Given the current economic and financial climate, the FIB anticipates that other such frauds and related financial crimes will come to light during the coming months.
As part of its service to members, the FIB conducts due diligence enquiries and comprehensive investigations against individuals, companies and related financial instruments and documents.
FIB Divisional Director John Lavers says: “The FIB has seen a distinct rise in major frauds and related financial crimes. It is expected that this trend will continue throughout 2009.” Lavers stressed that there is a greater need for institutions and private investors alike to exercise an enhanced due diligence process before committing corporate or private monies to any investment scheme.
The Madoff case is seen as a stunning failure of due diligence because people failed to ask the right, and more importantly, difficult questions. Its disclosure has heightened the need for an overhaul of how financial instruments and investment schemes are generated and managed.
Lavers points out that in the past few years, individuals and institutions were developing and investing in schemes that really no-one truly understood except for those who would benefit the most. The risk factor was always down-played and the returns (profits) always played up to generate momentum and confidence among investors, brokers and even seasoned bankers.
In the Madoff case, for example, the exercising of a comprehensive due diligence process was quickly dispensed with because of the ‘word-of-mouth’ reputation of the investment scheme and the person controlling it. No steps were taken to verify the reliability and authenticity of the instruments and methods used in the scheme.
As a result, Lavers comments, the fiduciary duty of the individual and or organisation was overlooked as a proper risk assessment using any of the standard risk models or internal systems against Madoff was not undertaken. Non-application of a comprehensive due diligence programme, combined with an individual who effectively controls a scheme from start to finish, will normally equal a greater risk to the investor.