Monday, April 13, 2009
Patterns in Governance Failures
Corporate frauds - A shocking revelation
A study called “Early Warning Signals of Corporate Frauds” conducted by the Pune-based Indiaforensic Consultancy Services (ICS), a forensic accounting and education firm, from January 2008 to August 2008 has come out with shocking revelations about corporate frauds.
Study details
The study has revealed that at least 1,200 companies out of 4,867 companies listed on the Bombay Stock Exchange and 1,288 companies listed on the National Stock Exchange as on March 31, 2007, including 25-30 companies in the benchmark Sensex and Nifty indices, have massaged their financial statements.
The study investigated 11 sectors, viz. real estate, retail, banking, manufacturing, insurance, public sector undertakings, mutual funds, transport and warehousing, media and communications, oil and gas and information technology.
The manufacturing sector, which contributes about 28 per cent of India’s gross domestic product, is the one most ridden with fraud mainly due to the peculiar nature of the business and the procedural complexities inherent in this sector. Real estate and public sector undertakings came second.
The motive for committing accounting statement frauds, according to 73 per cent of 340 chartered accountants who were respondents to the findings of the study, was to exceed expectations of stock market analysts. Other reasons for the fraud include credit-hungry firms manipulating application data in order to qualify for credit.
The KPMG India Fraud Survey Report 2008 showed that more than 80 per cent of respondents recognise fraud is a problem and 70 per cent believe it will increase over the next two years.
Accounting fraud is the worst type of fraud, shattering as it does the very basis of investor confidence in financial statements. In fact, investors eagerly await corporate results quarter after quarter, and if these statements themselves are manipulated, the efficient market theory relating to price formation itself does not hold good. As such, frauds cannot continue to be committed for long, prices will ultimately find their own realistic levels.
The beneficiaries of the frauds are those responsible for the fraud, including the personnel in the accounts departments of companies, auditors and concerned directors of companies and others who are in the know of things, all at the cost of the ordinary investors. It is possible that the fraudsters and those in the know of fraud may be indulging in insider trading, committing yet another serious offence.
Clause 49
It is indeed sensational that accounting frauds of such a large number of listed companies have occurred, despite the fact that Clause 49 of the Listing Agreement has been in operation for the last few years.
Clause 49 of the Listing Agreement provides, inter alia, for the Board of Directors to have at least half the Board to be independent directors, and for a qualified and independent audit committee with two-thirds of the members being independent directors and the chairman of the committee also being an independent director.
The audit committee should have an oversight of the company’s financial reporting process and disclosure of its financial information “to ensure that the financial statement is correct, sufficient and credible.”
Besides, the chief executive officer, as also the chief financial officer of the company have to certify that the financial statements do not “contain any materially untrue statements or omit any material fact or contain statements that might be misleading”, “present a true and fair view of the company’s affairs” and that no transactions of the company “are fraudulent, illegal or violative of the company’s code of conduct.”
Over and above these are internal auditors, apart from and the statutory auditors who have to certify that “no material fraud on or by the company has been noted or reported during the year.”
With all of the above mentioned in-built checks and balances and the Department of Corporate Affairs of the Government of India overseeing the working of companies all over the country, it is amazing that about 20 per cent of the listed companies have successfully managed to come out with financial statements that are fraudulent.
Corrective action
What is needed is immediate corrective action. The Department of Company Affairs /Securities and Exchange Board of India (SEBI) should order immediate special audits of the relevant years of these companies where frauds have occurred.
Suitable penal action should then be initiated against the directors of the company and all others involved in cases where special audits reveal frauds. The Institute of Chartered Accountants on India should also take suitable penal action against the concerned chartered accountants. The role of independent directors need also to be ascertained; is it just negligible or connivance, neither of which is pardonable.
Not just that. In all cases where the fraud is of a serious nature, which if revealed in time would have had a significant influence on the movement of stock prices, SEBI should start investigations of transactions in the shares of these companies to detect cases of insider trading. Needless to say that penal action must follow all cases where insider trading is detected.
Besides all these, the proposal of the Ministry of Finance to make it mandatory for companies to publish their balance sheets every quarter (which is presently done once a year), along with the profit and loss account, which will help the investors to know the liquidity and solvency of the companies, needs to be implemented urgently. This will, incidentally, bring India closer to international disclosure standards.
Guidance
If the actual financial statements are incorrect, chances of knowingly manipulating the figures relating to subsequent quarters for guidance of investors are greater still, particularly in the context of the desire of most of managements to show better results in the short-term, which may not always be in the long-term interest of the company. Former chairman of SEBI, M Damodaran, had called for a public debate on this issue. Although a joint call to end quarterly EPS guidance was made recently by the CFA Centre for Market Integrity and by the Business Roundtable Institute for Corporate Ethics, the matter has not been pursued. It is time that the issue is revisited in the context of the revelations made by ICS.
Conclusion
Any relaxation towards the guilty will encourage the fraudsters to continue their fraudulent activities, affecting adversely not just the process of price formation on stock exchanges, but also the very basis of the functioning of the corporate world. It is relevant to note that several of the leading companies in the United States, including Enron Corporation, Imclone Systems, Tyco International as also the leading accounting firm, Arthur Anderson, who were all involved in huge corporate frauds in the 2002 financial scam are serving time in jail. Recently, Bernard Ebbers, CEO of WorldCom, who was involved in an $11 billion accounting fraud, was sentenced to 25 years of imprisonment, despite his heart condition and he being called “an angel to desperate charity causes.”
Indian authorities do need to take a lesson from the United States. Will they?
Source: www.business-standard.com, By M R Mayya, Mumbai, April 13, 2009
Thursday, April 9, 2009
The Rise and Fall of ‘Chinese Warren Buffett’
Mr. Tang was the toast of the occasion, rubbing elbows with Chinese officials and media. It was an event celebrating “wealthy and intelligent” Chinese, and the Toronto-based investor was honoured with the “Award for Best Credibility.”
But that credibility was called into question recently after investigators with the Ontario Securities Commission accused Tang of defrauding his investors of as much as $60 million, allegedly part of a Ponzi scheme in which old investors were paid with new investors’ money.
On March 17 the Ontario Securities Commission ordered that Tang and his companies cease trading so that investigators could probe the allegations further.
On Wednesday, the commission extended that cease-trade order to Sept. 10.
Tang’s rise to prominence was no less dramatic than his recent fall, according to a Chinese-language article on Tang’s corporate website titled “Why Is Weizhen Tang So Capable?”
Tang was born the son of peasants in Hunan Province, China. He entered South Central Forestry College in 1978 and nine years later was sent overseas as a visiting scholar of biochemistry at a university in Ohio.
Tang came to Canada in 1990, continuing biochemistry studies at the University of Waterloo before taking up a job as a researcher at a Toronto hospital.
It was in Toronto in 1995 that Tang is said to have discovered his knack for trading, first by managing mutual funds for family and friends.Two years later he formed what would later become the Weizhen Tang Corporation, one of three company’s run by Tang that have now been named in the security commission complaint. His wife and daughter are listed as directors and officers of one company, according to the OSC filing.
Tang succeeded in earning trust from other ethnic Chinese by presenting himself as someone who could help them succeed in an unfamiliar world. His investors included ethnic Chinese in Canada, the U.S., and Mainland China.
In an article on the Weizhen Tang Corporation website where Tang shares his “road to Buffettian wealth,” Tang argues that the fears shared by Chinese immigrants are barriers to their success in North America.
“The majority of Chinese refrain from trusting others,” Tang wrote. “On the rare occasions when we must, however, we are ever plagued by feelings of worry and suspicion. Many of us fear that someone might covertly make profit from us, or even cheat us. What we do not seem to understand is that we ourselves will not be able to make money if we stop others from doing the same.”
In Canada, Mr. Tang was also an advocate of the Chinese regime’s policies. When Chinese police cracked down violently on protesting monks in Tibet in 2008, Mr. Tang came forward with the funds for dozens of buses to bring Chinese to Ottawa for a rally supporting the Chinese government’s stance that Communist rule had liberated Tibetans, he boasts on his blog.
For the event, Tang says he was prepared to spend up to $200,000.
“My role was to set the goal, provide funds, instruct how the capital was to be used, shoulder the risk, and do things that others can’t and don’t dare to do,” he wrote.
Tang also enjoyed close ties with the Chinese consulate in Toronto. In January 2009 alone he organized and funded two events at which the consul general was a guest speaker.
And in February and March, he was recognized twice with an award for having organized the rally against the Tibetan cause last year. Both times the consul general was again in attendance.
In its March 24 submission to the securities commission, investigators now say Mr. Tang admitted in an interview to losing $15 million in 2007 while reporting a profit to investors.
The commission claims it has evidence that Tang was also paying old investors with funds from new investors.
Tang and his companies are also accused of trading securities without being registered with the commission and without filing a prospectus.
For Tang’s part, he has stressed that no formal charges have been laid against him to date. In a series of letters posted on the Weizhen Tang Corporation website, he has admitted to making mistakes, but has denied benefiting personally.
“I did not steal everyone’s funds,” he said in the first of five letters.
“I am not like Ponzi or Madoff, because even my car is a leased one,” he wrote in the latest, posted Monday.
Tang has said that if given the chance, he would earn back the money he lost. And, it seems, many investors want him to have the chance.
In a petition claiming to represent 116 investors that was posted by Tang to his company’s website on Sunday, the OSC was asked to lift the ban on Tang’s trading.
“Most investor clients of Weizhen Tang believe that, as overseas Chinese and a minority in Canada, non-physical confrontations should be solved internally,” the letter read.
It said failure to lift the ban would result in “total, unrecoverable loss of our investments. This is something that we cannot accept on any terms.”
Neither Tang’s lawyer nor the investors presented the petition to the committee on Wednesday. Tang’s lawyer instead stressed that his client was cooperating with investigators.
But one investor was present on Wednesday, a man who identified himself as Mr. Liu, a former doctor from China now in his 60s and out of work.
FBI: Internet Fraud Rates Rose 33% Last Year
Internet fraud complaints to the FBI by consumers increased more than 33 percent in 2008 over the previous year, according to figures released this week.
Some 275,284 complaints were filed last year with the Internet Crime Complaint Center (IC3), a partnership between the FBI and the National White Collar Crime Center. In 2007, the IC3 received 206,844 complaints.
The report shows that the nation's capital appears to be home to the largest concentration of online con artists in the country. The District of Columbia ranks #1, just ahead of Nevada and Washington State, in terms of online fraud perpetrators per 100,000 residents, the IC3 found.
The non-delivery of merchandise and/or payment was by far the most reported offense, accounting for nearly one-third of all referred cases, the IC3 reports. Internet auction fraud made up 25.5 percent of referred complaints, while credit/debit card fraud comprised 9 percent.
The total dollar loss from all 72,940 cases of fraud referred to federal, state and local law enforcement was $246.6 million, with a median dollar loss of $931 per complaint -- up from $239.1 million in total reported losses in 2007. The highest median dollar losses came from check fraud ($3,000), confidence fraud ($2,000), and Nigerian (West African 419) "advance fee" scams ($1,650).
Ironically, many of the victims who reported fraud to the IC3 were taken in by scam e-mails made to appear as though they were sent by the FBI, falsely claiming that the agency needed the recipient's personal and banking data to investigate a pending financial transaction.
"Recipients are told that if they do not comply with the FBI's request for information, they will be prosecuted or suffer some other financial penalty," the IC3 report concludes. "In some cases, recipients are led to believe that they will become the subject of a terrorist investigation if they fail to cooperate."
Source : www.washingtonpost.com, By Brian Kerbs, April 2, 2009
World's top tax havens that hoard billions!
The world is witnessing a severe recession, jobs are vanishing with unemployment rates rising sky-high, major businesses are going under -- financially, none of us has experienced such hard times ever.
And now visualise the other side of the coin -- trillions of dollars stashed away safely in a tax haven, wealthy tax evaders saving billions and getting richer. . .
How much 'dirty' money is there? Well, there is no exact figure, but the Organisation for Economic Cooperation and Development estimates that at least $11 trillion have been stashed away globally. That is roughly about Rs 5,55,50,000 crore!
India loses a great deal of tax money as firms and individuals park billions into tax havens the world over.
However, with the financial tsunami inundating the world, more and more countries are beginning to clamour for better tax conformity and transparency. Along with the United States and Japan, Germany and France too believe the offshore system not only deprives them of taxes, but also aggravates the financial crisis further.
The issue was dramatised by the case of UBS, the Swiss banking major, who in order to settle the charge that it promoted tax fraud, agreed to divulge the names of some 300 clients to the US. But US says it is yet to receive the names of another 47,000 (American) account holders suspected of tax evasion.
So check out the favourite nations where billions of dollars have been stashed away by the high and mighty. . .
Switzerland
In the three-tier list compiled by OECD, Switzerland was placed in the middle tier of countries, which have adopted the norms on exchanging tax information but not yet 'substantially' implemented them.
The Swiss, government, under tremendous pressure from the US, and few European nations decided on March 13 to ease the country's banking secrecy and fully adopt OECD tax standards.
Despite its complex federalistic political structure, Switzerland's tax structure is extremely simple.
Lump sum tax
Retired foreigners who become residents of Switzerland can choose to pay a lump sum annual tax, which is calculated based on their rental payments (or the rental value of their house or apartment) with no relation to their real income or wealth.
Income tax
Taxes depend on where you live, as the rate varies from canton to canton.
Wealth tax
Swiss cantons levy a small wealth tax of maximum 1% of your net assets.
Capital gains tax
Switzerland does not apply capital gains taxes, except for professional equity and real estate traders.
The world's rich hide at least $1.89 trn of the estimated $7 trn of private wealth according to the Swiss Bankers Association, though others put the figure much higher.
Switzerland passed its banking secrecy laws in 1934 during a worldwide depression and under the threat of espionage by France and Nazi Germany.
And after the 2001 terrorist attacks on the United States, Switzerland started takinga proactive role in investigating suspected financiers of global terrorism.
Cayman Islands
With no direct taxation, the islands are a thriving offshore financial centre.
More than 68,000 companies were registered in the Cayman Islands as of 2003, including almost 500 banks, 800 insurers, and 5,000 mutual funds.
Caymanians enjoy one of the highest standards of living in the world.
Anguilla
Caribbean, islands between the Caribbean Sea and North Atlantic Ocean, Anguilla is situated to the east of Puerto Rico.
Anguilla has few natural resources, and the economy depends heavily on luxury tourism, offshore banking, lobster fishing, and remittances from emigrants.
The Bahamas
A chain of islands in the North Atlantic Ocean, the Bahamas is located to the southeast of Florida and northeast of Cuba.
The Bahamas is one of the wealthiest Caribbean countries with an economy heavily dependent on tourism and offshore banking.
The Bahamas levies neither personal income nor capital gains tax, nor are there inheritance taxes.
Since December 2000, when the government started reforming the financial sector, many international businesses left the island.
Gibraltar
Gibraltar benefits from an extensive shipping trade and offshore banking.
It is no longer considered a non-cooperative tax haven since 30 June 2006.
Grenada
It is a Caribbean island situated between the Caribbean Sea and Atlantic Ocean to the north of Trinidad and Tobago.
Tourism is its main source of foreign exchange.
Isle of Man
It is an island in the Irish Sea, between Great Britain and Ireland.
The Isle of Man does not charge corporation tax, capital gains tax, inheritance tax or wealth tax.
Personal income tax is levied at 10-18 per cent on the worldwide income of Isle of Man residents, up to a maximum tax liability of pound 100,000
Antigua and Barbuda
Investment banking and financial services comprise an important part of the economy.
Banking majors like Bank of America, Barclays, Royal Bank of Canada, and Scotia Bank have subsidiaries in Antogua.
Recently Antigua based Stanford International Bank owned by Texas billionaire Allen Stanford was found guilty of orchestrating a huge fraud that may have cheated investors of some $8 billion.
Belize
A Central American nation, Belize borders the Caribbean Sea, between Guatemala and Mexico.
Essentially a private-enterprise economy, tourism is the number one foreign exchange earner for Belize, followed by exports of marine products, citrus, cane sugar, bananas, and garments.
It has no capital gains tax.
Turks and Caicos Islands
Its attraction lies in a combination of its tax exempt status and minimal disclosure and administrative requirements.
There are more than 15,000 international companies registered in the Turks and Caicos Islands.
The Turks and Caicos economy is based on tourism, offshore financial services, and fishing.
Marshall Islands
This Oceania nation is actually two archipelagic island chains of 29 atolls, each made up of many small islets, and five single islands. It's situated in the North Pacific Ocean, about half way between Hawaii and Australia.
US government assistance is the mainstay of this tiny island economy.
Montserrat
A Caribbean island, Montserrat is located in the Caribbean Sea, southeast of Puerto Rico.
Severe volcanic activities have hurt its economy.
The UK has launched a three-year $122.8 million aid program to help reconstruct the economy.
Niue
Industry consists primarily of small factories to process passion fruit, lime oil, honey, and coconut cream. Sale of postage stamps to foreign collectors is an important source of revenue.
The International Banking Repeal Act of 2002 terminated all its offshore banking licenses. Economic aid from New
Liberia
A West Africa nation it borders the North Atlantic Ocean, between Cote d'Ivoire and Sierra Leone.
Civil war and government mismanagement destroyed much of Liberia's economy.
Richly endowed with water, mineral resources, forests, and a climate favorable to agriculture, Liberia had been a producer and exporter of basic products - primarily raw timber and rubber. Local manufacturing, mainly foreign owned, had been small in scope.
Mauritius
Mauritius based front companies of foreign investors are used to avoid paying taxes in India utilising loopholes in the bilateral agreement on double taxation between the two countries.
The use of Mauritius as a gateway to funnel foreign investments into India has always been controversial.
The economy rests on sugar, tourism, textiles and apparel, and financial services, and is expanding into fish processing, information and communications technology, and hospitality and property development.
Panama
This Central American nation borders both the Caribbean Sea and the North Pacific Ocean, between Colombia and Costa Rica.
Panama's economy rests primarily on a well-developed services sector. Services include operating the Panama Canal, banking, the Colon Free Zone, insurance, container ports, flagship registry, and tourism.
Panama has the second most unequal income distribution in Latin America. The government has recently implemented both tax and social security reforms.
San Marino
Tourism contributes over 50 per cent of San Marino's GDP. Other key industries are banking, electronics, and ceramics.
San Marino's postage stamps, which are only valid for mail within the country, are mostly sold to philatelists and are a source of income.
Nauru
This island in the South Pacific Ocean lies to the south of the Marshall Islands.
Revenues of this tiny island have traditionally come from exports of phosphates.
Only tax in country is an airport departure tax.
Guernsey
Financial services - banking, fund management, insurance - account for about 23 per cent of employment and about 55 per cent of total income.
Light tax and death duties make Guernsey a popular tax haven.
Jersey
This Channel island is in the northwest of France.
Jersey's economy is based on international financial services, agriculture, and tourism.
Light taxes and death duties make the island a popular tax haven. Living standards come close to those of the UK.
Cyprus
Tourism, financial services, and real estate are the most important sectors.
According to the latest estimates of the International Monetary Fund, its per capita GDP (adjusted for purchasing power) is, at $28,381, just above the average of the European Union.
British Virgin Islands
These islands are situated between the Caribbean Sea and the North Atlantic Ocean to the east of Puerto Rico.
Adoption of a comprehensive insurance law in late 1994, which provides a blanket of confidentiality with regulated statutory gateways for investigation of criminal offenses, made the British Virgin Islands attractive to international business.
A KPMG report in 2000 indicated that the British Virgin Islands was home to approximately 41 per cent of the world's offshore companies.
Aruba
Tourism is the mainstay of the small, open Aruban economy, along with offshore banking and oil refining and storage.
Cook Islands
It comprise a group of islands in the South Pacific Ocean, about half way between Hawaii and New Zealand.
Economic development of Cook Islands is hindered by its isolation from foreign markets, limited size of domestic markets, lack of natural resources, periodic devastation from natural disasters, and inadequate infrastructure.
It is a major exporter of black pearls.
Dominica
It is an island between the Caribbean Sea and the North Atlantic Ocean, about half way between Puerto Rico and Trinidad and Tobago.
The Dominican economy depends on agriculture, primarily bananas, and remains highly vulnerable to climatic conditions and international economic developments.
Bermuda
Bermuda enjoys the third highest per capita income in the world, more than 50 per cent higher than that of the US.
Its economy is primarily based on providing financial services for international business and luxury facilities for tourists.
A number of reinsurance companies relocated to the island after September 11, terror attacks in the US and again after Hurricane Katrina in August 2005.
Bermuda does not levy income tax on foreign earnings, and allows foreign companies to incorporate there under an 'exempt' status.
Bahrain
Situated to the east of Saudi Arabia, Bahrain is an archipelago in the Persian Gulf in West Asia.
Bahrain is home to numerous multinational firms with business in the Gulf.
It is also focused on Islamic banking and is competing on an international scale with Malaysia as a worldwide banking centre.
Saint Vincent and the Grenadines
Much of the workforce is employed in banana production and tourism, but persistent high unemployment has prompted many to leave the islands.
Saint Vincent is home to a small offshore banking sector and has moved to adopt international regulatory standards.
Samoa
This group of islands in the South Pacific Ocean isabout half way between Hawaii and New Zealand.
The economy of Samoa has traditionally been dependent on development aid, family remittances from overseas, agriculture, and fishing.
The Samoan government has called for deregulation of the financial sector and continued fiscal discipline.
Netherlands Antilles
The islands' economy depends mostly upon tourism, international financial services, international commerce and shipping and petroleum.
The islands form an autonomous part of the Kingdom of the Netherlands.
US Virgin Islands
These Caribbean islands lie between the Caribbean Sea and the North Atlantic Ocean to the east of Puerto Rico.
Tourism is the primary economic activity.
It offers a 90 per cent exemption from US income taxes and 100 per cent exemption from all other taxes and customs duties to certain qualified taxpayers.
Malta
Shareholders of certain companies pay less than 5 per cent tax and dividend income where the company holds less than one per cent of equity is usually not taxed.
Malta's economy is dependent on foreign trade, manufacturing - especially electronics and pharmaceuticals - and tourism.
Saint Lucia
This island between the Caribbean Sea and North Atlantic Ocean lies to the north of Trinidad and Tobago.
The island nation has been able to attract foreign business and investment, especially in its offshore banking and tourism industries.
Vanuatu
This Oceania group of islands in the South Pacific Ocean lies about three-quarters of the way from Hawaii to Australia.
Its financial services commissioner announced in May 2008 that his country would reform its laws so as to cease being a tax haven.
Fishing, offshore financial services, and tourism are other mainstays of the economy.
Seychelles
Seychelles' growth has been led by its tourist sector and tuna fishing. In recent years, the government has encouraged foreign investment to upgrade hotels and other services.
It is, per capita, the most highly indebted country in the world according to the World Bank, with total public debt around 122.8 per cent of GDP.
St. Kitts & Nevis
These islands in the Caribbean Sea are about one-third of the way from Puerto Rico to Trinidad and Tobago.
St. Kitts and Nevis is heavily dependent upon tourism revenues, which has replaced sugar, the traditional mainstay of the economy.
Source : www.rediff.com
Email providers will need to have servers in India
Internet users will have email accounts ending with ‘.in’ instead of ‘.com’. While some like Yahoo already provide email services with this suffix, many others offer the global suffix ‘.com’.
The change is going to make a huge difference for the investigating agencies dealing with cyber crime, including data theft. Local mail IDs are a big problem across the globe, wherein the investigating agencies struggle to get personal details of account holders due to jurisdictional issues. As the servers of these accounts are generally overseas, mostly in the US, every country has to go through the Mutual Legal Assistance Treaty and send letters rogatory (LRs) to get the details. The process of sending LRs takes more than six months.
“For a long time, we have been asking for this, and I think there will be an automatic change once the gazette notification for IT Act amendment comes into effect. Parliament has passed the Bill, and internet domains will be bound by Indian law if they have to carry out their business here,’’ says IGP, CoD, H C Kishore Chandra.
In India, the issue assumed critical proportion after the Mumbai terror attacks, where the terrorists used BlackBerry mobiles. As the parent company initially refused to part with information critical to the investigation, there was even talk of banning BlackBerry.
“It’s a question of availability of information when we need it. When the Indian Computer Emergency Response Team director was here for discussion, we said this can’t go on forever. Most of the time, we had to plead helplessness as we could not get information in time,’’ DIG, CoD, Malini Krishnamurthy says.
The question is, will global email service providers agree to the idea of hosting servers in India to service their Indian client base?
“We don’t know how they are going to do it, but the government has decided to do it. Every domain company has their branch office here, and they are bound to pass on the information immediately, whenever investigation agency needs it,’’ Krishnamurthy says.