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Astonishing Scam

Steven Taub, at CFO.com, writes about very large fraud:

"A former CFO who was an accused mastermind of a scam that investigators said had "astonishing scope" was sentenced to time served, which amounts to seven months in prison.

The key to the soft sentence in the more than $680-million scheme, according to federal prosecutors: his cooperation in a case that so far has led to the arrest of 15 U.S. defendants."

A friend of mine at a very large accounting firm sent me this, and wondered out loud how the banks could have missed this fraud. Didn't they ask for audited statements, he wondered.

In brief, here is the Allied Dealers fraud, according to Taub:

"The Allied Deals companies were controlled by brothers Narendra Rastogi in the U.S. and Virendra Rastogi in the UK.

As part of their business, the companies supposedly would arrange for sales between buyers and sellers of metal in transactions negotiated by unrelated parties, each acting in his or her own best interest. '

To finance those metal sales, the defendants then arranged for loans with banks, usually to be repaid after 180 days.

As collateral for the loans, the banks relied on Allied Deals' accounts receivables, expecting that the loans would get repaid when the customers repaid Allied Deals for the metal that had been purchased."

Naturally, there were no real metal sales.

My accountant friend finds this surprising. I do not.

Here is the accompanying report from the British Serious Fraud Office:

"The defendants persuaded banks and funding institutions to provide facilities to RBG amounting to many hundreds of millions of US$ by convincing the banks that they traded extensively with genuine businesses around the world.

By arrangement with the banks the debts arising on the sales to these customers were `discounted.' In other words RBG would receive up to 90% of the face value of a sales invoice by drawing it down from the facility provided by the banks.

In return the banks acquired the right to receive the full amount of the debt from the customer when the debt fell due at the end of the credit period extended by RBG.

This was important to RBG, as it claimed to have extended lengthy credit terms to its customers of up to six months, and the facilities therefore provided RBG with cashflow ahead of the debts being paid by the customers.

In reality false documentation was created and sent to the banks as evidence of what purported to be genuine trade.

The creation of this documentation involved the co-operation of not only ADI staff, but various `hub controllers' in key jurisdictions around the world, notably Hong Kong, Dubai and India.

These `hub controllers' were in charge of ensuring that money was paid into the fraudulent system, for onward transfer to the banks, at the time when the so called debts became due.

They would also act on the instruction of the Rastogi brothers to make purchases or enter into various business enterprises for the benefit of the Rastogi family, using the fraudulently obtained funds."

Reviewing the bankruptcy records in New York, it appears that one large German bank lost almost $250 million.

How does this happen?

It is much easier than people think.

Once the German bank is on the hook, and being paid a very nice rate of return, it is easy to convince other banks that since this prestigious German bank is doing well, then your bank ought to sign up.

It is a very small ponzi scheme in terms of the number of players.

But factoring, which is the business of selling receivables, is essentially open to being an ponzi scheme.

It is simply false that the greater amount of money involved in a deal requires greater scrutiny.

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Full post as published by Misleading Advertising Law on June 20, 2008 (boomark / email).