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White-collar crimes

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atching the premiere of “The Informant!” – the

Matt Damon movie about a high-level FBI mole at a large multinational company – was the mole himself, Mark Whitacre.

The movie is a dark comic take on the three years Whitacre – a former divisional president of Archer Daniels Midland, the U.S.-based food additive giant – spent working undercover to break a global price-fixing conspiracy.

Whitacre recognized real episodes in his life on the big screen, such as trying to fix a hidden tape player during a meeting and his delusional belief he would be made chief executive of the company as a reward for his undercover work.

But what you won’t see in the movie are the events of 9 August 1995, six weeks after an FBI raid blew the case into public attention. It was two days after ADM fired Whitacre and accused him of embezzling millions from the company. His FBI partners for the previous three years would no longer speak to him.

On that day, Whitacre sat alone in his car with its engine running inside a closed garage and slowly lost consciousness. He was hoping to end his life as surely as he had ended his career. A gardener found him unconscious.

Some scenes just can’t be played for laughs. “There was nothing comical in the reality of the story,” says Whitacre, who eventually spent nearly nine years in prison for his role in the price-fixing scheme and revelations he siphoned off US$9 million from the company while he was working for the FBI.

Although the events took place over a decade ago, “The Informant!” has a deep resonance today. In the receding waves of affluence, the financial crisis is revealing a stony shore of scams such as the billions bilked by Bernard Madoff. When the economy goes down, there is always an upswing in fraud, says Kim Frisinger, a former FBI accounting fraud investigator and now managing director of LECG Hong Kong, a consulting firm. “It’s like the ocean going out and you can see everything that was hidden under water.”

In September, the accounting profession in Hong Kong was startled by a courtroom bombshell that an Ernst & Young partner had falsified audit documents. The discovery caused E&Y to settle a US$1 billion negligence claim for an undisclosed sum; Hong Kong police seized documents and detained the partner, who has been suspended by the company. Also in September, a KPMG executive in London was sent to prison for four years for taking nearly US$900,000 in falsified expense claims.

As fraud grows, so does the business for people who investigate fraud. The Association of Certified Fraud Examiners, which trains accountants and other professionals in fraud investigation, has 47,000 members across the world – more than 20 percent of its membership joined last year.

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The fraud triangleUnfortunately, a lot of fraud stems from a company’s own employees.

Although there are “millions of ways to commit fraud, there are always three common elements in any employee fraud case – incentive, opportunity and rationalization,” says Gary Zeune, a U.S. accountant who specializes in fraud. He runs a speakers’ bureau called “The Pros and the Cons,” which puts professional accountants and white-collar criminals together to give lectures about fraud.

Incentives to steal don’t necessarily involve greed – often there are more esoteric underlying reasons. For example, Zeune referred to the Société Générale trader who nearly put the bank under by hiding and growing US$7 billion in trading losses. “He didn’t make a cent of that,” Zeune says. Instead he was trying to show he was a “smart securities trader.”

Opportunities for fraud abound, says Frisinger. Fraudulent statements, misappropriating assets, kickbacks, billing schemes, payroll schemes, cheque tampering, extortion – the list goes on and on, he says.

Over time, culprits feel there is a low likelihood of getting caught, especially if there are poor internal controls. “The average fraud in a public company is US$175,000, but the average fraud in a private company is US$200,000,” says Zeune. “Public companies typically have more processes in place that catch fraud.”

People who slide into white-collar crimes inevitably rationalize why they are doing it, especially during a downturn. “There is downsizing, people are not getting raises but they’re being asked to do more,” Zeune says. “People will only obey laws and internal controls they think are fair.”

Catching a crook with crooksBut sometimes a crook is just a crook, says Sam Antar, who employed a number of accounting tricks when

cooking the books for his company. The chicanery went beyond false accounts and into psychology.

“[The auditors] are always young, single and just a few years out of college,” he says. To spice things up – and to distract the auditors – he would always pair them with “cute hot female” employees. It would be difficult for the auditors to find fault with the company if it has a “sexy face,” he says.

Antar was at the centre of a multi-million dollar fraud 20 years ago but avoided jail time by working with the U.S. government. He likens accounting tricks to professional magicians. “It’s like David Copperfield, it’s an illusion... I want you to look over here so you don’t see what I’m doing over there.”

Other tactics would be to delay giving the auditors information required for as long as possible so that they have to either rush the job or ask fewer additional questions, Antar says.

It’s difficult to detect fraud, often because fraudulent books are done in reverse – so of course the numbers are going to add up, says Mark Morze, who spent five years in U.S. prisons for a billion-dollar stock fraud in the 1990s. “The judge in my case actually said the books looked too good, which is right there a cause to be suspicious,” says Morze, who like Antar now works with accountants to fight fraud.

Because fraud is done the other way round, it’s helpful to look at the books in reverse – starting with the footnotes, Antar says. Compare footnotes over time and see how they have changed. Any differences should be a red flag to starting digging for fraud.

How fraud is found outFraudsters escalate their activity for a simple reason – they don’t get caught. “According to statistics, 60 percent of crimes are found out by fellow employees who turn them in,” says Zeune. “The next most common reason – by accident.”

Antar’s fraud unravelled as a result of a feud between fellow Antar family members who owned the business – when lawsuits started to fly and authorities began looking into the accounts, the depth of the deception began to unwind. Morze’s deception was discovered when a small-town reporter was writing a “fluff piece” on his company and found that the company wasn’t properly licensed – again, bringing authorities in to snoop about.

The massive case against Archer Daniels Midland began when Mark Whitacre lied – problems with a new plant caused delays, and Whitacre falsely said he had received a note saying saboteurs from a Japanese competitor were in the plant and had demanded US$10 million to cease operations. The FBI came in to investigate the false crime and were told about the real crime the company was involved with – a massive price-fixing conspiracy.

“If senior management is involved in cooking books and records, it’s very difficult to detect,” says Frisinger, the Hong Kong fraud specialist.

Antar and Morze say fraudsters surround themselves with “legitimacy” to create a strong, upright impression. “I didn’t miss synagogue,” Antar says. “Guys like Madoff are very, very likeable guys. You do a good deed in one aspect of life, [which] cancels out the bad deeds [on] the other side. You build a false wall of integrity around yourself.”

The fix is inFor Whitacre, “The Informant!” is a study of his own mental illness, as he was diagnosed with bipolar disorder after hospitalization for his suicide attempt. His meeting with Damon at the premiere was the first time the pair met and Damon told him he hoped they portrayed his illness in a sensitive way.

“He didn’t want to talk to a 52-year-old Mark Whitacre while

White-collar crimes

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preparing for the role, the Mark Whitacre who went to prison, who has been treated for bipolar disorder, who is now COO (chief operating officer) of a company,” says Whitacre, who works for a small food supplement maker. “He wanted to portray the 35-year-old Mark Whitacre, otherwise it would make it difficult to portray the delusions I had at that time.”

For companies and regulators, the 1997 conviction of ADM was a landmark event, the first antitrust action in the United States since World War II and a case that has spurred price-fixing investigations around the world. “As

a result of this case, the Department of Justice and the FBI started looking around to see if they could find any other cases like this,” says Dean Paisley, a retired FBI agent who supervised the undercover ADM work.

“This used to be relatively unusual until the (ADM) case came to light,” says John Connor, a Purdue University researcher on cartel activity and an expert witness in the government’s case against ADM. “Back in 1993, you’d see maybe one or two global [price-fixing schemes] being discovered... in the past three years or so, there are about 50 a year.”

Price-fixing schemes – where a cartel

of manufacturers or services providers inflate prices against market demand – cost consumers untold millions each year. In the ADM case, investigators found that the company’s cartel activity with manufacturers in Japan and Korea inflated prices by at least US$200 million during the three years of investigation.

The case resulted in a record US$100 million fine in 1997 – a figure long since dwarfed. In August, Japanese company Epson agreed to pay US$26 million for its role in price-fixing LCD panels used in mobile phones in the United States. Several other companies, including Sharp, LG and Hitachi, have already

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Flawed heroesA sign of cartel activity is usually a sharp and uniform increase in price with a contraction in demand. “But, in fact, in the last 15 or 20 years [governments] have relied almost exclusively on whistle-blowers to make their cases,” Connor says.

pleaded guilty in the case and paid fines of more than US$600 million. In September, the Hungarian government fined Visa Europe, MasterCard and seven commercial banks a total of US$10.4 million for price-fixing bank fees (Visa and MasterCard are appealing that decision).

And as Whitacre showed, whistle-blowers often don’t have noble motives. “The movie should be taken very, very seriously,” Sam Antar says. “In white-collar cases, the governments have to rely on informants... in effect relying on unsavoury characters to make their case.

“What happened in “The Informant!” is he had an agenda to become head honcho of the company,” Antar says. “The mistake the FBI agents made in the movie is they fell in love with their witness. It turned out there was a dark side they didn’t know about.”

Whitacre says he began stealing millions from the company while work-ing for the FBI, in part as a financial backstop in case things went wrong. In short, he rationalized his crime: “I had this sense of false entitlement, like they owe me this... after all, the company was stealing hundreds of millions.”

The stress of Whitacre’s double-life undoubtedly added to his mental woes, says Paisley, the original FBI supervisor in the case. He points out that undercover FBI agents receive surveillance training and are pulled for psychological evaluation once a year – Whitacre received none of that.

“There were no provisions for similar checks and balances with Whitacre,” Paisley says. “He had no idea what he was getting into when he agreed to cooperate... we had no idea it would last three years.”

Although Whitacre has served his time, Paisley and other agents involved in his case are seeking a presidential pardon. “He really screwed up by stealing,” Paisley says. “Be that as it may, how many hundreds of millions would have been stolen if (ADM) wasn’t stopped by Mark Whitacre? He is a national hero, in my eyes.”

White-collar crimes