Modern tunneling still a risk to your firm

Assuming you read last week’s column and now know the definition of “tunneling” in the context of money laundering and Central Europe (and hopefully assuming that you have not had the bad luck to experience this type of theft first-hand), we’ll now move on to more modern incarnations that could threaten your business.

True, old-fashioned, 1990s-style tunneling does exist—this being the insertion of a person with a false identity into your firm with the sole goal of diverting bank transfers—but in the new millennium white-collar criminals have become much more advanced.

This is based primarily on the fact that old-fashioned tunneling is akin to a bank heist. Generally speaking, it is a one-shot, catastrophic event, the severity of which is likely to trigger at least a half-hearted police investigation. Far more effective is to bleed a firm over a number of years while also co-opting members of the company so that an investigation would provoke embarrassment, internal turbulence or worse, multiple convictions.

Thus the following methods are typically used, and CEE Consulting investigators literally see such setups on a monthly basis. Allow me to run through a few, which hopefully will not set alarm bells ringing—but then again, better late than never.

1)      The multi-tasking vice president. This is perhaps the most common ruse. A vice president or high-ranking manager  sets up a number of mirror companies (often sole proprietorships), which are de facto created by his wife, brothers, cousins or anyone else in his family. These will be used for billing purposes even though the actual services performed will still be conducted based on the resources available at his company. If the vice president attained his current status through talented salesmanship, so much the better, as he can easily meet clients on his own, suggested different billing addresses and then throw his own personal projects into the mix. While some companies are more vulnerable to this than others (think manufacturing companies with sale-and-buy back arrangements), a typical red flag is the “boutique marketing firm” that literally nobody has ever heard of in the company but the vice president himself. Market research or consulting services are then booked and paid for and if the vice president has real independence, he simply signs off the money to himself. Such arrangements can last for years—with secretaries, accountants, employees and even passive CFOs becoming unwillingly co-opted along the way. Eventually, if he goes down, so do a slew of key employees. Not so surprisingly, when the vice president is eventually confronted and fired, he is also given a healthy golden handshake to simply keep his dirty secrets to himself.

2)      The self-marketer. While this is partially covered above, the number of marketing scams we see is at times astounding. These come in the form of kickbacks to the head of marketing for targeted advertising (i.e. he buys an advertisement in a magazine or on television but is well rewarded off the books); the arrangement of entertainers at company events that just so happen to be working for him; the mystery marketing or consulting study bought through an associate that is paid for but which nobody can ever find or even dreaded art-auction scam, which we will cover at a later date, as this is more often to sort out bribes for politicians.

3)      The valuation scam. This scam hit its prime before the real estate crisis, but it is still sometimes used today, especially in countries with political turmoil but high-value locations (think Ukraine). Such a trick relatively more complicated in that it involves the corruption of an approved valuator who then pushes a valuation far too high in order gain a higher-than-deserved credit agreement from a lender. Once the loan comes in, the money can be diverted during the developing of the land, the renovation period or even during fit-out stages of a property. In worst-case scenarios, the special purpose vehicle actually developing the property must declare bankruptcy, and despite the ensuing pain the money is simply gone for good. While this type of tunneling may seem unlikely in this day and age, it does happen, and even in the case of heavy hitters with good lawyers behind them, the embarrassment and potential risk to the reputation of a fund is often enough to get such investigations dropped.

4)      The IT team. There are so many IT scams out there that it would take a series to describe them all, but the worst can be debilitating to the profits of a company. A typical, not-so-smart set up involves two-to-four IT personnel who simply alter products and sell them through their own private companies on the side. These scams are often easily uncovered, as larger companies are always on the lookout for stolen or reverse-programmed applications, but just as often the temptation often is simply too much. Look for such scams in companies set up by an “idea-man” type of entrepreneur who really does not have a great deal of understanding about the nuts and bolts behind the IT solutions in his own company. This happens more than you might think.

As you have probably noted by now, none of the above conform to the past, hard-core mafia tunneling jobs of old. In fact, such tunneling attempts often target banks or large private accounts, as there is still the chance of the big score. Yet the four examples above still amount to lost profits, potential humiliation and legal nightmares for small and large entrepreneurs alike—and more frightening, ask any risk consultancy, white-collar crime specialist or detective agency and they will tell you the same thing: They happen all the time.

Preston Smith is managing editor for CEE Insight and managing director of CEE Consulting Group. Please feel free to contract him at .