As an accounting professor, I study fraud and forensic accounting around the clock. This has been a crazy year, with no shortage of fraud. Most interestingly, the cases discussed below all share a theme: action (or failure) by government or professionals. This can be a truly dangerous combination.
U.S, White Collar Cases Take a Tumble: Lowest Number of Prosecutions since 1986
One of the largest scandals of 2020 is the lack of federal white-collar prosecutions, which reached their lowest level on record, down nearly 10 percent this year alone. The data was analyzed by the Transactional Records Access Clearinghouse, of Syracuse University.
This despite, quite literally, a pandemic of fraud. Before you readers shout: this is a political article! the downward slope actually began during the Obama Administration, and if measuring prosecutions against large organizations, the trend first began under President William J. Clinton. While the downward slope may have started before Trump, the rapid zig downwards over the past four years is undeniable. White collar cases have decreased, federally, by more than 50 percent in recent years.
What’s more, for those of us with doctoral seminars in research methods under our belts, the existing white collar statistics released by Syracuse include identity theft, a frequent immigration charge used against those using false identification. (Immigration enforcement is way up). Therefore, if we exclude identity theft-related charges, the true white-collar prosecution statistics come into focus: nearly nonexistent.
As professional investigators, this is something we should all be concerned about. After all, for most of us, the victims are our client organizations.
As Ankush Kharodi, until mid-2020 a prosecutor in the fraud section of the U.S. Department of Justice put it: “There’s never been a better time to be a white collar criminal.” Kharodi blames this on the Trump Administration’s “signature mix of incompetence and corruption,” but as Duke law professor Brandon Garrett noted in his book Too Big to Jail, the trend of not prosecuting the leaders of corporate frauds began well before the outgoing administration.
Upshot: This is a time of brazen occupational crime in the United States. Luckily, we know some professional investigators who can help ring in the New Year. Also, lest you think white collar crime and government incompetence is solely a U.S. problem, read on.
Wirecard’s short circuit: Missing $2 billion
Competing for the title of “2020 cases with unusual facts” is the failure of Europe’s largest fintech company, Wirecard AG. The scandal has everything: engaging the former Libyan spy chief to intimidate investigative reporters; bungled audits by big-four accounting firm Ernst & Young; massive securities and bank fraud; and a devastating forensic accounting by KPMG, identifying that about half of Wirecard’s global earnings were potentially cooked (and missed by EY audits). When it finally all spun out of control in June 2020 (and all its senior management were sacked or arrested), Wirecard admitted that it may be missing about $2 billion.
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So what happened? Let’s rewind a few years.
In September 2018, Wirecard became a member of the DAX 30, replacing Commerzbank, to become the world’s leading financial technology company. Like Tesla today, this meant that many index funds were forced to invest. It was one of the few tech firms not located in Silicon Valley. However, since as early as 2008, investors and journalists had been raising questions about Wirecard’s balance sheet. Rather than seriously investigate those concerns, however, German authorities prosecuted those asking the questions, seemingly more concerned with protecting the reputation of Germany’s only tech darling. In doing so, BaFin and Bavarian state prosecutors ignored the allegations and red flags concerning the company itself. So much for crime-fighting farfegnugen.
Even worse, Wirecard hired global accounting firm EY to conduct a “special audit,” to address the financial mismanagement allegations. At the time, Wirecard was audited by a smaller German public accounting firm. EY purportedly found no concerns; it was then hired in 2009 to become Wirecard group’s regular auditor. In the auditing business, we call this form of choosing one’s auditor the “beauty contest,” because the choice of auditor is rarely about competency. With EY and authorities jointly schlafen at the switch, however, finance journalists continued to raise questions.
To turn the tables, Wirecard leaders hired a former Libyan intelligence chief, and a leading EU private investigations firm, in an attempt to muzzle the reporters. Tactics included spearfishing the reporters and engaging in all sorts of unangemessenes Verhaltenun. It didn’t end well. The tactics solidified suspicions, journalists kept digging, internal whistleblowers raised their hands, German authorities stayed shleeping, but Singaporean police eventually acted based on news reports regarding Wirecard’s APAC operations.
In June 2020, after the raid, Wirecard’s market performance short circuited. Then Wirecard’s CEO was sacked (then arrested). New management announced that approximately $2 billion were vermisst. Wirecard filed for bankruptcy protection in Germany.
Upshot: Public accounting firms sometimes put beauty over brains. Government regulators can go seriously blind. Private investigators and Libyan spy chiefs can be used for conduct unbecoming. Speaking of which….
Professionals gone wild: The Escape of Carlos Ghosn
photo: Bertel Schmitt {CC BY SA 3.0}
Carlos Ghosn, the former CEO of Nissan Motor Corp., was a Japanese hero: He brought Nissan to profitability, and was one of the few outsiders to ever lead a Japanese public corporation. Today he’s on the lam, and as of March 2020, Nissan is at least $6.2 billion in the hole. This is an extraordinary story involving multiple teams of security operatives, bungling Japanese inspectors, at least three passports, and one seriously large music transport case.
We begin in November 2018, when Ghosn was first arrested at a Tokyo airport, the first of four times he would be charged by Japanese prosecutors. Ghosn was ultimately accused of secretly receiving or arranging over $100 million in unapproved salary, retirement, and perks from Nissan, as well as multiple tax offenses, primarily failure to report this ill-gotten income. After being held for more than 100 days, he was released on $13.8 million bail, restrictions on electronics, and a prohibition on communication with his wife Carole Ghosn. He was purportedly subject to 24-hour electronic surveillance.
Yet sometime around December 31, 2019, he escaped with the help of some friends. The escape followed months of planning, with a large team of professional operatives. The team allegedly visited Japan more than twenty times, and visited ten different Japanese airports, looking for security weaknesses. Ultimately, Ghosn was spirited out of Tokyo, in a large music instrument case, to the Osaka airport, a six-hour drive (technically only a three-hour ride, as he was transported by Shinkansen, a Japanese bullet train).
From there, it appears he made it onto a privately chartered jet, which landed in Turkey. A second jet from the same charter firm then flew him to Lebanon. No other flight records matched these paths during the relevant time periods. (Professional investigator tip: FlightRadar24, a tracking website, offers paid subscriptions, and limited free information on flights for those investigating cases like these). In May 2020, Turkey indicted seven, including four pilots, alleging that flight records were falsified to hide Ghosn’s presence.
The security weakness? Osaka’s aviation screening was run by private security, not the Japanese government, and the scanning machines located in the general aviation terminal were not large enough to accommodate the music transport case. Private security failed to manually open and search the case. (Professional investigator tip: Based on the repeated visits to Japan and different airports, leaving the chance that screeners would manually open the case was unlikely. The high level of risk therefore raises a different scenario: an insider corrupted by the team, or by omnipresent Japanese organized crime – the Yakuza — on behalf of the team. Only then could the lack of an inspection of the music case be assured).
On January 2, 2020, an Interpol Red Notice was issued for Ghosn to the Lebanese government. But Lebanon does not extradite its citizens, even for the most serious of crimes. On January 7, 2020, Japan charged Carole Ghosn with perjury, issuing a second Interpol Red Notice. Carole Ghosn, also a dual-Lebanese citizen, remains in Lebanon with her husband.
In May 2020, the U.S. Department of Justice unsealed charges against three Americans for facilitating the Ghosn escape – two of them with long histories of having assisted the U.S. Government with investigations and hostage extractions, including that of a New York Times Reporter held captive in Afghanistan. Two of them are being held without bail – the other has eluded capture, for now. In October 2020, the State Department confirmed plans to extradite them to Japan to face charges.
Upshot: If you are a professional investigator specializing in extractions, including plans for your own extraction is key. As a security professional, if an item does not fit in the scanning device, prudence dictates a manual inspection. And, as I have said to my students many times with regards to extradition, if you are a white-collar crook, remember that a nation like Lebanon will become an awfully small place to spend the rest of your life hiding out. Certainly, no more Disney trips with the family.
About the author:
David P. Weber is a recurring contributor to Pursuit Magazine. He is an assistant professor at the Perdue School of Business, Salisbury University, on the Eastern Shore of the Chesapeake Bay, where he teaches fraud examination each semester. He is an attorney, certified fraud examiner, and licensed private investigator. He concluded his first career as the Assistant Inspector General for Investigations at the U.S. Securities and Exchange Commission.