The Rise and Fall of Rajat Gupta

Dear Member/s,

This is not good news, information article (that I normally share) that I would want to send it out to all. Nevertheless, nothing will stop it – this will be on every media websites, blogs, newspapers/publications, TV News you name it with everyone from politicians (both placed India, US) to business titans (globally) to analysts and finally ordinary individuals (incl. me) will be talking on justice or rather injustice that has happened in Mr Rajat Gupta case. Legal eagles will continue to scout around for some or the other loop-holes etc.. to save the day (rather face) and of-course Mr Gupta.

Keep aside law, business, relationships..etc..etc; The Truth is very simple – Mr Gupta slipped up heavily on “Ethics and Moral” part and this is to say in legal parlance “beyond a reasonable doubt” as described by Judge in-spite of all his good deeds and contributions till date.

The other thing that will be remembered in this lawsuit will be that - in far of land it was and Indian who brought down another Indian although they may be US citizens.

(P.S. – These views are personal)

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(Source: The Wall Street Journal)

Rajat Gupta's impending journey into the federal prison system for criminal insider trading ends a remarkable success story and punctuates his swift fall from grace.

A native of Kolkata, Mr Gupta, 63 years old, moved at a young age to New Delhi. His father, Ashwini, a disciple of Mohandas Gandhi, was jailed for years in the fight for independence from the British and later was a journalist. His mother, Pran, was a Montessori schoolteacher and principal.

Both died by the time he was in his teens, his father of tuberculosis contracted in an Indian prison, according to one of Mr Gupta's daughters. Still, Mr Gupta thrived both academically and as an anchor for his family. He studied engineering at the Indian Institute of Technology in New Delhi, where he was a "a big man on campus, bright, talented, popular," and head of student government, according to his wife, Anita, who met him there taking part in a one-act play in 1968. He wrote his essays to apply to Harvard Business School in a local coffee shop.

"It seemed like such a dream," Anita Gupta wrote in a letter last month to the judge who sentenced him Wednesday for giving a hedge-fund manager inside information about Goldman Sachs Group Inc., where he was a director. Mr Gupta agonized when he was accepted to Harvard about leaving his siblings, his wife added, but "decided it was an opportunity he could not afford to miss."

He came to the U.S. in 1971, delivering newspapers at Harvard to help support himself. Two years later, in New York, he broke into McKinsey & Co., a top-tier consulting firm for America's most powerful corporations, and rose through the ranks. At 45, in 1994, Mr Gupta became the first Indian-born chief of a U.S. international corporation. He served in that role until 2003.

Besides breaking ground in the U.S., Mr Gupta's success inspired people in his home country. McKinsey was one of a few global companies in which many Indians made their careers, but Mr Gupta blazed the trail for other Indians who joined the small club of multinational CEOs, including former Citigroup Inc. Chief Executive Vikram Pandit and PepsiCo Inc. Chairman Indra Nooyi.

He routinely visited India and maintained close ties with senior business leaders in India and was consulted by the Indian government on policy issues.

"He was a hero from an Indian perspective," said Richard Rekhy, head of advisory services for consulting firm KPMG in India.

Mr Gupta lived in Chicago for a time and eventually moved to Connecticut, where he and his wife live in Westport, on the Long Island Sound. They have four daughters and two grandchildren.

Having the ears of corporate chieftains, Mr Gupta became active in philanthropic and academic endeavours, serving in advisory roles at Harvard and the Kellogg School of Management. Mr Gupta worked with former President Bill Clinton in leadership roles at the American India Foundation and as chairman of the Global Fund to Fight AIDS, Tuberculosis and Malaria.

He was viewed as a master networker, establishing relationships through his philanthropy with Mr Clinton, Microsoft Corp. co-founder Bill Gates and Hank Paulson, the former Goldman CEO and Treasury Department secretary. Mr Gupta and his wife were among the list of invited attendees to President Barack Obama's first state dinner, according to a list released by the White House.

It was through the creation of the Indian School of Business in Hyderabad in the late 1990s that Mr Gupta met the man who would help bring about his downfall. A mutual friend, Anil Kumar, asked for donations from Raj Rajaratnam, founder of the Galleon Group hedge fund, who pledged $1 million, according to testimony at Mr Gupta's trial. Mr Rajaratnam was convicted of insider trading last year and sentenced to 11 years in prison.

Mr Kumar, who was Mr Gupta's protégé at McKinsey, pleaded guilty to giving the Galleon chief unrelated tips, testified at both men's trials and recently received a sentence of probation.

Messrs’ Rajaratnam and Gupta became friends. The ability to cultivate contacts, along with their South Asian heritage, was a quality Mr Gupta shared with the 55-year-old Mr Rajaratnam, a Sri Lankan native.

Messrs’ Gupta and Rajaratnam had vastly different personal styles. The square-jawed Mr Gupta was quiet and distinguished; Mr Rajaratnam was rougher around the edges and enjoyed practical jokes, people who know them said. Though Mr Gupta had a more public persona, the billionaire Mr Rajaratnam was far richer.

Mr Gupta often would have lunch with Mr Rajaratnam in the hedge-fund manager's office, ordering Indian or Chinese food.

Starting around 2003, he and Mr Rajaratnam began investing millions of dollars together, according to court documents from his trial, both in vehicles related to Galleon and in an Asia-focused private-equity fund Mr Gupta had helped to start.

In the ensuing years, Mr Gupta leaked Mr Rajaratnam inside information, both because of their friendship and business dealings, prosecutors said.

They said Mr Gupta became a "secret pipeline" to Mr Rajaratnam from 2007 until early 2009 for inside information on the boards of Goldman and Procter & Gamble Co. He provided advance tips about, among other things, a $5 billion investment in Goldman by Warren Buffett's Berkshire Hathaway Inc. at the height of the financial crisis and the investment bank's first quarterly loss as a public company, the government said.

After the conviction of Mr Rajaratnam in May 2011, friends said, Mr Gupta seemed worried and nervous about his own future. "He was distraught. He seemed upset," Anand "Bill" Julka, a childhood friend, previously told The Wall Street Journal.

Six months later, Mr Gupta was indicted, surrendering to federal agents. He decided to go to trial instead of pleading guilty as many other defendants have, hoping to beat back the largely circumstantial case, sitting straight-backed through the month long proceedings, his wife and daughters right behind him. Unlike in the case against Mr Rajaratnam, prosecutors had only one substantive wiretapped phone call of Mr Gupta and pieced together the case through phone and trading records.

Mr Gupta's lawyer, Gary Naftalis, told the jurors who convicted him on four of six counts that Mr Gupta had no idea about Mr Rajaratnam's "secret world" of insider trading and argued unsuccessfully that a falling out over a failed investment had negated his motive to leak. Nor did he personally trade on inside information, although prosecutors said he benefited from his business relationships with Mr Rajaratnam.

Mr Gupta, despite his desire to testify in his own defense, took his lawyers' advice and remained silent. Jurors, some of them shedding tears, ultimately convicted him on three counts of securities fraud and one count of conspiracy. He was acquitted of two counts of securities fraud, including the only one relating to P&G.

"We wanted him to walk, go home to his family, live a very prosperous life," juror Ronnie Sesso, a 53-year-old youth advocate in New York, said in an interview after the verdict. "I struggled with everything…but looking at the evidence made it clear."

Since then, Mr Gupta has spent time trying to console his family, helping one daughter rearrange her Boston home. His lawyers sent more than 400 letters seeking leniency to District Judge Jed Rakoff, from the likes of Mr Gates, former U.N. Secretary-General Kofi Annan, and many others. Mr Kumar's 25-year-old-son, Aman, who had called Mr Gupta "Rajat uncle" growing up, wrote one, too.

"Often these days, I see my father and notice an unfamiliar look of fear on his face," wrote his daughter Megha. "I'll put my arm on his shoulder and say, 'Don't worry, Baba.' He moves quickly to compose himself: 'I'll be all right, baby. Are you all right?' "

Harvard University probes largest mass cheating scandal

NEW YORK: About 125 Harvard University undergraduates are being investigated for cheating in a final exam last year, the largest academic misconduct scandal in the prestigious institution's history.

The Harvard College administrative board is reviewing the allegations of "academic dishonesty," ranging from "inappropriate collaboration to outright plagiarism, on a take-home final exam," dean of undergraduate education Jay Harris said in a note sent to students.

A comprehensive review of every exam from the class found that nearly half of the 279 enrolled students may have worked together in groups to develop and share answers.

Harris said the magnitude of the case is "unprecedented in anyone's living memory."

The students whose work is under review have been contacted by the board, which will meet with each student separately seeking to understand all the relevant facts and to determine whether any faculty rules were violated.

Students found responsible of academic dishonesty could face disciplinary actions including withdrawal from the college for a year.

"We take academic integrity very seriously because it goes to the heart of our educational mission," said Michael Smith, dean of the Faculty of Arts and Sciences, who sent a letter to the FAS faculty to outline actions the faculty can take to reinforce Harvard's academic policies.

"Academic dishonesty cannot and will not be tolerated at Harvard."

While neither the course nor the name of students allegedly involved was revealed, Harvard Crimson, the university's student newspaper, said the students were enrolled in the 'Introduction to Congress' class taught by assistant professor Matthew Platt.

"These allegations, if proven, represent totally unacceptable behavior that betrays the trust upon which intellectual inquiry at Harvard depends," said Harvard University president Drew Faust.

"We must deal with this fairly and through a deliberative process. At the same time, the scope of the allegations suggests that there is work to be done to ensure that every student at Harvard understands and embraces the values that are fundamental to its community of scholars."

The allegations surfaced last semester when the faculty member teaching the course questioned the similarities between a number of exams and referred them to the board.

After reviewing the exams and interviewing students who submitted them, representatives of the board initiated the broader review in consultation with the faculty member.

The board has not come to any judgment about specific cases.

Smith cautioned that the allegations should not lead people to draw broad conclusions.

"We must also not forget that the vast majority of our students complete all their assignments honestly, diligently, and in accordance with our regulations and practices," Smith said.

"Allegations of inappropriate collaboration or plagiarism in a single class should not be allowed to diminish the good work or reputation of our outstanding student body."

The administrative board is responsible for evaluating requests for exceptions to academic policies and review of students' academic performance.

Forensic accounting is a career to count on

Source: By Laura Raines, For the AJC

They don’t carry guns or engage in car chases, but forensic accountants are among this century’s greatest crime fighters.

U.S. News & World Report listed these financial watchdogs as one of eight “careers to count on” in 2002. A rise in white-collar crime, an increase in oversight regulations and the globalization of business continue to give this occupation staying power.

“I wouldn’t have dared consider a career in law enforcement, but an investigative career that fights the kind of crime that stays on the books and papers, I thought sounded interesting,” said Jenna Green, assistant associate with Porter Keadle Moore, LLP (PKM), an Atlanta-based, full-service accounting firm.

Green was headed for a degree in marketing when she took Accounting 101 at Georgia Southern University as an undergraduate.

“My professor told me I’d be a good candidate for the university’s new forensic accounting program, so I looked into it,” said Green. She graduated with a Master of Accountancy degree with a concentration in forensic accounting in December 2008 and began work as an auditor at Porter Keadle Moore in January 2009.

“Besides the normal accounting skills, forensic accountants need that extra critical eye to look at financial records and be able to see suspicious activity [like embezzlement, theft, financial misappropriations or money laundering],” said Green. “Surprisingly, the other skill they need is an ability to read people. It’s all about interviewing and client interaction. You’d be surprised at how many people skills it takes.”

At this stage in her career, Green is doing less investigating and more prevention of fraud when she audits her clients’ books. She identifies areas where fraud could be perpetrated.

“All executives are more aware of white-collar crimes because of high-profile cases like [Bernard] Madoff’s [multibillion-dollar Ponzi scheme]. It’s important for all accountants and managers to be aware of potential fraud,” said Green. “I enjoy working with clients to help them make their company environments stronger.” She’s learned that if small-scale fraud is left unchecked, it usually escalates.

Statistics show that white-collar crimes are on the rise. The Treadway Commission has examined corporate fraud for three decades. Its study, “Fraudulent Financial Reporting: 1998-2007,” saw a rise in the number of alleged accounting fraud cases investigated by the U.S. Securities and Exchange Commission.

There were 347 cases, compared with 294 in the decade before. But the real growth was in the dollar amount involved per case. With high-profile, high-cost cases like Enron, Tyco International and WorldCom, the mean dollar figure rose to nearly $400 million per case, as compared with $25 million in the prior 10 years.

Almost all companies are susceptible to risk, according to the Association of Certified Fraud Examiners, which publishes an annual report. Its global study, the “2010 Report to the Nations on Occupational Fraud and Abuse,” estimated that the typical organization loses 5 percent of its annual revenue to fraud. Based on the 2009 gross world product, that figure translates to potential fraud loss of more than $2.9 trillion.

“Financial fraud impacts everyone by increasing the cost of living, raising the costs for goods and services and adding the need for corporate procedures to prevent and detect fraud to the cost of doing business,” said Don Berecz, director of the Center for Forensic Studies in Accounting and Business at Georgia Southern University.

Many universities offer one or two forensic courses now in their accountancy programs. “Few have a program as extensive as ours,” said Berecz. Georgia Southern offers a 10-course forensic accountancy program with two tracks. Undergraduates from a variety of majors can take five courses to complete the fraud examination track. Accounting majors can take an additional five courses as part of their Master of Accountancy degree with a specialization in forensic accounting.

The center and PKM also sponsor a Fraud and Forensic Accounting Education Conference each year. Experts from the field will gather in Savannah on June 2-4 this year.

Berecz, a former financial investigator with the FBI, said that students who want to learn the investigative process need to be curious, pay close attention to detail, and have a never-give-up attitude and good people skills.

“The fraud examiner track is interdisciplinary, and we’ve drawn students from criminal justices, IT, political science, even hotel and restaurant management, because fraud permeates all areas of society,” he said.

His graduates go on to work at accounting firms, corporate security and risk management divisions, law firms, financial consulting firms and government agencies such as the FBI or IRS.

“Forensic accountants and fraud examiners have a tangible and practical skill set that makes them very valuable in today’s market,” said Greg Esslinger, an Atlanta managing director with FTI Consulting, a global business and economic advisory firm.

A lawyer with financial skills, Esslinger spent almost six years with the FBI working in international counterintelligence and financial-related investigations.

“These skills are needed because corporations have a growing legal responsibility towards the public, their employees and shareholders to police themselves and their financial records,” said Esslinger. “Corporate accountability has grown, and the government has gotten more sophisticated about what it requires through financial reform legislation.”

The Sarbanes-Oxley Act in 2002, passed to prevent future Enron debacles, and the more recent Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have spurred growth in accounting and auditing fields. Demand is projected to grow by 22 percent through 2018, according to the Bureau of Labor Statistics. The U.S. Sentencing Guidelines for fraudulent crimes have standardized penalties in the court system, encouraging prosecutors to go after more fraud offenders.

“As companies become more global, their obligation to ferret out fraud expands exponentially, and it creates greater challenges to be accountable across global markets,” he said.

“That means that forensic accountants and fraud examiners are going to be around for a long time and have an increasingly wide choice of career paths. Consulting firms, like ours, and accounting firms are hiring. The pay straight out of college is respectable, and the opportunities for advancement are significant,” said Esslinger.

He advises anyone interested in the field to talk to someone working in it, learn the trends and tailor their education accordingly. “This industry is complex and rapidly changing,” he said, “but I enjoy it a lot. There’s rarely a dull day.”

Fines paid by global banks helps US Regulators a revenue of USD 3 Bn since 2009 - A snapshot

Sr. No	Bank Name	Description
1.	ING Bank NV	The bank was accused of covering up billions of dollars in fund transfers that violated U.S. sanctions against Cuba and Iran by concealing the source of the transfers in a process known as stripping. The investigation centered on an ING subsidiary at the time, the Netherlands Caribbean Bank.   This was the largest money settlement record in US by the Dutch bank agreeing to pay 619 Mn
2.	Lloyds TSB Group PLC	The U.K. bank reached an agreement with the Manhattan district attorney’s office and the U.S. Department of Justice in January 2009 to pay $350 million in fines and forfeiture for allowing Iranian and Sudanese clients access to the U.S. banking system. Later in December 2009, it reached another $217 million settlement with the U.S. Treasury.
3.	Credit Suisse Group	In December 2009, U.S. regulators fined Credit Suisse $536 million, ending a five-year investigation in which the U.S. said the Swiss bank helped clients in Iran, Libya, Sudan, Myanmar and Cuba conduct financial transactions in secret between 2002 and April 2007. Half of the total fine was divided between New York City and New York state. “In both its scope and its complexity, the criminal conduct perpetrated by Credit Suisse in this case is simply astounding,” U.S. Attorney General Eric Holder said at the time, adding that the fine would had been even higher had Credit Suisse not cooperated in the investigation.
4.	ABN AMRO Holding NV/Royal Bank of Scotland Group PLC	The Dutch bank agreed to pay $500 million in April 2007 to regulators after an investigation found ABN conducted transfers for Libya and Iran through New York. ABN’s settlement came just as the Dutch bank was the target of a bidding war involving Barclays PLC and a consortium led by RBS. ABN had already agreed in 2005 to pay $80 million over laundering laxity. The $500 million fine was settled by RBS, which later acquired ABN Amro, in May 2010.
5.	Barclays Bank Plc.	In August 2010, Barclays agreed to pay $298 million to settle charges by U.S. and New York prosecutors relating to client payments from Cuba, Sudan and other places under U.S. sanctions for a roughly 11-year period until September 2006. Barclays was accused of using opaque methods of payment messages, known as cover payments, to obscure transfers. The deal included an agreement that allowed the bank to escape prosecution for two years if it cooperated with government investigators and implemented new training and compliance programs.   Separately, in June of this year, Barclays settled a probe by U.S. and U.K. regulators that its traders rigged the London interbank offered rate benchmark, or Libor. Barclays paid $452 million to the U.K. Financial Services Authority and the U.S.’s Commodity Futures Trading Commission and Department of Justice Fraud Section
6.	HSBC Holdings PLC	The U.K. lender said it has set aside $700 million to cover potential fines following a U.S. Senate report alleging that some of HSBC’s global operations were used by money-launderers and potential terrorist financiers. HSBC’s Mexico unit paid $27.5 million in fines to the country’s regulator after the Senate probe found it shipped billions in bank notes by car or aircraft to the U.S.
7.	Standard Chartered Plc.	Standard Chartered PLC has reached a settlement to pay $340 million to U.S. regulators over money-laundering allegations involving Iranian customers

HSBC's BSA Violations Set Example

OCC's Message: 'It's Absolutely Critical to Be Fully Compliant'
By Tracy Kitten, October 8, 2010, Bankinfo Security

HSBC Bank North America (USA) says it's taking seriously the cease and desist order filed against it earlier this week by the Office of the Comptroller of the Currency. The $186 billion institution says it has already launched ongoing efforts to address its non-compliance with certain requirements set forth by the Bank Secrecy Act. "We've taken a number of actions and we will continue to focus on improving," says Rob Sherman, HSBC North America's vice president of public affairs. "The key areas of action we are taking include staffing, systems and advisory services."

The OCC on Thursday announced that it had issued a cease and desist order against HSBC USA for violating the BSA. Regulators issued the order with the bank's parent company, HSBC North America Holdings Inc., to ensure compliance within the overall holding company's risk-management program. At the heart of the order is the OCC's finding that HSBC's BSA compliance program had deficiencies in the areas of suspicious-activity reporting, the monitoring of bulk-cash purchases and international funds transfers, customer due diligence relating to foreign affiliates and risk assessment.  Sam Ditzion, CEO of Boston-based Tremont Capital Group, a financial-services consultancy, says the OCC is sending a message that non-compliance with the BSA and other regulations is not going to be taken lightly. "The OCC's announcement sends a loud and clear message to all other institutions with domestic operations that it's absolutely critical to be fully compliant with all aspects of the Bank Secrecy Act and similar regulations that mitigate money-laundering risk," Ditzion says.

Cease and Desist: What It Means for HSBC

Kevin Sullivan, a former investigator with the New York State Police and director of the New York-based Anti-Money Laundering Training Academy, says the OCC's cease and desist order means HSBC is now mandated to address inefficiencies that financial regulators discovered within the bank's anti-money-laundering program. "This can have some dramatic economic effects on the bank in several ways," Sullivan says. "Reputation damage, the cost of making the repairs and bringing the program up to the satisfaction of the regulators, and any potential fines that could be levied against it."
 Moving forward, the OCC's order requires HSBC USA to implement corrective actions and be subject to periodical reviews - reviews to be conducted by a Compliance Committee put in place by the bank's board of directors.  According to the OCC, HSBC's oversights resulted in violations of statutory and regulatory requirements. Between mid-2006 and mid-2009, the OCC found that HSBC did not monitor so-called bulk-cash transactions with its foreign affiliates - affiliates in which HSBC North America's parent, England-based HSBC Group, holds a majority interest. The bank also reportedly conducted bulk-cash wire transfers and purchases without due diligence, which limited the bank's assessment of customer risk and the identification of suspicious activity. Ultimately, because of those oversights and others, the bank was unable to "disposition its alerts appropriately or to comply fully with its obligation to report suspicious activity on time," the OCC found.

'We Are Accountable'

The order is not an unusual one, Sullivan says, but when news of a cease and desist order against a bank of HSBC's size is made public, it gets attention. "Some banks are victimized by their own size and popularity," he says. "You rarely hear of an action against a small bank in the national media. However, when HSBC, Wachovia or the Vatican Bank is subjected to some type of action, it tends to make headlines."
 Sullivan is quick to note that the case is one every banking institution should take to heart. "Any good AML (anti-money laundering) compliance director should be reviewing these types of enforcement actions, and then take the time to analyze their own program to make sure that they are compliant and not making similar mistakes."
HSBC says it has been reviewing and improving its anti-money-laundering practices since August, when internal investigations were already underway. "Regulatory complexity is an interesting back-story, but doesn't change our view that we fell short of the expectations of our regulators, and we fell short of our own expectations," Sherman says. "We are accountable, and we take full ownership for putting things right, now, and keeping them right going forward."

SCB's $340MM Penalty Signals Change

London Bank Settles with N.Y. for Loose Bookkeeping
By Tracy Kitten, August 22, 2012, Bankinfo Security

A $340 million settlement reached last week between a New York regulator and London-based Standard Chartered Bank should serve as a wake-up call to all financial institutions. The settlement illustrates how state regulators can impose hefty penalties for failure to comply with state-mandated bookkeeping practices tied to foreign transactions in cases that also involve alleged violations of the Bank Secrecy Act.

The claims made by the New York regulator against SCB mark the first time a state agency has reached a settlement with a federally regulated institution for alleged violations tethered to BSA compliance.

While some observers say state regulators acted appropriately in enforcing their requirements, others say they overstepped their authority in an investigation that largely involved alleged violations of federal law.

One expert with a legal background that touches on Office of Foreign Assets Control programs and BSA compliance, who asked not to be named, says demanding that a bank pay $340 million to a state agency is unprecedented.
 "That's certainly not a small amount, considering that this is an action by a state regulatory body," when other enforcement agencies also are involved, the expert says.
In an Aug. 6 order, the New York State Department of Financial Services asked SCB to answer a number of questions about alleged violations to its state charter, including failure to maintain accurate books and records, falsifying books and reports, obstructing governmental administration and failure to report crimes and misconduct. The order, which asked the bank to appear before the department on Aug. 15, also accused SCB of conducting about $250 billion worth of unauthorized transactions with Iran, in violation of BSA.

On Aug. 14, the bank opted to enter the settlement agreement. In addition to paying a hefty civil penalty, the bank agreed to hire an independent monitor who will report directly to the state for the next two years about SCB's money-laundering risk controls and corrective measures. State examiners also will be placed onsite at the bank. And SCB agreed to hire permanent personnel at its New York branch to oversee and audit offshore money-laundering due diligence and monitoring.

The Allegations

In its order, the department accused SCB of moving at least 60,000 secret transactions worth about $250 billion through its New York branch for Iranian financial institutions - institutions that were subject to U.S. economic sanctions. The department claims the bank covered up its transgressions by falsifying records, and that the external auditing firm, Deloitte LLP brought in to review SCB's BSA practices, assisted with the cover-up.

SCB has denied the allegations, and in a response said it does not believe the order presents a full and accurate picture of the facts.

Deloitte also has denied the conspiracy allegations, according to a statement provided earlier this month to Reuters.

Was the State's Action Fair?

Some financial-fraud experts have suggested Benjamin Lawsky, who's heading up New York's newly created State Department of Financial Services, overstepped his bounds.

For example, the legal expert who asked to remain anonymous contends the state was failing to coordinate with other agencies when it filed its order against SCB, especially considering federal regulators have not yet completed their investigation into the alleged sanctions violations related to financial transactions with Iranian banks.

"Let's remember, this is for violations to New York state laws, based on incomplete books and records," the expert says. "This has nothing to do with the payments from Iran, which are subject to federal regulation, not state regulation. And there is no evidence so far from the federal regulator or the Treasury Department that there was a violation in that area."

But Charles Intriago, the president and founder of the Association of Certified Financial Crime Specialists, disagrees.

"Nothing says Lawsky has to be subservient to federal regulators when state interests are at risk," says Intriago, a former federal prosecutor who in 2001 also founded the Association of Certified Anti-Money Laundering Specialists. "Personally, I say more power to him."

Sign of the Times?

Intriago says the state had every right to issue an order against SCB for questionable transactions, and he believes the bank got off easy.

"There were a number of items that the state cited in its order, and the amount the bank paid is chump change, especially for a bank like SCB," he says. "Banks need to know, when they try to hide information or make false statements, criminal actions could be brought against them."

The bottom line, Intriago says: Banking institutions going forward will have to honor obligations to federal regulators as well as regulators who oversee financial transactions in the states where they are chartered.

"Especially for banks that come to the U.S. to operate from overseas, when they get a federal charter, they have to realize that the state charter carries just as much importance," Intriago says.

Similar claims against other foreign-based institutions, such as HSBC Holdings, which since 2003 has faced a number of compliance violations for lax BSA practices, illustrate the breadth of the problem, experts say

One AML expert closely involved with the HSBC case, who would not speak for attribution, says more enforcement is going to have to come from governmental agencies before banks' make serious strides to comply with federal sanctions and AML requirements.

"Ultimately, it's a problem with the culture of compliance," the expert says. "International banks' culture of compliance is typically very poor. It just comes right down from the top, and it goes back a long time. And the fines handed out by the Feds aren't enough."

This expert says international institutions can expect to see more scrutiny from all regulators. "The money of the world still runs through the U.S., and that's why we have to take this seriously," the expert says. "And if you are not going to follow the rules of this country, then don't do business here. It's that simple."  

A Peek Inside a Forensic Fraud Investigation

As part of a conspiracy to profit from phony expense reports, a company’s CEO relieved its honest CFO of his responsibilities for overseeing reimbursements.

When Chris Giovino began investigating a U.S. manufacturer, the company knew funds had been embezzled but not how much or who was involved. But during the process, Giovino discovered a systematic fraud, totaling more than $3 million, that was perpetrated by two rather key employees: the chief executive officer and the head of human resources.

The CEO had set up a scheme that involved removing the company’s CFO from its expense-reporting and reimbursement processes, says Giovino, a partner with forensic accounting firm Dempsey Partners. He then assigned oversight of the company’s credit cards to the HR leader, and both parties set about charging the company for personal expenses. (CFO learned of the case from Giovino, who spoke on condition that the identity of the company not be divulged in this article.)

The responsibilities were taken away from the CFO because he “always demanded proper documentation,” says Giovino, a former official with the U.S. Drug Enforcement Agency. Ultimately it was the CFO who discovered the discrepancies after the board laid off the HR leader during a downsizing.

After being hired by the company, Giovino’s team conducted 28 interviews in two weeks and accumulated bank statements, credit-card statements, payroll records, and employee records. The investigators concluded that the two high-ranking employees alone committed the theft over a span of three to five years.

The CEO lost control of the situation when the board fired the HR leader, it was discovered. Once his accomplice was gone, credit-card statements began to pile up in the reception area. Eventually they were sent to the CFO’s department, which discovered the fraudulent charges as well as credit cards the company didn’t know it had. “The CEO had directed the company’s overseas entities to acquire credit cards for his travel use, and the bills for those were sent to HR,” Giovino explains. The HR leader spent company funds on motorcycles and jewelry, among other items.

Giovino adds that it is common for one person acting alone or as few as two conspirators to steal from a company, but such crimes are typically perpetrated by finance workers. Usually there are other people who unwittingly help out, and in this case there were five or six.

The company was insured against employee theft and had assembled a fraud-risk team that included a risk manager and one representative each from internal audit, corporate security, the general counsel’s office, and HR, Giovino notes. The company’s team either investigated a fraud and its recovery aspects internally or retained outside counsel or forensic accountants.

But as is often the case, the team was inexperienced in dealing with fraud and made the common mistake of sending the insurance carrier a completed proof-of-loss form without a sufficiently detailed narrative or documentation. That can delay an investigation from beginning as the carrier waits for the needed information. The carrier finally paid the claim more than a year later.

The insurance settlement was for more than $1 million, and the company also had coverage that allowed it to pay about half of the professional fees incurred. “Many don’t know that kind of coverage exists,” Giovino observes. In fact, organizations that are most likely to suffer a fraud typically have the least amount of coverage and almost never have fee coverage.

Maureen Richmond, senior vice president with insurance brokerage Aon Financial Service Group, sees that her clients are insured for investigative costs. Underwriters will add an endorsement to the policy providing funds, generally $100,000 to $250,000, to pay for investigations the company is required to perform in such cases, she says.

Richmond adds that although theft and embezzlement are nothing new, “We’ve seen an uptick in the number of claims reported. Some people may be encouraged to steal when the economy shrinks or companies close. We are seeing a high frequency of losses, and I think it parallels the bad economy.”
Meanwhile, the CEO and the HR leader later received prison sentences of seven years and four years, respectively. Financial constraints arising from the theft caused 43 employees to lose their jobs. The CEO also was ordered to pay restitution of $1.7 million and back taxes, interest, and penalties totaling $1.37 million. And the two co-conspirators jointly had to pay $450,000 to cover the company’s legal fees and other costs it incurred as a result of the crimes.
Even though organizations should be thinking of “when” rather than “if” an internal fraud will happen, many are unprepared, Giovino says. “There are patterns. It’s not atypical for people in high levels to be caught” and for the company to later find out that the same people committed similar crimes elsewhere. In fact, he says, the CEO of the midsize manufacturing firm had been accused of an expense-reimbursement fraud years before at a prior company, but he was allowed to resign and there was no criminal record.

It should be rote for companies to conduct background and credit checks on job candidates, particularly executives, before hiring them. But when Giovino did so after the fact on the CEO, he found “someone with a very dicey credit history” that included a number of arrests for financial-related crimes, check-kiting, and DUIs.
A common mistake that companies make is firing a suspected fraudster too soon, which can make it harder to find out the extent of the crime or whether other parties are involved. “The immediate reaction of terminating an employee is worthless,” Giovino says. “It’s better to try gaining information from that person while he or she is still an employee.”

Giovino also recommends consulting law enforcement before terminating an employee. “The police may want the employer to get a signed statement detailing his or her involvement while the thief is still an employee,” he says.

(Source: CFO, By Caroline Macdonald)

The Adidas-Reebok saga in India: When the shoe moves to the other foot

Veeresh Malik | July 17, 2012 04:01 PM |

We have an unfortunate tendency to simply believe everything the foreign companies tell us. It was so in the case of the Adidas/Reebok episode also, when ‘scam’ figures of Rs8,700 crore were thrown around and published without demur

The Reebok-Adidas episode in India moved from the shocking to the absurd and now appears to be settling down to a more rational case of corporate tax evasion.

The issue was initially positioned by eager PR tactics as a case of fraud to the tune of Rs870 crore by the senior Indian executives in the company post takeover of Reebok by Adidas globally. This was lapped up eagerly by a business media more tuned to swallowing hand-outs wholesale. The story was next pushed into another level by the ‘mistaken’ addition of an extra zero which converted it into a Rs8,700 crore scam. It has now eventually been scaled down to a few hundred crores as a possible scam.

And of all things, a claim of Rs135 crore worth of damages suffered in a warehouse fire, on the outskirts of Delhi.

A quick re-check with the fire department reveals that there was no major fire of this sort reported in Delhi or around Delhi in the last eight years, and a fire involving so much rubber, plastic, polymer and other fabrics as well as shoes would have left more than a lingering smell over Delhi for weeks.

At a very modest estimate, a 40 ft container would be able to transport about Rs40 lakh worth of shoes. Such a fire would imply 350 such containers. That is nine train loads. Is it the contention of Adidas and Reebok that there was so much of their product, raw material or finished goods, in stock?

So what’s the truth here, and who is playing a fraud on whom? As on date, this is part of the known status:

# The Income Tax Department opines that it may not be a case of corporate fraud, but more likely be a case of tax evasion, to the tune of about Rs140 crore. This is on operations in India of both Reebok and Adidas, pre and post takeover, and as of now does not include the transfer pricing element. Adidas took over Reebok globally, but there is no clarity on what component of the profits from this sale were taxed in India for the India part of the deal.

# The other official entities involved, which include the police, the Serious Fraud Investigation Office (SFIO) and the Registrar of Companies (RoC), are continuing their enquiries and investigations. However, the ROC has come on record stating that Reebok India was not co-operating fully and not furnishing documents. This, reportedly, pertains to trying to establish who the beneficiary owners of Reebok are.

# The auditors, N Narasimhan & Co, as well as KPMG have claimed that they are not auditors to the companies Reebok and Adidas, though the matter is not as simple as that. They have not really provided any further information to back up the claims made by Reebok-Adidas on the fraud. It is interesting to note that the global merger/take-over took place in 2005 but the India merger/take-over was consolidated only in 2011.

# It is also a fact that there appears to be a strange reluctance on the part of Adidas-Reebok to provide more information on this matter after the initial flurry of accusations and announcements which very often bordered on tarring and besmirching the reputation of not just the Indian managers and executives in the company but also cast aspersions on the whole Indian business ethos as a whole.

All this in the face of a simple fact—true turnover of both the companies put together was in the range of a few hundreds of crores every year. Which number is also in doubt now, due to certain excise related issues on discounts and possible violations in numbers, what is known as ‘seconds’. And in large corporate entities like this, there is no way that fraudulent expenses or tax/excise evasions in thousands, leave alone lakhs and crores, can take place without full and tacit knowledge as well as approvals of board-level people as well as accounts and audits.

What actually happens in such cases is like this:

A merger or take-over takes place between two entities situated abroad at mutually agreed terms after lots of due diligences and negotiations. Space is kept open for issues which may crop up, and some margin for error is also kept, but by and large most issues are pre-empted. Space is also kept wide open for “off the record” issues.

The issue that causes problems, however, is taxes on profits derived by any of the parties involved in the merger and take-over. Till the Essar-Vodafone issue opened this, taxes on these profits were avoided by routing the transaction through a wide choice of tax havens. It was assumed that foreign companies, especially western or other developed countries, could do no wrong in this context.

However, in this case also, as the game unravels, it appears that transfer pricing and arms-length provisions have been flouted by all the entities concerned, Adidas, Reebok and the new entity. The long timeline from 2005 till 2011 also saw the introduction of a whole gamut of new rules and regulations globally which impact such take-overs and mergers, especially the taxation on profits aspect.

This appears to be the real issue here. Because, as of now, there appears to be no record or track of taxes paid on profits in India on windfall or otherwise, by virtue of the sale or merger or takeover of Reebok in India by Adidas in India, paid by either of these two entities. The trail, as a simple matter of fact, appears to go cold in the annual report by Adidas for 2011.

The actual details are very complicated, but very briefly bear repeating. No taxes appear to have been paid in India on any part of the merger/take-over. Some insurance frauds appear to be part of the game. And there was a very interesting linkage to the Sports of India which appears to have been removed from the online investors’ report of Adidas too.

The lives and careers of more than a few resident Indian directors and executives who worked at Reebok and Adidas in India have been ruined, the business future of vendors and retailers are in limbo, and there is no sign of any substantial evidence by Adidas-Reebok to prove the allegation of Rs870 crore fraud in India by Indians.

(Source: Money life - Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)

Always Ask a Banker to Put the Lie in Writing: It has been an open secret for years that banks have routinely misstated their growth numbers

By JONATHAN WEIL NEW YORK

If we take Bob Diamond and Paul Tucker at their word, part of the Libor scandal at Barclays can be chalked up to a series of comic misunderstandings, like a children's game of telephone. It's a bit much to swallow, but the spectacle sure has been fun to watch.

Both men agree that on October 29, 2008, while the financial system was on the brink, Tucker, who is the Bank of England's deputy governor, called Diamond on the phone. Diamond, who resigned last week as Barclays's chief executive officer, was head of the company's investment-banking business at the time. In Diamond's version, Tucker told him "he had received calls from a number of senior" UK government officials asking "why Barclays was always toward the top end of the Libor pricing", according to a file note Diamond wrote that day. Tucker said "while he was certain we did not need advice, that it did not always need to be the case that we appeared as high as we have recently", according to Diamond's memo. Tucker, testifying before a UK parliamentary panel this week, said that last sentence of Diamond's note "gives the wrong impression". He wasn't nudging Barclays to underreport its Libor submissions, he said.

Rather, Tucker said he was expressing concern that Barclays was paying too much to borrow money — and sending signals to the markets that it was desperate for funding, at a time when Barclays was widely viewed as the next big UK bank to need a government bailout. Tucker said he didn't make any record of the talk, in spite of the Bank of England's policy to make notes of important phone calls. He said he was too busy. Libor is the now-infamous interest rate benchmark used in hundreds of trillions of dollars of transactions globally, from loans to derivative contracts. Each day, in surveys overseen by the British Bankers' Association, major banks estimate their borrowing costs. It has been an open secret for years that banks routinely misstated their numbers. A Barclays Capital strategist, Tim Bond, even said so in a May 2008 interview.

Last month, Barclays agreed to pay $453 million to settle US and UK claims that it manipulated its Libor submissions as far back as 2005 — years before the phone call in question.

Diamond told the same parliamentary panel last week that he didn't interpret Tucker's comments as an instruction to lower Barclays's Libor submissions. Another top executive did perceive them that way, however, after receiving Diamond's memo and passed down orders to that effect to the bank's submitters. That person, Jerry del Missier, resigned as Barclays's chief operating officer July 3. The supposed misunderstandings don't end there. In his October 2008 file note, Diamond wrote that he asked Tucker "if he could relay the reality, that not all banks were providing quotes at the levels that represented real transactions".

Tucker told members of Parliament's Treasury Committee that he didn't take that statement to mean there was cheating going on. He said he thought it meant that "when they come to do real transactions, they will find they are paying a higher rate than they are judging they would need to pay."

Tucker also was asked about a 2007 meeting with banking-industry members of a Bank of England liaison group. Minutes show "several group members thought that Libor fixings had been lower than actual traded interbank rates." Tucker, who chaired the meeting, said "it did not set alarm bells ringing".

 "This doesn't look good, Tucker," the committee's chairman, Andrew Tyrie, said. "It doesn't look good that we have in the minutes on November 15, 2007, what appears to any reasonable person to be a clear indication of low-balling, about which nothing was done." Tucker replied: "We thought it was a malfunctioning market, not a dishonest market." Diamond's credibility doesn't look any better. This week, Barclays's departing chairman, Marcus Agius, released an April 10 letter from the chairman of the UK's Financial Services Authority, Adair Turner, expressing doubts that Barclays could be trusted. At last week's hearing, Diamond said the FSA had been happy with the bank's "tone at the top”. He downplayed the FSA's concerns as mere "cultural issues", even when asked about the letter, which hadn't been released publicly yet when he testified. It's hard to know whom to believe less.

There's no mystery why Tucker's 2008 phone call to Diamond is receiving so much attention. The notion that a central banker may have prodded a big bank to lie about its numbers rings true.

In May 2008, for example, the US Office of Thrift Supervision let IndyMac Bancorp backdate a capital contribution so it would appear on its books in the prior quarter. IndyMac failed two months later, costing the Federal Deposit Insurance almost $11 billion. When banks were teetering in 2008 and 2009, regulators and lawmakers in Europe and the US browbeat accounting-standard setters into making emergency rule tweaks so banks could show smaller losses.

After American International Group's 2008 government bailout, officials at the Federal Reserve Bank of New York pressured AIG executives not to disclose details of how the company had paid its counterparties 100 cents on the dollar using taxpayer money. Now it turns out the New York Fed says it received "occasional anecdotal reports from Barclays of problems with Libor in 2007", according to a statement it released July 10. The district bank wasn't a party to Barclays's settlement.

Here's one lesson that hopefully has been learned from all this: If you ever think someone in business is telling you to lie, ask that person to put it in writing.— Bloomberg

No accounting wrong doing in Reebok, says auditor

Reebok's auditor N Narasimhan & Co has informed the ICAI the there was no accounting wrong doing in the company which has filed Rs 870-crore fraud case against two of its former employees.

"Narsimhan & Co has said they are both the tax auditors and statutory auditors of the firm. They have told us that as far as audit is concerned there is no issue. We are waiting for some trigger from the company," ICAI President Jaydeep Shah told PTI on the sidelines of Chartered Accountants Day function here.

The Institute of Chartered Accountants of India (ICAI) had asked from Narsimhan & Co and Reebok's former chief operating officer Vishnu Bhagat, who is also a CA, to give their version and clarification on allegations about their role in the case.

Information was also sought from Rebook India which is still carrying out its internal investigation, Shah said.

"The company (Reebok) has said till investigation is going on they will not be able to share anything," he said, adding, "they have given us the report of the FIR that they have filed with the Gurgaon police."

ICAI has sought information from the auditors and the company in order to carry out its own probe into the role of auditors. Shah said the body would wait for the company to complete its probe and give leads.

Apart from the ICAI, Corporate Affairs Ministry's fraud probe body SFIO is investigating the case. The I-T department too launched a probe into the finances of Reebok India.

In May, Adidas-owned Reebok India had filed an FIR, alleging that its former Managing Director Subhinder Singh Prem and Chief Operating Officer Vishnu Bhagat were involved in Rs 870-crore fraud by indulging in "criminal conspiracy" and "fraudulent" practices over a period of time.

Both the executives, however, had denied the allegations. Following this, the Ministry of Corporate Affairs (MCA) had ordered a scrutiny of the books of accounts of the sportswear maker Reebok's Indian arm by the Registrar of Companies. The case was later handed over to the SFIO.
(Source: Press Trust of India / New Delhi Jul 02, 2012, 18:19 IST)

Con Inc

Fraud cases threaten to mar corporate India's reputation

When Satyam founder Ramalinga Raju's letter admitting to inflating his company's accounts landed at the Securities and Exchange Board of India (SEBI), people thought it was a spam mail circulated with ulterior motives. While Satyam's will go down as the biggest fraud case in corporate India, it is not the only one. Experts say that corporates are more vulnerable to risk and fraud today than ever before.

A 2012 survey by Ernst & Young on fraud in India Inc. reveals that three out of five respondents (MNCs and domestic firms in India) have been victims of fraud in the last one year. “India faces the challenge of a compromised ethical behaviour, justified by offenders for survival in a highly competitive and fast growing market,” says Arpinder Singh, partner and national director, fraud, investigation and dispute services, Ernst & Young.

The Association of Certified Fraud Examiners report states that 34 cases of fraud have been reported in the corporate world in India in 2011-12.
Reebok India has been among the latest victims. Reebok India has lodged a complaint with the Gurgaon Police alleging that its former managing director Subhinder Singh Prem and former chief operating officer Vishnu Bhagat had stolen products by setting up secret warehouses in Delhi, fudging accounts and making fictitious sales causing a loss of Rs870 crore to the company. The Reebok complaint says that by the end of 2011, products worth Rs147 crore were invoiced, but not delivered. It also alleges that the former executives ran an unauthorised franchise referral programme and collected money for opening stores. This was done despite instructions from the parent company, Adidas, not to expand the store base further. Apparently, no franchise store was opened despite a collection of Rs114 crore from various investors. The case has now been referred to the corporate affairs ministry's Serious Fraud Investigation Office (SFIO).
In the retail sector, companies such as kidswear brand Lilliput and grocery chain Subhiksha have also been accused of accounting fraud. According to Wipro chairman Azim Premji, who invested in Subhiksha, there was an overstatement of accounts, fake inventory, fake bills and fake companies to which money was transferred. Says Neeta Potnis, senior director and national leader, forensic and dispute services, Deloitte India: “In case of retail, the volume of transactions is very large. There are a lot of touch points with business associates. A large inventory has to be maintained and there are multiple processes. So, sometimes, when there is too much focus on growth, focus on internal control goes away.”
In the case of an accounting fraud, the revenues are boosted and liabilities are understated to show higher profits. Experts say frauds also occur in procurement and the chances of receiving kickbacks for orders and manipulation of quotations are high.
According to the Ernst & Young survey, rising consumerism has resulted in executives indulging in frauds to support lifestyle needs 'that is not commensurate with their incomes'. Typically, a fraudster is a very ambitious mid-management employee, with many years to go before retirement, working in the procurement or sales department.
For a growing number of executives, the pressure to meet revenue growth targets is undermining their commitment to compliance with policies and the law. “Expectations of stakeholders such as investors have increased irrespective of business conditions. Remuneration today is far more connected with performance, so there is pressure on the top management to perform,” says Potnis.
The Ernst & Young survey also says that data or information theft and intellectual property infringement ranked first among the top five fraudulent activities in the country. The growing use of technology has led to more instances of online banking or trading frauds, malwares and phishing attacks. Hacking and stealing of passwords, distributing viruses and illegally downloading files also come under technology-led frauds. In quite a few cases, data theft involves employees stealing confidential data like client lists and internal surveys, before taking up jobs in rival organisations.
Sectors that are most vulnerable to fraud are banking and financial services, retail and IT. In a Deloitte survey that was conducted in February, 93 per cent of the respondents said that there was an increase in frauds in the banking industry. The banks are able to recover less than 25 per cent of losses in more than half of the fraud cases. Citigroup wealth management's relationship manager Shivraj Puri had allegedly diverted funds over Rs300 crore from customers and non-customers of Citibank into personal accounts and had been investing in the equities market for over a year, before he was arrested in December 2010. He had offered high returns to investors, including the promoters of the Hero group.
How can this be tackled? “There is no way to eliminate frauds from the system. However, having a robust corporate culture and putting internal controls can stem it to a large extent. If any data is abnormal, be it positive or negative, it should be examined,” says Vidya Rajarao, leader, forensic services at PricewaterhouseCoopers India.
Many companies think twice before revealing they have been affected by fraud, fearing a tarnished image and loss of business. It also affects employee morale. “It is a well laid out plan. The fraudster generally takes advantage of leakages in the system to siphon off funds. Therefore, periodic and independent reviews are very important. Organisations should anticipate risk coming out of circumstances and make a fraud control plan accordingly,” says Bhupendra Bangari, chief operating officer and national head, risk and advisory services, BDO Consulting, India.
For India Inc., its ambitious reputation is at stake.


Fraud in corporate India
© Instances of fraudulent activities steadily increasing
© Data theft, intellectual property infringement pose the biggest risk
© A typical fraudster is in his 30s, mid-management level
© Rising consumerism encourages fraud
© Companies unwilling to reveal fraud, fearing loss of reputation


Tackling the menace
© A robust corporate culture
© Whistle-blowing mechanism
© Internal controls and audit
© A fraud control or risk management plan

(Source: The Week, By Vandana, June 25 2012)