Secret Lender Agents Make Asset Searches Harder

Posted by Philip Segal on February 15, 2012

It’s always nice to be able to know who has loaned people money. It helps in asset searches, of course, but we also like to call bankers in after-fraud investigations. Now getting to the identity of those lenders is about to get harder.

Secured creditors have to put their customers on the public record. Such lending on real estate is called a mortgage, and on other kinds of property a “UCC-9” security agreement (known long ago as a chattel mortgage).

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Who’s loaned money to whom is useful information if you’re a lender’s competitor, but it’s also great information in an asset search. You often need to contact other creditors to swap information, or else in litigation to figure out whether the person you are investigating may have perpetrated a fraud. What they told their lenders can be critically important.

Lenders have in the past tried to file under trade names (also known as DBA’s, for “doing business as,”) but those are also a matter of public record if not always findable on line. You can make up a name on a financing statement, but that gets awkward when it’s time to go to court and enforce a security interest.

The Company Corporation in Delaware thinks it has come up with a good solution that it’s recently started marketing: under UCC Article 9, lenders can submit the name of an authorized representative and have them listed in place of the lender, just the way people forming Delaware corporations can hide their identity by hiring an incorporator and registered agent. CSC offers that kind of service for Delaware corporations, and now says it’s the first to go into cloaking the identities of UCC creditors.

Now, instead of looking up who loaned money to a debtor, fact finders may have to determine who the representative of the lender is and then send in questions via that representative to uncover the identity of the lender. Who will answer? It could be the lender, but the lender won’t be under any obligation to respond. Or, depending on the agreement between the representative and the lender, you could be forced to deal with an intermediary representative instead of going right to the bank or finance company in question.

Just one more reason that data dumps by computer – never enough in conducting any kind of thorough investigation – fall short of the mark. Now even a search for a lender that used to be findable by computer or by an entry-level clerk may need the hand of someone experienced enough to be able to ask the right questions in the right way just to get the right person to come to the phone. 

Background Checks for All: Lessons from the Alleged Archdiocese Theft

Posted by Maria Matasar-Padilla on January 31, 2012

Anita Collins, an elderly woman working as an accounts payable clerk for the New York Archdiocese, was recently arrested for embezzling funds from the church.  That’s bad news for the archdiocese.  But the real black eye for the church is that the entire experience could have easily been prevented.  Had the church run a simple criminal background check on Collins, they would have seen that she had a felony conviction for stealing funds from her previous job, and had pled guilty to a misdemeanor when charged with criminal forgery and grand larceny.  In fact, she was still on probation for the felony conviction when she was hired by the archdiocese.  Given her criminal past, putting her in a position where she had direct access to church funds would fall under the category of poor management decisions. 

What this situation teaches us is not just that the archdiocese should have run a criminal background check on the woman—that’s obvious.  The real lesson here is the importance of timing.  Collins was hired shortly before the archdiocese instituted a policy requiring background checks for all new hires.  The church had chosen to make background checks retroactive for existing employees who worked with minors, but they made no such allowance for employees with access to church funds.  As the archdiocese spokesman explained, “It was just a happenstance of timing that [Collins] was hired just almost immediately before the program was instituted.” 

Clearly, the church should have made background checks retroactive for a broader pool of existing employees.  A reasonably prudent policy would have required a background check for new and existing employees entrusted with financial responsibilities.  In other businesses, background checks may also be in order for employees with access to trade secrets, or with access to other employees’ confidential personal or medical information. 

Now, you’re thinking, I have a background policy in place and all new employees that have these posts are rigorously scrutinized.  Well, good. But does that same level of scrutiny also apply to internal promotions whose new posts now give them access to funds or sensitive information?  Sure, a background check on an internal candidate may seem unnecessary.  After all, she’s been working for you for a while, and you believe that you don’t have to confirm that she is trustworthy, reliable, a good team player—clearly you think so or else you wouldn’t be promoting her.  Or maybe it feels invasive to conduct a criminal background check at this point.  Perhaps you assume that you know her so well that suspecting that she’s been lying or withholding information all this time is a betrayal of sorts. 

 But due diligence requires that we take a step back and look at a situation anew.  If this person had been an external candidate for this position, she would have been subject to a much more rigorous vetting process.  An internal promotion is not a time to get lazy, or to assume that because there have been no red flags up to now everything will remain fine in the future.  Or to be afraid of what you’ll find out.  It’s so easy for companies to give themselves an out when it comes to due diligence.  Don’t do it.  Make it company policy that everyone, be they an internal promotion or external hire, who has access to funds, trade secrets, confidential information, and/or minors is subject to thorough due diligence, including a criminal background search.  That’s the only way you can have peace of mind that you've done all you can to protect your organization’s best interests.  

Forensic Investigations: Due Diligence Done Correctly

Posted by Philip Segal on January 27, 2012

What’s the difference between a forensic audit and a regular audit? We think we know the difference when we see it, but what is it?  The issue came up before a short talk I was giving to some accountants last week, and the answer was relevant to our fact-finding business.

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A regular audit is not comprehensive. It doesn’t presume there’s something wrong and it doesn’t even look at every supporting document in a company’s accounts. If it did, annually auditing an entire large company would be impossible.

A forensic auditor goes in with the presumption that something may be wrong, and decides to leave nothing unexamined on the hunch that there is fraud in a particular department or company line of business.

The distinction holds for many other kinds of investigations. You can do the once-over-lightly check for criminal history and check references given, or you can decide to turn over every court case involving your subject, check for side companies at every address he’s had in the past five years, and perhaps talk to everyone he’s sued or been sued by – ever.

That’s what we would call a forensic investigation. If the New York State Society of CPAs says that a forensic accountant “prepares each case as if it will result in litigation in the future,” that is the approach a good investigator should take too. Gather facts, but do it meticulously so that you can back up your findings if anything goes to court. And whatever you do, don’t break the law or violate ethical rules when you gather your facts, because a fact that’s not admissible as evidence may turn out to be useless to your client.

How could this distinction work in practice? A normal “investigation” could turn up five court cases in Jefferson County. An investigator could report that none of them were criminal matters and had all settled. We’ve seen reports that really say this, and they are often not worth the paper they are written on.

What you should ask when you hire a fact finder is not for reports of settled cases, but a summary of what was in the papers filed in court. What were the allegations against the person? What kind of evidence was on the public record? And (probably only available by interviews), what were the terms of the settlement?

When it comes to due diligence on a prospective CEO or investment partner, regular background checks verify employment, education and call the places on the resume to make sure the person worked there.

Forensic due diligence looks for the places the person worked that are NOT on the resume (Fired? Quit to avoid being fired?) and the people not listed as references (“Everyone thought he was lazy and were happy when he left.”)

It’s not that a forensic investigator presumes that everyone he looks at is hiding something bad. But if they are, he has a much better chance of finding it than someone using the approach of once-over-lightly.

Why the Greek Crisis Should Make you Think about Switzerland

Posted by Philip Segal on June 30, 2011

One thing we always tell new clients: there is no such thing as a “local” investigation. A Russian guy in L.A. means you could be dealing with a Nevada corporation in addition to Russia and California. An apartment in Miami may be owned by a British Virgin Islands company.

That’s a good thing to remember when dealing with Greece, and especially if you’re counting on the solvency or liquid assets of a business partner. Your business could be in Greece, but your partner’s collateral could be sitting in HSBC in Switzerland, or in Cyprus. While cracking a Swiss bank account isn’t as hard as it once was, it’s no piece of cake even with a subpoena. Cyprus may be part of the European Union, but it’s not a member of the Financial Action Task Force, the OECD’s umbrella group that fights money laundering. We’ve had experience trying to find assets in Cyprus, and our clients don’t find it fun.

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As Greece’s new restructuring plan (which The Economist says is doomed to fail) includes plans to sell state-owned assets, it’s easy to envision foreign investors going into partnership with locals to buy up cheap assets. The local participation may be to get around Greece’s legendary bureaucracy, and local partners sometimes put up cash or guarantees. Given what’s been going on in Greece of late, bank balances in euros held in Greek banks don’t seem to be the most secure kind of backing an investor could be looking at.

The Bank of Greece’s own statistics make for sobering reading. In April, Greece’s net capital flows veered into negative territory. The numbers would have been much worse this year but for large injections of money from the EU.

As long as a year ago The Financial Times was reporting that Greeks were shoveling their bank deposits out of the country to Switzerland, Cyprus and other international points. With the teargas and the fragile plans being discussed this week, no asset search of a Greek person of any means should be complete without looking beyond the country’s borders.

Some other tips before concluding a deal with anyone in Greece or any other jurisdiction with risk of capital flight:

  • As part of your standard due diligence, find out whether this person has ever been sued in the places he or she does business, such as the U.S. or the U.K. Previous business partners will have come to know this person and will probably have included associated companies along with the person in their lawsuit. Those companies could contain assets worth going after either as part of a guarantee or to attempt to attach later on.
  • Do a basic verification of the person’s alleged contacts in the home country. We have seen many people boast that they are “very close” to a key minister or other connected official, when in fact no particular bond exists. In countries where relationships matter most, it’s the quality of those relationships that is critical. Such things are seldom written down, but are rather determined by quietly interviewing knowledgeable people in the country in question.
  • Insist on adjudication of disputes outside the country in question, whether you are looking for arbitration or traditional legal remedies. According to Transparency International Greece’s public corruption problem is worse than Romania’s and almost as bad as the rating achieved by India.