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Erasing the Money Trail via Layering

 

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There are three steps that each criminal takes in order to successfully launder his or her money. First, the schemer must go through the placement process. This is the point in which the dirty money is introduced to the financial system; for instance, a bank deposit. The second step in the process is the structuring of the tainted funds so that it is difficult to ascertain the  point of placement, commonly called layering. More on this to follow. Finally, integration is the conversion of the illegally obtained funds into legitimate assets, i.e. real estate, art, diamonds, etc.

The focus of this blog is the middle stage in the laundering process or better known as layering. Layering is probably the most complicated step in the money laundering process because it consists of multiple transactions and money movements between accounts. It is designed to befuddle investigators researching the trail of illicit funds. The reselling of high valued goods, buying and selling stocks and bonds, and converting account holdings into money instruments are a few other examples of layering.

However, wiring funds to and from different institutions and jurisdictions may be the most common method of layering. Although, banks have many controls in place to trace funds and prevent wires from transferring to certain suspicious accounts, wires are still a fast and easy way for launderers to move their money. Structuring is a highly popular form of layering. It is the processing of financial transactions just under the threshold which jurisdictions set for reporting purposes. These thresholds vary depending on the jurisdiction.

Criminals regularly probe the regulatory landscape for new and undetectable ways to hide their money. Broker-dealers are vulnerable to money laundering due to the high volume of trades conducted and the variety of financial products offered to clients. Wash trading and spoofing are two methods of layering in a broker-dealer setting. Wash trading consists of the launderer using illicit funds and taking a long position in one stock and a short position in that same stock, usually at a different broker-dealer. Aside from the cost of the trades, the launderer normally breaks even and receives a clean check once the position closes. Spoofing is the practice of placing limit orders and cancelling them just before the stock reaches the strike price. The cancellation would have an adverse effect on the stock and the launderer could place an order to benefit.

Cuckoo smurfing is another form of layering. This technique requires the work of an “insider” at a money remitter, an innocent bank customer and a transfer of funds. The “insider” receives an order to send money to an overseas account. The account information of the beneficiary is supplied to the launderer by the “insider.” The initial “clean” funds being sent are redirected into the launderer's account giving he or she a legit source of cash and the illicit money provided by the launderer is deposited into the innocent beneficiary’s account. Cuckoo smurfing has been predominantly a European practice, however, U.S. regulators have seen an increase in third party deposits in recent years.

As newer, faster and easier ways to transfer money are introduced, criminals will be looking for loopholes to exploit them. Venmo is one such product. It is a mobile app which allows peers to transfer funds freely among each other in amounts up to $2,999.99 per week. There have already been issues with these payment systems however, there are ways to prevent launderers and other criminals from exploiting systems and their users. Knowing your customer is paramount in any anti-money laundering initiative. The more information gathered and verified by these pay sites, the easier it is to identify a culprit.

For more information please contact MSA Investigations.

The Latest Major Network Security Breaches: USIS and UPS

 

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It was recently reported that U.S. Investigation Services (USIS), a major provider of background checks for the U.S. Government, experienced a network compromise.  Details surrounding this compromise, such as the method used and the data affected, have not been released.  Suffice it to say, given the nature of the work conducted by the USIS, the potential for a compromise of extremely sensitive data, remains high. Similarly, the UPS Store, the shipping and business service retailer, recently disclosed that 51 of its stores in 24 states experienced a data breach caused by a malware. In the UPS breach, additional information was available about the type of data compromised, in this instance, customer credit card data.   In the UPS case, we are still awaiting answers about how the malware infection occurred.

While the investigation is ongoing in both of these matters, we are left to make assumptions as to how these compromises succeeded. What can be learned, even before the findings are made public, is the importance of an active and dynamic network security program for both private and public entities.  The reality is that motivation for compromising network systems varies from hacker group to hacker group.  For some the motivation is monetary, for others it is political (backed by a nation state), and for others it is activism.  Regardless of the motive, it becomes clear that all companies and government agencies are potential targets. 

Although we don’t yet know how the USIS and UPS Store compromises succeeded, based on recent trends it was most likely a combination of end-user action and the ability of hackers to take advantage of network security vulnerabilities.  On the end-user action side, we must continue to remind our network users to employ the utmost care in opening e-mail attachments or clicking on links embedded in e-mail messages.  Preventing most network intrusions and data breaches, starts with educating the end-user.  However, because we don’t live in a perfect world and when mistakes do occur, security vulnerabilities should be proactively identified and remediated through penetration testing, IT security audits, and regular vulnerability scans.

MSA Investigations cyber-security professionals work with clients to analyze IT networks, perform penetration testing, and  develop incident response plans to protect private information from both external and internal threats.

For more information contact MSA Investigations.

 

Photo Credit: http://www.iti.illinois.edu/

Form I-9 Audits: What Employers Should Know

 

At the moment, Form I-9 compliance is a hot-button issue in the United States. Immigration and Customs Enforcement (ICE) has recently increased its I-9 audits, which means more employers are being fined for improper filings. A Form I-9 is a mandatory document for employees to complete prior to working for money in the U.S. It was mandated as part of the Immigration Reform and Control Act of 1986 and with the introduction of the Internet, E-Verify has become a vital part of ensuring the identity of potential employees. E-Verify uses a Form I-9 to verify an individual's identity and employment eligibility with information retained by the Department of Homeland Security (DHS) and Social Security Administration (SSA).

Filing a Form I-9 is a simple process. However, filing incomplete forms or bypassing the submission altogether, carries some stiff penalties. Here are some consequences of Form I-9 violations:

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1) Civil Fines

 

  • Companies can be fined as low as $110 and as much as $1,100 for failing to comply with Form I-9 requirements. Knowingly hiring a person unauthorized to work in the United States can range from $375 up to $16,000 in civil penalties. Committing document fraud can be punishable in fines ranging from $375 to $6,500. Unlawfully discriminating against an authorized worker can cost a company at least $375 and up to $16,000. Finally, asking an employee for an indemnity bond can be fineable by $1,100 or a full refund of the bond's value. 

 

2) Criminal Penalties

 

  • If convicted of hiring, recruiting or referring unauthorized aliens a company would have to pay at least $3,000 or the individuals deemed responsible could face up to six months in prison. 

 

3) Debarment from Government Contracts

 

  • Depending on the security clearance or government agency employing the offending company, a government contract could be lost due to Form I-9 violations. 

 

4) Restitution

 

  • A company guilty of discriminating against an individual in connection with I-9s, could either be forced to remit back pay to the employee or mandated to hire the individual.

 

Companies being audited by ICE should comply with all requests for documentation. Showing good will can have a beneficial impact on the ultimate sentence. The Office of the Chief Hearing Officer (OCAHO) is the government agency which adjudicates  I-9 cases. The administrative law judge (ALJ) decides whether or not the fines levied by ICE are fair. In
certain instances, the ALJ may feel the amount is excesive and adjust the total.  In other instances where a violator shows blatant disregard for the guidelines, a harsher fine or even possible jail time are considerations. OCAHO can, also, deem the fine to be fair and take no further action.

In early 2014, a New York restaurant was found negligent in filing nearly 300 I-9s and assessed a fine of $264,605. The ensuing OCAHO hearing found that the fines levied by ICE
were, in fact, too harsh and they were reduced to $88,700. This reduction was in consideration of the restaurant's financial condition. The ALJ recognized the fine was almost 50 percent of the restaurant's total income in 2011 and could have caused its demise. Fines were imposed due to the serious nature of the violations, which, in some cases, was a  total disregard for filing I-9s.

It is imperative for businesses to be current on all I-9 rules and regulations. ICE audits have increased in the last several years and the fines for each violation keeps pace with inflation. In 2008, USCIS adjusted the value of fines due to Form I-9 violations to be more in line with inflation. These fines could rise in the coming years, as could the number of audits performed by ICE. 

 

For more information please contact MSA Investigations.

 

Due Diligence: What You Should Know About Your Business Partner

 

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For many companies operating in international jurisdictions, conducting due diligence on international business partners has become a standard business practice. However, while the need to “know” their foreign counterparts is clear, there is no regulatory guidance specifying a minimum level of due diligence to be conducted. This lack of guidance can make it tempting for companies to take a corner-cutting approach to critical work that must be done properly. A company’s decision to conduct the minimum level of due diligence is almost never in the company’s best long-tern interests. A more systematic investigation on potential international business partners should involve collection of information from the business partner, verifying that information, and following up on identified “red flags” during the course of the investigation.

The U.S. Foreign Corrupt Practices Act (FCPA), the U.K. Bribery Act and increased global compliance regulations require that companies have adequate procedures in place that are designed to address third party corruption risk. Due diligence in regard to FCPA compliance requires that a company evaluate the risks involved in doing business prior to establishing a relationship and if, in facrt, a relationship is formed, an ongoing process of periodically evaluating the association to find links between current business relationships overseas and ties to a foreign official or illegal activities linked to corruption.

Companies wanting to evaluate their business partners for FCPA compliance should consider taking the following steps in their probe of a potential international business partner:

  1. Require the potential business partner to disclose information on a questionnaire
  2. Verify the information provided and independently identify adverse information
  3. Perform additional due diligence on any “red flags” identified in the process

DISCLOSURE OF INFORMATION

Companies should create a questionnaire that, at the very minimum, contains the following components:

- Identifying information for the company – such as, address, registration and contact information

- Ownership and management details, including beneficial owners, as well as identifying  background on these individuals, such as, date of birth, current address, educational and employment history, and business affiliations.

- Disclosure of any bankruptcy, civil, criminal and regulatory matters.

BACKGROUND RESEARCH

Once the questionnaire is completed, companies should conduct an assessment to determine the level of risk presented by each business partner. A number of factors should be considered, including the type of relationship, corruption risk associated with the jurisdiction, interaction with government officials, compliance regime, and known adverse information about the business partner.

Effective international business partner due diligence requires companies to gather meaningful information and assess potential risks. International online public records can be sparse and unreliable; instead, local resources may be required for record retrieval and for human source inquiries regarding the reputation and background of the subject at hand. Companies should strongly consider hiring an independent firm to conduct background research to benefit from access to sources otherwise not available. A professional's expertise and knowledge of the jurisdiction would greatly lower the risk of overlooking critical information and provide credibility to the information gathered during the investigative process.

A more systematic investigation on potential international business partners will significantly contribute to a better informed decision and allows the company to evaluate all of its costs, benefits, and risks. MSA Investigations’ due diligence practice is committed to assisting clients in understanding the risks associated with a potential business partner by providing crucial information and intelligence.

Melissa Rodriguez is a Senior Investigative Analyst at MSA Investigations.

Photo Credit: digitalmined.com

[UPDATE 2] Massive CityTime Fraud: Red Flags Were Ignored (Part 2)

 

This is Part 2 of 2 of a mini-series on the epic fraud committed right under the noses of the public and the City of New YorkRead Part 1 here.

***

UPDATE (July 17, 2014):

On July 15, 2014, Svetlana Mazer, Mark Mazer’s wife, was convicted for obstruction of justice.  The court sentenced Svetlana Mazer to three years of probation and ordered her to complete 200 hours of community service. 

Larisa Medzon, mother to Svetlana, was convicted for structuring transactions to evade reporting.  Medzon was sentenced to six months of home confinement, three years of probation, and ordered to complete 200 hours of community service.

Anna Makovetskaya, Mark Mazer’s distant cousin, was convicted for conspiracy to defraud the United States.  Makovetskaya was sentenced to three years of probation and ordered to complete 200 hours of community service.

***

UPDATE (April 29, 2014): 

On April 28, 2014 Mark Mazer, Gerard Denault, and Dimitry Aronshtein were each sentenced to 20 years in prison and ordered to forfeit $40 million in cash and property.

Co-conspirators, Svetlana Mazer, Mark Mazer’s wife; her mother Larisa Medzon; and Anna Makovetskaya, Mark Mazer’s distant cousin, all pleaded guilty on June 19, 2013 and their adjournment for sentencing is slated for June 24, 2014.

Carl Bell reportedly co-operated with investigators and pleaded guilty on June 14, 2011.  His sentencing records are sealed.

Victor Natanzon also reportedly co-operated with investigators and pleaded guilty on February 8, 2011.  No sentencing information is currently available.

Scott Berger, co-conspirator and defendant in the case, died of an apparent heart attack on December 19, 2010.

***


As discussed in Part 1, this $700 million scandal could not have been possible if it were not for a few key players and their ability to influence, authorize, and conceal illegal activities. Once these individuals laid the groundwork to defraud the City they began recruiting others to aid in the scheme.

The Schemes

According to court documents, around 2003, Gerard Denault (SAIC’s Program Manager on the CityTime project) and Carl Bell (SAIC's Chief Systems Engineer in New York City) recommended that SAIC (the lead project developer on the CityTime project) hire TechnoDyne LLC, wholly owned by Reddy and Padma Allen (CEO and CFO respectively) as a subcontractor to assist in the CityTime project.  In turn, the Allens agreed to pay Denault and Bell each $5 for every hour worked by a CityTime consultant hired by or through TechnoDyne, and thus these kickbacks created an incentive for the perpetrators to increase the project labor as much as possible.

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Mark Mazer

Perhaps as a method to create another layer of concealment, around 2005, Mark Mazer (a third party consultant and subject matter expert on the CityTime Project) and Denault, among others, caused the Allens and TechnoDyne to hire D.A. Solutions, Inc. as a sub-subcontractor on the CityTime project. The owner of D.A. Solutions was Dimitry Aronshtein, Mark Mazer’s uncle. This familial relationship was apparently not disclosed to project officials. 

The following year, Mazer and Denault, among others, caused the Allens and TechnoDyne to hire yet another sub-subcontractor, Prime View, Inc., whose owner was Victor Natanzon.  Both of these sub-subcontractors agreed to pay kickbacks to Mazer.  Initially, Natanzon agreed to pay Mazer 80 percent of Prime View’s profits on CityTime.  Perhaps not satisfied with this deal, over time, Mazer demanded an even larger share of the profits. 

With these two sub-subcontractors in place and with illegal proceeds flowing into Mazer's and the Allen's pockets, prosecutors allege that Mazer and the Allens agreed to pay Denault an additional $2 for every hour billed by D.A. Solutions and Prime View.

Around 2005 and 2006, Mazer and Denault, among others, used their influence to recommend an amendment to SAIC’s CityTime contract, in which the City agreed to change the agreement from a “fixed price” contract, which SAIC would bear “the responsibility of absorbing cost overruns,” to a “fixed price level of effort” contract, “so that the City, and not SAIC, would largely become responsible for future cost overruns.”

According to court documents, after the contract amendment, the co-conspirators allegedly upped the ante and significantly increased the staffing on the project. In 2005, less than 150 consultants worked on the project.  In 2007, the number of consultants increased to more than 300; most of them hired by TechnoDyne. This hiring spree occurred in spite of an internal memo by Denault that indicated that the program "was staffed adequately to meet both current and projected contract needs.”

Based on interviews with former employees, investigators claim that the scheme also extended to fraudulent time sheets and ghost employees.  In one interview, a former employee claims to have witnessed time sheets, which were submitted to the City for billing, that were fraudulently completed for work conducted, when in fact the consultant in question was on vacation or had been already terminated. The same former employee alleged that when he/she was notified of his/her termination, Aronshtein, owner of D.A. Solutions forced the employee to sign two weeks' of new time sheets in order to receive severance pay.  Investigators believe these blank time sheets with the employee's signature would subsequently be completed and submitted, following the employees' termination, for work that had not actually occurred.  Mazer and a colleague, Scott Berger, purportedly acted as supervisors and knowingly approved these fraudulent time sheets.

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Gerard Denault

The Concealment

Prosecutors allege that conspirators withdrew cash through ATM transactions at multiple banks for amounts under the threshold for which a currency transaction report needs to be completed, avoiding possible anti-money laundering detection; transferred their illegal proceeds to foreign banks in India and Latvia; and deposited kickbacks to shell companies formed by the perpetrators and their family.  Prosecutors accused Mazer's wife and his mother of forming some of these shell companies that received kickbacks to add layers of complexity to the fraud and to further conceal Mark Mazer's involvement.

In total, between 2003 and 2010, TechnoDyne allegedly received at least $450 million in connection with the CityTime project. Sub-subcontractors, D.A. Solutions and Prime View reportedly received $55 million between 2005 and 2010 and $20 million between 2006 and 2010 respectively. Prosecutors stated, "virtually the entirety of the well over $600 million that the City paid to SAIC on the CityTime Project was tainted, directly or indirectly, by fraud."

Denault is reported to have received $9 million in kickbacks and Bell $5 million. Dimitry Aronshtein of D.A. Solutions and Victor Natanzon of Prime View allegedly paid Mark Mazer $25 million in kickbacks.

Red Flags

So how was this fraud allowed to continue for nearly seven years, even when the original budget for the project ballooned to an absurd number? Perhaps performing some very basic due diligence and exercising tighter internal controls may have uncovered the scheme sooner. 

According to court documents, D.A. Solution's revenue from the CityTime Project represented almost 100 percent of the company's income and Prime View's portion totaled 75 percent, after they were hired and up until the scheme unraveled.

News outlets reported that in 1994, Mark Mazer was investigated by the FBI while working at City’s Administration of Children’s Services division after millions of dollars went missing in the division he supervised. The media claimed that foster-care checks were being issued without proper supporting documents and approximately $2 million went missing. Mazer was never charged; however, he was barred from the room that wrote the checks and his salary was lowered from $43,925 to $34,537.

In 1995 and 1996, allegations against Mazer were made for sexual harassment. The victims eventually received payment from the City.  Mazer was again under investigation when two city laptops were stolen in 1998, though he was not charged. The media also reported that he was arrested on petty larceny charges in 1999, though the case is sealed.

SAIC, a Fortune 500 company and a major government contractor, receives billions of dollars in revenue from its contracts, so how did they allow TechnoDyne to be hired as their major subcontractor for this project?  Court documents show that upon Denault's recommendation and denial of any conflict of interest, TechnoDyne did not have to undergo any competitive bidding process to win the contract and was retained as a "sole source" contractor.

In one damning piece of evidence, according to court documents, in 2005 SAIC received a whistle blower complaint alleging that subcontractor TechnoDyne was receiving an inordinate amount of work from SAIC on the CityTime project and claimed contract mismanagement and allegations of Denault receiving kickbacks. Despite SAIC's internal investigation, TechnoDyne continued to reap a large amount of the work, about 74 percent of the overall total paid to SAIC for the CityTime project, compared to 14 percent to all the other subcontractors and vendors combined.

City officials are also partly responsible for ignoring the warning signs  According to published media, during Bill Thompson's tenure in office as city comptroller from 2002 to 2009, he failed to audit the CityTime program despite the program's growing costs.  Instead, on seven ocassions he authorized amendments to the program's contract allowing the program to use more and more of the taxpayers' money.

In July 2008, the OPA internally audited the program and discovered several instances where consultants had been collecting paychecks weeks after they had been terminated, costing taxpayers $145,000.  According to news articles, Thompson's office was aware of the OPA audit and had been requested to investigate further.  However, no further action was taken until 2010, when Thompson was succeeded as city comptroller by John Liu.  As discussed in Part 1 of this series, the subsequent audit found that the program was mismanaged.

 

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Reddy and Padma Allen

Discovery

Eventually, the scheme was discovered in June of 2010, when a former consultant on the CityTime project came forward and informed the City's Department of Investigation that the consultant was being paid by D.A. Solutions rather than SAIC and TechnoDyne. DOI then learned that D.A. Solutions did not have contractual rights to receive payment for the CityTime project, which led to several interviews with other former consultants and eventually revealed the fraudulent time sheet scheme.

On November 22, 2013, Mazer, Denault, and Aronshtein were convicted for their involvment in the fraud, as have all of the defendants that have been charged in the CityTime scandal. The Allens have fled to their native India, where, with the $39 million it is believed that they embezzled, will be quite comfortable as fugitives. News articles report that at their sentencing in March 2014, both Mazer and Denault will face life in prison.

Although SAIC paid back $500 million this was a huge embarrassment for the City and officials.  A project meant to create efficiency and prevent waste and fraud turned into a decade long debacle resulting in one of the largest fraud cases in New York history.  One can only hope that the City has learned from its mistakes and will conduct its own due diligence to prevent future recurrences.

 

 

Ricky Tong is a Coordinating Investigative Analyst at MSA Investigations.  To learn about our fraud investigation and due diligence capabilities, contact us today.

Photo Credits: NY Daily News

Background Check on Your Child's Nanny

 

Nanny Background Check

Few choices in life are as important as deciding on a caregiver for your child. All parents want the best for their children, however, the number one priority should always be the safety of the child. Too many horror stories have been told about nannies committing heinous crimes after being hired without completing a background check or being cleared when they should not have been. Of course, many of these nannies do not have a criminal past and so it is difficult to identify whether a person is capable of committing a crime. One easy way to get a better idea of a person's character is through a social media search. The internet has a wealth of self-disclosed information that, surprisingly, many people feel safe sharing.  Another search to conduct is a simple education verification.  Many of applicants are recent college graduates and verifying that someone actually received the degree they claim they did can provide insight into their character and propensity to lie.

It is not only nannies that need should be subjected to scrutiny, but parents should take a close look at potential daycare's as well. When conducting due diligence on a prospective daycare it is imperitive that they not only investigate the daycare, but the employees . A daycare facility may have a perfect safety record, but they could have unwittingly hired a sex offender or someone convicted of kidnapping. It may sound far-fetched, but it can happen. There is no such thing as "maybe I'm being paranoid" or "is this search really necessary" when it comes to your children. 

As a parent, another important factor to take into consideration, when conducting these investigations, is record and reputation of the background screening company. Many of the nanny screening providors contract with large-scale, background screening "check the box" companies, where quantity, not quality is the primary concern.  This can lead to a high volume of human error resulting in people being cleared, or given certain access, when they should not have been approved.

Many young families today are in need of a caregiver because both parents need to work. The nanny industry is expanding rapidly, meaning the number of nannies are applying for positions is increasing exponentially. Regardless if the person is a career criminal or just fibbing on his/her resume, the person left in charge of your child's safety needs to be 100% trustworthy. Using a background screening company you can trust to take the time and care needed to get the job done right is what you and your child deserves. There is never going to be a fail-safe method to identifying someone as a danger because people are unpredictable. The most a parent can do to feel comfortable with leaving their child in the care of another human being is to exhaust every avenue of investigation regarding that caregiver.

The following methods for conducting a background check on your child's caregiver should be taken into consideration when selecting a provider:

Have the applicant sign a release 

  • Disclosure and authorization is a required step under the Fair Credit Reporting Act. Prior authorization is required before initiating a background check on any individual.

Conduct civil/criminal record searches

  • Include a county, statewide and federal criminal search along with civil matters in the same jurisdictions. A national sex offender search should also be completed in each jurisdication where an applicant has been known to reside, attended school and/or been employed.

Conduct a social media search

  • This is perhaps the easiest and unfortunately, most overlooked search to conduct. Facebook, Twitter, YouTube, and Google are the most popular social media sites to check, however, there are many more publicly accessible web outlets for people to express their views and post pictures and they should all be researched before hiring a nanny.

Check personal and professional references

  • Speaking with former employers can provide a wealth of information about the candidate and how they behave in a work environment.  Speaking with friends and relatives can also provide insight into an applicants motivation for becoming a nanny.

For more information and a detailed description of nanny/daycare investigations please contact MSA Investigations

Photo Credit: istock

Broker Due Diligence – Changes and Criticism of FINRA’s BrokerCheck

 

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The Financial Industry Regulatory Authority (FINRA), Wall Street’s independent and non-governmental regulator, recently announced that its Board of Governors approved amendments that will require their member brokerage firms to expand their background check obligations on new brokers and transfers.

Investors can currently use BrokerCheck, a free-to-access database maintained by FINRA, to perform due diligence on brokers and brokerage firms.  According to FINRA, the database includes, but is not limited to, such information as, a broker’s license status, jurisdictions licensed to practice, exams passed, employment history, employment terminations, regulatory actions, bankruptcy filings, criminal convictions, civil judgments, tax liens, customer disputes, disciplinary history, and arbitration awards.

FINRA states on their website that the information found on BrokerCheck is gathered from disclosures made by brokers and brokerage firms.  Brokers and firms are initially required to disclose this information when first registering with the Central Registration Depository (CRD), the securities industry online registration and licensing database maintained by FINRA.  Subsequently, they are required to update their professional and disciplinary history within 30 days of any new and/or relevant events. 

With the passage of these new amendments, brokerage firms will no longer be able rely solely on their employees to self-disclose all pertinent information. Instead, they will be required to verify that the self-disclosures are accurate, complete and up-to-date, to ensure that brokers are not omitting relevant information, intentionally or otherwise.  

As for criminal records, brokers are already required to be fingerprinted when joining a firm, regardless of whether they are a new broker or transferring from another firm.  According to FINRA, the fingerprints are sent to the United States Department of Justice for processing.  According to the press release, FINRA will now search publically available criminal records on all brokers who have not been fingerprinted in the past five years.  FINRA will then perform unspecified periodic checks to ensure that the information available on BrokerCheck is accurate and complete, and that brokers and firms are following their requirements to disclose certain information in a timely manner.

FINRA also announced that they are studying whether there is a correlation between the number of examinations failed and broker misconduct, and whether that information should be made publically available.  These amendments are pending approval by the United States Securities and Exchange Commission, before they can go into effect.

Is BrokerCheck Reliable?

These amendments come on the heels of recent criticism of BrokerCheck made by the Public Investors Arbitration Bar Association (PIABA), whose members represent investors in disputes with the securities industry.  In a document published on March 6, 2014, PIABA criticized BrokerCheck for not providing certain broker disclosures, even though the disclosures are public record and can be requested through state securities regulators.  They claim that the states’ data source for broker disclosures, the CRD, is the same database BrokerCheck utilizes to obtain its information and should therefore be included in the BrokerCheck report.  PIABA argues that instead of searching multiple state regulatory databases, BrokerCheck should be a comprehensive database where investors can obtain a broker’s complete history.

In their publication, PIABA compared information available between BrokerCheck and state regulators for several brokers.  PIABA identified several discrepancies that did not appear on BrokerCheck, but were reported by state reports, such as, 1) reasons why a broker was terminated from a firm; 2) whether a broker was ever under internal review “for fraud or wrongful taking, or violating investment-related statutes, regulations, rules or industry standards of conduct;” 3) a personal bankruptcy filed by a broker; 4) a federal tax lien filed against a broker in excess of $100,000; and 5) exam scores and failures.  

PIABA advised that another potential hurdle for obtaining broker disclosures, through state regulators, is information availability due to each state’s public record laws.  Furthermore, according to PIABA, some state report requests “cost consumers money; must be requested by telephone, by email, or through the state securities regulator’s website; and may not be delivered for hours or days after the request,” unlike the free and instantaneous BrokerCheck.

PIABA argued that FINRA should not be limiting the information available on BrokerCheck and that it should be up to the investor to decide whether or not certain information is relevant when selecting a broker.  According to FINRA’s website, BrokerCheck only provides information about a broker’s criminal and investment-related civil history within the past ten years.  Additionally, the U4 form, which brokers must complete to be registered in the appropriate jurisdiction, requires the disclosure of bankruptcy filings only within the past ten years.

The PIABA document states that the SEC has recognized the potential problems of marketing BrokerCheck as a comprehensive tool for investors, and has urged FINRA to expand the disclosures available through the database; although it appears FINRA has been reluctant to do so.  PIABA asserts that FINRA’s basis “for not disclosing the same amount of information as these states is based on ‘personal privacy and fairness’ to FINRA members” and that this rationale is “flawed given that the same information excluded from BrokerCheck reports is already publicly available from these states.”

The takeaway here for investors – before entrusting a broker with your investments, perform your due diligence not only on the broker, but also on the research tools you are utilizing to ensure the information you are receiving is comprehensive.  For investors concerned with non-required disclosures such as bankruptcies older than ten years and non-investment related misdemeanor convictions, MSA Investigations recommends, in conjunction with searches with BrokerCheck and state regulators, to seek out other public record repositories or contact a due diligence firm.

 

Ricky Tong is a Coordinating Investigative Analyst with MSA Investigations.  To learn about our due diligence capabilities contact us today.

Photo Credit: Flickr

Background Check Myth – SSNs Not Important As You Might Think

 

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Today, virtually every United States citizen has been issued a Social Security Number (SSN), a unique nine-digit number that is used for a variety of things such as filing taxes, obtaining a driver’s license, and opening bank accounts.  SSNs are also used by many employers to document and identify their employees.  Employers may also provide a candidate’s name and SSN to an investigations firm to conduct a pre-employment screening.

However, among those outside of the background screening industry there is a big misconception about the use of SSNs when conducting background checks.  There is an assumption that the sole use of a candidate’s name and SSN will identify any and all jurisdictions, and by extension, criminal records for an individual.   Speaking from experience, that assumption is not only inaccurate, but can have dire consequences.

To begin with, as we have mentioned in previous blog posts, there is no publicly available national criminal database.  Products labeled as a “nationwide (or national) criminal background check” are misnomers, inasmuch as they do not cover every jurisdiction within the United States, and may not have the most up-to-date records available.   While the National Crime Information Center (NCIC) exists, and is maintained by the Federal Bureau of Investigations (FBI), this database is not available to the public and reportedly has issues of its own.

So What's The Problem?  

As an industry best practice when conducting a criminal check, investigative firms should search both county/municipal level court databases as well as state maintained criminal repositories.  It is important to note that a majority of these court databases and criminal repositories do not allow you to search by SSN.  In most cases, these tools will only allow you to search by name and/or date of birth.  

You would be correct in thinking that a name and date of birth are not unique identifiers the way a SSN is unique, however, there are methods you can employ to verify the identity of your subject. Depending on the state or jurisdiction, address identifiers may be included in the results, which can assist in verifying that the defendant named in the criminal record is the same individual that is being investigated.

There are other considerations to take when looking for criminal records.  Since these checks are essentially a name search, what happens if an individual has previously been known by a different name?  If you are only conducting a background check on the name provided by the applicant and not accounting for AKAs, you are potentially overlooking criminal records that were filed under an alias or maiden name

Take the example of a hyphenated dual surname – In New York, a Criminal History Record Search through the New York Office of Court Administration for a Mary Johnson-Smith with a date of birth of May 25, 1977 will not identify criminal records for a Mary Johnson with the same date of birth.  Flip the search terms around and the same concern arises; searching for a Mary Johnson will not identify criminal records for a Mary Johnson-Smith.  In order to conduct a complete background check on this individual you would need to check both names in New York.  

Do SSNs Have a Role in Criminal Checks?

It is not to say that a SSN is irrelevant when conducting a background check. A SSN can assist with identifying an individual in public record databases.  This search is most commonly called a SSN Trace and allows investigators to identify jurisdictions where an individual has previously resided along with any aliases that the individual may not have disclosed.

Furthermore, there are many instances where a public reporting agency will provide limited information as to the identity of the defendant on record. 

This is a particular issue when searching for criminal records at the federal level.  The one and only public source for federal criminal records is through the Public Access to Court Electronic Records (PACER) database.   While other databases allow for a name and date of birth search; this database can only by searched by name.  This is a great concern when an individual has a common name.  Investigators will often times sift through court documents that are available online through this database, in order to search for an additional identifier.  However, in many cases these identifiers are not recorded in court documents, or the court documents may not be available.

It is then up to the investigator to follow-up with court clerks and probation and parole offices to verify that defendant’s identity.  Depending on the jurisdiction and their protocols it may be possible to verify with a clerk or supervision office a defendant’s last four digits or even full SSN, in addition to other identifiers that they may have on record.

Speak With Your Provider

If you were under the impression that a criminal record search is conducted primarily using a subject’s SSN you may find it worthwhile to speak with your background screening provider regarding the use of aliases.  While searching for aliases may be more costly, due to running additional name searches, the benefit of conducting a comprehensive search is immeasurable.

Ricky Tong is a Coordinating Investigative Analyst with MSA Investigations.  To learn about our background screening services contact us today.

Photo Credit Flickr

Anti-Money Laundering: Quality Control on a Global Scale

 

Every company wants to grow; whether its a start up or a well-established name within an industry, progress is a primary goal.  However it is important to remember that growth can be more complicated than it seems, and can more often than not lead to chaos in one form or another. Take the banks for example.  The wrap many institutional banks are getting these days is that they are too big to accurately monitor transactions. Many of these banks are in, or have been through, lengthy and costly money laundering court cases.

The latest of the big banks to fall victim is Citibank, which is now embroiled in a $400mimagesCAMXO6F8 resized 600 fraud investigation in Mexico. Banco Nacional de Mexico, known as Banamex, Citigroup's Mexican unit, is trying to recover money from Oceanografia, an oil contractor based in Mexico City. Oceanografia is the largest contractor utilized by the state-owned oil conglomerate, PEMEX. However, due to recent events Mexican Attorney General, Jesus Morillo Karam, began to suspect that money laundering may have been occurring within Oceanografia and Banamex. 

PEMEX has a long-standing relationship with Oceanografia, which has won over $2B in domestic and international bids since 1999. Yet, Oceanografia's CEO, Amado Yanez, reported just $50M in the company's accounts earlier this year and further indicated that they were going to default on loan payments to Banamex. According to media reports, Banamex apparently loaned Oceanografia the nearly $400 million based on falsified invoices to PEMEX.  Once Oceanografia was unable to pay down the debt it had been accruing since 2008, authorities took notice.  As a result, Citigroup began to investigate its financial ties to the company and found that "only $185 million of the collateral backing $585 million of loans could be verified", according to a statement from the company obtained by Bloomberg News.  They then had to adjust their 2013 profit to reflect the missing money, from $13.91B to $13.67B. 

It has been reported that Oceanographia has been suspended from bidding on government contracts for almost two years as a result this violation; contracts with Penmex amount to approximately 97% of their revenue.  Oceanografia has also had their assets seized by Mexican law enforcement officials.

The International Business Times quoted Mr. Karam as saying  “money laundering can start with the initial crime of fraud, but it does not stop there.” As evidenced by this case and reiterated by Mr. Karam, the effects of money laundering are more far-reaching than we may think. The day Citigroup announced the over $250M hit to its 2013 profit, shares dropped $.06. While this may not seem like a lot, it could make a very large difference to an investor who is heavily leveraged. Other significant consequences of money laundering can be (and certainly were in this instance):

  • Deterioration of legitimate businesses
  • Erosion of the financial sector
  • Reduction in government revenue
  • Increased crime and corruption

Though the investigation is just getting under way and all the facts have yet to come out, it should go without saying that a good way to help mitigate future headaches, such as lawsuits and loss of income, when engaging in large-scale business transactions is to do your due diligence. This would include making sure a prospective client or partner meets the following criteria:

  • Good Standing
    • A company is in good standing if it complies with the rules of its charter.
  • Quality Financial Situation
    • Entering into a transaction with an individual or entity in the midst of financial trouble could have a negative financial or reputational impact on your business.
  • Sufficient Assets
    • When entering into a sizable transaction it is extremely important to gauge the value of assets (as well as any debts) held by the other party, in the event they are needed as collateral.
  • Operates with All Required Licenses and Permits
    • Most businesses need licenses and permits to legally operate. These should be current and have no disciplinary or regulatory sanctions noted.
  • Positive Financial and Legal History
    • An individual or entity with significant legal (civil and criminal) or negative financial history would require further investigating.
  • Insurance Coverage
    • It is always best to enter into a transaction with an insured business.
  • No Derogatory Articles and/or Publications
    • Conducting media searches regarding a potential partner can only assist you when entering into a massive business deal.  Oftentimes information contained within the media can lead to discoveries where you may not have thought to look.

 John Maguire is an Investigative Analyst with MSA Investigations.

Tax Fraud: 12 Scams You Should Beware of in 2014

 

Tax FraudLast week, the Internal Revenue Service (“IRS”) issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a variety of schemes. Identity theft and telephone scams top this year’s list as it did in 2013 and 2012. The IRS warns that many of these cons peak during filing season as people prepare their returns. According to the latest report, more identity thieves are looking for ways to get their hands on personal information.  Once the information is obtained, they will file a tax return as the unsuspecting victim and claim the refund for themselves.

The following Dirty Dozen tax scams were identified for 2014:

1.      Identity Theft

This occurs when someone uses your personal information, such as your Social Security number, to file a fraudulent tax return.

2.      Telephone Scams

Callers pretending to be an IRS representative solicit personal information in hopes of stealing money or identities from victims.

3.      Phishing

Victims will receive an unsolicited email from what appears to be the IRS. The email will direct recipients to a dummy website posing as a legitimate IRS site in an attempt to lure potential victims and get them to provide valuable information.

4.      False Promises of “Free Money” from Inflated Refunds

Posing as tax preparers, offenders entice their victims by promising large federal tax refunds; using flyers, advertisements, and phony store fronts to lure their victims. Perpetrators will often prey on low-income individuals, the elderly, and non-English speakers.

5.      Return Preparer Fraud

This is similar to the “False Promises” scam; however, the tax preparers are legitimate, just not ethical. It is important to choose carefully when hiring an individual or firm to prepare your return. Taxpayers should use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINS).

6.      Hiding Income Offshore

While there are legitimate reasons to have financial accounts in offshore banks, there are reporting requirements that need to be fulfilled. U.S. taxpayers who have such accounts and do not comply with the reporting requirements are breaking the law and risk significant penalties and fines.

7.      Impersonation of Charitable Organizations

Following a natural disaster, it is common for criminals to impersonate charities in an effort to get money or private information from taxpayers. Perpetrators will use a variety of tactics. Some operating bogus charities will contact individuals by phone or email to solicit money or financial information. They will even go as far as contacting the disaster victims and claim to be working for or on behalf of the IRS to help victims file casualty loss claims and get tax refunds.

8.      False Income, Expenses or Exemptions

The taxpayer willfully engages in this scam. This includes such things as claiming unearned income or listing false expenses in order to maximize a refund. In some cases, taxpayers will inflate the number of dependents to get the tax credit for each.

9.      Frivolous Arguments

This occurs when taxpayers make unreasonable or outlandish claims to avoid paying the taxes they owe.

10.  Falsely Claiming Zero Wages or Using a False Form 1099

Again, this is a scam taxpayers commit, in which they claim that wages paid by a company are not in fact “wages,” but something else, such as reimbursements for expenses paid out of pocket or a loan. The claim is often made that the company who paid wages is at fault and refuses to correct the W-2 for fear of IRS retaliation.

11.  Abusive Tax Structures

This scam is very complex and is usually benefits taxpayers in the highest tax brackets. By using limited liability companies, limited liability partnerships, and other similar entity formations, in a non-traditional way, the scammer sets up a structure which attempts to create a “tax-neutral” entity. Unsuspecting victims are encouraged to buy into these arrangements, with the promise of eliminating or substantially reducing their tax liabilities.

12.  Misuse of Trusts

Trusts are commonly used in tax and estate planning, and when done properly are completely legal. However, the IRS also sees a lot of abuse when questionable transactions are placed in trusts alongside legitimate ones. Another example of misuse is an attempt to use a trust illegally, to transfer wealth from one generation to the next without incurring taxes.

To avoid becoming a victim of tax fraud, file early; never provide personal information such as your social security number over the phone; don’t click on links within an email that you think are suspicious; and conduct your due diligence when selecting an accountant.  Make sure you use tax preparers who sign the returns they prepare. To learn more about ways to protect yourself from becoming a victim, visit the IRS website for more information.

Melissa Rodriguez is a Senior Investigative Analyst at MSA Investigations.

Photo Credit: taxsoftware.com
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