September - October 2010
CPENet Fraud in the
News Newsletter
Conditions Improve for
Whistleblowers
The Dodd-Frank Financial Reform
Act signed into law in July by President Obama has been both lauded
and derided for its new protections for fraud whistle-blowers. The
debate notwithstanding, employers will be forced to focus more on
rules prohibiting retaliation against whistle-blowers because, among
other things, the new law closes the notorious loophole which
enabled corporations targeted by whistle-blowers to hide behind the
legal language in Sarbanes-Oxley (SOX) that exempted them from
compliance with the whistle-blower law if the complaining employee
worked for a subsidiary.
Countless complaints of financial wrongdoing have been brought by
whistle-blowers who stuck their necks out under the belief that
SOX-provided anti-retaliation measures would protect them -- only to
be dismissed from their jobs because of this loophole. The companies
they worked for had cases against them dropped thanks to the fancy
footwork of their attorneys on whom the now remediated SOX flaw was
not lost.
Another critical element of the new financial reform law is its
provision allowing employees to report alleged violations of
securities law directly to the Securities and Exchange Commission
(SEC) or the Commodity Futures Trading Commission (CFTC). The
provision allows whistle-blowers to file their complaints directly
in court instead of having to complete the painfully bureaucratic
administrative process by the Occupational Safety and Health
Administration (OSHA), which was the agency designated under
Sarbanes-Oxley to process SOX-related fraud complaints. OSHA's
track record during the two Bush Administrations is widely
considered to be overwhelmingly anti-whistle-blower. Numerous
seemingly solid complaints about corporate financial crime were
brought by courageous employees after the enactment of SOX, only to
culminate in employment termination as well as the dismissal of
their complaints. The new pro-whistle-blower provisions of the
Dodd-Frank law should remedy this, although the discouraging record
of SOX-related whistle-blower complaints may have left some enduring
reluctance on the part of many potential whistle-blowers.
In
addition to eliminating the SOX whistle-blower flaw, the new
financial reform law provides what has come to be termed a "bounty"
for blowing the whistle on violations of federal securities law.
Specifically, the law allows the SEC and the CFTC to award
whistle-blowers who provide "original information" about a violation
with between 10% and 30% of penalties in excess of $1 million that
are collected by the government in connection with the conclusion of
a successful enforcement action. According to the prominent
law firm Arnold & Porter, this provision "will likely increase the
number of employees who report information to the SEC or CFTC; they
provide a financial award for any fruitful tips and… may offset the
perceived risk to employees of filing reports that might have
otherwise jeopardized their current or future employment."
Importantly, the new provision extends to violations of the Foreign
Corrupt Practices Act (FCPA) as well. Because FCPA is considered a
securities law, the new "bounty" provision now also applies to
employees who file complaints with the SEC for alleged violations of
the anti-bribery provisions of the FCPA which, as has been widely
reported, are now being vigorously enforced by the SEC and the
Department of Justice. With giant-sized penalties like the $800
million one imposed on Siemens AG in 2008, the incentives for
employees to report such violations would appear to be rather potent
indeed.
Despite the new legal protections and incentives for prospective
whistle-blowers, the financial reform act underscores the critical
importance of having an effective whisteblower hotline in place.
Sarbanes-Oxley requires large publicly traded companies to have such
a reporting mechanism in place. However, since the enactment of SOX
some eight years ago, employees have not been afforded the
protections intended by the Act. Many have been terminated for
reporting alleged fraud with less-than-favorable results from filing
their complaints of SOX violations with the Occupational Safety and
Health Administration (OSHA) -- the agency originally designated by
SOX to administer legal proceedings in response to employee
complaints of retaliation.
Now, the financial reform law empowers employees who have been
retaliated against for blowing the whistle to sue their employers
directly in federal court. It also significantly lengthens the
deadline by which such complaints must be filed. Specifically,
according to Arnold & Porter, the law states that filing a complaint
in court is allowed if "the employee reported the alleged violation
(1) to the CFTC, for a period of up to two years after the alleged
retaliatory act transpired; or (2) to the SEC, the later of (a) six
years after the alleged retaliatory act, (b) three years after the
employee reasonably should have discovered the retaliatory act, or
(c) no later than 10 years after the alleged violation of the
securities laws." These limitations periods are significantly longer
than provided for in the SOX whistle-blower provisions.
Implication: According to Arnold & Porter, "An employer found liable
for retaliating against a whistleblowing employee could be ordered
to pay substantial damages and take certain actions including:
* Reinstating the employee with the same seniority status that the
employee would have had if the alleged discrimination had never
occurred.
* Paying the employee back pay with interest for claims relating to
commodities violations or double back pay (i.e., twice the amount in
the SOX provision) with interest for claims relating to securities
violations.
* Compensating the employee for litigation costs, expert witness
fees, and reasonable attorneys' fees."
Bottom line: The financial reform act puts significant new
compliance burdens on employers. It also markedly broadens the
intended impact of having public companies implement and manage a
robust whistle-blower hotline. Specifically, the internal benefits
of having an employee hotline -- widely and repeatedly reported by
the Association of Certified Fraud Examiners as being instrumental
in facilitating the filing of employee fraud complaints -- are now
extended beyond the corporation. As labor attorney Jason Zuckerman
wrote, "Recognizing that robust whistle-blower protection is
critical to preventing another financial crisis, Congress included
in the Dodd-Frank financial services reform bill… numerous
provisions designed to encourage whistleblowing and to provide
robust protection from retaliation."
Key point: If employers handle fraud complaints submitted by
employees with fairness and efficiency, the incentives to circumvent
corporate hotlines in favor of the federal judicial system may be
substantially diminished. This is disputed by some labor attorneys
who predict that the prospect of significant monetary awards for
reporting securities violations directly to the SEC and/or CFTC will
diminish management's opportunity to resolve fraud complaints
internally. The jury, as they say, is still out on that point.
Congress Poised
to Grant Request for
Health Care Anti-Fraud Strike Force
Congress
is set to grant President Barack Obama’s request for a record $1.7
billion to fight health-care fraud, in part to almost triple
investigations into crime rings that steal from Medicare. The money,
included in both House and Senate versions of a fiscal 2011 spending
bill for the Health and Human Services Department, amounts to a $250
million increase. Almost half of that, $116 million, would go toward
expanding a program of fraud “strike forces” to 20 cities from
seven. UnitedHealth Group Inc., based in Minnetonka,
Minnesota, and smaller health insurers stand to benefit from an
increase in the federal government’s fraud effort. Insurers are
often victimized by the same criminals that target Medicare, said
Louis Saccoccio, executive director of the National Health Care
Anti-Fraud Association, a Washington-based group.
“If a certain health provider is defrauding Medicare there’s a good
chance they’re defrauding the private side as well,” Saccoccio said.
UnitedHealth, the biggest U.S. health plan by sales sees helping
companies battle medical fraud as one of the “strong growth areas”
for Ingenix, its information-technology and consulting unit, said
Andrew Slavitt, Ingenix’s chief executive officer, said in a July 20
call with analysts.
Medicare estimates that about 7.8 percent of the $308 billion it
spent in fiscal 2009 was “improper,” a term that encompasses
non-criminal waste along with fraud. There is no similar estimate
for the private market, Saccoccio said, though his group estimates
that about 3 percent of national health spending is lost to fraud
every year. National health spending totaled about $2.3 trillion in
2008, according to the most recent estimate from the government’s
Centers for Medicare and Medicaid Services.
The strike force program has stopped fraud schemes totaling about
$1.9 billion and led to charges against more than 800 people,
according to Laura Sweeney, a departmental spokeswoman. The amount
of fraud the strike forces have deterred from happening is “far
higher but nearly impossible to calculate” said Kirk Ogrosky, a
partner at Arnold & Porter LLP in Washington and a former federal
prosecutor who began the strike force program in Miami in 2007.
In the strike force’s first year operating in south Florida, Ogrosky
said, Medicare observed a $1.2 billion decrease in claims from the
area for purchases of home medical equipment, the industry that
prosecutors first targeted. The Obama administration estimates
that a budget increase for anti-fraud programs will pay for itself
and then some, bringing in $10 billion for the government over a
decade.
Jay Darden, another former federal prosecutor who is now a partner
at Patton Boggs LLP in Washington, said that the government should
consider intensifying its law enforcement in places like Miami -- a
hotbed for health-care fraud -- before expanding to more cities.
“I think there’s 20 cities where Medicare fraud is a problem,”
Darden said in a phone interview. “I’m not sure you could say there
are 20 cities where Medicare fraud is the size of the problem as it
is in Miami and Los Angeles and in the southern district of Texas.”
The southern district includes Houston and McAllen, a town that was
the focus of a New Yorker story last year examining differences in
Medicare spending across the U.S.
The legislation carrying the extra money for fraud-fighting is
stalled in Congress due to a partisan debate over government
spending. Senator Tom Harkin, the Iowa Democrat who is chairman of
the appropriations subcommittee that wrote the bill, said last week
that it is unlikely to become law before the end of the year. The
full Senate Appropriations Committee approved the bill last week on
an 18-12 vote. The additional cities weren’t identified.
The Miami Master of the
Ponzi Scheme
As a kid, Luis Felipe Perez
cleaned bathrooms at a taco joint. By his 30s, he was a high-end jeweler, riding
the streets of Hialeah in a Bentley. He traveled with bodyguards. Donated tens
of thousands of dollars to local and national politicians. And even dined at a
fete for the king and queen of Spain when the royal couple visited Miami. But
his businesses, the feds say, were a sham. His jewelry companies had no
employees -- and the man known simply as ``Felipito'' orchestrated a $40 million
Ponzi scheme and took part in a $12 million bank fraud conspiracy, according to
law enforcement authorities. Even diamonds offered as collateral to investors
were fake.

Perez, already facing federal charges for the alleged pyramid scheme, was
indicted last week on additional federal charges, accused of conspiring with two
others in a scheme to fraudulently obtain millions of dollars in commercial
lines of credit. The allegations paint a far different portrait of Felipito from
the Hialeah golden boy who gave his mother his first paycheck for $60 and who
was mentored by the late Rolando Blanco, a pillar of the community. With his
groomed goatee and penchant for well-cut suits, Perez, 38, cut a dashing figure
around town. ``In Hialeah, a person who goes around in a Bentley is not an
everyday thing,'' said former Police Chief Rolando Bolaños. ``And Felipito did
it with a chauffeur, bodyguards and a laptop. It was like his mobile office.''
The Securities and Exchange Commission says investors' money supported Perez's
lavish lifestyle. He and his ex-wife bought a $3.2 million Mediterranean-style
villa on the edge of Coral Gables, east of U.S. 1. Perez also spent $400,000 to
lease luxury cars; $200,000 on vacations; $300,000 on clothes for his wife;
$200,000 on extravagant dinners; and $100,000 on art, according the SEC.
In June, Perez was accused of swindling about 35 investors in a $40 million
Ponzi scheme from 2006 through May 2009. He faces a civil complaint by the SEC
and six federal counts of securities fraud. He allegedly promised
investors high rates of return -- up to 120 percent annually -- in exchange for
investing first in his jewelry business, then in pawn shops in New York.
His criminal-defense attorney, Alvin Entin, said that for several months Perez
has been cooperating with authorities in a widening investigation. ``It's going
to continue,'' Entin said of the probe. The legal case involving Perez has
already grown. The latest federal indictment, filed Wednesday in Miami, alleges
Perez helped orchestrate a $12 million bank-fraud conspiracy with accountant
Berta Sanders, 61, of Miami Lakes, and Richard Garcia, 29, of Miami, a former
loan officer at Wachovia Bank, now Wells Fargo. Both Sanders and Garcia have
been released on bond. Sanders has pleaded not guilty. According to the
indictment: Sanders prepared at least 25 fraudulent loan applications on behalf
of borrowers to gain commercial lines of credit -- $12 million in total. Garcia
told Sanders what information needed to be faked to gain the credit. And Perez
recruited borrowers, encouraging them to invest the money in his business
ventures. The borrowers -- who are not named by federal authorities --
allegedly paid Sanders 10 percent of the loan amounts for her help. Sanders
shared $134,000 with Garcia, who faces six counts of receiving gifts to procure
loans. The bank allegedly ended up suffering $10 million in losses after
borrowers defaulted on most of the lines of credit.
In addition, Perez, Sanders and Wachovia Bank face a civil suit in Miami-Dade
Circuit Court. A lawyer for the bank, Niall McLachlan, declined to comment.
In the civil case, business owners Mayra Velez, Manny Alfonso, Luis Estrada and
Daniel Hernandez claim to have been ``caught in the conspiracy.'' The suit
details how they were introduced to Sanders, paid her commissions for obtaining
loans -- each in the hundreds of thousands -- and how they invested the money
with Perez with his promise of high returns. The complaint names bank employees
Garcia and Daniel Rivera, who no longer work there. Rivera could not be reached
for comment. Their attorney, Peter Valori, said the plaintiffs did not know
about false information on their applications and together lost more than $5
million. The plaintiffs may not be so innocent, said Joshua Entin, who
represents Perez in the civil lawsuit. ``They should concern themselves more
with the false information presented to the bank to obtain funds that eventually
were invested with my client,'' said Entin, the nephew of Perez's
criminal-defense attorney.
Perez faces six counts of securities fraud; each count carries a maximum of 20
years in prison. The bank-fraud charge has a 30-year maximum. He is currently in
custody. Perez, born in Havana in 1972, arrived in South Florida with his
parents at the age of 5. His mother, Aida Perez, said her son was always a hard
worker. ``My son brought me his first check for $60 when he started
working at 12 years old, cleaning bathrooms and making picadillo in a taquería,''
said Aida Perez, who runs Aida Hair Designs in Hialeah. Perez eventually
became an entrepreneur mentored by Blanco, whose business ventures included
towing companies and real estate. After Blanco's death in 2007, Hialeah named
part of West 77th Street in his honor. ``Felipito was like a son to Rolando
Blanco,'' said former Hialeah Mayor Raul Martinez.
Fostering a Culture of
Compliance
We're hearing lots of buzz these days
about "culture of compliance" and "chief compliance officer" and
"ethical climate." But what does it really mean to have a culture of
compliance? Compliance with what?
Well, the short answer is that it depends on your organization. The
long answer is that there are a multitude of regulations and
internal policies with which organizations and their employees must
comply to maintain a positive reputation, both internally and
externally, as well as to avoid hefty fines and even jail time in
many cases. Federal legislation, such as the Sarbanes-Oxley Act and
the Foreign Corrupt Practices Act, impose numerous responsibilities
on U.S. organizations. Many industries, such as the energy and
banking sectors, have additional federal regulations with which
companies must comply, resulting in entire departments dedicated to
ensuring compliance. And then there are the internal policies and
procedures that companies implement, by which employees and
consultants are expected to abide.

So how do we create a
culture of compliance in this world of so many rules? There are a
few important things organizations can do to exude strong ethics and
foster a culture of compliance:
1) Tone at the top -- This phrase has been exhausted in the
business world, but for good reason. An organization's image, both
internally and externally, is created almost entirely from the
attitudes of the executives of the organization. If the executives
believe that the rules don't apply to them (which, by the way, is a
fraud risk), their staff members aren't likely going to be motivated
to follow the rules themselves. But an executive team that shows the
world how important the rules are by strictly following them is much
more likely to inspire the staff to behave in the same manner.
2) Training -- Employees can't possibly be expected to follow
the rules if they don't know what they are. Let's be honest -- many
employees aren't going to do their own homework and find out what
all of the organization's policies and procedures state, nor are
they likely to learn about the industry regulations on their own. So
it's important to provide training to employees on the policies,
procedures, and regulations with which they are expected to comply.
The benefit of such training is two-fold:
* It gives employees the tools they need to contribute to the
culture of compliance with the knowledge of the requirements.
* It shows the staff that the organization's leaders value
compliance enough to take the time to train them.
Live training is typically the best way to show employees just how
important compliance is to the organization. Make it fun and
engaging with quiz questions throughout the course or an interactive
game at the end. Allowing people to sit in the back of the room and
nod off during the training probably isn't going to be terribly
effective, so keep folks engaged. If computer-based training is the
best option, make sure it's created in a way that doesn't allow
employees to hurry through it without retaining any of the content.
A quiz at the end is a helpful way to ensure people were paying
attention or at least already knew the rules. So train well and
train often -- people forget this stuff over time, too. Once-a–year
review courses are probably enough to keep people fresh.
3) Code of Conduct/Ethics Policy -- Even the tone of the code
of conduct can influence the ethical climate and culture of
compliance in an organization. If the code of conduct is long,
punitive in tone, and boring, employees are not as likely to be
inspired to follow it. However, if the code of conduct is clear and
concise about the expectations of staff behavior, employees are much
more likely to adopt and adhere to its contents. Adding some lighter
and more humorous language to the code of conduct, depending on the
type and culture of the organization, can sometimes engage and
inspire employees as well. (For an example of a code that uses
casual and humorous language to inspire adherence, see Google's code
of conduct.) Make sure the code of conduct is displayed all over the
company's offices to remind people of what they are expected to do.
Again, people tend to forget things if not regularly reminded of
them. Posting the code of conduct around the office and on the
organization's website also communicates the importance of
compliance to the organization's management.
4) Chief Compliance Officer -- Designating a high-ranking
employee in the organization as the chief compliance officer or
chief compliance and ethics officer adds additional support to the
culture of compliance. Ideally, this person should be a
well-respected individual with a strong ethic and a charismatic
personality to best inspire the staff to be compliant and ethical.
In some organizations, this person is the director of internal
audit; in others, it's a separate vice presidential position. Any
number of positions in an organization may be suitable for this
designation.
Creating a culture of compliance and establishing a high ethical
standard in an organization reduces employees' motivation to commit
fraud and creates an inspiring and ethical environment in which to
work.
Smaller companies and nonprofit organizations -- in which the chief
compliance officer is also the CFO/controller/bookkeeper -- also can
and should work to proactively create a culture of compliance. Such
organizations frequently don't have enough employees to adequately
segregate duties to provide sufficient control over the money and
financial statements. Therefore, they often have a higher risk of
fraud due to increased opportunity, making it even more crucial to
create a culture of strong ethics and compliance.
The four practices mentioned in this article are not expensive, nor
are they incredibly time consuming if done efficiently; any
organization can implement them. The "culture of compliance" buzz is
not a short-term fad. Not only is it important to help companies
reduce the risk of fines and an unfavorable reputation, but it is
also an excellent fraud prevention method.
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