Case Study: Lack of Integrity Due Diligence Has Painful Consequences

Editor’s note: The following article excerpt is from our latest Fraud 360 magazine (Issue 1 2015)

Recently, an investor group put its trust — and its funds — in the hands of an outside business partner without conducting a due diligence check on this individual. Eighteen months into the partnership, the individual had succeeded in fleecing the group of more than U.S. $6 million (and is still at large). The fact is, a proper integrity due diligence investigation on the individual would have revealed his criminal past, false associations with key banking resources and even the nonexistence of his stated home address.

In the high-stakes world of investing, not everything is as it appears. Hand-shake agreements built solely on trust are a thing of the past, as fraudsters take on complex identities and utilize far-fetched (but very believable) schemes to boldly fleece seemingly intelligent and highly educated victims. This case study is a prime example of what happens when parties focus too much on trust and dollar signs, and not enough on the outside sources that are promising those dollars …

… In 2013, the U.S. investor group sought expert help, claiming it had been defrauded of more than U.S. $6 million by an outside business partner with whom the group had established what appeared to be a solid and trusting relationship.

Over the 18-month lifetime of the fraud, the subject, who we will call “Mr. X,” was introduced to and became very close to the members of the investor group — slowly and steadily earning their trust and eventually siphoning their dollars. Mr. X had passed himself off as a global investment professional with impeccable credentials who worked out of Dubai and whose close contacts included the brother-in-law of the Prime Minister and Vice President of the UAE. He was deceiving the group with an impressive-looking website that show-cased his various accomplishments and capabilities. Mr. X proceeded to describe in detail the joint venture he had formed with the PM’s brother-in-law, which offered investors lucrative lines of credit that would be backed by the group’s various investments in global gold mines, fine artwork, precious metals and other valuable assets.

Mr. X convinced the group that ABC bank, which was owned in part by his business partner, the brother-in-law of His Highness PM, would supply the group with Safe Keeping Receipts for the assets and provide lines of credit with those receipts. This mechanism would produce liquidity for the group, the proceeds of which would be used to invest in a variety of economic and humanitarian projects that had been earmarked by the investor group.

Mr. X established a financial mechanism which would temporarily transfer ownership of the group’s assets to a bank account owned by him. He deceived the investor group by telling them that he was transferring money into a company account, ostensibly for the purpose of establishing business in a Free Trade Zone (FTZ) in Dubai. In truth, there was no such company account — he was embezzling the money.

Mr. X further explained that, in order to provide maximum return on the investment, the group would have to open “Premier Level Bank Accounts” which would man-date a U.S. $300,000 minimum balance for each asset deposited. Each of the group’s assets would also be subject to incorporation in the Free Trade Zone of Dubai, which charged a fee of U.S. $10,000 per asset.

Enamored with this deal, the group sent Mr. X a total of U.S. $4.03 million representing the value of 13 different assets (it was later discovered that one of the group members forwarded an additional U.S. $2 million, which was unbeknownst to the rest of the group). The funds would stay safe in the ABC account and $130,000 was charged as an expense to set up the incorporations in the Free Trade Zone.

The formal contract cementing this business transaction required Mr. X to re-fund all of the group’s deposited funds on demand if certain performance measures were not met.

After seven months, the group soon realized that Mr. X was not going to meet those benchmarks, and by January of 2013 the ugly truth was starting to reveal itself. After repeated requests to terminate the contract and retrieve the funds, the group contacted the Compliance Officer at ABC and learned that Mr. X had in fact never opened the accounts, had lied outright in his communications with the group, and had absconded with their funds. To add insult to injury, it turned out that his high-ranking resources at the bank were fictional characters as well.

As one group member stated: “It suddenly became clear that his intention was to steal the money from us from the start and, unfortunately, we didn’t bother to undertake any due diligence before entering into this deal.”

Read the full article and learn the rest of the story in Fraud 360 magazine. Just sign in (for free) to subscribe and get immediate access to the online version.