Hide and seek

The swath of regulations introduced post Enron and WorldCom have yet to show any substantial improvement in finding embezzled money. Alan Gough reports

It seemed like a deal made in heaven for the residents of tiny Columbia Falls, Montana, when an entrepreneur offered to rescue the town's sole employer from going to the wall back in 1990. The closure of the Columbia Falls Aluminum Company would have meant that the breadwinner of virtually every local family would have been thrown out of work – a death sentence for the community. So the workforce readily agreed to the rescue deal package. In exchange for 50 per cent of all future profits and an acquiescent workforce – pay cuts, extra hours, doing exactly what they were told – the money man promised to save the company.

True to his word, he did just that. Within four years, the company had fought back to the position where it was not only paying its way, but it had also accumulated profits of around $250m (£154.6m). It was only when the workforce cooperative asked for their share of the profits to set up a pension fund that things went pear shaped. What money are you talking about? What deal? Furthermore, the money in question – more than $120m (£74.2m) – had mysteriously disappeared from the company's bank account, only to turn up again in an offshore trust fund in the Isle of Man.

The workforce sought immediate legal advice from a top New York firm, which obtained a New York court order to retrieve the money. But having done this, it emerged that no such order would be recognised in the Isle of Man. Things got back on track when asset tracing specialist Gough & Co was called, as it is based in the jurisdiction where the money was held.

It was relatively simple to get an injunction on the island, but some time had elapsed since the disappearance of the money, and knowing his paper trail had been discovered, the entrepreneur had transferred half the funds to Gibraltar. However, it was not difficult to gain a further injunction on the Rock and the money was effectively “arrested”.

A deal was eventually done that kept the money man out of jail. The workforce got most of their money back, the company survived and to this day continues to flourish. But this does not happen in the majority of cases. Some years back, I estimated that only 2 per cent of the money involved in international fraud was ever recovered. I have no reason to believe that the situation has changed today, even with the host of new regulations that have been imposed post-Enron and WorldCom scandals, and following 11 September.

When events such as Enron take place, you don't really notice the impact for some time. Naturally, the screw has been tightened – regulations regarding reporting offshore deals have become more stringent. In particular, there is an onus on knowing who your customer is by checking passports, utility bills and references, and an ever-increasing emphasis on overall compliance regulations.

More pressure has been applied to banks to check the provenance of monies, and banks found to have fallen short risk serious consequences. The Patriot Act in the US is arguably the most important piece of post-Enron legislation. Effectively, this allows the US authorities to go after any foreign bank based in the US which has been involved in the improper movement of funds to its sister banks anywhere in the world. As virtually all banks, even obscure Russian ones, have US operations, this effectively gives the US authorities some level of control over the entire international banking world. So, in theory, things should be getting better, but the reality is that largely they are not, even though some of the enforcements imposed by the Financial Supervision Commission in the Isle of Man is nothing short of draconian.

The problem lies in the sheer sophistication of the contemporary top-level criminal and fraudster. Everything starts with a paper trail from a bank or financial institution that will lead you to a destination that affords greater security and confidentiality. That is the easy bit.

Where it becomes increasingly difficult is with the speed of the international banking system today. Money can originate from a US account, move to Hong Kong where it is changed into diamonds, then on to Amsterdam where the diamonds are sold to convert the transaction back into money, then on to the Caribbean – all within a matter of hours.

However, the skills of those involved in tracing assets do not appear to prevent fraudsters from hiding funds arising out of fraud. A few weeks ago, Gough & Co was involved in arresting $200m (£123.7m) held in a trust fund in the Isle of Man – the proceeds of an alleged massive Nasdaq fraud. The firm arrested it on behalf of the victims when it was already the subject of an injunction by the US authorities. That money will be held while the two groups fight it out.

Such successes are unlikely to put people off, particularly those who regard hiding money offshore as the answer to their problems. Matrimonial cases – the guy who runs off with his secretary and the odd million or two – remain quite common post-Enron, for example. A Californian recently walked out on his wife and four children. They had previously appeared to be short of money, but in fact had been secretly building up an empire of tenement blocks which he sold on the eve of his disappearance. The wife was delighted when a paper trail led to a Caribbean account with $200,000 (£123,700), but this turned out to be a carefully placed red herring. Further investigation revealed some $2m (£1.2m) hidden in the Isle of Man, which was arrested. When his apartment was searched, the runaway husband was found to have a number of books on offshore jurisdictions, including one title – Screw the Bitch – a guide to dumping the wife and keeping the money. Those are the sort of guys that post-Enron may have a hard time, but unfortunately, those having that hard time are vastly in the minority.

Those most likely to get caught are usually covertly disposing of assets for the first time – one-off opportunist deals where someone finds themselves with a very large sum of money that they want to keep away from the authorities. People like this don't understand the offshore world and often are inexperienced and naive.

Alan Gough is managing partner at Gough & Co in the Isle of Man