Yesterday, I used some of the wisdom from current CIA
Director General David Petraeus to suggest how senior management might move
forward with a compliance program. Today I will use a very different individual
to help inform your third party due diligence, Charles Ponzi.
My colleague Tracy Coenen writes an invaluable blog
entitled The Fraud Files
Blog. She consistently writes about detecting fraud in all its forms.
In a recent post,entitled "Ponzi
Scheme and Investment Fraud Red Flags", Tracy identified many Red Flags
which might come up if you performed some due diligence on a Ponzi scheme or
persons promoting it. In her blog post, she listed "some red flags about the
"investment" you're considering that might indicate it is a Ponzi scheme" and
they are as follows:
- Promoters
are not registered to sell investments (Consider doing a background
check through Financial Industry Regulatory Authority
(FINRA) if the promoter is U.S. based.);
- Promoters
have a history of being investigated and/or disciplined for actions
related to investments (Google is your best friend for this one.);
- Promoters
and/or founders of the business/investment have criminal, bankruptcy, or
civil court histories that are troubling (Use PACER to search all
federal court records for a nominal fee. State courts generally have their
own online systems, and access to them is growing daily.);
- Difficulty
in verifying whether there is a legitimate business behind the investment
(Again, Google is your friend!);
- Groundbreaking
"new technology" or other special (but super-secret) methods or assets,
which are going to take the world by storm and be the greatest thing since
sliced bread;
- Complicated
alleged business model that prevents an experienced investor from
understanding how money is really made;
- The
alleged performance of the company is suspiciously higher than competitors
or companies in related industries;
- No
objective third-party information can be found about the company;
- Elaborate
explanations for why the business cannot be verified;
- Unusually
high rates of return offered on the investments (Note that this one is the
most common across all Ponzi schemes.);
- Returns on
investment are guaranteed (Not to be confused with an
annuity from a reputable company with a guarantee in the contract.);
- Promoter
downplays the amount of risk investors will be exposed to, often
using phrases such as "a sure thing";
- Reluctance
to provide documentation supporting claims being made about the investment
and the business behind it;
- Address
of the "business" is a mail drop location, virtual office, or small
private office that couldn't possibly hold a business the size that is
being claimed (Google Maps is very helpful for this one.);
- Few
(if any) employees in the operation other than the founder and/or
promoter;
- Background
of the principals of the business is mismatched with what the business
does (Use Google to find out what kinds of jobs they held previously, and
compare it to what they're supposedly doing now.); and
- Company's
alleged success is related to a recent announcement of some sort, rather
than historical financial results (This one is even worse if the information
in the announcement can't be verified, and it appears to just be a PR
stunt for the benefit of potential investors.).
One of the things that struck me in reading Tracy's list
of Ponzi scheme Red Flags is how closely they mirror those which may appear in
a Foreign Corrupt Practices Act (FCPA) or UK Bribery Act due diligence
investigation. Additionally the Red Flags would seem to organize themselves
into four general areas:
- Something
seems out of the ordinary.
- Reluctance
of party to supply information/difficulty of verifying information.
- The
scheme is not verifiable by data, only anecdotally.
- Mismatch
in business experience with the product or services offered.
In due diligence training, I always tell people to listen
to their guts, or if the hair on the back of their neck stands up, pay
attention. Not listening to your internal warning system can lead your company
down a path that it may well not desire to travel. Red Flags are so called for
a reason and if they are raised they must be sufficiently clear. Tracy Coenen's
list of Red Flags for Ponzi schemes is one which any corporate compliance
officer should take to heart.
Tracy
Coenen, CPA, CFF has also written a useful book for
helping companies and individuals detect fraud and Ponzi schemes and investment
frauds entitled, "Expert Fraud
Investigation: A Step-by-Step Guide." She can be reached via
email at tracy@sequenceinc.com.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
This publication contains general information
only and is based on the experiences and research of the author. The author is
not, by means of this publication, rendering business, legal advice, or other
professional advice or services. This publication is not a substitute for such
legal advice or services, nor should it be used as a basis for any decision or action
that may affect your business. Before making any decision or taking any action
that may affect your business, you should consult a qualified legal advisor.
The author, his affiliates, and related entities shall not be responsible for
any loss sustained by any person or entity that relies on this publication. The
Author gives his permission to link, post, distribute, or reference this
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author can be reached at tfox@tfoxlaw.com.
© Thomas R. Fox, 2012
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