Fraud Activities in Financial Companies

Question: Fraud activities occur in financial companies, like financial leasing frauds, frauds in securities exchange markets, contracts, etc. And describe at least 3 related cases as an example. Recommended structure for each body part: (a). Current situation and recently development in your area (b). Introduce fraud activity of your part (c). Analyse cases in detail, supported by law and regulations (find cases from ASIC website) (d). Our suggestions on this type of fraud (development of regulations, prevention, punishment etc.) Answer: (a). Fraud case at BearingPoint Australia Pty Ltd involving former CEO John Morris. Representation of false information about the financial records of companies has been witnessed in many cases. The laws and regulations governing financial institutions has however been stepped up recently. These kinds of frauds are usually perpetrated by managers charged with the responsibilities of holding the information as custodians. Usually manages misrepresent the information to conceal bad financial status of the companies they are in charge to cover up fraudulent activities they have engaged or committed the company into. In the case involving BearingPoint CEO Mr John Morris, he was accused of giving false financial information about BearingPoint Australian Pty Ltd to appointed company auditor PricewaterhouseCoppers in the year 2004. The CEO admitted that he had established a payment schedule to the variation contract between BearingPoint Australian Pty Ltd and Canon. The problem here was that while the CEO produced documents that showed that the contract value between his c ompany and Canon was $ 19.6 Million, PWC established through financial records held by Canon that the value to be $ 13.2 million. The variation of $ 6.4 was what the CEO concealed to both BearingPoint Australia Pty Ltd and her appointed auditor PWC. The act represented gross misconduct by fraud on the part of the CEO by first falsifying financial records of his employer and secondly by failing to adhere to the code of conduct of his employer which required that he acts in good faith and in the best interest of the company while discharging his mandate as the CEO of the company. John Morris was taken to court by Australian securities and investment commission (ASIC) established in 2001 under the Australian laws. ASIC put forth that the CEO breached corporations act 2001 (Corporations ACT) when he knowingly mislead both his employer and her auditor by falsifying financial records of BearingPoint Australia Pty Ltd. The judge agreed with the prosecution (Commonwealth director of Public prosecutions) and Mr. John Morris was found to have contravened corporations act under Australian laws having pleaded guilty of two charges and the magistrate sitting at Melbourne magistrate court fined him $ 2,500 with regard to each charge and was instantly banned from any managerial duties of any company for the period of five years from the date when the conviction was delivered that is Tuesday, 22nd August 2006. ASIC Home | ASIC - Australian Securities And Investments Commission (2016) Asic.gov.au https://asic.gov.au/. It is our recommendation that CEOs of the companies should not be the only custodians of crucial financial records of the company. Such that for a fraud to happen it has to involve conspiracy of a lot of people in the system to an extent that it is almost impractical to committee a financial malpractice without the knowledge of other junior and senior managers. Paul M Clikeman, Called To Account. (b). Fraud case involving Dessipur Pty Ltd former director Mr. Haydn James Dodge. Without the existence of proper regulation and closer scrutiny of the many companies that deals with public funds many fraudulent transactions and dealings may go unnoticed. This is because if the company is paying taxes, employees and any other cost associated with the smooth operation of the company, it is challenging to suspect foul in the yearly stages. The fraud is usually the work a senior officer and a few employees and since usually the repercussions are felt later when the company is in deep financial crisis the act can easily go unnoticed. Mr. Dodge of Sorell in Tasmania was accused by Australian securities and investment commission (ASIC) that between the dates of 18th November 1996 and 26th of August 1998 Mr. Dodge and former Hobart solicitor a Mr. Thomas Peter Baron in there full knowledge used Dessipur Pty Ltd as a means to defraud investors Money in excess of $900,000 from mortgage fund. The investigation was centered on two failed sub-divisions known as Co Drive Penn ington Drive at Sorell. The public was duped by the two to buy shares of the land using Dessipur Ltd and that when the two sub division is complete every one who invested will get his or her shares accordingly. The division never came to pass and the public funds were in jeopardy. Mr. Dodge pleaded guilty to three counts of conspiracy to defraud investors close to $1.4 million and one count obtaining financial advantage dishonestly in Supreme Court of Tasmania. The case that was prosecuted by the Tasmanian Director of public prosecution arose from Mr. Dodges participation in the failed solicitors mortgage funds operated by Hobart law firms. The chief Justice Underwood in his wisdom stated that the crime committed by the two will attract three years in jail because the deterrent is fundamental factor in the act of sentencing discretion. He further stated that such like crimes are difficult to detect and prosecute. Mr. Dodge having committed the mentioned crime was sentenced to three years imprisonment. The two had contravened Australian law under Australian corporations act 2001. He was however eligible for parole after serving one full year in jail. Mr. Dodge was initially accused of 38 counts of dishonesty but after discussion with Tasmanian Prosecutor it was agreed that the tree counts of dishonesty will adequately cover the rest of the counts prosecutable under the law. ASIC Home | ASIC - Australian Securities And Investments Commission (2016) Asic.gov.au https://asic.gov.au/.We recommend that closer supervision and scrutiny should be enforced to all financial institutions that deal with public funds. Their core financial systems should be accessible to the regulator at any given time to enable close scrutiny. Rory M. Cohen, "US Securities And Exchange Commission Amends Dollar Threshold Tests Under Qualified Client Standard, Requires Exclusion Of Net Equity In Primary Residence" (2012) 13 Journal of Investment Compliance. (c) Conviction of former Woodvile North mortgage broker As it is currently in Australia credit brokers usually act from the position of trust. Each application they forward to creditors is assumed that the broker has delivered correct information to the best of his or knowledge since the credit broker is the conduit between credit provider and the credit borrowers. There is a lacuna in the regulations because not every loan application is scrutinized in each and every detail. The guidelines as it is currently constituted bestow much trust on the part of the broker. However such crimes as dishonesty in this kind of arrangement can be easily committed and are hard to detect unless the act itself is glaring. Philip Wolny, Understanding Financial Frauds And Scams (Rosen Pub., 2013). Mr. Daniel Duy Nguyen of Woodvile North South Australia operated as a credit broker. He is the sole director of Ausfin Solutions Pty Ltd which traded as Arndale finance. Australian securities and investment commission 2001 (ASIC) investigated Mr. Nguyen. It is alleged that in the period between October 2011 and February 2012, Mr.Nguyen provided false information regarding to sale contract and appraisal letters for rentals provided to the credit provider for the purposes of supporting home loan application on behalf of his five clients. The credit provider was Westpac Banking Corporation (Westpac). Mr. Nguyen perhaps looking for more commission decided knowingly to alter financial information in favor of his clients in order for the application to be approved by Westpac. This act reprensentd gross misconduct on the part of Mr.Nguyen having contravened corporations act 2001. The act requires among other things that the broker shall endeavor to provide correct financial information of h is/her clients to the best of his knowledge when making any kind of loan application on their behalf. It also requires that the broker acts in good faith without tricking creditors to approve loans for entities or people who do not qualify for the same. Mr. Nguyen pleaded guilty of five counts of charges of providing misleading financial information to Westpac Banking Corporation. He therefore got four months suspended sentence. The case was prosecuted by commonwealth director of public prosecutions at the Adelaide Magistrate court in Australia. ASIC Home | ASIC - Australian Securities And Investments Commission (2016) Asic.gov.au https://asic.gov.au/. We recommend that there is no need for assuming all credit brokers are trustworthy even if they have all the necessary papers. There has to be bet checks and balance it is easy to give false information especially when done on small bits. The banks should check each and every part of the information provided. Celeste M. Hammond, "Subprime: Real Estate Frauds, Mortgage Frauds And Legal Certainty" SSRN Electronic Journal. (d) Fraud case involving South Australian adviser. Its norm for general public to seek financial assistance or advices from companies providing such consultancy services. This is widely spread practice across the world not just in Australia. In all cases the advisor or the advising entity is expected to act in the best interest of the client. They act in the position of trust both from the public and industry regulators. This kind of arrangement entirely depends on who the client feels more comfortable in, as it involves exposing financial positions of the clients seeking the service. Mr. Michael Andrew Smith from Glenata South Australia worked as financial planner and advisor through his company. The company was registered in Australia as Mossbrook Pty Ltd and was trading as Mossbrook Financial Planning. The core business of the company was provision of financial consultancy. H. A. Surface, "Frauds, Semi-Frauds And Questionables" (1915) 8 Journal of Economic Entomology. It is alleged that in the period between December 1999 and March 2001, Mr. Smith committed a crime of fraudulently diverting his clients money meant for investment to his own private investment or that of Mossbrook Pty Ltd. The amount here was $35,000. In another separate incident in the period between December 2001 and January 2002, Mr. Smith received money a total of $146,000 from eight clients for the purposes of purchasing shares in Arrowlea Pty Ltd. But instead of purchasing the shares with the whole amount as received from the investors, Mr.Smith decided to divert $48,666 to his own investment or that of the company he was working for. In both incidences the cheques were made payable to his company and thus he was able to easily divert the money from the original cause intended. These cases were investigated by Australian Security and Investment commission 2001. George D. Hornstein, "Investment Trusts And Investment Companies, Report Of The Securities And Exchange Commission" ( 1940) 40 Columbia Law Review. Mr. Smith was sentenced to three years and six months in Jail in connection to his improper/gross misconduct in his capacity as financial planner and advisor. The two counts of charges were prosecuted by Commonwealth Director of Public Prosecutions. ASIC Home | ASIC - Australian Securities And Investments Commission (2016) Asic.gov.au https://asic.gov.au/. We recommend that the public should be cautious when looking for financial advice. By the mere fact financial advisers act in the position of trust investors or general public should be reluctant while engaging on activities that involves money. When making payments the general public or inventors should always ensure that the cheques are addressed to the intended entity instead of addressing cheques to financial advisors who then can easily reneged on the promise of forwarding the funds to the right entity instead they use them for their own personal gains. (e) Fraud case involving two Melbourne men As it has been the norm in many countries around the world, financial institutions have been using middle men to connect to their clients especially when it comes to loan borrowing or credit advancing. Simon Stern, "Sentimental Frauds" (2011) 36 Law Social Inquiry. Mr Aizaz Hassan and Mr Mohamed Radhi Ebrahim were both brokers at one company by the name Myra Home Loan Pty Ltd transacting as Myra Financial Services. They are alleged to have purported false or fake home loans applications from would be their clients. They then forwarded the applications to various banks among them St George Bank, Pepper Bank, Aldelaide Bank and Choice Home Loans. The two together with another person named Mr. Najam Shah conspired to defraud these banks money in the name of making home loans application on behalf of their clients. The complainant to the court in this case was Australian securities and investment commission 2001. The two pleaded guilty to one count each before Her Honor Judge Lawson. These crimes were alleged to have been committed between March 2008 and December 2011. They were each sentenced to five years community correction orders, and four hundred hours of community service for the offences. The fraud saw them falsely acquire approximately $17 0 million from the financial institutions affected by the scandal. ASIC Home | ASIC - Australian Securities And Investments Commission (2016) Asic.gov.au https://asic.gov.au/. Its our recommendation that financial institutions offering credit facilities need to be more careful when approving loans least they will continue approving fake loan applications. They should do thorough checks like call backs, visiting the actual client up to their homes just to ascertain that the applicant do exist and can be easily traced or contacted. Bernard Mees and Ian Ramsay, "Corporate Regulators In Australia (1961-2000): From Companies' Registrars To The Australian Securities And Investments Commission" SSRN Electronic Journal. References Clikeman, Paul M, Called To Account Cohen, Rory M., "US Securities And Exchange Commission Amends Dollar Threshold Tests Under Qualified Client Standard, Requires Exclusion Of Net Equity In Primary Residence" (2012) 13 Journal of Investment Compliance Hammond, Celeste M., "Subprime: Real Estate Frauds, Mortgage Frauds And Legal Certainty" SSRN Electronic Journal Hornstein, George D., "Investment Trusts And Investment Companies, Report Of The Securities And Exchange Commission" (1940) 40 Columbia Law Review Mees, Bernard and Ian Ramsay, "Corporate Regulators In Australia (1961-2000): From Companies' Registrars To The Australian Securities And Investments Commission" SSRN Electronic Journal Mees, Bernard and Ian Ramsay, "Corporate Regulators In Australia (1961-2000): From Companies' Registrars To The Australian Securities And Investments Commission" SSRN Electronic Journal Stern, Simon, "Sentimental Frauds" (2011) 36 Law Social Inquiry Surface, H. A., "Frauds, Semi-Frauds And Questionables" (1915) 8 Journal of Economic Entomology Wolny, Philip, Understanding Financial Frauds And Scams (Rosen Pub., 2013).