This month marks my tenth years in the insolvency business and so, I thought I would try and touch on a topic that is sadly too common in the global financial system – fraud.
I’m not a lawyer or an accountant, so I can’t give you
a “legal” definition of term. However, as a layman, I understand the term as “making
something appear a certain way for personal gain.” If you look at this definition,
you’ll notice that its something that happens quite often and its not that difficult
to do.
Getting away with “fraud” is actually easy. As long as
you can make the documents match, you’re pretty much OK. Yes, there are audits
and various government regulations, which are supposed to check on these things
but the reality is that as long as you have documentary proof to back things
up, nobody is going to question you too much unless they choose to – which is
unfortunately something that happens rarely given that most authorities are
overworked.
What do I mean by this? Well, use a basic example. Take
a loan application for example. Well, if you’re an employee, you’re going to be
required to provide “pay slips.” If you own the company, its actually easy to
generate the pay slips required. As long as you can show the pay slips and you
make the required payments, nobody is going to question you.
It’s one of the first lessons I learnt in the
business. I was thrown into an investigation and required to look at the
payments issued to a director. I saw lot of payment vouchers issued to as
salary. I was then required to check a General Ledger. The vouchers and ledger
entries matched. Then, my boss, Mr. Farooq Mann, would insist that I check bank
statements. His point was that there was a clear difference between what
businesses recorded in their books and what money actually went in and out of
the bank account.
This is just the most basic and crudest form of making
something appear a certain way. One of the most sophisticated ways in which
this happens is called “round tripping.” The most common instance is when
assets are sold, which inflates the sales of the company. Perfectly legitimate
sales documents are generated and cash does enter the account. However,
sometime down the line, the company buys back the same asset for the same
amount. This makes the company’s sales figures look good for a certain period.
Another example of “round tripping” comes from
directors who pump money into a company to inflate the paid-up capital. This
amount is then paid back to the directors and usually booked as “repayment of
loan from director.”
Why do people get involved in such “financial dressing?”
Well, financial dressing is pretty much like any other form of dressing. We do
so to make a point to certain people. Think of the world’s most famous property
developer – Donald Trump. When asked about his wealth, the answer is inevitably
“depending on whose asking.” If it’s the tax man, the valuations are low. If it’s
the bank, its higher. The sad reality of the capitalistic system is that h’s
merely the most famous person doing it.
Whenever a scandal breaks out, governments inevitably
wring their hands, throw a bit of money at the victims to keep them quiet and
then come with a slew of regulations. One of the crackdowns in Singapore
involves the number of nominee directors.
As was reported in an article by Blackstone Gold LLC
(as a matter of disclosure, this is a firm that has given my employer works
with on a number of matters) that was published in the Business Times in
Singapore, “Recent
crackdowns by the authorities have given a glimpse of the proliferation of
nominee directors, where in one case a local resident was a nominee director of
980 companies at the same time. It is one of the most striking contrasts in our
line of work, to see frauds perpetrated by foreign individuals using Singapore
companies with local nominee directors, most of whom are modest people living
in public housing unaware of how they might have unwittingly aided some dubious
actions by the companies they have been asked to be a director of.”
Whilst tighter
regulations help, regulations themselves are pointless if they are
unenforceable. There is a high standard of proving fraud in a trial. So, how do
the authorities gather the evidence effectively. As stated by the BlackstoneGold article, “ In every commodities fraud case I was involved in,
empowering the individuals pressured to falsify information, with a protected
forum to whistle blow could have made all the difference.”
However, while
Hollywood might be inclined to glorify whistleblowers, most countries are not
inclined to do so in their legislation. Think of the most famous whistleblower in
Singapore and Germany – Pav Gill, the man who blew the whistle on the Wirecard
Fraud.
Whilst Mr. Gill
has become something of a celebrity, he revealed the sad reality of being a
whistleblower in an interview with Fraud Magazine:
https://www.fraud-magazine.com/cover-article.aspx?id=4295017127
In that interview Mr. Gill says that “the authorities in Singapore and Germany have barely acknowledged or thanked him for his efforts, not to mention provide any protection from top executives at Wirecard whom he had a hand in bringing down.”
So, here’s the
point. If whistleblowers can make all the difference in the prosecution of fraud
and other doggy practices, shouldn’t we make it safe for people willing to do
the right thing? As Blackstone Gold argues: “A robust national whistle-blowing
regime would put the power back into the hands of the very people that might
feel unfairly pressured to commit wrongs – and in doing so, protect not just
their interest but the national interest of Singapore as a trade and financial
hub as well.”
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