Right Side Up The Investigation of Schemes to Defraud By:
Bill E. Branscum
In most cases involving the investigation of some sort of device, scheme or artifice to defraud, you will be contacted by someone seeking your assistance in their effort to identify assets and “follow the money.” Private investigators specializing in financial investigations enjoy a certain degree of "Voodoo cachet" in this regard, largely due to the myth and mysticism promulgated by cinema and TV. Potential clients, desperate to get right side up, don’t know what we can really do, so it is up to us to tell them.
There are those among us who capitalize upon these misconceptions, and unrealistic expectations, offering services and results that they cannot possibly deliver. I have been involved in several cases where my client had been outright defrauded by someone in our industry they had hired to help them.
In one case, my client believed that her husband had hidden money offshore and an investigator from Missouri that she consulted convinced her that the money would most likely be in the Cayman Islands, or Aruba. There are hundreds of offshore financial havens – evidently, those were the places he most wanted to visit, and he did. She paid him something in excess of ten thousand dollars to travel to the Cayman Islands where he claimed to have surreptitiously accessed bank record keeping systems “after hours” and determined that her husband had no accounts.
In another case, two elderly ladies were defrauded of something in excess of a million dollars by their securities broker. Their attorney solicited my opinion regarding their prior efforts to trace the funds through a Florida investigator who claims to specialize in such things. His work in tracing the assets from one offshore venue to another was almost as impressive as it was expensive. His work would have made Ian Fleming proud. It turned out that the broker had actually entrusted the funds to his mother in New Jersey.
Outright fraud aside, private investigators who rely upon, or take a case believing that they can rely upon, “information brokers” who advertise bank locates often do not know what the limitations of these info brokers are, and what the legal ramifications could be if the info broker’s search was conducted in violation of the Gramm-Leach-Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999. Let’s start with how their capabilities stack up against conventional methods.
When I began doing financial investigations in the private sector, the info broker concept was new to me. In those days, there was no Gramm-Leach-Bliley Act and info brokers specializing in financial information were widely relied upon to the point that many private investigators working financial cases never considered subpoenas, and never used them. That seemed very odd to me.
Rather than have it said that I was too old to learn a new trick, I tested them on several occasions against cases where I had scrupulously dissected a subject’s finances, using one round of subpoenas after another. I was amazed to find that these people could actually use their various tricks to identify bank accounts, and account balances - they could indeed, and their information was fairly reliable, but their results were not exhaustive.
I never had a case where an info broker’s information compared to the results achieved through conventional means. In most cases where I had identified five or more open, active domestic accounts, they were able to identify no more than one or two. In one case, they identified just two of twelve. Still, in domestic cases, I found that their services could be very valuable, especially as a starting point, or in situations where there was no requirement that information be produced (discovery), and third party compulsory processes (subpoenas) were not available.
The landscape changed dramatically with the passage of the Gramm-Leach-Bliley Act. Title V, Subtitle B: Fraudulent Access to Financial Information, as codified at 15 U.S.C. § 6821–6827 provides that “Pretexting” financial information, or soliciting others to do it, can cost you, and the attorney who employed you, five years of your lives.
My purpose in writing this article is to inform you, share my experience, and prepare you to answer client questions factually, and responsibly. I assure you that no matter what you may have seen on television, or what others may want you to believe, no information broker on earth can reliably and exhaustively identify a subject’s bank accounts.
I would like to meet the individual who believes they can identify this one - impossible.
The pictured pass book is to a “numbered account” at Erste Bank in Austria. This is the truly anonymous account you may have heard about; the account belongs to whoever possesses this book, and knows the code word. Erste Bank has no idea who that actually is. These accounts are no longer available anywhere in the world insofar as I am aware.
To properly identify accounts and run down assets requires subpoena power and you should explain this to attorneys and/or fraud victims. In advocating reality, you will not lose business. Instead, you will stand out as the person upon whom they can reasonably and comfortably rely.
When you are first contacted, the thing they most want to know, and often need to know is, “what will this cost.” Do not fall into that trap. My stock-in-trade response is, “Who could say how much it would cost to paint a house they haven’t seen? The person who would just ‘throw out a number’ is not someone I would trust to paint my house.”
In addition to cost related concerns, there are two other factors that come into play when clients choose whether or not to hire you, and both bear mentioning. First, while the fraud victim may hope to dicker and deal, if their losses are such that they desperately need to recover them, they are actually looking for the best help they can get -- not the cheapest. Second, if the attorney involved is making the decisions, they must consider the possibility that the recovery effort will not go well.
In the event that recovery proves impossible, the client will be bitterly disappointed. In that case, it may behoove the attorney to be able to demonstrate that they hired someone with good credentials and a credible track record as opposed to someone willing to work cheap. I would not want to be the attorney who paid some info broker a few hundred (or a few thousand) dollars to identify bank accounts, only to have his Client later discover that there were significant assets they missed.
Again, declining to offer an unrealistic estimate, firmly quoting your hourly rate, and requiring a substantial retainer, will not cost you business. Nothing sells like the truth and anyone can see that the guy who offers an estimate to paint an unseen house is either a fool, or a fraud.
Sell yourself – don’t sell yourself out.
Once you have successfully convinced your potential client that nobody can actually do all those wonderful things they thought private investigators could do, and you are not going to work as cheap as they had hoped, you must be able to tell them what can be done, and why they should hire you to do it.
In trying to help them get right side up, you should first consider unwinding their situation. Sometimes it is possible to finesse the fraudster.
In most cases, by the time they call you, the relationship between the fraud victim and the fraudster has deteriorated to the point that it is not possible to hustle the promoter. However, in mapping out potential strategies, you should consider this possibility because, when it works, it is the easiest way to get from where they are to where they want to be.
Remember, if there is any possibility of staging a withdrawal, the client should never withdraw more than they have actually invested. Ponzi schemes often wind up being assigned to a Receiver who can be expected to “claw back” the proceeds of any transaction where an investor profited. These funds are then pooled for equitable redistribution.
If a staged withdrawal is not feasible, and it rarely is, your next option is to support your client’s attorney in their effort to persuade the fraudster to release the client’s funds. A recovery by negotiated withdrawal is more likely to be possible if the fraudulent investment scheme is still in operation. Sometimes the fraudster will recognize that you pose a threat to their operation, weigh the alternatives and opt to release funds rather than risk having their money maker exposed as a fraud. Again, it is imperative that you do not allow the client to recover more than they actually invested. Any money beyond what they put in is someone else’s theft loss.
Several years ago, I was involved in one such negotiation overseas. We effectively recovered several hundred thousand dollars from a fraud scheme promoter who preferred making the payout to seeing their operation shut down. We represented a serious threat to his continued operation so he made a sound business decision and paid what it cost to make us go away.
In this case, I spent several weeks doing the investigative work necessary to produce a thorough background report. As will be further explained later in this article, it is important to note that the victim of a bona fide investment fraud loss can expect to realize a significant return on this expense, whether they actually recover any funds from the fraudster or not. For the moment, suffice it to say that this report will contain the same information that the Internal Revenue Service will require to support the client’s theft loss deduction claim.
Once I compiled the initial report, we were ready to meet with the fraud scheme promoters. Most of the law firms with whom I have worked do not understand how important this is. Successful fraudsters are inundated with victim complaints. As we have seen over and over again, if you hope make these people see you as a credible threat, you need to stand out from their crowd of victimized complainers, and the single most effective thing you can do in that regard is go see them. While the attorneys representing everyone else that they have defrauded send them futile “demand letters,” you show up at their front door.
Prior to meeting with fraudsters, it is a good idea to lay the foundation by identifying the relevant law enforcement authority and making an appointment to visit with them. In this case, we made an appointment with the Bahamian Financial Intelligence Unit in Nassau.
It was not our intention to make any complaints at this point, or even tell them what we were doing. We simply intended to introduce ourselves, and establish contacts that we might need later on. We also anticipated that “name dropping” might have an impact upon our fraudster. Put yourself in their shoes – who would you pay, the guy sending you threatening mail, or the guy in your face who knows the cops where you live?
As is so often the case, things developed that we did not plan. There is a truism in this business that every aspiring investigator should understand. No matter what is going on, or what your objectives are, if you want to be a player, you have got to be part of the game. As long as you are in the middle of it, you can manipulate the action, spin things, redirect them, and know what is going on, even if you cannot control it. You play the game, you try to make something happen, and you capitalize on any opportunity that presents itself. Where there are no opportunities, you try to create them -- sitting on the sidelines is a waste of time.
When we met with the investigators at the Financial Intelligence Unit office, one of them recognized me from a drug interdiction operation I was involved in when I worked for the government. It was no big deal, it was merely a, “weren’t you the guy . . .” sort of thing, but it was useful.
When we met with the promoters of the fraud scheme, it was a completely cordial, professional meeting, but we had carefully scripted some of it. Naturally, we knew that they would make some comment about us coming all the way to Nassau. The attorney I was with explained that the meeting was no particular inconvenience since we were dealing with the BFIU on other matters, dropped a couple of names and then waltzed right on with the, “Ain’t it a small world” story about the Bahamian investigator who knew me. Just as we had rehearsed, that gave me the opportunity to talk about the good old days, and what a wild time it was back in the day dealing with money laundering, tax compliance issues, narcotics trafficking, and so forth.
As we all know, every investigative text book in the world preaches that the essence of a good interview is to establish a comfortable rapport; you might say that this is the same thing – but backwards. In the friendliest possible way, we made it very clear that we were not to be confused with the people they were used to.
We came to an understanding, we effectuated recovery, and our business was amicably concluded, efficiently and at very little expense.
Remember, no matter what you may have done in the past, you are a private investigator with a responsibility to your client. It is not your job to police the world – if you negotiate a resolution of your client’s issues based upon a nondisclosure agreement, you must honor it, even if your client encourages you to surreptitiously “drop a dime” afterwards.
To recap, you will initially consider the possibility of staging a non-confrontational withdrawal. If that is not possible, you will work to negotiate a recovery of the client’s funds. A negotiated recovery will be significantly less expensive than litigation.
If you cannot avoid litigation, these cases are a complicated exercise, but you may find that your client’s prospects are dramatically better offshore than they would be domestically. For example, in British common law jurisdictions, Mareva Injunctions and Anton Piller Orders make it possible to freeze assets pre-judgment, and search for evidence, unlike anything available to the private sector in the United States.
If civil recovery strategies fail, the next step in the process is to pursue criminal prosecution, and you should encourage that for several reasons. Restitution and receivership may result in some recovery, but even if they do not, seeing justice done is important, and the criminal prosecution may serve to help establish that your client suffered a tax deductible fraud loss.
Pay particular attention to that. The difference between a capital loss, and a tax deductible theft loss, is usually huge.
You should familiarize yourself with the relevant provisions of the Internal Revenue Code, at IRC §165(c)(2). I have an article on the Internet that discusses this code section, and its application to our cases, at length. Understanding the tax implications, and being able to discuss them with a potential client, will set you apart from everyone else they have consulted.
The potential client who lost a million dollars to an investment fraud probably qualifies for a tax deduction worth hundreds of thousands of dollars, but it will be denied one hundred percent of the time if they cannot prove up the criteria to the satisfaction of the IRS. By researching the code section, and understanding what is required to meet this burden, you will develop and outline for your investigative report, and put yourself in the position that you can make it possible for them to realize this deduction.
In other words, even if there is no recovery whatsoever, your work may make it possible for your client to support a theft loss tax deduction worth many times what you were paid. Again, nothing sells like the truth, and that’s a Gospel truth that plays out in these cases over and over again.
Be careful out there.
This article was originally published in the August 2010 edition of PI Magazine, the professional trade publication for the private investigative industry. I'm sure some of you remember what a pitiful rag that magazine was "back in the day" before Jimmie Mesis took it over; he certainly knew what he was doing and his Editor, Grace Elting Castle, is absolutely a pleasure to deal with.
Bill E. Branscum, Investigator