Financial scandal: Kraft and Heinz do not make a good accounting recipe
Surely Heinz baked beans are a favourite of many of us. For some, it creates a form nostalgia, reminiscing of Sunday mornings. Now, who does not love Kraft cheese or some Toblerone. Considering that these two firms make some of the most beloved products out there, a merger between them was believed to have been the perfect match, creating more delicious food products and, as investors thought, making huge profits alongside. However, things went downhill as from there. It seems that the Kraft-Heinz merger was a recipe for disaster, resulting in not only dissatisfied customers, but an accounting scandal and a huge settlement. The Kraft-Heinz merger and the cost-cutting process In 2013, Warren Buffett’s Berkshire Hathaway (BRKB) and the private equity firm 3G Capital bought Heinz and approximately 2 years later, it merged with Kraft. One of 3G Capital’s partner Bernardo Hees became the leader of Kraft-Heinz. The future of this merger seemed to be very promising, except for all the things that went wrong. Instead of working on new food products that would appeal to customers, Kraft-Heinz’s strategy seemed to be on cutting costs. Was this the right strategy? Let’s find out. The new company instantly started working on reducing expenses to boost profits. Another strategy was to create more deals to make more savings. For instance, in 2017, it bid more than $140 billion for the UK-Dutch food and beauty products conglomerate Unilever. The latter is the owner of Ben & Jerry’s, Lipton, Hellmann’s, Dove, Vaseline and Q-Tips. However, Unilever rejected the deal and Kraft-Heinz did not insist. According to analysts, during that time, Kraft-Heinz failed to grab huge opportunities such as bidding on Pinnacle Foods or buying Campbell Foods. Let’s not forget that the food market is an extremely competitive one and not keeping up with changing consumer attitudes can be a huge mistake, which has most probably led to Kraft-Heinz’s downfall. Its sales gradually started to downfall and with commodity costs increasing, its cost-cutting strategy was not really working. Most analysts agree that one of the main causes for shares plunging is because of the growing interest at the time in healthier and more organic food; several of the merged company’s competitor had already started capitalizing on the trend. By the time, Kraft-Heinz’s, sales started to become stagnant and shares started to fall. In just two years, its shares plunged by more than 60% and following several revelations, investors started losing trust in the company. The various accounting misconducts! In February 2019, Kraft-Heinz revealed that it has revealed a subpoena from the Securities and Exchange Commission with regards to its accounting policies and internal controls. Its investigations found out that Kraft-Heinz had been practicing several types of accounting misconducts as from 2015 to 2018. Some examples are recognizing unearned discounts from suppliers and maintaining false and misleading supplier contracts. This led to false accounts on the company’s cost of goods sold and its achieved ‘cost savings’. It should be noted that these false numbers were conveyed to the market and were covered by financial analysts. The SEC accused Kraft-Heinz of not designing and maintaining effective internal accounting controls for its procurement division. This meant that its financial team constantly overlooked, willingly or not, indications that expenditures were not properly accounted for. Moreover, warning signs were neglected and instead internal controls were being circumvented. The regulator further advanced that the company violated the negligence-based anti-fraud, reporting, books and records, and internal accounting controls provisions of the federal securities laws and accountants were not given accurate information, which caused further violations. The various improper expense management practices, the numerous misleading transactions and all the other forms of misconducts that spanned over the years resulted in considerable harm to investors who have had to bear the costs and burdens of a restatement and delayed financial reporting. The accounting improprieties involved a total of $208m in improperly recognized cost-saving practices. SEC charges for both Kraft-Heinz and his executives After the SEC investigation, Kraft-Heinz has announced that it is going to restate financial reports for a near three-year period. It will thus correct $208 million in improperly recognized cost savings. Moreover, both the company and two former executives have had to settle more than $62 million charges. To be more precise, Kraft-Heinz agreed to pay a $62 million civil penalty and it committed not to engage in more violations as part of an agreement. This penalty was recorded in the second quarter of 2021. Coming to the executives, chief operating officer Eduardo Pelleissone, who was accused of negligence-based anti-fraud and other controls violations had to pay a penalty of $300,000 and another $14,000 in disgorgement. As for Klaus Hofmann, former chief procurement officer, he agreed to pay $100,000. Furthermore, he was barred from serving as a public company officer or director for five years Kraft-Heinz fixed its bookkeeping processes While Kraft-Heinz did not admit guilt about the allegations, it did not deny any of the charges as well. Moreover, it agreed to settle all the SEC charges and to cooperate with the regulator and to introduce various measures to prevent these accounting improprieties from happening again. In a statement, the firm’s global chief communications officer advanced, “We have fully cooperated with the SEC throughout its investigation and took prompt and extensive remedial action and proactive steps to improve our internal policies, procedures and internal controls over financial reporting”. Whether these practices will prove to be efficient and whether it will lead Kraft-Heinz’s image to turn around remains to be seen. However, experts agree that a way to prevent such a type of fraud from occurring is to automate document matching. This will ensure that vendor invoices, purchase orders, and payment information will be identical, preventing fraudulent invoices. For instance, with developments in tech, artificial intelligence can be leveraged to automate tasks in the accounting processes that are repetitive. Automation will eliminate manual processes, which means less opportunities to tamper with records and to falsify approvals, ensuring the legitimacy of transactions.
Enron Scandal: where are we now and what are lessons learnt?
Those in the market will remember the downfall of Enron. It is one of the most impressive financial collapses in history and is still the subject of many stories. This year symbolises the 20th anniversary of this scandal marked by shady practices, deceits from its executives, inaccurate reportings and accounting malpractices. Let’s look back and examine how this downfall impacted the financial system and whether we learnt any lessons from this scandal. What happened 20 years back? Enron was founded in 1985 by Ken Lay and it soon grew to become one of the largest firms in the world. Its revenue surged from $5 billion a year to $200 billion and it had 20,000 employees globally. However, in 2001, it was found out that the firm had millions hidden debts and inflated profits and it filed for bankruptcy in December of the same year. The corporate darling, the ‘economy powerhouse… it was just all a mirage. As it turns out, its traders had been manipulating the electricity market and executives had been playing with their finances so much that when it crashed, it was forced to write off more than $1 billion of failed investments and disclose major losses in shareholder equity. As we say, “It was a total fiasco!”. Employees had just minutes to vacate the Enron building and they were seen carrying out cardboard boxes. Just like that, they had no job and their millions of dollars in retirement and pension funds were wiped out… All of this, during the festive month of December. Repercussions on the American financial sector Such a downfall has definitely had repercussions on the market, as was expected. First of all, the US stock market was stained with a huge black mark. At the time, most investors trusted the market. They could not even imagine that such a huge financial fraud could really happen when they purchased US listed stock. In fact, the US markets were seen as the gold standard when it came to transparency and compliance. Imagine what happens when you are at the top and suddenly, everyone discovers that you were a fraud. This was the sort of punch that the system received. Considering how such a huge fraud went unnoticed, it became obvious that the sector needed to be strengthened. The government introduced several sets of strict regulations for firms. Auditors, accountants and senior executives… all have to adhere to huge requirements for record keeping and other activities. Let’s not forget: more criminal penalties for securities laws violations. Moreover, everything was like a domino effect, which means more repercussions. All those rules and regulations meant that there was less choice for US stock investors and lower participation in stock ownership by individuals. People started thinking, “If a giant like Enron could collapse, what about us?”. A huge number of Americans stopped participating in the stock market and this still holds true even today. Those from lower classes are hesitant because they are afraid of losing their savings. Additionally, following all the rules, regulations and bureaucratic form-filling that were involved, it became difficult for companies to IPO. It cost a lot money to go public and fewer companies were able to meet all the requirements needed. Now, firms wait until they are far larger before going public. Even today, fewer companies are listed. What does this mean? The public market has fewer investing opportunities, in comparison to private ones and small investors are excluded from participating and gaining. What are some of the lessons learnt from this scandal? Despite all the complaints about the regulations and new rules, one thing cannot be denied: the US financial market has learnt its lesson and it is now a safer environment. Investing in equities is now more transparent. For instance, a year later, the Sarbanes-Oxley Act was introduced. This was described as “the most far-reaching reform of American business practices since the time of Franklin Delano Roosevelt”. What did it involve? The maximum prison term for fraud increased by four to reach 20 years. Chief executives and finance chiefs had to personally vouch for the truthfulness of financial statements and documents. The Public Company Accounting Oversight Board had to provide independent oversight of public accounting firms providing audit services. Standards for external auditor independence were established. Securities and Exchange Commission enjoyed more tools to try to restore confidence in the market. In summary, its aim was to create a more controlled environment based on cross-checking, reconciliations, data verification and accountability. With these processes in place, it might be difficult to conduct fraud. Additionally, since Enron’s board of directors was criticized and sanctioned, executives of other firms learnt their lessons. They became aware that the days during which everything was game to them were over and things had to be taken seriously now. The scandal, thus, acted as a form of governance lesson. Moreover, since then, there have been continuous calls for corporations to develop and commit to environmental, social and governance reforms that link corporate success to societal goods.
Wells Fargo: a fake account scandal that started in 2016 and is still going on
The Wells Fargo scandal is one that became public in 2016 and in 2021, it is still relevant. Why? Because it is still an ongoing scandal. Early during the year, new accounts of frauds have been discovered. This does not bid well for Wells Fargo, right? Let’s not forget that the financial institution is the third largest bank in the United States and the scandal is so huge that its reputation has taken a serious fall. The discovery of the fake accounts Everything was disclosed in 2016 when people woke up to the news that Wells Fargo has committed a serious crime. Its employees had been creating millions of fake accounts on behalf of clients to satisfy quotas and meet sales goals that were realistically not just possible. The general concept underpinning the fraud is cross-selling. Things started well before that. According to media reports, this practice began as early as 2002, which is when cross-selling was taken to another level and employees started using fraud to meet sales goals. What did they do specifically? Well, they opened online banking services and ordered debit cards without customer consent. According to the American Bankruptcy Institute Journal, the employees “opened as many as 1.5 million checking and savings accounts, and more than 500,000 credit cards, without customers’ authorisation”. When ordering credit cards for pre-approved customers, employees used their own personal information to fill out the necessary details. They also created fraudulent checking and savings accounts, which means that movement of money out of legitimate accounts took place, creating fake personal identification numbers and even forging signatures. They even used the pinning process which involves setting customers’ PIN number to 0000 to be able to control their account without their knowledge. However, this scam could not have lasted forever. With time, clients started to discover that something was wrong. This was only a matter of time since they were being charged unanticipated fees or receiving unexpected credit or debit cards or lines of credit. Naturally, they started questioning charges for accounts they did not own or request. So many complaints were filed that authorities started to look into the matter and the fraud began to gain the attention of the wider public. A culture of employee abuse So who was to be blamed? While at first individual branch workers and managers were considered to be at fault, it was soon discovered that matters were much more complicated than that. In fact, there was a culture of employee abuse going on at the institution. It was found out that there was pressure from higher management to open as many accounts as possible and they were in fact, encouraged for these actions. Many advanced that they did this out of desperation, for fear of termination. In court papers, there are reports of a pressure cooker environment in which employees were mentally abused and harassed to meet goals set by the management. Every year, low-level workers were squeezed tighter and tighter since senior executives keep ignoring the signs that the goals were unrealistic and they kept raising them. Those who did meet sales goals, by hook or by crook, were held up as examples for the rest of the staff. They claim that they were warned that “if they did not achieve sales goals, they would be ‘transferred to a store where someone had been shot and killed’ or ‘forced to walk out in the hot sun around the block.’” One employee even said, “I had less stress in the 1991 Gulf War than working for Wells Fargo”. According to the U.S. attorney for the Central District of California, this scandal demonstrate a failure of leadership at multiple levels within the bank. FX transactions: the recent scandal However, that is not the end of Wells Fargo’s scandals. More recently, it was found out that the bank defrauded 771 customers on FX transactions. FX refers to the international trade in currency. This is a complex market wherein money is made, and lost in a complex and constant shifting array of selling and buying. The firm defrauded customers by marking up the prices on currencies that it sold and market down those it bought. The FX sales group had agreements with customers for fixed spreads between buy and sell prices; however it systematically charged higher spreads, which allowed Wells Fargo to pocket millions. The group would cherry pick rates to get a greater advantage for the bank. Some of the personnel would make up rates and calculations as a pretence of meeting their obligations. They would also play with the number to inflate profits and some salespersons would take advantage of those they thought did not know much about FX. The employees would receive incentive for the money that they brought in. What happened when they got caught? Well in some cases, they would claim it was an honest mistake and in others, they would lie and create fake transaction data. Repercussions of the scandals It goes without saying that Wells Fargo had to face several repercussions for everything that have happened. The Federal Reserve has imposed bruising unprecedented sanctions on Wells Fargo and it is facing several lawsuits and legal actions from former and current employees. The bank has paid $72.6 million to settle a government lawsuit and just recently, CNN News revealed that as part of the total $3 billion settlement, the bank has agreed to pay restitution to customers. Additionally, it has had to face more fines with regards to delays in the process. Let’s not forget the most important repercussion: the firm’s brand reputation has been tarnished, something that it has spent 20 years building. For many years, Wells Fargo has enjoyed the reputation for sound management but since 2016, both its business and image experienced a steady downfall. After the scandal broke, new credit card applications in the fourth quarter of 2016 decreased to 43% and checking account openings fell by 40%. The public simply refused to give its business to
AML/CFT: Mauritius revises its Fit and Proper Person test
Considering that money laundering and other scandals are becoming rampant everywhere around the world, it is important for jurisdictions to introduce the appropriate measures so that firms operating in their area and investors are protected. This has become more than essential. Following this line, Mauritius has been strengthening its financial sector. One of the measures taken is amendments to the Fit and Proper Person test. On the 2nd of October 2020, the Financial Services Commission (FSC) rolled out its revised “Guidelines on Fitness and Propriety”. This is to ensure that businesses conducted in the financial services and global business sector is done in a sound environment. The guidelines became applicable as from the 1st of November of the same year. What is the Fit and Proper Person test? The Financial Services Authority has listed out the criteria determining whether a person is ‘fit and proper’. This pertains to their “ability to perform the relevant functions properly, efficiently, honestly and fairly” and their “reputation, character, financial integrity and reliability”. To put it simply, they are able to conduct business in an honest and right way. What will be assessed? The financial standing, relevant education, qualifications and experience, reputation, character, financial integrity, reliability and their capacity to perform relevant functions properly, efficiently, honestly and fairly. Who are going to be assessed by the regulatory institution? Besides the ‘person’, who is the applicant, the fit and proper test involves anyone who is, or will be, employed by, or is associated with the person and any representation or agent of the applicant. In the case of the applicant being a corporation, it will look at the officers and any shareholder of the corporation, its related corporations and their officers. A first ‘Fit and Proper Test’ will be conducted when a person, or a firm, submits an application for a licence or requests any other authorisation from the FSC. Following this, the test will be applied on a continuous basis to ensure that the applicant remain ‘fit and proper’ at all times. Why conduct the “Fit and Proper Person” test? What is the purpose of the ‘Fit and Proper Person” test? The FSC has determined several reasons, listed below, for conducting this assessment. It should be noted that the list is non-exhaustive. The test aims to: establish a standard benchmark for licensing and for continuous regulation and supervision of licensees/applicants, encourage high standards of conduct in the market, maintain a high level of confidence and trust amongst those using (Mauritius as a base for their business. This is also applicable to those considering to do so, act as a deterrent to protect the interests of consumers of financial services in the country, promote a business environment that meets acceptable international standards, deter dishonest, incompetent, unskilled or inappropriate operators in Mauritius. deter making an abuse of the Mauritian financial market, and to ensure that persons, who are not “fit and proper” to perform functions in a regulated field of activity, are precluded from doing so, in the public interest. What are some of the amendments in the Guidelines? The guidelines with regards to the ‘Fit and Proper Test’ have been amended to increase the efficiency of the test and to increase the safety of the financial sector in Mauritius. The scope of the ‘Fit and Proper’ test has been extended. Now, besides just the applicant, benefit owners and the controllers of a licence being assessed, the FSC will look at other persons whose involvement will be relevant. Incumbent officers such as the money laundering reporting officer (the “MLRO”), the deputy MLRO and the compliance officer, and the external and outsourced auditors of regulated entities will also be assessed to determine whether they are ‘fit and proper’. According to the previous guide, the FSC has the right to make this assessment to determine whether an individual is capable enough to take over, or hold, a particular or a proposed position. To generate an impact on the long-term, the guidelines have been revised to give the FSC more power to keep reviewing whether the person is still meeting the conditions involved in the ‘fit and proper’ test. This means that the process is a continuous one and the entity may have its licence revoked following the result of the test. The FSC has also reviewed the questionnaire of the ‘Fit and Proper’ test. It is now more extensive than the previous version. Now, the following documents must be provided for the test: previous residential addresses, occupation, and regulatory approvals or licences held (with dates of approvals) for the ten preceding years, information concerning the principal bank account. For instance, the opening date of said account, and affiliations with politically exposed persons, and several new confirmations, to know if the applicant acts under the directions of others. Applicants have to notify the FSC in the event of changes within 30 days. Moreover, the FSC has the authorisation to make further enquiries and seek any information it deems appropriate while conducting the assessment and verifying the information disclosed in the questionnaire.
The role of auditors in financial scandals: the case of EY
Financial scandals have been plaguing the industry and these past years have seen the downfall of several huge companies. Nonetheless, a controversy, money laundering, accounting, or otherwise, has several layers. There is not just the firm in question that can be considered guilty. There are several factors at play: auditors, regulators and external institutions. Let’s have a look at two of the biggest corporate scandals that took place in 2020. These involve the financial company Wirecard and the Chinese coffee giant Luckin Coffee. Both firms were involved in high-profile accounting scandals and one of the things that they have in common is that their auditor was EY (Ernst and Young). What role did EY play in these controversies? The Wirecard scandal Wirecard is a financial company that was founded in 1999. It offers its clients several services such as electronic payments, risk management, card issuing and processing and others. The firm grew at a very rapid rate and it attributed this international growth to the acquisition of local businesses and the use of latest tech. However, even during the early days of its incorporation, there have been several allegations of malpractices against the firm. Wirecard has been accused of being engaged in, not one, but a series of fraudulent accounting activities to increase its profits. Things started going down for the firm in 2019 when The Financial Times published a series of investigations, internal documents and whistleblower complaints. In 2020, the firm filed for insolvency. The Luckin Coffee scandal Luckin Coffee is a coffeehouse chain that was incorporated in Beijing in 2017 and it grew at a very rapid rate. By October 2018, it had already opened 1300 stores and it had been working to become the biggest coffee brand in China and to surpass Starbucks, which it did. It managed 4,507 kiosks in January 2020. However, things were not all rosy. In the same month, the firm Muddy Waters Research published an anonymous report accusing Luckin Coffee of falsifying financial and operational figures. According to the report, the number of purchases per store were inflated by at least 69% in the third and by 88% the fourth quarter of 2019. While at first, the firm denied these allegations, a few months later, it revealed that that its chief operating officer had fabricated sales revenue by up to US$310 million. Stock price crashed, executives were fired, trading was suspended, the company was delisted from NASDAQ and it filed for bankruptcy in the US in February 2021. More scandals with EY as auditor Some might say that these are just two cases among several companies that EY handles. Well, these are not remote cases. According to a research, several of other EY clients have been involved in high-profile accounting scandals. For instance, the hospital operator NMC Health PLC and its sister company Finablr PLC had $5 billion in undisclosed debt and the office space company WeWork had to pull its IPO following several accounting issues. While EY being an auditor is not the cause of these scandals, we cannot deny that it is a common thread between all of these controversies. One possible explanation behind these cluster of blowups could be certain elements in the auditor’s business strategy. Failures: E&Y’s operating method Investigators dealing with the accounting scandals have raised questions about the quality of EY’s work. According to reports, their work may have been tainted by the relationship shared by executives. Indeed, there are reports of “extensive ties between EY and executives and board members at some of its troubled audit clients”. This implies that the audits were not carried out in a fair and independent way. Secondly, as advanced by EY itself advanced, it charges lower fees for its audits. While this might be a good way to attract more clients, experts advance that could have pushed the firm to lower the resources it has devoted to audit operations. Instead of accounting firms, it has focussed more on auditing young, fast-growing technology firms. So, the question arises: Is there something wrong with EY’s operation method? EY will invest $2bn in improving its audit quality It seems that the auditing firm has realised that it has to improve the way it operates. It has recently announced that over the next three years, it is going to disburse $2bn (£1.4bn) to improve the quality of its audits. This is part of a larger $10bn investment plan to finance staff training and improve the company’s fraud detection capabilities, more specifically, it will use this money for artificial intelligence technology, machine learning for Canvas, its audit platform and training in fraud detection for its staff. Thanks to these, it will be in a better position to conduct more efficient audits and will increase its ability to detect fraud. Additionally, it advanced that it is strengthening its process of “accepting and continuing clients”. This means that it is conducting more in-depth investigations about current and future clients. This involves an in-depth research into social media sites. What about other firms? EY is not the only firm that is having to deal with such issues. In fact, several other auditing firms have faced criticisms with regards to their operations or quality of work. As such, as companies, it is essential as you are careful when choosing the institution that you want to work with. Working in jurisdictions where the companies are well-regulated is a definite advantage. For instance, Mauritius has enacted anti-money laundering/combating the financing of terrorism (AML/CFT) legislation to deal with corruption, fraud, financial crime, money laundering and terrorism activities. It has set up the Financial Intelligence and Anti Money Laundering Act 2002 (FIAMLA), the Prevention of Terrorism Act 2002 and the Prevention of Corruption Act 2002 and the Financial Intelligence Unit (FIU) to ensure that firms operating in the country are well protected and regulated.
Money laundering: changes in the Mauritian legislation to combat this?
Money laundering is a serious issue in several countries across the globe. Whether it is big companies or SMEs, none are safe from this problem. In fact, the problem is not just at company-level, even if this plays a great role. A determining factor also lies in the jurisdiction in which a firm operates. Indeed, a company must operate in a country having strong laws and legislation so that it is well-regulated. The Anti-Money Laundering and Combatting the Financing of Terrorism Act 2020 Mauritius, a country that recognises the severity of this problem for both businesses and its clients, has been working towards making its jurisdiction safer for companies and investors. It has been introducing several changes to enhance the reliability of the jurisdiction. One of them involves the The Anti-Money Laundering and Combatting the Financing of Terrorism Act 2020. This has been enacted in July 2020 and it was to ensure “closer compliance with the recommended international best practices of the Financial Action Task Force” and was published in the Government Gazette a couple of days later. The reforms have been introduced to strengthen the legal and regulatory framework with regards to the fight against money laundering and financing of terrorism. Banking Act 2004 (THE “BA”) Section 64B – Consumer due diligence information Previously, the fine which the Bank of Mauritius had the right to impose to financial institutions and holders of licence not complying with money laundering or terrorism financing guidelines, directives or instructions issued by the Bank of Mauritius was one million rupees. This has been increased to an amount not exceeding ten million rupees. Section 64C – Examination of financial institutions or holders of licence First of all, this section of the BA has been changed to address the frequency and intensity of the examinations of the operations and affairs of financial institutions or holders of licence carried out by the Bank of Mauritius. The tests depend on several factors. The money laundering or terrorism financing risks and the policies, internal controls and procedures associated with the financial institution or holder of a licence or its group, as identified by the Bank of Mauritius’ assessment of the institution’s or group’s risk profiles. the money laundering or terrorism financing risks present in Mauritius; and the characteristics of the financial institution or holder of a licence or its group, in particular the diversity and number of financial institutions or holder of a licence and the degree of discretion allowed to them under the risk-based approach implemented by the Bank of Mauritius. Moreover, now, the Bank of Mauritius will periodically review the assessment of money laundering or terrorism financing risk profile and risks of non-compliance of a financial institution, licence holder or group if there are major events or developments in the management and operations of said financial institution or holder of licence. Companies Act (CA) The changes brought about focus on beneficial ownership information. The provisions have been expanded so that now it is mandatory for companies to obtain, record and disclose information about beneficial ownership as appropriate. Moreover, a new definition of beneficial owner has been introduced. A “beneficial owner” or “ultimate beneficial owner” is “any natural person who ultimately owns or controls a company or the natural person on whose behalf a transaction or activity is being conducted in relation to a company”. After the amendment, any declaration regarding beneficial ownership information shall be made upfront at the time of making an application for incorporation in order to identify any nominee arrangement. Along the same lines, after an entry or alteration in the share register, the Registrar of Companies has to be notified within 14 days. Moreover, the Registrar has been given the power to remove a company from the register of companies if that company fails to comply with filing of the beneficial ownership information as has been prescribed. The requirements are also applicable to foreign companies registered under the CA and companies registered by way of continuation in Mauritius. Financial Intelligence and Anti Money Laundering Act (the “FIAMLA”) The Financial Intelligence Unit (the “FIU”) will now disseminate disclosure of information to the Counterterrorism Unit and will inform, advise and cooperate with the latter. Additionally, one of the functions of the FIU has been amended to include issuing guidelines to auditors, reporting persons and internal controllers of credit unions with to the manner in which a report under section 14 shall be made. Upon suspicious transactions, additional information may be supplied to FIU. If there are reasons to suspect money laundering, predicate offences or terrorism financing, the Director of the FIU shall disseminate information and the results of the analysis of the FIU to the Counterterrorism Unit. A reporting person or auditor, or any director, employee, agent or legal representative of a reporting person or auditor who does not supply any information as may be requested by the FIU under section 13(2), (3) or (6) by the date specified in the request, or who falsifies, conceals, destroys or otherwise disposes of, or causes or permits the falsification, concealment, destruction or disposal of, any information, document or material which is, or is likely, to be relevant to a request under section 13(2), (3) or (6) will commit an offence and will be liable to a fine not exceeding one million rupees and to imprisonment for a term not exceeding 5 years. Financial Services Act (The “FSA”) Scope of on-site inspectionPreviously, these inspections to verify the compliance with applicable laws and whether the licensee still satisfies the relevant criteria were restricted to the business premises of licensees. Now, it can be done at such other place and at such time as the FSC may determine. Now, there are more factors that determine the frequency of the on-site inspections. These include: the money laundering or terrorism financing risks and policies, internal controls and procedures associated with a licensee, as assessed by the FSC; the money laundering or terrorism financing risks present in Mauritius; and the characteristics of
HSBC and money laundering: a story that never ends
It seems that HSBC’s story with money laundering is one that will never end. Nonetheless, its episodes do not have a happy ever after for the bank. Like any story, the villain, in this case the bank, is finally discovered. That is how the operations of HSBC can be described: villainous. This is because the money laundering charges fuelled illegal activities of drug dealers. Things started going down for the financial firm back in 2012, when its criminal activities were discovered, it promised to ‘fix things’ but it seems that it did not learn from its mistakes! Let’s dive in the money laundering violations by HSBC. The case of the drug cartels There is no mistake on this case since the firm itself admitted to the wrongdoings. Indeed, in 2012, HSBC admitted to prosecutors that it has aided drug cartels and other criminals flow dirty money through its branches across the globe. The money laundering protocols were so lax, dare we even say non-existent, at the firm that drug cartels were able to use it to move $881 million in drug proceeds. These were the Sinaloa drug cartel in Mexico and Norte del Valle cartel in Colombia. Moreover, it conducted business with customers in Iran, Libya, Sudan, Burma and Cuba which is a violation of US sanctions, such as the Bank of Secrecy Act or the Trading with the Enemy Act. The worst part is that neither the criminals, nor the bank did much to cover their tracks. In fact, the money laundering transactions were conducted in a way that was open to public eye, literally. The drug dealers would just walk into a bank and deposit hundreds of thousands of dollars in cash into a single account in a day. In fact, they were so used to how the bank works that they used boxes that had been designed to fit the teller’s window. This was to speed things up and to move as much money as possible more efficiently. A precise operation, would you not say? It can be said that HSBC was in cahoots with the drug dealers since one of them advanced that HSBC was “the place to launder money”. How did things go- HSBC’s promise Considering how serious these crimes are, we would expect serious charges against the firm. Like all parties following this case, we were quite disappointed with the results. In fact, neither the bank, nor top officials at HSBC faced criminal charges. This was because authorities were concerned that charging the bank would have serious implications for the financial and economic stability in Europe and Asia and that it would cause a global financial disaster. So, did the bank just go scot free? Not really. It had to pay a fine of $1.92bn (£1.48bn). Moreover, it entered into a deal which involved a pledge to reinforce its sanctions and anti-money laundering controls. At the beginning, it seemed as if that the bank had learnt its lesson and it had started cleaning up its act. Indeed, after signing the agreement in 2012, HSBN rolled out a project to update its systems across the globe to US systems. As mandated, it also installed an independent monitor charged with producing annual reports on the progress of its reforms on fighting financial crime. While analysts at the time thought that these charges were too lenient, some even said it was a joke, there was nothing we could do about it, except hope that HSBC learnt its lesson. The Gupta issue- another money laundering ring? So did HSBC learn its lesson and cleaned up its act? It seems not! According to the Guardian and the Bureau of Investigative Journalism, there was a vast money-laundering ring which moved $4.2bn through a network of 60 HSBC accounts in Hong Kong just a few years after the drug cartel debacle. According to reports, the Hong Kong ring was discovered by HSBC in 2016 while it was trying to assess its exposure to the extremely rich Gupta family. The latter has been mixed up in corruption scandal allegations in South Africa. The report advanced that three companies with accounts at the Hong Kong branch were identified as being controlled by the Gupta family. When tracing funds flowing from these accounts, bank investigators discovered a suspected money laundering network controlled by unrelated parties. What is HSBC’s role? So you might start thinking: How was HSBC wrong here? Well, following the 2012 story and the agreement, the bank was expected to disclose this information to the independent monitor that the US Department of Justice brought in. However, authorities advanced that they were never, voluntarily, made aware of this. Instead they waited to be asked about it. A member advanced that the bank report was never disclosed and that this appeared to be a bigger money laundering network than any that they had identified with the bank. Is HSBC defending itself or did it admit guilty to the wrongdoings this time? Well, the firm concluded that money-flow into these networks was contained and minimal”, the amount being just £12m. With regards to it failing its duty as dictated by the agreement, it refused to comment on the matter, saying that it was “illegal to disclose information it had shared with government authorities, and said specific discussions with our former monitor remain confidential”. Money laundering poses a serious problem which can be contained if all parties involved are committed to prevent instances of crimes. To begin with, the jurisdiction itself should have strict AML protocols. For instance, some could advance that the leniency of authorities during the first issue encourage the bank not to do more to clean up its act. That is why countries such as Mauritius have implemented several measures to improve the environment and tighten the security in which financial firms operate. For instance, just last year, it brought changes to the Anti-Money Laundering and Combatting the Financing of Terrorism (Miscellaneous Provisions) Act 2020 to increase transparency about customers.
Danske Bank: One of Europe’s largest money scandal
While every time we are surprised by the severity of a money laundering case, another one, with greater magnitude, crops up. However, the Danske Bank scandal might be the biggest case till date. The amount of money involved was more than the whole GDP of the country involved. Of course, this means that the repercussions are going to be serious as well. This time, death was even involved. Let’s have a look at that went down, the causes behind this failure and the consequences. Danske Bank: the whole story Described as the largest money laundering scandal in European history, the case began in 2007. In that year, Danske Bank, based in Denmark, acquired the Finnish Sampo Bank, an institution having a branch in Estonia. This is where all the trouble began: Sampo’s non-resident portfolio in Estonia is the root of all the problems. According to estimations, as from 2007 to 2015, approximately €200 billion of suspicious transactions were processed from Estonia, Russia and other countries through the Estonian branch of Danske Bank. The money laundered was outsourced to Estonia, Latvia, China, Switzerland, Turkey and more areas. If you are a bit confused about the severity of the case, let us put things into perspective for you. The suspicious transactions amounted to around €200 billion. In 2017, the GDP of Estonia as a whole was estimated to be €29 billion. If you want a European comparison, the money laundered is nearly two thirds of the GDP of Denmark, which is €324 billion. Of course, the charade could not go on forever. With time, things were bound to deteriorate. In 2013, following suspicions that large amounts of money were being laundered to Russia, the US bank JPMorgan Chase decided to stop dealing with the Estonian Branch. In 2014, the Estonian Financial Supervision Authority found “large-scale, long-lasting systemic violations of anti-money laundering rules”. Danish authorities were notified of these findings. An investigation revealed that more than half of the financial institution’s customers were suspicious. What happened after the discovery: lawsuits… deaths… Following the big reveal of the bank’s suspicious activities, several countries started investigating the activities of Danske Bank. Moreover, as expected, Danske Bank became persona non-grata in Estonia which decided to give it the boot. The firm’s market value has decreased by more than 50% which left investors furious. Approximately 60 investors sued Danske Bank for 1.5 billion crowns, which equals to $224 million, because of this money laundering issue. Besides that, what might be considered to be a first in such cases, the ex-CEO of Danske Bank Thomas Borgen, as an individual, was sued as well. A law firm based in Brussels filed a legal complaint against Borgen on behalf of 155 institutional investors. They sought damages worth 358 million euros against him. Why sue the CEO in a case of money laundering? Thomas Borgen was responsible for the firm’s international operations when all of this took place and it is believed that investors were deliberately misled with regards to the Estonian bank’s financial position. Moreover, four years later a report was published. It showed that Thomas Borgen and “other members of the senior management were briefed in detail by the internal audit team about the illegal activities in Estonia and the substantial risks the bank was facing at the group level”. Something even more unfortunate and rare in this case is the death of a top executive. Aivar Rehe was the CEO of the branch. Of course with all the scandals surrounding the financial institution, he left in 2015. Shortly afterwards, being a key witness in the criminal investigation that was going on at the time, he was reported missing from his home in greater Tallinn. The police had warned that he was a suicide-risk. Two days later, during a search operation, he was found dead. Reports advanced that the cause of his death is suicide. The pressure must have been too much for him to handle, which is an extremely sad turn of events. Insufficient anti-money laundering protocols What went so wrong for Danske Bank? While there are so many issues at play here, a large part of the problem is due to not vigorous anti-money laundering protocols. An independent report on the scandal reasserted these sayings by advancing, “Anti-money laundering procedures at the Estonian branch had been manifestly insufficient and inadequate”. In 2015, when it became more than evident that the safety systems in place were not working as they should, Danske shut down the Estonian branch. The latter should have implemented its acquirer’s money launderings controls. However, this was not possible since it had its own IT system. This means that the risk monitoring systems were disparate. Danske Bank admitted that there were “major deficiencies in controls and governance”. Thus, it was incredibly easy to launder money through the branch. That is why it is incredibly importance to do business in a country that has the appropriate protocols and regulations in place. For instance, Mauritius adheres to international initiatives to combat money laundering in this country. There are several legislations in place to ensure the reliability of financial firms. Lack of transparency This money laundering issue was facilitated by the fact that there was a huge issue with regards to transparency. For instance, the IT-system at the branch and several other documents were written either in Estonian or Russian. Being aware of these differences, Danske Bank did not introduce the necessary changes to facilitate control and regulatory activities for the headquarters in Denmark. Additionally, there were considerable difficulties identifying the true source of funds, which relates to another instance of lack of transparency. There was inadequate information pertaining to the real owners of customers in the portfolio. Since some of them are registered as limited liability partnerships, they are not required to publish details of their owners. To ensure transparency in Mauritius, the institution Transparency Mauritius was established. This firm helps the Government against its fight against corruption.
Financial scandals: why are AML and KYC important?
Financial scandals… It seems that we have had our fair share of these in 2020. Even well-established firms saw themselves in the limelight because of controversies within their companies. In fact, regulators had to hand out fines worth approximately USD 5.1 billion for Anti-Money Laundering (AML) and Know Your customer (KYC) violations. A huge part of these was imposed on Goldman Sachs and Westpac. These firms were the landmark cases of 2020. Let’s have a look at what went wrong so that financial institutions can prevent this from happening again. The case of Goldman Sachs and the 1MDB scandal This might have been the biggest scandal that we have heard of. What did Goldman Sachs, a leading global investment banking firm did wrong? Well, first of all, as from early on, there were certain red flags that arose with regards to how Jho Low, a private banking customer, generated his wealth. These were, reportedly, dismissed by the firm’s agents who proceeded with doing business with the businessman and his associates. There were several transactions related to the three 1MDB bonds held with Goldman Sachs. Not only does this scandal involve criminal misconducts from several executives, but it also highlights how various red flags about 1MDB that were raised over the years were disregarded. These should have allowed officials to identify and stop misconducts. Instead, various Goldman bankers committed frauds to steal approximately USD 2.7 billion from 1MDB for their own personal gain. This might seem to be something trivial, but what happened to Jho Low and the repercussions on Goldman Sachs show a lack in bank culture. Moreover, there were allegations that the firm was not diligent enough in its regulatory practices. To put it simply, even if it was supposed to constantly monitor financial activities taking place, it was unable to identify the fraud taking place right under its nose. What happened in Westpac’s case? In the case of Westpac, the firm admitted that it was guilty of some of the charges against it. It was accused of knowing that a customer was charged for child exploitation offences. Moreover, he was one of its many customers sending funds to the Philippines. Needless to say that child exploitation is a huge concern there. It should not have been difficult to put two and two together, right? However, that did not happen. Whether its team failed to make the link or chose to disregard it, we will never know. Speaking about the scandal, Westpac admitted to “breaking the law by failing to monitor whether a dozen customers were making transactions consistent with child exploitation”. AUSTRAC, the government agency set up to monitor financial transactions to identify money laundering and other financial crimes, said that this was a failure from Westpac’s part to carry out appropriate customer due diligence in relation to suspicious transactions associated with possible child exploitation cases. Lessons to be learnt- how should due diligence be conducted? What happened with Goldman Sachs showed us the importance of due diligence. It should be noted that this must not be done only once at the start of the ‘relationship’. Instead, due diligence must be carried out consistently and holistically throughout the partnership. Moreover, to ensure effective communication among all members of a financial institution and so that no details slip through the cracks and fraud can be detected and resolved, all business decisions must be recorded in sufficient details somewhere that is accessible to all business areas. In the case that the relationship is terminated or declined, the reason behind this should be mentioned clearly in the customers’ due diligence records. This will be utilised by for constant monitoring activities. Documenting, record-keeping and following up on the information recorded is of utmost importance. This will make sure that all risks are identified and assessed at some point in time. Lessons to be learnt- how to ensure AML controls are efficient? While Anti-Money Laundering controls must be established by all companies, financial firms must make sure that AML professionals are regularly trained on current technologies. This is because new money laundering tools are constantly being developed according to regions, products, service offerings, customer types and other factors. With advancements in the tech sector, it is normal that criminal groups and those wishing to launder money are getting smarter and equipped with better tools. Thus, transaction monitoring systems and those working to detect frauds have to remain up-to-date and relevant as well. Monitoring solutions must be robust and strong enough to detect and oversee changes regarding customer behaviour and suspicious activities, especially when higher risk transactions are involved. For instance, Westpac had a 3LoD (three lines of defence) to combat risk. Nonetheless, its structure was not consistently integrated within the bank, which means that its employees often misunderstood their roles and responsibilities. Thus, financial institutions must make sure that their staff are given sufficient training. What can we take from these cases? These two cases show us the importance of due diligence, KYC and AML protocols. Moreover, it shows that ensuring compliance is not something that must be left to the financial firm only. This is because within an organisation, there can be corrupt officers or simply those not trained enough to detect criminal activities. Thus, a robust anti-money laundering culture must be established within the whole jurisdiction. For instance, Mauritius is a member of the Eastern and Southern Africa Anti-Money Laundering Group. This is a regional inter-governmental body established to combat money laundering and terrorism financing in the eastern and southern African region. The island constantly improves its existing regulations, procedures and systems to combat money laundering. For instance, it has amended the FIAMLA, POCA, POTA and enacted the FIAML Regulations and UN Sanctions Act in order to meet the FATF requirements and improve its AML/CFT framework. Moreover, Mauritius has an anti-money laundering and terrorism financing regime which makes it easier for many businesses to apply AML/CFT processes and procedures. As such, financial firms are better guided to establish the appropriate
The story of Carlos Ghosn, Nissan’s fallen hero
A story no less than a Hollywood movie… That is how we can describe the life of Carlos Ghosn. In fact, he is no less than our fallen hero. He reached the peak, brought his firm to the top, to then fall down, be charged and arrested. He has now escaped, seeking refuge in Lebanon! Fascinating, isn’t it? Let’s have a look at the story of Nissan Motor’s ex-chairman Carlos Ghosn. Nissan Motors, the Alliance and Carlos Ghosn To fully understand the role of Carlos Ghosn, we have to go back to 1999 when Nissan was on the brink of bankruptcy and it was rescued by Renault. The Alliance was then formed. In 2016, Mitsubishi, who was damaged by scandal and struggling financially, joined these two. How did this Alliance work? The three companies retained their distinct identities, however, they operated under a global car grouping. They leverage the same technologies to manufacture their vehicles and purchase parts from the same suppliers. At the time, Carlos Ghosn was the chairman of Nissan and Mitsubishi and the chairman and chief executive of Renault. He was also chairman and chief executive of the Alliance, which has its own board. So you can imagine the power that this man held! With time, all three firms became successful. However, Nissan grew even more quickly. It made a third more vehicles than Renault and the credit of the success could be attributed to Carlos Ghosn who ruthlessly made Nissan’s earning rise, until the financial crisis. While Nissan recovered from the crisis quite quickly, things degenerated as from then. Declining sales, rising costs and a quality control scandal in Japan… all of these affected its profit margin. What went wrong for Carlos Ghosn? Amidst all of this drama, Carlos Ghosn had been earning a lot of money. In 2017, he was paid approximately $17m in salary, share options and bonuses. His earnings were so much that a lot of controversies about his pay packet emerged. When things started going down, Nissan conducted investigations and claimed that Ghosn had been systematically under-reporting his earnings to security regulators and had been misusing company assets for personal benefit. With time, two main charges were reported against Carlos Ghosn: Under-reported earnings According to Japanese prosecutors, Ghosn conspired with a fellow board member Greg Kelly to under-report about half the 10 billion yen ($88 million) Ghosn earned at Nissan over five years. Moreover, other media outlets announced that he had received share price-linked compensation of about 4 billion yen over a five-year period to March 2015. This was not disclosed in Nissan’s financial reports. Ghosn had also understated his remuneration at Nissan by around 8 billion yen in the eight years through the fiscal year that ended in March, including 3 billion yen over the last three fiscal years. These are only a few examples of the several rumours that were going around about under-reported earnings. Misappropriation of funds Moreover, following an internal investigation which was carried out for months, it was found that Ghosn used company funds for personal purposes and misrepresented the company’s investments. For instance, the Japanese public broadcaster NHK revealed that the automaker disbursed millions of yens for the purchase and renovation of homes for Carlos Ghosn in several locations such as Rio de Janeiro, Beirut, Paris and Amsterdam. It should be noted that these have no business purposes and they were not listed as benefits in filings to the Tokyo bourse. Like above, there were several other cases here as well. For instance, Nissan spent hundred thousands of dollars for vacations for the Ghosn family, Ghosn’s sister was paid for a non-existent advisory role, etc. When these charges were made public, it is obvious that he was arrested for financial misconduct. He was also dismissed as the chairman of Nissan Motors. Besides charges by Japanese authorities, Ghosn was also charged with fraud in the US by The Securities and Exchange Commission. It is not surprising that that this scandal has caused rifts in the Alliance, the future of which is being held by a thin thread. Lawsuits v/s lawsuits Following this scandal, things started going even more wrong for Nissan. Shareholders became angry and there were a lot of damages to deal with. Following repercussions, the automaker decided to file a $91 million lawsuit against Carlos Ghosn. It is no surprise that executives were furious following the financial frauds allegations. Moreover, it had to pay fines in both the US and in Japan because of the overpayments to Ghosn. Let us not forgets that sales and earnings plummeted at a rapid rate. Thus, as Nissan advanced, this lawsuit is an attempt to recover damages that it suffered “as a result of years of misconduct and fraudulent activity”. What did Ghosn have to say about of all this? Did he keep quiet? No he did not. In fact, he fought back! After spending four months in detention in Tokyo, he was released on bail which gave him the opportunity to escape and flee to Lebanon, where he holds citizenship. Ghosn has been claiming his innocence all along. In fact, he hit Nissan back with a $18 million damage suit in the Netherlands and another claim in France for $273,000 against Renault over pension payments. A toxic culture lacking transparency Speaking about this issue, Nissan’s former top lawyer talks about a toxic corporate culture and internal conflicts. Nonetheless, it seems to be that the main problem here seems to be transparency, or a lack thereof. According to speculations, “there’s been scant oversight by the automaker’s board of directors regarding internal conflicts of interest by senior staff, as well as executive compensation and stock option award policies”. In fact, till now, it is still unclear as to what happened or how much money was “swindled”. This case is yet another example of the importance of transparency and the enforcement of regulations both within a company and a jurisdiction. Mauritius boasts of an organisation called ‘Transparency Mauritius’ which assists
