No Monitoring Systems For Suspicious Transaction?


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Sarbanes Oxley : Auditing : Fraud

No Monitoring Systems For Suspicious Transaction?

Adam Weisman
Partner, FAS’ Forensic & Dispute Services Practice
Deloitte Touche Tohmatsu

As anti-fraud enforcement levels have surged to an all-time high in the investment management industry, a recent online poll, conducted by Deloitte, found that nearly one-quarter (23.8 percent) of respondents’ companies do not have a “suspicious transaction” monitoring system and an additional 32.4 percent of respondents were not aware of whether their firms did.

“Because hedge funds, private equity firms and other investment managers are often incorporated offshore and serve a client base of high net worth individuals from around the world, these organizations can be potential targets for suspicious transactions that may be part of money laundering, Foreign Corrupt Practices Act violations and other fraud schemes,” said Michael Shepard, a principal in the Anti-Money Laundering practice of Deloitte Financial Advisory Services LLP (Deloitte FAS).

“Even though these organizations are only a fraction of the overall financial services industry, fraud can be a potential sleeping giant of financial woes for individual and institutional investors, not to mention legal trouble for the firms through which schemes are perpetrated,” added Adam Weisman, a partner in Deloitte FAS’ Forensic & Dispute Services practice.

While 39.2 percent of respondents’ surveyed said that their companies maintain formal anti-money laundering policies and procedures, one in 10 (10.1 percent) respondents’ surveyed said that their companies have not addressed money laundering at all. An additional 31.7 percent of respondents surveyed do not know whether their firm has established formal anti-money laundering policies and procedures.

Investment management firms must also be wary of potential FCPA violations. The FCPA states that it is a federal criminal offense for any company or individual doing business in the U.S. to offer, pay or authorize a bribe to a foreign government official to gain business advantage. While the FCPA was passed in 1977, enforcement has increased dramatically in recent years. Yet, despite the increase in the number of enforcement actions, 13.6 percent of respondents surveyed indicated that their companies have not addressed FCPA risk at all; 12.1 percent said that their organizations had addressed FCPA risk, but have not established a program to address the risk; and 10.9 percent said that their organizations have an established FCPA program, but that it needs improvement.

“A severe lack of viable checks and balances designed to prevent and detect wrongdoing, combined with high pressure to deliver strong investment returns, may make firms within the financial services industry vulnerable to fraudulent behavior,” said Simon A. Charlton, a principal in Deloitte FAS’ Forensic & Dispute Services practice. “Just because compliance programs aren’t federally mandated for these companies, shouldn’t necessarily make them optional. Fines for money laundering, FCPA and other fraud violations have, in many cases, been in the millions of dollars per case with jail time included for certain individuals.”

According to Deloitte, some of the key steps that can help mitigate fraud, money laundering and FCPA violations include:
•    Establish a consistent organizational culture that does not condone fraudulent activity.
•    Understand that the complex transactions inherent in hedge funds and private equity are often unique to each organization. Fraud prevention and detection programs should be tailored to the organizations they serve.
•    Do not expect banks to catch all anomaly transactions. Consider implementing detection software designed to help uncover troublesome events more quickly; some programs currently available can track investing patterns and report back on less routine activity.
•    Institute an anti-money laundering compliance program. Such a program should be designed to address several areas including: assessing risk, establishing proper governance and reporting structures, designating an anti-money laundering compliance officer and conducting an enterprise-wide training program.
•    Help mitigate FCPA risks by conducting FCPA due diligence. Learn about which geographic regions and industries are at higher risk for bribery and corruption, then institute controls designed to identify violators before they become investors.

More than 500 executives from the banking and securities, financial services and investment management industries responded to the polling questions during the webcast, which was titled “Investment Management Anti-Fraud Programs: Are You Ready if the Government Launches an Investigation?”

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