Financial investigation | White-Collar Crime and Workplace Ethics

International financial investigator Jared Bibler led the initial inquiry into the 2008 Iceland financial crisis, precipitated by the collapse of the Nordic country’s three national banks.

Appointed by the Icelandic markets regulator, the Financial Supervisory Authority (FME), he and his team ultimately referred more than 30 criminal cases to the Special Prosecutor of Iceland, involving illegal loans and the banks buying their own shares to manipulate market prices.

In this article, Bibler, author of new book Iceland’s Secret: The Untold Story of the World’s Biggest Con—a revelatory forensic examination of one of the world’s largest financial crimes—offers guidance on how professionals should act if they uncover white-collar offences in their company.

By Jared Bibler CFA

I spent several years investigating the collapse of three giant failed banks. In all that time, I read thousands of emails between managers and employees. Despite the voluminous correspondence, only one lonely voice took a stand. Her boss instructed her to wire millions of the bank’s own funds overseas as the institution was failing.

The staff member—middle management at most—pushed back. She pointed out that the overseas counterparty did not meet requirements for demanding such funds and she did not feel comfortable making the transfer. “Do it,” responded her boss, and then she did. Within a few hours, the bank collapsed.

Compared to so many of her colleagues, to me she was a hero. Even if only briefly, she had taken a stand for what was right, attempting to safeguard millions in valuable assets that legitimately belonged to her employer.

Countless opportunities present themselves for white-collar crime in financial and industrial firms today. Financial Statement Fraud, by Gerard M. Zack, recites many schemes to commit fraud. I will outline a few here. But this is such a rich field that it dates back as long as business and accounting themselves.

Some classic frauds are perpetrated by altering a firm’s books and records. That could involve backdating contracts and agreements to make a recent deal look as if it was signed long ago. In some jurisdictions, this widely practiced act is regarded as forgery—one of the oldest crimes of all—and, generally, a very serious one given that legal systems rely primarily on documents being reliable and valid.

Another way to cook the books is to keep the firm’s accounts open past the end of the month or financial quarter, allowing the front-loading of future cashflows. In this way, sales can be booked into the past, bulking up the financial performance of a poor period by stealing from the future.

Why commit these crimes? The beneficiaries are often the managers of a firm who want to ‘dress things up’ to make them look a little better—to ensure personal gain, like that next bonus.

Within a firm’s accounts, there are dozens of ways to ‘juice the numbers’, including channel stuffing (pushing out sales via unusually large purchases), early revenue recognition, sales to related parties, ‘round-tripping’, inventory manipulation schemes, and improper valuation of assets, to name but a few.

In the boldest cases, staff embezzle funds directly, siphoning them off to pay private debts or finance lifestyles more lavish than their honest salaries can bear. The use of expense reports to do the same thing is, unfortunately, also widespread.

Further along the spectrum are bribery and money laundering. A bribe is a payment in cash or kind to a counterparty to secure some advantage, and is illegal in many jurisdictions, such as under the UK Bribery Act. Money laundering is especially common in cash-intensive businesses, for example restaurants and retailing, where ‘dirty’ cash from illegal activities, such as drug trafficking, is inserted into the cash register of a legitimate business. When the restauranteur or storekeeper takes the cash to the bank, it has been ‘laundered’ back into the banking system where it can be used for investments or other purposes.

I have personally encountered incidents of nearly all of the examples I have given above, either as an investigator or line employee. Sadly, such conduct occurs remarkably often, and in almost every kind of organisation. The severity can range from mild (a person expenses a raincoat he buys on a trip to Seattle) to off the charts, such as Enron’s years-long scam of unloading toxic assets to holding companies at the end of each quarter, then buying them back the next day. Potential criminal penalties are often in line with the amount of money in question.

Rigid and hierarchical work cultures, such as those that existed in the banks I investigated, can create fertile ground for mismanagement—and even fraud. Organisations where employees are encouraged to speak up, where managers are routinely challenged by their teams, are invariably less susceptible to these kinds of problems. Anonymous whistleblower hotlines, a relatively recent innovation, can help.

What to do if you find yourself in the situation of being asked to facilitate activity that seems problematic? It can feel very lonely and cause sleepless nights. I can empathise; I have been there. A supervisor once told me to wire €5 million in cash out to an offshore account I’d never heard of. Although I objected, he then had me do that two more times, for a total of €15 million. When those transactions later came to light, and despite a chain of emails showing otherwise, he shrugged them off and implied I’d done them on my own!

Here are some questions you can ask if you find yourself in a similar situation. (Note I am not a lawyer and nothing here should be construed as legal advice. If in any doubt, consult a solicitor in your local jurisdiction.)

• Can you challenge your supervisor?

• Can you afford to lose your job?

• Whom do you trust— inside or outside the organization—to speak with and get advice?

• What is your responsibility to your immediate supervisor, versus your responsibility to the company itself—or even its owners or shareholders?

• What are your avenues of recourse?

• Does the firm offer an anonymous tip line or whistleblower hotline? Is there an internal audit or compliance department you can contact?

Often it is a good idea to go on the record in an email with your concerns to both ensure awareness of the situation and protect yourself. And, if possible, keep paper copies of all correspondence for your own records.

I believe things are slowly getting better, as organisations become more distributed and technology enables more openness within them. But we still have some way to go to enable truly clean finance.

Iceland’s Secret: The Untold Story of the World’s Biggest Con (Harriman House) is out now on Amazon in hardcover, eBook, and audiobook formats, priced £22.99, £14.99, and £16 respectively. 

Visit www.icelandssecret.com or click the button below.

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