COMPUTER CRIME, FRAUD AND FINANCIAL CRIME

Financial Institution Fraud Misrepresentation of the truth or concealment of a material fact by a person to induce a business, organization, or other entity that manages money, credit,

UNIT 12 COMPUTER CRIME, FRAUD AND FINANCIAL CRIME

Read the text and decide if you agree or disagree with the statements below

Leeson paid £61,000 for speech

Adapted from the BBC web-site Business: Your Money (October 1999)

Disgraced former Barings trader Nick Leeson has been paid $100,000 (£61,000) to speak at

a business conference in the Netherlands

It was the first in a long line of lucrative celebrity-style appearances planned by the man who single-handedly brought down Barings Bank

He will also be endorsing products in advertisements and appearing on television shows Business people, brokers and bankers paid about £188 each to hear him speak at the event in the Netherlands Leeson was released from a Singapore jail four months ago after serving three-and-a-half years of a six-and-a-half-year sentence for fraud He was caught after going

on the run when his gambling on derivatives markets landed Barings Bank with £800m of debt Now, Leeson's assets are frozen and he has huge debts hanging round his neck

He said: "I would like to go back into the financial world, but which company is going to be brave enough to employ me? Who will let me trade again?"

Leeson has written a book of his story, "Rogue Trader", which was made into a film,

starring Ewan McGregor and Anna Friel But his public relations adviser, Ian Monk, says Leeson did not gain a

penny from either, because it went directly to Barings' creditors Under an agreement with the creditors, he will be allowed to keep 35% of money earned from public and media

appearances and advertising The remaining 65% will go to creditors Some of his portion of the money will go on medical bills Leeson found out while in prison that he has colon cancer After treatment, he is now in remission Leeson also receives a monthly allowance of

£3,000 a month from his frozen assets "This man is inundated with offers It's great," said

Mr Monk Asked where he wanted to be in 10 years' time, Leeson replied: "I hope I'm still alive " I would like to live with somebody, have children and be left alone."

Leeson spoke about his view of world stock markets to 250 members of the Amsterdam stock exchange It was a Dutch group, ING, which bought up Barings after its collapse and bailed it out

1= Agree very strongly 2= Agree 3= Not sure 4 = Disagree 5= Disagree strongly

1 Nick Leeson is a dangerous criminal and should be more carefully monitored

2 He has served his sentence according to the law and should be allowed to get on with his life

3 Nick Leeson should not receive anything other than the bare minimum to live until he has paid as much of the debt as possible

4 35% of his earnings is too much to be allowed to retain

5 The fact that he can employ a PR adviser suggests that he has a good life style

6 He should be obliged to pay for all medical treatment even if it is usually free

7 No decent company would ever employ him to trade

8 ING Bank should apply for a "restriction order" against him

9 No decent person from the financial world could gain anything from such a crook

10 Barings Bank was foolish in allowing one man the chance to “gamble” with their money

Exercise 1

Match these definitions with one of the words underlined in the text

1 to rescue from a tricky situation =

2 amount of money received but not necessarily earned =

3 persons who are owed money officially, e.g after bankruptcy of a company =

4 bonds and other negotiable financial instruments =

5 dealers in bonds and other financial instruments =

6 to purchase completely ("lock, stock and barrel"), especially after a financial collapse or company bankruptcy =

7 evading the police and other authorities =

8 to support or to promote =

9 as a great burden or load to carry =

10 financial resources (wealth) =

Discussion

What are credit cards? How do people obtain them legally?

How can they be illegally used?

What is the link between credit cards and the Internet?

How is this aspect of legitimate business likely to develop in Romania?

How might this bring a growth in a new type of crime?

Exercise 2 Credit card fraud as organised crime

Adapted from an article in “Nexus” the bulletin of the UK National Criminal Intelligence Service (NCIS) Autumn 2001

In each of the lines 1-25, there is ONE word omitted Suggest one correct word for each line The place is marked with *

1 Losses identified * credit card issuers in UK – usually banks and building societies-

2 grew from under ₤190 million pounds in 1999 * around ₤300 million in 2000.These

3 figures include plastic fraud as, for example, the fraudulent use * individual cards

4 stolen * a handbag to the sophisticated remote technology to retrieve card data from

5 computerised storage facilities of some international merchants and * The two types

6 of CCF identified * the most attractive to organised crime are specifically the

7 counterfeiting of cards and fraud * a CNP (card not present) environment such as

8 telephone order and internet mail-order Proof of * involvement of organised crime in

9 plastic fraud is not * anecdotal nor is it difficult to verify UK NCIS strategic

10 intelligence reports * a significant number of crime groups whose primary interest is

11 CC crime * is also an alarming number of crime groups for whom CC crime is a

12 secondary interest The new modus operandi also indicate well-* criminal enterprises

13 For example, recently there have * attacks on the on-line gaming industry-

14 betting * football, horse racing and other sporting activities), multiple attacks on

15 stored data from some major European hotel * and transport companies and

16 attacks * the ATM systems in Britain and abroad These crimes require technological

17 expertise, capital investment in technology and global * to “spread” the

18 fraudulent *

19 When NCIS first started * collate intelligence on card fraud, the information seemed

20 to suggest * most of the criminals originated from South-East Asia This may have in

21 part been * to the legitimate hologram-making businesses in Hong Kong It may also

22 have been because of many Chinese criminal * predisposition for existing

23 types of financial crime However, by the late 1990s, it had * apparent that this

24 criminal group had saturated its own market and had started to look * its own

25 ethnic group * recruits

Exercise 3 Front-line fraud

Now put these sentences in the best sequence to complete the “picture”

1 2 3 4 5 6 7 8

F

A Two such environments were readily identifiable – petrol stations and restaurants

B In such places the staff usually received low wages, were possibly temporary or transient and likely to be under-supervised

C They had to find “front-line fraudsters” (those who attempt the fraud in the shop or other retail environment)

D Access to a network of vulnerable retail networks was needed

E These customers would be less likely to notice the card “compromises” than customers

in a familiar shopping environment

F The Chinese gangs sought out other ethnic groups, especially illegal immigrants as they,

or even their families, are most vulnerable

G Both networks have the added advantage of being used by legitimate transient customers and tourists

H Some poorly-paid employment environments are also more likely to be staffed by the

less-skilled and less well-educated

Exercise 4

Card fraudsters prey on high-class diners

Patrick Collinson, Guardian Weekly –November 2002

Put the verbs given to you in brackets in the correct form

Plastic card fraud (1) (jump) by more than 50% over the past two years to L430m, banks said this week, warning that "skimming" (2) (reach) epidemic levels, particularly in the London area

Skimming - the copying of a card's black magnetic strip - barely (3)

(exist) _ five years ago but netted L161m for criminal gangs in the year to August 2002, according to the Association for Payment Clearing Services (APACS)

A third of that (4) (take) _ from card users in London, with fraudsters targeting high-class restaurants in the capital Second worst hit was Birmingham, where losses from skimming (5) (be) L6.6m

An unscrupulous restaurant waiter processes a transaction but then, out of sight of the customers, separately records the card's data on tiny devices that can be fitted on to a trouser belt He or she then (6)(sell) _the data to criminal gangs who (7) (use) it to mass-produce counterfeit credit and debit cards

Cardholders are often unaware of the fraud until a bank statement

(8)(arrive) detailing purchases they (9) (not

make)

In the latest twist, fraudsters (10) (begin) _ attaching fake swipe

machines to the doors of bank ATM lobbies used by customers to gain entry at evenings or weekends The fake swipe devices (11) (remove) later, containing thousands of customers' details

APACS said this week that it hopes to beat the fraudsters with a dual strategy of PIN numbers, first (12) (introduce) in France more than a decade ago, and

"smart card" technology

Customers paying by card will no longer have to sign receipts at shop tills but will instead type a four-digit PIN number into a keypad Cardholders also (13) (issue)

with new-style cards that contain computer chips These are more difficult to copy than traditional cards

To avoid fraudsters targeting overseas markets instead, Mastercard and Visa (14)

(coordinate) _an international roll-out of chip and PIN cards By the end

of 2005 these (15) (replace) the 1 billion-plus plastic cards currently

in circulation

Activity 2

Some shops in Bucharest accept credit cards such as VISA or MASTERCARD Imagine a dialogue between two criminals, one of whom works as an assistant in an expensive

clothes shop, suggesting ways they can make money out of “borrowing” credit card

information from legitimate customers How might they also get hold of (i.e steal!) the

credit card

Try to think of the dialogues and the scenarios If you can think of 2 or 3 ways, the real

crooks will think of more “scams”!

Read the descriptions (1-7) of the different frauds There are 7 "victim" situations described

(A-G) Identify which type of fraud (1-7) is involved with each situation (A-G)

1 2 3 4 5 6 7

1 Online Auction/Retail

The fraud attributable to the misrepresentation of a product advertised for sale through an Internet

auction site or the non-delivery of merchandise or goods purchased through an Internet auction site

2 Investment Fraud

An offer that uses false or fraudulent claims to solicit investments or loans, or that provides for the

purchase, use, or trade of forged or counterfeit securities

3 Business Opportunity/ "Work at Home"

The offer of a “phony” job opportunity, often with associated charges such as "processing or

application" fees Perpetrators frequently forge the name of a computer service or Internet Service

Provider

4 Financial Institution Fraud

Misrepresentation of the truth or concealment of a material fact by a person to induce a business,

organization, or other entity that manages money, credit, or capital to perform a fraudulent activity

5 Credit Card Theft/Fraud

The unauthorized use of a credit/debt card or credit/debt card number to fraudulently obtain money

or property Credit/debt card numbers can be stolen from unsecured web sites

6 Ponzi/Pyramid Schemes

An investment scheme in which investors are promised abnormally high profits on their investments

No investment is actually made Early investors are paid returns with the investment money received

from the later investors The system usually collapses, and the later investors do not receive

dividends and lose their initial investment

7 Non-Delivery of Goods/Services

The non-delivery of goods or services which were purchased or contracted remotely through the

Internet, independent of an Internet auction

A " My girlfriend or rather ex-girlfriend bought some clothes using my card."

B " I saw this advertisement on a web-site, offering really high profits for a small

investment I transferred US1000 and I haven't heard anything since! Neither have lots more people, I

understand!"

C "I have a computer and Internet at home and this Internet company said I could compose advertising

texts for them and be paid for them But they charged me 50US$ for their application form and another

US$50 for "distribution of my credentials" and I haven't heard from them since."

D "Well, you know I like to collect coins There was a great selection in an on-line auction I paid 200US$

for what was described as a 'Charles 1 token' The Internet picture was certainly Charles I, but when the

coin arrived it was quite different and virtually worthless!"

E " I wanted a list of properties This Internet agency promised to supply the list and I transferred US$100

to the account but I haven't received the list and they don't reply to my e-mails."

F " I received several messages via the Internet and e-mail from this client who said he needed a credit to extend his business premises He wanted to build a new office section for his small factory, so he said Well, this is certainly part of our work in supporting small business But what he didn't say was that he had already received a loan from another bank for the same project."

G "Have you ever heard of the "Re-development and Re-structuring Fund"? Well, from

the website description, the scheme is based on a bond or security certificate, paying 6% over 5 years I bought US$5000, received the certificate and now I find out it is all false The company, the fund, the certificate everything!"

Activity 3 THE "CASABLANCA" STING

Read about this well-known case involving money laundering

Summary

1 In 1995 US Customs agents, posing as money launderers were hired by the Cali drug cartel

2 In early 1996, the agents located employees in 12 large Mexican banks who agreed to launder drug money for a 1% commission The bankers opened sham accounts

3 The undercover agents collected Cali-Juarez drug-sale proceeds on the streets of cities like New York, Chicago, Houston, Miami and even Milan in pick-ups ranging from

$150,000 to $2 million By the Summer of 1996, the agents were depositing the cash into phony accounts via US Banks

4 The money was wire-transferred to the Mexican or Cayman Islands bank branches and converted into cashier’s checks made out to the fictitious companies These checks can be cashed almost anywhere in the world with no questions asked The drug-cartel origins of the money were now erased During the three-year operation, more than $50 million was

laundered

5 The agents delivered the cashier’s checks to cartel operatives in Cali

6 In May 1998, the Mexican bankers were arrested by Customs in the USA after they had been lured to “money-laundering sales meetings” in Las Vegas, San Diego and Los

Angeles

Vocabulary from the summary

3 proceeds =

The law does not allow criminals to retain the proceeds of their criminal activities Drug-money or other Drug-money gained by criminal activities is confiscated

4 pick-up = or hand-over of money for something else (usually drugs)

5 phony (slang) =

6 to cash a check (cheque) =

7 to lure = (often by attracting someone; the famous "honey trap" is a form of enticement!)

The engineer was lured into a trap which compromised him and made him agree to become a spy

Now read on for more details…

1) The bust was one of the final acts in an intricate three-year undercover effort by the Clinton administration to root out drug-money laundering via the U.S The “sting”, known as Operation Casablanca, had jailed more than 160 people from 6 countries and from more than half a dozen banks in Mexico and Venezuela, most of them respectable mid-level financial institutions It had also led to extraordinary criminal indictments against 3 of Mexico’s largest banks for their alleged role in the money laundering

Customs agents had seized more than $150 million in assets from the powerful

Colombian Cali cartel and Mexico’s Juarez cartel

2) Aside from the wounds inflicted on the drug lords, Casablanca caused acute

embarrassment to the Mexican government and its scandal-plagued banking system US law-enforcement agents had not breathed a word of the operation to their counterparts in Mexico and even luring the bankers across the border was done to avoid the red-tape of extradition Even President Zedillo of Mexico was unaware of the slick operation, some

of it taking place on Mexican soil Not surprisingly, Zedillo sent a stern letter of protest

to President Clinton

3) US officials insisted that the safety of their undercover agents was the primary concern but it is well-known that even high-ranking Mexican law-enforcement officers have been found to be in the employ of the cartels, so, unofficially, US agents say they never seriously considered briefing anyone outside the US

4) For their part, US Customs officials say that probing higher for corruption would have set off

alarms which could have compromised the sting They hope that those arrested will point the finger at other conspirators in order to cut their own potential sentences, which could run as high as life imprisonment

Activity 4

Which paragraph talks about

A An official (offended!) Mexican reaction

B The impact of the "bust"

C Strategic objectives of the operation

D The non-involvement of the Mexican authorities

Discuss the issues of cooperation/non-cooperation between countries on such topics

Exercise 6

FIND WORDS IN THE TEXTS (1-4) WITH THE FOLLOWING MEANINGS:

Section

1 - a slang word meaning final (dramatic) solution of a criminal operation

2 - a slang word meaning to discover

- financial resources

- surrounded by scandal

- had not revealed any information

- efficient, well-organised

- colleagues in same field/business

- to entice (attract) into a trap

- bureaucratic procedures

- on the territory of

- strongly-worded (e.g warning/ protest/ reply)

3 - of major importance/ the most important factor

- in the pay of / working for

- keeping a person informed

4 - searching carefully and more deeply for something

- accuse (slang)

- could amount to

Activity 5 Money Laundering and International Efforts to Fight It

Adapted from an article by David Scott, Senior Financial Sector Specialist, World Bank

May 1995

Although money laundering is impossible to measure with precision, it is estimated that US$300 billion to US$500 billion in proceeds from serious crime (not tax evasion) is

laundered each year Measures in major financial markets to detect and prosecute laundering are driving it toward less developed markets linked to the global financial system If left unchecked, money laundering could criminalize the financial system and undermine

development efforts in emerging markets This article surveys efforts by international bodies

to combat money laundering It looks in particular at the Financial Action Task Force

(FATF) based at the OECD, which has made the most continuous effort

How money is laundered

In money laundering, the proceeds of crime are run through the financial system to disguise their illegal origins and make them appear to be legitimate funds Most often associated with organized crime, money laundering can be linked to any crime that generates significant proceeds, such as extortion, drug trafficking, arms smuggling, and white-collar crime Although money laundering often involves a complex series of transactions, it generally includes three basic steps

The first step is the physical disposal of cash This placement might be accomplished by

depositing the cash in domestic banks or, increasingly, in other types of formal or informal financial institutions Or the cash might be shipped across borders for deposit in foreign financial institutions, or used to buy high-value goods, such as artwork, airplanes, and precious metals and stones, that can then be resold for payment by check or bank transfer

The second step in money laundering is known as layering, carrying out complex layers of financial transactions to separate the illicit proceeds from their source and disguise the audit trail This phase can involve such transactions as the wire transfer of deposited cash, the

conversion of deposited cash into monetary instruments (bonds, stocks, traveler's checks), the resale of high-value goods and monetary instruments, and investment in real estate and

legitimate businesses, particularly in the leisure and tourism industries Shell companies,

typically registered in offshore havens, are a common tool in the layering phase These companies, whose directors often are local attorneys acting as nominees, obscure the

beneficial owners through restrictive bank secrecy laws and attorney-client privilege

The last step is to make the wealth derived from the illicit proceeds appear legitimate This

integration might involve any number of techniques, such as using front companies to

"lend" the proceeds back to the owner or using funds on deposit in foreign financial

institutions as security for domestic loans Another common technique is over-invoicing or

producing false invoices for goods sold or supposedly sold across borders

Activity 5

Match one of the expressions underlined or in bold type with these definitions

1 the process of making laundered money appear legitimate

2 complicated processes of concealing or covering illegal transactions to disguise their

original source

3 the process of checking, verifying and scrutinizing all sorts of accounting and

financial transactions

4 companies which have the outward appearance of legitimate companies but usually

in offshore locations

5 basically this process involves “getting rid” of the cash – think of the switch to the

Euro in Western Europe and what that meant to those gangs holding large sums of cash!

6 financial papers that are traded openly and legally but have intrinsic value which can

be converted into cash (legally) relatively easily

7 banking and financial centres which usually offer tax advantages to clients because

they operate according to their own law However, these locations are generally accepted and tolerated by governments and even reputable financial institutions (especially banks) have their offshore branches

8 this process is used to conceal the real value of goods so as to make them appear

more expensive than they really are/were to enable apparently legitimate transfers to take place

The first international STOP Money Laundering! conference took place in London in

February 2001 This is the post-conference communique, summarising the main concerns

Activity 6 Read the text Identify where the 5 points (A-E) should be inserted into the communique

A) More seminars and conferences in the future with participation of the leading

organisations such as FATF, UN, World Bank, IMF etc should be set up without further delay B) The international banking community should progress from the recommendation stage to the stage of providing banking standards and requirements

C) There should be enhanced co-operation between the developed countries and the

developing

countries in expediting the return of laundered money to the people from whom it was stolen D) Legal delays must be reduced and the whole process accelerated

E) Established cases of financial crime must be dealt with promptly and severely We all know that without justice there will be no real peace.

Communique

The total sum involved in money laundering is huge and stands in the way of the economic development of many countries The Conference underlined the importance of fighting money laundering which is also recognised as a major source of terrorist funding This communique, based on the recommendations of the Conference participants, is addressed to all those involved in the regulation and prevention of money laundering, namely: the United Nations, FATF, IMF, World Bank, Governments, Ministries of Finance, Central Banks, Commercial Bankers; Associations and other national and international organisations and regulatory and control bodies

Taking into consideration the fact that different states around the world have varied political and economic systems and levels of social development, each country may have a different approach to fighting money laundering The discussions showed that the definition of money laundering as economic crime is not the same in all countries

There are cases when the controlling authorities make mistakes in blocking or freezing accounts suspected of being involved in money laundering activities Where it is found that the suspects are not involved in money laundering activities there should be compensation for the aggrieved parties Some progress has already been made The banking system of the Russian Federation has achieved significant results in achieving further transparency and in anti-laundering activities

It was recognized by the Conference participants that the Ukraine is making progress in the fight against money laundering Illustration from some recent investigations carried out by the Ukrainian Tax Police show that the Ukraine is fulfilling FATF obligations in combating money laundering Significant arrests and the freezing of suspect accounts in the Ukraine and abroad are examples of international co-operation in the fight against money laundering Taking into consideration the efforts of the Ukraine and the practical results achieved, it was felt that its position on FATF black list was due for examination and reconsideration

The return of stolen funds

1 All laws and regulations that inhibit the restitution of money which has been stolen and laundered must be revised

2 All governments, and in particular in those countries which have suffered badly from the theft of national funds, should pass legislation to make it increasingly difficult for such monies to be lodged in any bank in the world

3 All the monies stolen from countries like Nigeria, Democratic Republic of Congo,

Zimbabwe etc should be returned to these countries forthwith after the due process of law has been followed

4)

_ 5) The developed countries should not hide under the due process of law as a reason for delay before returning stolen money to the appropriate third world countries

Changes which need to be implemented