10/15/2009 Meeting - Tools of The Trade (Background Checks)

Background Investigations g gTips and toolsACFE, San Jose ChapterACFE, San Jose Chapter

Linda JusticeLinda JusticeDeloitte Financial Advisory Services LLPBusiness Intelligence ServicesOctober 15, 2009

These materials are for presentation purposes only, and are not intended to represent opinions or an authoritative position of Deloitte FAS LLP.

Agenda

• Introduction– Some of the common needs for backgroundSome of the common needs for background

investigations• Sources available for research

– Permissible purpose considerationsPermissible purpose considerations– Common misuses/caveats– Domestic vs. International

• How background investigations help:How background investigations help:– Fraud investigations– Fraud prevention– Litigation supportLitigation support

• Q & A

Copyright © 2009 Deloitte Development LLC. All rights reserved.1

I d iIntroductionOverviewOverview

Background investigations can help in…

• Investigating occurrences of fraud– Theft, embezzlement, whistleblower, bribery, FCPA, AML, and other internalTheft, embezzlement, whistleblower, bribery, FCPA, AML, and other internal

investigations– Conduct background investigations prior to conducting interviews– Help determine where a subject might be in the fraud trianglep j g g

• Preventing fraud– Integrity/reputational due diligence (prior to mergers, acquisitions, forming joint

ventures, forming partnerships, client/customer acceptance, investment gtargets, strategic alliance partners, channel partners, distributors, vendors, FCPA, and ITAR)

– “Know Your Vendor” process• Litigation support

– Witness location– Expert witness vetting


– Asset searches– Fact-finding outside of the discovery process

What you will learn today

• What is the value of online research?• What types of intelligence are there?What types of intelligence are there? • What resources are available online — in the public domain — and how

can they be utilized most effectively?• What if the subject is a foreign national or entity?• What if the subject is a foreign national or entity?• What are the limitations of online research?


S f hSources of researchWhat’s out there? What is it used for?What s out there? What is it used for?

Resources — Subscription databases

• Subscriber databases are essential– Instant desktop access to extensive information sourcesInstant desktop access to extensive information sources– Unique capabilities not available elsewhere– Easy way to quickly identify red flags– Cost-efficientCost efficient– Adds focus to additional investigative phases– Discreet

• Examples of popular subscription databases:Examples of popular subscription databases:– LexisNexis– Westlaw– Dun & BradstreetDun & Bradstreet– Factiva– PACER– World-Check


World Check– Dialog

Resources — Permissible purpose

• Use of the proprietary databases is governed by applicable law, including the Drivers’ Privacy Protection Act (DPPA) and related state g y ( )laws, and the Gramm-Leach-Bliley Act (GLBA)

• The data regulated by the DPPA and the GLBA may be used only for the permissible uses listed in the selections by the database providers.p y p

• If you do not have a permissible use, you will not be given access to that data.

• FCRA — The data retrieved may not be used as a factor in establishingFCRA The data retrieved may not be used as a factor in establishing a consumer’s eligibility for credit, insurance, employment, or other purposes identified under the Fair Credit Reporting Act (FCRA).


Overview — What can be found

• Litigation– Civil and criminal litigation (county, state, and federal)Civil and criminal litigation (county, state, and federal)– Bankruptcies– Reported legal decisions– Judgment filingsJudgment filings– Tax liens — federal and state– Financial Industry Regulatory Authority (FINRA) and other regulatory

sanctions• Assets

– Real property ownership records– Watercraft/Aircraft registrationate c a t/ c a t eg st at o– Motor vehicle registration– Stock ownership of 5% or greater in public entities– Undisclosed businesses/relatives that may own assets


y

Overview — What can be found (cont.)

• Media — What has already been reported? – Newspapers, magazines, specialty trade and industry publications,Newspapers, magazines, specialty trade and industry publications,

broadcasts, and wire transcripts• Business issues/reputation/relationships• Criminal problemsp• Adverse data• Litigation• History of fraudy• Property transactions• Published biographies

– Unique Internet resourcesq• Local newspapers not available through pay services• International publications• Chat rooms


Other sources of value

• States’ Web sites (Secretary of State, Division of Corporations, or equivalent records) – Corporations– Partnerships– DBAs

• State Boards of Accountancy for licensing and disciplinary records (select states)• State Bar Associations for licensing and disciplinary records (select states)g p y ( )• Medical licenses (select states)

• Securities and Exchange Commission Web site– Proxies, 10Ks, and 10Qs

C b i• Company web site• Google, Yahoo, chat rooms, and other Internet sources• Individual court Web sites (records vary by state)

– Criminal records — federal state and local– Criminal records — federal, state, and local– Civil litigation — federal and state – Bankruptcy filings – Tax liens — federal and state

J d fili


– Judgment filings

Other sources of value (cont.)

• Federal agency Web sites for regulatory records– FINRA (securities)FINRA (securities) – EPA (environmental issues)– SEC (public companies’ filings)– OFAC (Specially Designated Nationals — SDN)OFAC (Specially Designated Nationals SDN) – Federal Trade Commission (consumer complaints and trade practices)– Federal Election Commission (political donations)

• Internet sourcesInternet sources– Telephone and address directories– Business directories– Mapping toolsMapping tools


Free Internet sources

• Office of Foreign Assets Control: www.ustreas.gov/offices/enforcement/ofac/• NASD: http://pdpi.nasdr.comNASD: http://pdpi.nasdr.com• U.S. Dept. of the Treasury: www.occ.treas.gov• Health & Human Svcs — excluded individuals:

http://oig.hhs.gov/fraud/exclusions.htmlp g g• http://www.thevault.com/

– Basic service is free, but additional services are fee based. You can monitor chat rooms for information regarding specific companies.

• http://finance.yahoo.com/– Free. You can monitor chat boards of many companies.


Free Internet sources (cont.)

• http://www.virtualchase.com/people/public records.html– A great site that lists hyperlinks to a number of investigative searches you canA great site that lists hyperlinks to a number of investigative searches you can

do.• www.diligizer.com

– A board containing “information regarding the backgrounds of and/or theA board containing information regarding the backgrounds of and/or the experiences others have had with individuals/entities who/which have offered or are offering fraudulent investment transactions relating to unregistered private placements, high-yield investment opportunities, HYIPs, the buying

d/ lli f t /b k i d i t t l j t fi iand/or selling of corporate/bank-issued instruments, loans, project financing transactions, or other fraudulent business practices to investors worldwide.”


Caveats

Online research is a cost-effective and valuable first step but is not a substitution for further in-depth investigative efforts.p g• Availability, accuracy, and coverage of online information vary by source,

and by state and jurisdiction– Online research should be supplemented by manual searchesOnline research should be supplemented by manual searches

• Not all potentially material information is apparent in online sources – Nuances in data require investigative analysis


Common misuses of online information

• Missing leads• Not conducting follow-up researchNot conducting follow-up research• Not recognizing patterns• Not recognizing significance of findings

S hi “ i ” i h id i i i• Searching names “as is” without considering variations – (e.g., alternative spellings, common nicknames, and cultural differences)

• Relying heavily on a single source• Misunderstanding content/jurisdictional deficiencies


U.S. versus international investigations

• What are the major differences between U.S. and foreign public records?

• Can a critical mass of intelligence be developed without readily accessible public records?

• How do these differences affect investigative approaches?How do these differences affect investigative approaches?– Methodology– Cost– Timing– Timing


Reporting — Visual charts (i2)


How Background I i i h lInvestigations help…Fraud investigationsFraud investigations

Fraud preventionp

Litigation support

Fraud investigations

Public record research can assist fraud investigations by uncovering…• Undisclosed businesses of individuals potentially involved in the schemeUndisclosed businesses of individuals potentially involved in the scheme• Previously unknown relationships between internal employees and

outside vendor or customer• Patterns of criminal or similar legal problems• Patterns of criminal or similar legal problems• Subjects’ current legal or financial problems • “Ghost” employees on the payroll • Fictitious vendors• Discrepancies between income and lifestyle


Preventing fraud — Due diligence

Who’s doing background checks and why bother?• Companies are the people who run them — background checks of keyCompanies are the people who run them background checks of key

management of target entities/investment targets are a logical complement to legal and financial due diligence.

• Background/reputational checks of individuals and entities have becomeBackground/reputational checks of individuals and entities have become predeal “best practice.”

• These checks provide legal, reputational, and financial protection for clients/investors and give financial services firms an edge in the marketclients/investors, and give financial services firms an edge in the market.


Preventing fraud — Due diligence (cont.)

Key risk areas• Reputation and risk profile of target company

How due diligence can help• Investigative due diligence on management Reputation and risk profile of target company

and key principals• Material misrepresentations/omissions• Current or past criminal, legal, or regulatory

problems• Direct or indirect foreign government

g g gteam, shareholders, connected persons, and other parties of interest

• Provide an overview of corporate history and development

• Direct or indirect foreign government ownership interests

• Political links and relationships with government officials

• Business affiliations and known associatesC fli t f i t t

• Assess the subjects’ track record and reputation in current and past ventures

• Seek to identify past regulatory, governance, or ethical issues of concern

• Conflicts of interest• Macro risks inherent in a region or specific

sector for cross-border transactions• Integrity and stability of the current government • Attitude of key public authorities to foreign

• Country Risk Assessment to assess macro risks inherent in emerging markets

investors• Possible changes in legislation or with local

regulators that may impact operations in overseas markets

• Adequacy, integrity, and efficiency of the


q y, g y, yjudicial system

Preventing fraud — Know Your Vendor (KYV)

• A high-level assessment of the background of a large number of payment recipients (“Vendors”), including suppliers, agents, distributors, p y p ( ), g pp , g , ,and sales intermediaries

• Aims to identify red flags, adverse information, conflicts of interest, and fictitious vendors by consulting external data sourcesy g

• The process can apply to: – Existing vendors (in the context of a risk mitigation program or fraud/FCPA

investigation).g )– New vendors (as part of the onboarding process)


Preventing fraud — Know Your Vendor (KYV) (cont.)

• Verify existence of vendor– Identify corporate filings– Identify Web site and its registrar– Compare addresses identified on Web site and in corporate databases against that in vendor file

• Search PEPS and sanction list checks– Databases of Politically Exposed Persons (PEPS) and sanction and embargo lists such as the UNDatabases of Politically Exposed Persons (PEPS) and sanction and embargo lists, such as the UN

Oil for Food Program, the Office of Foreign Assets Control, the United Kingdom HM Treasury, European Union, Office of the Superintendent of Financial Institutions, Financial Action Task Force, the Australian Department of Foreign Affairs and Trade, and others

– Conduct adverse media search (in appropriate languages) in numerous publications to identify past issues of fraud, criminality, business conflicts, and other matters

• Other “Red Flags”– Adverse Internet researchCivil litigation – Conduct civil litigation searches to check for lawsuits including past contract disputes fraud falseConduct civil litigation searches to check for lawsuits, including past contract disputes, fraud, false

claims, etc.Criminal litigation– Conduct criminal litigation searches to check for criminal records, including mail or wire fraud, drug

possession, Foreign Corrupt Practices Act violations, etc.– Bankruptcy filings


a uptcy gs– Judgment and lien filings

How do background investigations assist the litigation process?

• Background checks on opposing parties can reveal:– Patterns of litigiousness

Fi i l diffi lti

litigation process?

– Financial difficulties– Poor business track record (e.g., a history of mismanagement or bankrupting companies)– Undisclosed professional relationships that have impacted inventories, sales, or loans (in bankruptcy

cases) Amount of assets if any (Is a judgment worth pursuing? Are there circumstances that might– Amount of assets, if any (Is a judgment worth pursuing? Are there circumstances that might affect solvency between pre- and post-litigation period of a bankruptcy?)

– Contradictions or inconsistencies in claim• Asset searches

Conduct prior to litigation to evaluate the value of proceeding– Conduct prior to litigation to evaluate the value of proceeding– Help collection on judgments

• Background checks on opposing expert witnesses can uncover:– Conflicts of interest

Prior contradictory testimonies– Prior, contradictory testimonies– Criminal records or other adverse findings

• Investigation of the underlying facts of a lawsuit can help to:– Verify key information, as well as uncover additional leads

Identify and locate other relevant parties to the litigation (e g witnesses former business associates


– Identify and locate other relevant parties to the litigation (e.g., witnesses, former business associates, or potential creditors)

Q i dQuestions and answers

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Copyright © 2009 Deloitte Development LLC. All rights reserved.Member of Deloitte Touche Tohmatsu

10/15/2009 Meeting - Tools of The Trade (Background Checks)

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