Posted by Howard Cooper, Paul Nash, and Oliver Stern[1]
In September 2017, Kroll delivered a seminar to a group of representatives from the Fiscal Network of the IMF’s African Department. The seminar, entitled ‘Fighting Illicit Fund Flows in Sub-Saharan Africa’, covered Kroll’s experience of performing forensic audits in various countries in Africa and other parts of the world, including the recent independent audit of three state-owned enterprises in Mozambique. The presentation also raised the global and growing issue of illicit fund flows, demonstrated how modern data analytics techniques can help to effectively detect and stop these flows, and highlighted the obstacles that currently prevent a coordinated data analytics strategy from working effectively.
Kroll is often asked to carry out discreet investigatory work to identify the origins of bottle-necks in decision making, or transparency issues associated with various transactions in emerging markets. These markets are often characterized by a combination of weak institutional capacity and highly politicized government spending. Powerful commercial and political patronage networks, and weak public financial management frameworks increase the risk profile for Kroll’s clients. In addition to the macro-economic challenges associated with, for example, off-budget spending, a highly politicized environment can leave investors facing challenges over their security of tenure and a general lack of predictability.
The Mozambique forensic auditMozambique is one of the poorest countries in the world, and relies on external funding from donor countries and the IMF to meet its fiscal requirements. Net official development assistance and official aid to Mozambique in 2015 was USD 1.8 billion.[2]
Kroll was engaged to complete an independent audit of the expenditure of loans in the region of USD 2 billion, contracted by three Mozambique companies. These companies were ostensibly set up by the Government of Mozambique to monetize gas reserves discovered off the Mozambique coast in 2009.
The scope of work was to determine the process for obtaining the loans, the flow of loan proceeds, the specifications of assets and services acquired, and importantly, to independently establish the possible price of the assets and services.
Kroll’s work predominantly focused on the review and analysis of loan agreements, supply contracts and the underlying accounting records for expenditure of the loan proceeds. Kroll worked closely with the Mozambique Attorney General's Office (‘PGR’) to obtain information from the three companies, and liaised with several other parties in the UK and Middle East to obtain information pertaining to loan agreements and supply contracts. It also undertook interviews with numerous individuals involved in the project, including government ministers, company directors, bank personnel, and supplier representatives.
Kroll’s Summary Report, which is publicly available in redacted form, highlighted that:
- The process for providing government guarantees appears to have been inadequate, with widespread breaches of government regulations. Specifically, no documentation was provided to establish that any assessment took place before three of the five government guarantees were issued, with a combined value of USD 1 billion;
- Confirmation that the three companies are not fully operational. The business cases and feasibility studies carried out were overly optimistic in estimating combined operating revenues of USD 2.3 billion by December 2016. At the time of reporting, negligible revenue had been generated by the companies; and
- No clear business plans had been drafted by the companies to show how their assets would be made operational, thus enabling them to generate revenue in the foreseeable future.
Illicit fund flows
The OECD defines illicit fund flows as those “that are generated by methods, practices and crimes aiming to transfer financial capital out of a country in contravention of national or international laws”, and that generally involve money laundering, bribery and corruption, and tax evasion.
Governments are trying to improve the exchange of information with other countries in several ways. They are strengthening anti-money laundering regimes, and implementing recognized corporate governance standards, such as those set out by the Financial Action Task Force (FATF). Therefore, the key question to ask is: Why is the system failing?
To answer this question, it is worth considering the entities and organizations that have access to fund flow data, and who therefore have a role in detecting and stopping these flows. Examples of these entities include local banks, correspondent banks, local and international regulators, local and international law enforcement agencies, the international donor community, and the auditors of these parties.
Getting the right data quickly into the right hands is key, but international cooperation is still fragmented and inconsistent in its application. There needs to be a renewed focus on developing a coordinated global approach from a combination of banks, regulators, law enforcement agencies, and other external parties, and across multiple jurisdictions to combat money laundering, bribery and corruption, and tax evasion.
Kroll, through the course of the investigations it undertakes, has extensive experience in reviewing large volumes of fund flow data in multiple jurisdictions. The review of these data using modern data analytics techniques shows clear patterns in illicit fund flows including: 1) the consistent use of companies registered in offshore jurisdictions; 2) the transfer of large round sum amounts; 3) the transfer of large volumes of transactions in US dollars; 4) similarities in the descriptions of the underlying commercial rationale for the fund flows; and 5) the use of the same banks to move the funds.
With appropriate cooperation from key parties, the results can be hugely effective. In 2014, three banks in Moldova collapsed, and Kroll’s subsequent investigation uncovered a USD 1 billion fraud. Crucially, the Moldovan authorities obtained the agreement of financial regulators in several overseas jurisdictions to share information. This agreement allowed Kroll to analyse the fund flow data and uncover a complex mechanism involving hundreds of company bank accounts in multiple jurisdictions (including Latvia and Estonia) and thousands of transactions designed to prevent the onward tracing of the misappropriated funds. Millions of dollars of the fraud proceeds were transferred to parties around the world, including to bank accounts in Russia, Cyprus and Moldova.
This international cooperation has provided Moldova with a much greater opportunity to recover the stolen funds and to bring those who coordinated and benefitted from the fraud to justice.
In conclusion, whilst there is a will for greater collaboration between countries, and between the private sector and law enforcement agencies, the structure for effectively sharing information generally remains cumbersome and slow. The objective should be to establish a coordinated strategy so that the key controllers of financial information, both at a local and global level, work together to tackle illicit fund flows and financial crime more broadly.
[1] Howard Cooper (Managing Director), Paul Nash (Associate Managing Director), Oliver Stern (Senior Director). Contact – paul.nash@kroll.com
[2] https://data.worldbank.org/indicator/DT.ODA.ALLD.CD?locations=MZ
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