INTERNET SECURITY & DUE DILIGENT AUDIT, FORENSIC EXPERTS, OFFSHORE OFF BALANCE SHEET BANKING, & UNCOOKING THE BOOKS: AUTOMATIC SCANS, ENRON CORP. & THE ENERGY TRADING INDUSTRY
<BF>Avi Rushinek, Ph.D., U. of Miami Professor <RO>
<BF>Sara F. Rushinek, Ph.D., U. of Miami Professor <RO> * **
This is a study of the Due Diligent Auditor, Forensic Expert Witnesses, Offshore Off Balance Sheet Banking, & Uncooking The Books: Internet Security, Enron Corp. & The Energy Trading Industry. Internet Security (INetSec) & Due Diligence (DD) represent a new approach to automating and standardizing old manual operations. This combination of INetSec & DD programs a computer to conduct automatically regular internet scans to show the vulnerabilities, suggest remedies, and provide documentation with minimal human intervention. This will hopefully bring about a more frequent due diligence before a disaster occurs. This study promotes the programming of the INetSec & DD to be like anti-virus software that will run unattended and if need be manually run and modified.. This way it will be preventive, run during periods of inactivity, and stay out of the way of the users.
<BF>Introduction<RO>
<BF>The Problem With Offshore Banking, Tax-planning, & Due Diligence (OBDD) <RO>
The Problem With Offshore Banking, Tax-planning, & & Due Diligence (OBDD) is that scam artists learn how to use it and deploy it very fast as Elisabeth Donovan describes in a recent article entitled: “Investors Lose Big In Offshore Scheme”, in the Miami Herald.
That article describes how “minorities, immigrants” are “targeted in ‘pansy’ plan” under the subtitle of “Islands Of Secrecy. The article describes how “Antigua launched a criminal investigation; more than 60 Texas residents have filed a civil suite against Ford, the Form and related companies; About 800 hundred Floridians say they lost more than $10 million; and … how U.S. banks’ relationships with off-shore banks can serve as a gateway for dirty money.[1]
<BF>”Huge Profits and Potential Way To Avoid Taxes Were The Lure”<RO>
Elisabeth Donovan proceeds to describe how” huge profits and a potential way to avoid taxes were the lure.” She continues to describe how “the investment program was handled by a company called World Wide Resource Management, in Nassau, the Bahamas, but after October 1995, Ford and his associates moved their base of operations to the two-island nation of Antigua and Barbuda – which at the time offered absolute secrecy for its banks and off-shore businesses. The Form Ltd. Was established as an Antiguan Company and began to promote even more investment opportunities… While statements came, some of the investors found that the profits never did” In other words the crooks and the scam artists figure out how to use the Virtual Internet Office (VIO) to generate phony financial statements, much faster than the forensic accountants can figure out how to trace the lost funds and uncover the frauds.
“American International Bank, or AIB, the Antiguan off-shore bank at the center of The Forum’s financial activities… has been in receivership for three years, its assets still unaccounted for.” Who is supposed to be able to account for these assets if not forensic accounting experts who provide computer litigation support? But again, the crooks and the scam artists are much faster in producing more frauds, than the professional service providers and the various governments can track.”
“The Form appears to be a Ponzi-type investment scheme” according to a report published in February by the Senate Governmental Affairs Committee’s permanent sub-committee on investigations.”
“A Ponzi-scheme pays off early investors with funds from those who invest later. George R. Neely, the Houston lawyer representing the Texas investors, also believes his clients were victimized by a Ponzi scheme. Collectively, Neely’s clients…invested more than 1 million. The suit, which Neely would like certify as a class action, alleges fraud, conspiracy, non-disclosure and breach of contract. The defended it alleges led investors to believe ‘their funds were absolutely protected’ and that representations made about the vehicles were ‘false’.”
<BF>”What Can The Forensic Accounting Expert Witness Do To Uncooked The Books” <RO>
What can the forensic accounting expert witness do to help? The forensic accounting expert can help in almost every category of problems, including but not limited to the following:
Help certify the case as a class action, proving the allegations of fraud, conspiracy, non-disclosure and breach of contract. The forensic accounting can help prove that the defendant led investors to believe ‘their funds were absolutely protected’ and that representations made about the vehicles were ‘false’.”
<BF>”Forensic Accounting Expert Witness & Proving Fraud Allegations Using Internet Security, For Enron Corp. & The Energy Trading Industry”<RO>
Rushinek, A. and Rushinek, S. demonstrate how a forensic accounting expert witness can built a "Damage Cost Calculation Model for Exxon Corporation and the Oil and Gas Industry” and demonstrate fraud even when if fact the fraud does not exist. In this case, the forensic accountant simulated a fraud from financial statements that are fraud free. This article shows a “A Simulated Fraud Decomposition of Expert System Software Controls." Such a method can be applied to Offshore Financial Havens, since many times the actual fraudulent financial statements are not readily available. Therefore, the forensic accounting expert witness may have to resort to simulation. Once, the simulation explains the fraud to the court (judge and jury), the absence of the fraudulent financial statements themselves is less important[2].
Rushinek & Rushinek (1996) have picked the right industry (Oil & Gas) and even though
The company was not Enron, the industry and the methodologies still apply. The essence of this theory applies internet methods to scan the servers of the audited company and kill two birds with one stone. Find weaknesses in controls, and exploit them to prevent fraud, at the same time, while accessing the internal computer systems to scout for off-balance-sheet frauds.
In another case, Rushinek, A. and Rushinek, S. show how a forensic accounting expert witness can forecast “Tax Fraud” “For the Petroleum Refining Industry” using “Financial Ratios & Reversed Accounting Theory.” In this case, the forensic accounting expert witness uses the abnormality of the financial ratios to raise some red flags[3]. Just like some of the offshore financial havens promise astronomically high financial ratios, such as Return On Investment (ROI) that is 10-100% higher than normal.
Again even thought the company used is not Enron, the industry is the same, and the conclusions are very relevant.
In another case Rushinek, A. and Rushinek, S. show how a forensic accounting expert witness can deploy software that uses "Artificial Intelligence” to detect “Financial Fraud."[4] In another case, Rushinek, A. and Rushinek, S. illustrate how a forensic accounting expert witness can assist in "Controlling Computer Crime, Fraud and Abuse." This is relevant to the case of offshore financial havens, since it may assist in tracing the movement of funds, through a variety of electronic fund transferee, and the abuse of computers to disguise the theft of funds[5].
<BF>”Forensic Accounting Expert Witness & Proving Lack Of Disclosure”<RO>
As Rushinek, A. and Rushinek, S. demonstrate forensic accounting experts focus frequently on a variety of disclosure issues. Such disclosure issues "Evaluation of Business Line Reporting: Forecast Errors, and Segment Revenue/Earning Disclosure." This applies to offshore financial haven reporting that fails to disclose true revenues and earrings[6]. Instead, these havens confuse cash inflows from new investments, with true revenues and earnings, misleading investors to sink more money into their loosing investment adventures.
<BF> “Show Me The Money” & Is The Bank Responsible For The Losses? <RO>
“An attorney for The Form blames AIB for the investor’s problems, but the banks receiver says AIB is not at fault.” “One of Ford’s attorneys, Bruce Fein of McLean, Va., says the problem lies with American International Bank in Antigua, not with his client or The Forum.” For this “blame game” everybody wants to see the money. The attorneys, the plaintiffs and the defendants, so they are asking: “Show Me The Money” & Is The Bank Responsible For The Losses?
For this reason the accounting expert witness should know about banking as Rushinek, A. and Rushinek, S. banks move to new “Interactive Computerization of Manual Banks Demand‑Deposits Management Information System (MIS) for Electronic Data Processing (EDP) Auditing.” In an “Empirical Analysis," they demonstrate trends that led banks to automate their systems in the past 20 years.[7] Accountants that are familiar with such systems can help trace the money, and place the blame on the correct party.
Some times the only way to recover information is through "The Control of Computerized Information Related to Branch Manpower Management Follow up Systems for Banks,” as Rushinek, A. and Rushinek, S. show in an article.[8] Formal information channels are not available and the forensic auditor may have to resort to gain control of specific subsystems and derive information out of them.
Frequently, the sources of losses are loans that the bank extends to the founders of the offshore corporations, that are given without merit and with out proper collaterals. The trouble is that without some understanding of Bank Loan Systems, such determination is beyond the ability of the auditor. Moreover, the forensic expert witness and the forensic auditor should be able to demonstrate how a bank could be blamed and be held responsible for such activity. Rushinek, A. and Rushinek, S. developed "A Model for Measuring and Forecasting the Level of Information Content as a Function of Accounting Information System Reports: An Empirical Multiple Regression Analysis for a Computerized Banking Loan System." Such models can help pinpoint who is responsible for the insufficient information concerning the lost and unpaid loans.[9]
<BF> Misusing Transfer Pricing Scheme To Steal Funds Across Countries?<RO>
Tracing the money is often difficult since it the scam artists tend to move it from country to country, applying overstated transfer pricing to disguise the theft and the ponzi-schemes. This is a case of Misusing Transfer Pricing Scheme To Steal Funds Across Countries. In the case reported by the Miami Harold “the money went to Panama and ‘to a number of African countries for the so called investments.” As the move the money from country to country and company to company they may register phony service and product sales that are invisible to us. Rushinek, A. and Rushinek, S. demonstrate what are "Multinational Transfer‑Pricing Factors:” including, but not limited to “Tax, Custom Duties, Antitrust/Dumping Legislation, Inflation, Interest, Competition, Profit/Dividend, and Financial Reporting.."[10]
Legislation is another important factor in the offshore business, but without enforcing it, it may be very misleading. “you can have any law you want,” said David Merchant, Miami based publisher of Offshore Alert. (http://www.offshorebusiness.com/ ) “If you do not enforce it, or do not have the will to enforce it, you have nothing.” Thus, the accountant should evaluate the law and the degree at which the government enforces it!
Senate investigators say Ford and his associates tried to hide the trail – moving money in one case to Chase Manhattan Bank in New York to Banko Do Brasil in New York and then to Panama.” Rushinek, A. and Rushinek, S. describe "Accounting Software” that deals with “ Evaluation: Hardware, Audit Trails, Backup, Error Recovery and Security." The Managerial Auditing Journal discusses audit trails that apply to computer auditing, can also be used to track the money movements. [11]
Our extensive international network of offshore business and financial affiliations enables us to operate in virtually every major financial center in the world. Our business is to advise and assist you in the process and procedures involved in the formation of an international structure with its related communications and financial infrastructure. Our financial and business services facilitate your business and investment growth, protect your assets and minimize taxes. In short, we're here to serve your needs. Our extensive international network of offshore business and financial affiliations enables us to operate in virtually every major financial center in the world. Our business is to advise and assist you in the process and procedures involved in the formation of an international structure with its related communications and financial infrastructure. Our financial and business services facilitate your business and investment growth, protect your assets and minimize taxes. In short, we're here to serve your needs.
When we browsed to http://www.incorporateoffshore.org/index1.htm , we found a typical home page. This is the home page of Abaris
Offshore Business Formation for Trusts, IBC's, Bank Accounts, Brokerage Accounts, Merchant Accounts and More...From This home page of an offshore service company that offers the following services( and more):[12]
Company, IBC, LLC and Trust Formations, Tax & Estate Planning, Asset Protection,
Banking, Brokerage Accounts and Credit Cards, Trust Maintenance, Records and Returns, Governmental Reporting, Asset Acquisition and Disposal, Accounting Control, Directorships, Business Management, Capital Management, Invoicing and Cash Flow,
Office Specialized Services, Private Commercial Lending & Financing, Bahamas Investment & Trading Facilities, Annuity Design & Management. Privacy - In fact, it is the law in many jurisdictions such as Nevis and The Bahamas. Diligence - in helping clients plan, create and maintain their business structure.
One service that none of these companies are not offering as of yet, is the Internet Security (INetSec) & Due Diligence (DD) service, and that is primarily due to the fact that the technology is fairly new. The combined INetSec&DD approach will lead to the installation of a web server at the offshore location. This way the business can be run from anywhere in the world, yet be fully secure & legal. All it means, for example, is that a Miami CPA firm can drop a web server in the Bahamas, offering any of the above services from anywhere in the world to any client in the world, without stepping food in the offshore territory, with some local technical support. The local technician will ensure that the web server in up and running (working).
It is so difficult to trace the money in the traditional audit ways because of the rapid international and intercontinental movement of the money. “The money went to Panama and to a number of African countries for the so called ‘investments.’
<BF> Terrorist, Fraudsters & Money Launders Mix With Of Offshore Banking<RO>
The main problem with these new technologies, are that criminals of all kinds may abuse them faster than the law can deal with these new technologies. Terrorism and Money-Laundering are some of the crimes that seem to catch up quickly with these technologies, as the Wall Street Journal reports. As Michael M. Phillips and Jess Braven about “Terrorism and Money Laundering Bills Make Business Lobbyists Walk Fine Line”, in The Wall Street Journal, they describe some of the problems. [13]
The US “Congress has put business lobbyists in a delicate position.” “With full house expected to consider the counter terrorism legislation as early as this week,” the Visa USA Inc. spokes person claims that the bill will put “our member banks in a position of being a law enforcement entity; we don’t think that’s an appropriate role.” The forensic accountant can help banks ensure that they comply with the law, building systems that will automatically generate the required reports, without over doing it, and turning the bank into a law enforcement agency.
Likewise, “a spokesman for American for Computer Privacy, an industry group whose members include Cisco Systems Inc., Sun Microsystems Inc., and Oracle Corp. companies worried that they could face litigation from those claiming privacy violations if they turned over more information that is required by law.” If indeed companies are sued they can turn to a forensic accountant to help calculate the damages that resulted from such alleged violations of privacy. The forensic accountant expert witness can help calculate the damages and help the companies settle the dispute out of court.
<BF> How Can Internet Due Diligence Track Scams & Prevent Them?<RO>
We are quite surprised of the level of detail that publicly available databases, on the internet, provide.. Such details include a list of neighbors, with telephone numbers, addresses, and all past residences, etc, including criminal records, and pending warrants.
If it is about an offshore bank, you may be surprised to see that they have hardly any assets what so ever. Some of the hosting countries are very poor and would provide a banking license to anybody who can payoff the government.
<BF> How Low Can Offshore Banks Go? – Using A Picture Of A Precious Stone As A Collateral <RO>
For example, AutoTrackXP (a web based service) can help find insurance information about individuals that are involved in setting such banks. Such a bank can be funded by a picture of a Ruby, precious stone, and does not have to prove the ownership and custody of this stone. This picture of the stone will serve as collateral for the bank. When and if the bank goes into bankruptcy proceeding due to depositors claiming their funds, the government will try to sell the stone, which the bank has never really owned. Thus, no funds can be recovered.
<BF> “When Will They Ever Learn, When Will They Ever Learn? – It’s Now Or Never” <RO>
When will they ever learn, when will they ever learn? – it’s now or never” due to the terrorists abusing offshore banking on the one hand, while corporations are defrauding the public on the other hand. In this case, reported by the http://www.offshorebusiness.com/ , this bank took in $206,000,000 in 2 years, from people who fell for their marketing pitch, but never bothered to verify the existence of any capital. A typical average investor who has $400,000 as a retirement fund savings, getting 20% ROI a year, is not satisfied with his return, and goes for these scams, at the Grenada Bank. Even though Offshore Business Alert has exposed some of the scams of this bank, this individual decided to risk his life savings and invested it in the Bank anyway, only to loose the entire amount, without recourse.
A lot of these crooks will infiltrate churches and pass themselves as religious people, just to win the trust of naive investors. To demonstrate how it works, we use the audience in ours seminars and workshops. We have entered a name of a participant in a seminar at random to find his possible drivers licenses, addresses associated with the subject, and the properties he owns. Likewise, we can find their Social Security Number. We can even see when you driver license was issued, expired, and any (glasses) restrictions on you driving, etc. We can find all the addresses of a person within a period of time, his parents address, etc.
We can find their car model, their market value, etc. We still need the skill to interpret these reams of data and apply them to a possible due diligent situation. We can find all the traffic tickets, accidents, rulings, etc. We may have to backtrack the search, since the databases may not be perfectly updated. All of the above work may take about 10 minutes, and some time save us millions of Dollars, and even more importantly, our peace of mind and our professional reputation. So why don’t we do it? Hindsight is always 20/20, but foresight is not!
People can steel the identity of other people and use it to perpetrate all these frauds. Then, when these people are sued they move on to a different identity, and make the former identity disappear. This is especially easy to do with the help of offshore jurisdictions, such as Panama. We can payoff a mental patient (that is as old as the scammer) to provide the scammer with his birth certificate. Then, the scammer pays off a couple of liars to testify about his false identity, and the scammer gets a new passport with a false identity. For a cost of $1,000 scammers obtain phony passports, and sell them to others for $50,000, at a profit of $49,000.
We could use legal databases that will find any court proceedings, from criminal to civil, from appellate to Federal, State, etc. PACER.USCASE.GOV has public information a database that saves you times in combining different sources of information.
We can find crooks that sell fake handicap parking permit, professional licenses, etc. These people are advertising it on the internet, and yet they are not stopped, until they harm somebody. At this point they move offshore, to ignore the SEC and other local regulatory bodies, and sue the plaintiffs for defamation. The plaintiffs being an American company, cannot defend themselves and have to hire an attorney, thereby wasting a lot more money than they whished. Yet, when the plaintiffs win the case against the original complaints plus the false defamation lawsuits, the crooks ignore the judgments and refuse to pay. So the victim of the fraud has to fund the all the legal expenses without recourse.
If a foreign entity sues you in Britain they have to deposit some of the possible judgments so they will have to pay back a potential judgment. But, in the US no such requirements exists, therefore crooks are better off when they file false liable law suites in the US, compared to GB.
<BF>SUMMARY, CONCLUSIONS, & IMPLICATIONS<RO>
In summary, this paper showed how to apply new technologies, such as the virtual office, to the offshore banking, tax planning, & the virtual internet office. Further it shows how to integrate forensic accounting expert witness testimony & computer litigation support with the virtual office. For example, forensic accountants can help investors avoid investing in ponzi schemes by reviewing the financial statements of offshore companies and inform investors about suspicious financial statements. Likewise, they help implement remote servers for legitimate offshore companies at tremendous cost saving, efficiency gains, as well as tax reduction. That is especially applicable to foreign companies.
The conclusion of this paper is that the forensic accountant can serve as an expert witness and provide computer litigation support services to both offshore companies and investors. However, the forensic accountants have to use due diligence to make sure that they do not facilitate criminal activities and become an accessory to crime. The implications of this study are that forensic accountants will have to become more proficient in computer applications, such as internet web server development and implementation. This way they can set up servers in offshore location, serving as world wide web (WWW) as virtual offices for offshore companies. In the same time, they have to improve their investigative skills, auditing the clients to avoid the terrorists and criminals that will make the forensic accounting an accessory to crime or terror.
* The authors are professors at the University of Miami
** The authors will provide additional appendices, tables, charts, and program code listings, upon written request.
[1] Elisabeth Donovan, “Investors Lose Big In Offshore Scheme”, The Miami Herald , Monday, September 3, 2001, p. 13a.
[2] Rushinek, A. and Rushinek, S. "Damage Cost Calculation Model for Exxon Corporation and the Oil and Gas Industry: A Simulated Fraud Decomposition of Expert System Software Controls", OIL AND GAS TAX QUARTERLY, Vol. 44, No. 3, March 1996, 337-350
[3] Rushinek, A. and Rushinek, S. "Tax Fraud Forecasting For the Petroleum Refining Industry: Financial Ratios & Reversed Accounting Theory Applied to Shell Oil", OIL AND GAS TAX QUARTERLY, March, 1997
[4] Rushinek, A. and Rushinek, S. "Tax Fraud Forecasting For the Petroleum Refining Industry: Financial Ratios & Reversed Accounting Theory Applied to Shell Oil", OIL AND GAS TAX QUARTERLY, March, 1997
[5] Rushinek, A. and Rushinek, S. "Controlling Computer Crime, Fraud and Abuse," EDPACS, THE EDP (ELECTRONIC DATA PROCESSING) AUDIT, CONTROL AND SECURITY NEWSLETTER, December 1983
[6] Rushinek, A. and Rushinek, S. "Evaluation of Business Line Reporting: Forecast Errors, and Segment Revenue/Earning Disclosure", SOUTHEAST AMERICAN ACCOUNTING ASSOCIATION PROCEEDINGS 1991, 118, Birmingham, Alabama, April 1991
[7] Rushinek, A. and Rushinek, S. "The Interactive Computerization of Manual Banks Demand‑Deposits Management Information System (MIS) for Electronic Data Processing (EDP) Auditing: An Empirical Analysis," 1983 WESTERN AMERICAN INSTITUTE FOR DECISION SCIENCES (AIDS) PROCEEDINGS, Reno, Nevada.
[8] Rushinek, A. and Rushinek, S. "The Control of Computerized Information Related to Branch Manpower Management Follow up Systems for Banks, COMPUTER PERSONNEL, February, 1989
[9] Rushinek, A. and Rushinek, S. "A Model for Measuring and Forecasting the Level of Information Content as a Function of Accounting Information System Reports: An Empirical Multiple Regression Analysis for a Computerized Banking Loan System Follow‑up," SOUTHEAST AMERICAN ACCOUNTING ASSOCIATION (AAA) 1983 PROCEEDINGS, Virginia Beach, Virginia, 320‑327, April 1983.
[10] Rushinek, A. and Rushinek, S. "Multinational Transfer‑Pricing Factors: Tax, Custom Duties, Antitrust/Dumping Legislation, Inflation, Interest, Competition, Profit/Dividend, and Financial Reporting", INTERNATIONAL JOURNAL OF ACCOUNTING EDUCATION AND RESEARCH, Vol. 23, No. 2, 1989.
[11] Rushinek, A. and Rushinek, S. "Accounting Software Evaluation: Hardware, Audit Trails, Backup, Error Recovery and Security", MANAGERIAL AUDITING JOURNAL, Vol. 10, No. 9, 1995, 29-37.
[12] http://www.incorporateoffshore.org/index1.htm
[13] Michael M. Phillips and Jess Braven, “Terrorism and Money Laundering Bills Make Business Lobbyists Walk Fine Line”, The Wall Street Journal, October 16 2001, A28