British Virgin Islands: First Principles: What is a Serious Fraudsman?

"He will choose you, disarm you with his words, and control you with his presence. He will delight you with his wit and his plans. He will show you a good time, but you will always get the bill. He will smile and deceive you, and he will scare you with his eyes. And when he is through with you, and he will be through with you, he will desert you and take with him your innocence and your pride. You will be left a lot sadder, but not a lot wiser, and for a long time you will wonder what happened and what you did wrong. And if another of his kind comes knocking on your door, you will open it.

From an essay signed, "A psychopath in prison." " ⁴

How do You Recognise His Trappings and Understand His Behavior?

The following points attempt to capture the essential trappings of a serious fraudsman. They are based upon observations of the writers and include quotations from judgments of well-known English jurists on the topic.

• He evinces no intention to be bound by public or private obligations. Law, contract, and obligation mean nothing. He will keep this fact hidden.
  
  

• He is often of casual or multiple residence.
  
  

• He knows no barriers. International boundaries are crossed with impunity.
  
  

• He will ordinarily hide his wealth behind a labyrinth of secret offshore companies, trusts, and other apparently legitimate devices and instruments. The liquid assets of his puppets are run through banks, whose client confidences are usually subject to the protection of criminal secrecy legislation. As Lord Cumming-Bruce of the English Court of Appeal said in Re: A Company [1985] BCLR 333, "... he [hides] his wealth behind a ...web of puppet companies, with puppet directors dancing to his [the fraudsman's] every tune." One of the leading jurists of 20^th Century Great Britain, Lord Justice Denning, Master of the Rolls, had this to say of the fraudster, Dr. Wallersteiner, in a seminal decision:
  
  

• Another English Court offered the following:
  
  

• He manifests an element of arrogance. There is an analogy from history, Julius Caesar. Caesar, the vituperative dictator, yearned for legitimacy. This is the constant. That yearning. So too, is it an absolute with sharp dealers that they feel the need to continue to represent to diverse parties that they are clever, shrewd and one step ahead of the game.
  
  

• He is cunning. He studies his victims before he strikes.
  
  

Many economic criminals bear these markings unobtrusively, sometimes in apparent obeisance. They come to banks, lawyers, accountants and other professionals, clothed with the letters and trappings of legitimacy. The sharp dealer is well used to the successful juggle between appearance (or what he represents to the world at large) and reality (representing the dishonest self).

The literature of psychiatry provides key indicators of the presence of psychopathic disorders. These indicators are substantially similar to, and in some instances identical with, the seven points set-out above describing the signs of a serious economic criminal:

• "callous unconcern for the feelings of others;
  
  
• gross and persistent attitude of irresponsibility and disregard for social norms, rules and obligations;
  
  

• incapacity to maintain enduring relationships, though having no difficulty in establishing them;
  
  

• very low tolerance to frustration and a low threshold for discharge of aggression, including violence;
  
  

• incapacity to experience guilt and to profit from experience, particularly punishment; and
  
  

• marked proneness to blame others, or to offer plausible rationalizations, for the behavior that has brought the patient into conflict with society."
  
  

In 1994, the American Psychiatric Association said that an anti-social personality disorder is present in persons over fifteen years of age who display three or more of the following seven characteristics – indicating a "pervasive pattern of disregard for and violation of the rights of others":

• failure to conform to social norms with respect to lawful behaviors as indicated by repeatedly performing acts that are grounds for arrest.
  
  

• deceitfulness, as indicated by repeated lying, use of aliases, or conning others for personal profit or pleasure.
  
  

• impulsivity or failure to plan ahead.
  
  

• irritability and aggressiveness, as indicated by repeated physical fights or assaults.
  
  

• reckless disregard for safety of self and others.
  
  

• consistent irresponsibility, as indicated by repeated failure to sustain consistent work behavior or honor financial obligations.
  
  

• lack of remorse, as indicated by being indifferent to, or rationalizing having hurt, mistreated, or stolen from another. ⁷
  
  

How Does He Operate?

The activities specific to each dishonest obligor can vary according to where and from whom he learnt the trade and the opportunities that present themselves. There are however common themes and methods that continue to be used due to their reliability, and also because they mirror ordinary commercial transactions and are thus relatively safe ways of taking value by deception without stimulating suspicion at the early stages of a fraud.

Fraud has been with us for a long time. The English poet and novelist, Daniel Defoe, described, in rhyme, the phenomenon and mad hysteria that arose from the perpetration of a broad series of major frauds on the British capital market in 1720 known as the 'South Sea Bubble':

There are common techniques used to lift substantial value by deceit. Such methods of taking include the following: —

• 'Bait and switch.'
  
  
• Misappropriation and infidelity.
  
  
• Double pledging of collateral.
  
  
• Linked transactions.
  
  
• Cheque kite.
  
  
• Securities fraud.
  
  
• False appraisals.
  
  
• Art & antiquities dealing.
  
  
• Bleeding assets - the 'vampire' method.
  
  
• Prime bank notes.
  
  
• Up-front loan fee scams.
  
  
• Internet fraud.
  
  
• Mass telemarketing and mail fraud.
  
  
• Creditor fraud.
  
  
• 'Pump and dump.'
  
  

In a world where boundaries diminish by the day, the opportunities to misappropriate wealth are endless and mutate dynamically. The proliferation of goods and services available for purchase over the Internet expands the facility of fraudsters to set up seemingly legitimate businesses anonymously, attract clients and their money and close their 'operation' before law enforcement officials have a chance to investigate complaints which often take months to filter through.

Despite the varied methods available to 'take' wealth, once a fraudster has chosen a method or created a ruse to trap money illegitimately, he will often stick with that method, preferring to hone it rather than change a routine or formula that has proven successful in the past. Thus, where a dubious enterprise has been shut down by law enforcement, it will frequently raise its ugly head in another part of the world, or indeed simply under another name and with a different appearance.

Who are His Co-Conspirators and Facilitators?

His co-conspirators are knowing accomplices. However, there are also those who may assist in the primary acts of taking by deception unwittingly. These are often employees, following orders, and unaware that they are party to a dishonest design. Once the wealth has been successfully taken, it then must be hidden to obscure its provenance.

He cannot hide his fructus sceleris (the fruits of fraud) on his own. He needs the assistance of others — bankers, advisors, trustees, nominees and lawyers. Those advisors may fall into one or more of three categories:

1. the unwitting, innocent;
   
   
2. the reckless, indifferent, or perhaps willfully blind counsellor; and
   
   
3. the witting co-conspirator.
   
   

It is these parties who facilitate. One of the keys to gaining an understanding of how to successfully address a wrongdoer is recognising that he needs the professional assistance of these people, and how they can be of use to him.

How Does He Conceal?

A man conducts himself simultaneously within two complementary frameworks. There are two tiers of transaction, two kinds of conduct.

The one. The man conducts himself through companies and trusts. He commits certain miscreant acts. The conduct might be fraud committed by one of his companies upon a financial institution, a fellow citizen, a foreigner. It might relate to an investment, a loan, a real estate development. It may consist of participation in the types of criminal conduct more commonly associated with money laundering. That is the one series of events, the one kind of conduct. We shall call it the first tier fraudulent conduct.

There is the second. This is expressed by the man's sequestration of the fructus sceleris behind the veil of nominees dancing, walking – ambling to his every tune.

We revert to the protagonist. It is this master manipulator who controls both sets of activities, both tiers of the miscreant factual complex. To borrow from a recurring theme found in Shakespeare's tragedies, we dwell in two worlds — the world of appearance, and the world of reality. The reality is the protagonist who uses deceit to manipulate fact. If he is taken to task within the comfortable confines of conventional legal process, he will, in part, claim to be penurious, an asset-less hull. He points to his penury. He lies.

He uses deceit to steal and hide the money, and to keep it. To continue with Shakespeare's appearance and reality theme, there is this. Dancing about the self-described penurious protagonist are companies formed in the Turks and Caicos Islands, Panama, Luxembourg and the Bahamas. Tiers of trusts, bank accounts and companies reposed with wealth abound. Finding the hidden wealth is of no practical value unless it is attended with detailed, documented evidence attributing its beneficial ownership to him. Ordinarily, such evidence must also be procured under the protection of utmost secrecy so that it can be meaningfully used to pre-emptively freeze or preserve the assets thus located. Proof of the protagonist's suffocating dominance over his wealthy puppets often stands on the other side of what appears to be a legal analytical abyss.

His perceived strength is thus the fortressing of value beyond layers of asset hiding and purification devices. His fortress seems impenetrable.

One method used to launder the proceeds of bad dealing is known in the laundering trade as a starburst. This term is used to describe multiple, concurrent conveyances of fragments of money stolen through deceit. The star (of stolen monies) bursts, most usually a scintilla after the moment in time when the fraudster secures control over the object of his scheme — the money.

In a starburst, there are many co-participants acting in concert with the protagonist. At the instance of the fraudster, monies are disbursed to diverse locations (or, more accurately, to people co-ordinates) at once. A starburst has a point of inevitable, predictable collapse. The starburst implodes when the people co-ordinates at the outer reaches of it cause the funds to be moved onward. The starburst collapses at the point at which the protagonist retakes control of the preponderance of the monies which he caused to be disbursed in the first place. The monies do not typically return to their place of original jurisdiction. These funds are often reposed in a place of end deposit onshore, held by an offshore company – which is owned in turn by an offshore trust.

Each of the people co-ordinates in a starburst can earn a fee of between 2% and 5% of the value of the funds moved through their hands.

The use of puppet companies and trusts as repositories of the title to value held in bank accounts in the classic bank secrecy locales, makes an intimidating statement to the victim. This, combined with instances where a starburst (or other similar method) is used to deny the victim a clear trail to the point of end deposit, has the effect of compounding the forcefulness of the fraudster's statement.

What are His Strengths?

What then is his true strength? It is we and our domain – the domain of banks, insurance companies and other repositories of legitimate wealth. To a fraudster, such institutions are predictable and unimaginative.

Victims can also be drawn from the unthinking masses. In 1852, Charles Mackay catalogued some of the most incredible examples of human folly in the second edition of his classic – 'Extraordinary Popular Delusions and the Madness of Crowds.' Mackay's work is a salutary reminder that the follies of man are not unique to Enron, WorldCom, Global Crossing, Adelphia Communications, Bre-X Minerals, mass telemarketing fraud, or the dot-com bubble. Mackay records the story of John Law and his Mississippi Company – which effectively bankrupted the people and nation of France in 1720 through frenzied speculation in shares of one company, merely because it had been granted the exclusive right to trade between France and the East Indies, China and the South Seas.⁸ He also reveals the folly of the South Sea Bubble – which nearly did the same to Great Britain at the same time – and where "knavery gathered a rich harvest from cupidity,"⁹ and "visions of ingots danced before their eyes."¹⁰ 'Tulipomania' of 1636 Holland showed how an entire nation was brought to its knees by the mass lunacy that was speculation in tulips. Alchemy drew people over many centuries to lose fortunes by believing that some men could turn stone into gold. These and other grand events of mass madness and fraud are well-documented and should not be forgotten. Drawn from these examples, we can see how a sophisticated fraudsman might look upon his human prey as vulnerable and easily consumed.

Social psychologists use their cognitive dissonance theory to explain the ease by which mass frauds occur, by reference to the states of mind of victims:

Predictable. Unimaginative. Shackled by analytical orthodoxy. Cognitive dissonance. His strengths.

However, where there are strengths there are also areas of vulnerability. The more extensive and complex the sharp dealer's empire becomes – the more elements become involved, and the more difficult it is to supervise each element effectively. The more paper used to record the relevant transactions, the longer the trail.

By volume of dealing, the most ubiquitous career economic criminals are those who have demonstrated a facility for taking in excess of $20 million in a single scheme. They are normally clothed with the trappings of legitimacy. It is this appearance which allows them to operate easily within the milieu of name financial institutions, affording them the opportunity to steal and hide significant tranches of wealth. They have mastered the art of transferring risk and exposure to the victim.

Of a lesser size, in terms of magnitude of dealing, are the occasional economic criminals and male fide (bad faith) transactors. This group is marked by the taking of wealth at the rate of $1 million to $20 million per transaction. These individuals may borrow money legitimately, but when it comes time to repay, they hide the money that they owe.

In most large-scale money laundering cases, the primary protagonist has (a) unlawfully obtained very substantial wealth, (b) sought professional advice on how, when and where to hide that wealth, and (c) taken steps to implement such advice by obscuring the ownership of the assets thus taken. Such a person will wish to use the proceeds at some time in the future and, importantly, represents a person who possesses normal human vulnerabilities. To continue to carry out their unworthy ends, the violators of law who hold wealth illegally need to envelope themselves in (i) proper legal systems, (ii) (purportedly) properly constituted juridical persons (such as companies), and (iii) gilt-edged financial institutions – in order that they might enjoy the fruits of their conduct.

What are His Weaknesses?

As indicated above, a dishonest obligor's key strengths are also his Achilles heel. His arrogance and contempt conspire against him. As he becomes more successful at making an ass of the law, so his sense of infallibility expands. He reaches a stage where he believes that he is untouchable. He has seen how ineffectual traditional methods of asset recovery are. A sense of security prevails. He relaxes.

He does not expect his adversaries to uncover the critical information required to show his asset fortifications for what they are — tissue-thin veils. Legal orthodoxy is assumed by him. A company is what it says it is. Imprudently, he relies on that. Frequently, victims and their advisors also incorrectly assume that the lifting of the veil ¹² of a company is a legal rarity. His reliance on the separate juridical nature of his puppets is an expression of weakness. To exploit this, claimants ought to deploy the very element he flaunts, against him. His web. His fortifications. He, in effect, brings about his own downfall. The victim facilitates.

The recognition of common traits, and the identification and understanding of modus operandi, are crucial elements in the fight against economic crime. The internationalization of fraudulent operations has made more difficult the preparation of effective strategies to combat this form of wrongdoing. We must therefore learn to treat like with like, recognising that these actors exploit for their own advantages the divergence of legal systems among different countries. So we too must react with an internationalization of fighting strategies which have the effect of inverting the perceived strength of the professional money launderer.

What can be done to turn the tables? Take the following illustration. A US$ 720 million circular cheque and margin account kiting scheme is run from the Bahamas against a Canadian securities dealer. The fraudster, believing the person with whom he is engaged in conversation to be similarly predisposed to sail close to the wind, offers the following comment. While chuckling, he says ... banks are dumb and laughable ...; [the victim, whom he refers to by name] is laughable .... They [the victim, whom he again names] were an easy take ... here's how I did them, and here's how I hid the money. Unwittingly, he condemns himself. The counterparty to the conversation is not another miscreant. He is a professional investigator who acts for the victim. ¹³

Footnotes

^{1. McCord, W. & McCord, J., The Psychopath, Princeton: Van Nostrand, 1964.}

^{2. Lee, J.H., The Treatment of Psychopathic and Antisocial Personality Disorders: A Review, Clinical Decision Making Support Unit, Broadmoor Hospital (U.K.). ["Lee, J.H."].}

^{3. Id. at p. 5.}

^{4. As quoted in Lee, J.H. at p. 6.}

^{5. Denning MR, in the English Court of Appeal decision in Wallersteiner v. Moir [1974] 3 All ER 217, 223.}

^{6. Jones v. Lipman [1962] 1 WLR 832.}

^{7. Hare's Psychopathy Checklist (1985) was based on a list of sixteen characteristics considered to be typical of psychopaths. He applied them to a series of prisoners. After further study, he expanded the list to a twenty-item version. Ratings of 0 – 2 apply to each item, which can give a maximum score of 40. At a cut-off score of 30 or above, a subject is designated a psychopath. This is Hare's list of characteristics: (1) glibness/superficial charm; (2) grandiose sense of self-worth; (3) need for stimulation/proneness to boredom; (4) pathological lying; (5) cunning/manipulative; (6) lack of remorse or guilt; (7) shallow affect; (8) callous/lack of empathy; (9) parasitic lifestyle; (10) poor behavioral controls; (11) promiscuous sexual behavior; (12) early behavioral problems; (13) lack of realistic, long-term goals; (14) impulsivity; (15) irresponsibility; (16) failure to accept responsibility for own actions; (17) many short-term marital relationships; (18) juvenile delinquency; (19) revocation of conditional release; and (20) criminal versatility.}

^{8. Mackay, C., 'Extraordinary Popular Delusions and the Madness of Crowds' (2nd Ed.) (1852), page 14.}

^{9. Mackay, C., 'Extraordinary Popular Delusions and the Madness of Crowds' (2nd Ed.) (1852), page 88.}

^{10. Id, at page 53. Mackay also recorded that:}

^{11. Page 3, The Business and Security e-Journal, The Lubrinco Group (New York) (www.lubrinco.com), Volume 6 No. 10, October 2003.}

^{12. Or, to use the U.S. lawyers' term, the 'piercing of the corporate veil.'}

^{13. This is not a fictitious scenario. It represents facts drawn from a case with which one of the authors was charged.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.