtering
Practical advice was offered by service providers on the technical, process and due diligence issues involved in name filtering.

Name filtering is typically at the forefront of a financial organisation’s anti-money laundering efforts, to ensure that prospective and existing customers are not known criminals or terrorists, as featured on many government-issued or commercially available lists.

Scott Snowden of Truth Technologies outlined the three components of the filtering process, which include the filter software, customer data and master file data against which the customer data is compared.

He detailed the problems that can arise during the name matching process and how systems and data could be adapted to achieve a high matching ratio.
John Marquis of World-Check drew attention to the limitations and overlaps of publicly available lists of known criminals and terrorists.

New technology
Potential threats as a result of new technologies were also discussed.

Bonin Bough, global head of new media at PepsiCo, introduced the audience to social media and touched on the potential these new technologies have as platforms for fraud.

Hossam Abd El-Rahman, founder of Allied Compliance Consultants, took the same angle with regard to the emergence of mobile payments that can be executed via the mobile phone. 

In all, the diversity of the topics and quality of the speakers ensured a well-rounded event.