Tuesday 25 July 2017

White collar crime probes reveal State's puny powers

While other nations have the resources to tackle suspected financial crimes, investigations here drag on for years, say Nick Webb and Louise McBride

LESS than two weeks before Sean FitzPatrick resigned from Anglo Irish Bank over revelations that he had hidden €87m worth of personal loans, Wall Street was flattened by the meltdown of Bernie Madoff's financial empire.

It took four months to investigate Madoff and the collapse of his €85bn Ponzi scheme, a probe that involved 140 interviews and trawling through 3.7 million emails and documents. Less than three months after the investigation ended, Madoff was in jail.

It's a bit of a cliche, but the Germans are damn efficient at investigation, too.

Helmut Kiener's hedge fund K1 collapsed in September 2008 amid allegations that investors' money had gone walkabout. An investigation started within weeks and he was arrested 13 months later. His trial begins this month.

Australia's ASIC is a blur of activity. Former Queensland Gas executive Mukesh Panchal traded shares in February 2008 using sensitive information. Exactly a year later, he was charged after an insider-dealing investigation and was convicted for two years in April 2009. Fourteen months from crime to bird.

Ireland's approach to investigating allegations of white-collar and financial crime is pathetic. It's a mixture of lack of funding and lack of political will.

Paul Appleby's Office of the Director of Corporate Enforcement (ODCE) is charged with cleaning up corporate Ireland armed with little more than a spud gun.

The ODCE spent €3.7m last year -- or just over €10,000 per day -- trying to keep the 425,000 Irish-registered companies honest. That's about €9 per company. Make that a spud gun without any spuds.

If Ireland's enforcement operations were in a communal shower with other international outfits, they wouldn't drop the towel. We're that badly endowed. The sheer puniness of Ireland's enforcement and investigative efforts are highlighted by comparison with overseas operations.

The Securities & Exchange Commission in the US -- which missed all the red flags raised about Bernie Madoff's massive ponzi scheme -- had a $1.1bn budget last year.

It more than trebled over the last decade. The organisation had 3,748 staff at the end of 2010.

The ASIC will spend €284m this year and employs 1,948 staff. Germany's Bafin has a budget of €160m and has just announced plans to hire another 244 staff.

The British Financial Services Authority has a budget of €538m for this year and is upping staff numbers to 3,700 over coming months.

It overlaps to a certain extent with the Serious Fraud Office (SFO), which has its own €50.5m budget.

Last year, the SFO secured convictions against nine out of 10 of its defendants. One of these convictions was a 10-year sentence dished out to Kevin Foster for running his KF Concept ponzi scheme.

In 2009, almost 80 per cent of the SFO's defendants were found guilty; and almost 70 per cent the year before that.

A spokeswoman for the SFO said that "a more efficient approach to investigation and in some cases the adoption of plea negotiations" was one of the reasons for its high conviction rate.

The ODCE is utterly incapable of dealing with the workload brought on by the meltdown of the economy and collapse of thousands of businesses. The office is swamped with cases. Of the 3,320 cases it faced in 2010 it was only able to make a "decision" on just over 72 per percent.

The watchdog's big stick appears to be made out of celery. Hardly terrifying at all. Last year saw eight convictions for criminal breaches of the Companies Act -- seven of these related to people who weren't qualified to audit accounts.

It was investigators from the ODCE and the Garda Fraud Squad who raided Anglo's headquarters in late February 2009 as part of their investigation into alleged breaches of company law at the beleaguered lender.

Two years later, the ODCE has not yet decided whether or not to seek disqualifications or prosecutions of any former directors of Anglo.

When asked why it takes the ODCE so long when investigating allegations of serious financial crimes, Conor O'Mahony, principal officer at the ODCE, said that it is hard to investigate such allegations of crimes as they "tend to be hidden away".

"It's not like where you catch someone with their hands in the till -- with the video evidence to prove it," said O'Mahony.

"Very often, the alleged crime involves multiple events or financial transactions over a long period of time. It can be difficult to prove that a crime has been committed and there are usually large volumes of documents involved -- as well as a large number of people.

"The amount of proof you need to back up a case in court is quite demanding."

Only recently, Appleby said it was likely to be some time before the DPP could determine whether any charges would be brought as a result of the investigations into Anglo -- due to the volume of documentation involved.

Appleby's office has so far sent over 3,500 pages of documents on Anglo to the DPP. Those documents include a file on the loan given by Anglo to Sean FitzPatrick in late 2008, a report into hidden director loans, a report into loans given by Anglo to a "golden circle" of investors to allow them buy shares in the bank, and a report into false or misleading information in certain public statements made by Anglo in 2008.

Apart from the disqualification of former NIB executives in March 2007 -- nine years after High Court inspectors were appointed to investigate tax evasion in the bank in the late Eighties and Nineties -- it is largely only small fish that the ODCE has either convicted for fraud or disqualified for breaches of company law.

"There have been a number of people convicted (by the ODCE) of fraud over the years -- and these would usually be low-end rather than high-profile people," said O'Mahony.

The Garda Fraud Squad has "previous" when it comes to long-running probes. When the Merchant Bank collapsed in the early Eighties, the circumstances were probed by the gardai. But a lack of resources and adequate skills saw the investigation drag on for six years before a report was sent to the DPP. The DPP decided that there wasn't enough evidence and decided not to prosecute the case.

The fraud squad had a bit more success when investigating the fraud at the Cork stockbroking firm W&R Morrogh -- but it still took four years after the firm collapsed to secure a conviction.

Stephen Pearson, a former junior partner with W&R Morrogh, had defrauded the firm's clients -- some of whom lost hundreds of thousands of euro -- of €4.6m. Pearson was convicted of the fraud in 2005 -- and jailed for five years.

"Most fraud investigations are, by their nature, highly complex and involve the examination of large amounts of documentation requiring input from our forensic accountants and the obtaining of legal advice," said Sergeant Jim Molloy of the Garda Press Office.

"Court orders are often required to secure evidence. Many cases now also have an international dimension requiring investigation and sometimes court applications in other jurisdictions.

"All of these factors mean that fraud cases take longer to investigate and this is a common experience in most jurisdictions."

Molloy said that the investigations into Michael Lynn and Anglo were "ongoing" and "at an advanced stage".

"Most allegations of frauds tend to be like a spider's web -- you start off looking in one area and you end up opening the door to another," said Patrick d'Arcy, a former member of the fraud squad who is currently the director of forensic investigations with Grant Thornton.

D'Arcy said that it took time to build up the information required to take a case. "To begin an investigation, you've first got to get a statement of complaint from the person or company against whom the alleged fraud was committed -- but it can take a long time for someone to quantify the loss so they are able to make that complaint," explained D'Arcy.

"You've then got to decide what elements of law apply to the case. If someone is being investigated because of something they did on their work computer for example, was that person told that he or she could not use their computer to do that?

"The action may not be a breach of internal company policy, but it could be a breach of criminal law. You may have to get court orders to get information from certain individuals -- it's not a question of just knocking on a door and asking someone for the files you need for your investigation.

"When you get the information, you need to go through it to see who can make a statement. You also need to prove the origins and legitimacy of the documents."

D'Arcy admitted that a lack of resources can delay the progress of an investigation.

"If you have a large investigation, you need a large number of individuals to work on that case," said D'Arcy.

"The clock may stop on a medium-sized investigation as the bigger investigation will require resources to be drawn from existing investigations.

"There could be better resources -- as well as better use of them, but you could say that of any government department.

If you rush an investigation, you could have people appealing its findings. In a perfect world, everything would be done within a fortnight -- but that's not how things work."

While the ODCE is drowning in paperwork, it is not helped by the restrictive legal situation. At the annual DPP's prosecutor's conference last April, barrister Remy Farrell said that many of the charges set out on the statute books were "completely unprosecutable" and said that the vast majority of regulatory crimes appeared to have been drafted "with little reference to the possibility of prosecution".

Despite a gap in legislation that you could drive an aircraft carrier through, the Fianna Fail-led government did not bring in new legislation to deal with white-collar crime.

A new bill was prepared by former Justice Minister Dermot Ahern, but along with a raft of other legislation it was bumped in the rush for the exits.

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