Power to the People

 

 

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.”