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Larry C. Adams, CPA
Phoenix, Arizona USA
Certified Public Accountant
Certified Fraud Examiner
E-mail
fraudwritr@aol.com
Telephone (602) 995-8008
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September 2005 Topics
Tunneling, Rort, Tally, Erector-set Fraud,
Prevaricate, CFA, and Redfellas
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Tunneling fraud occurs more
often in civil law countries
because they have a higher proportion of
private and family-owned companies.
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Fraud In Other Words
Professional Jargon
and Uncensored Street Slang
by Larry C. Adams, CFE, CPA, CIA, CISA
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Tunneling
Fraud schemes committed by a company’s own management or majority
shareholders, to deliberately transfer company assets and real estate to
their own private businesses, sometimes located offshore. The term is
reminiscent of
 movie plots in which the characters dig an underground
tunnel to connect an adjacent building to a bank, and then carry all the
valuables away from the bank vault. Tunneling was a term used in the early
1990s in the Czech
Republic, when large, previously privatized, banks and factories went
bankrupt and their bank accounts were virtually empty. The prevalent
scheme in central Europe involved huge loans by the companies to their
management or private firms, which they never intended to repay. Managers
sold company real estate to their accomplices for a fraction of the market
price. The companies massively overpaid for outsourced services. Other
tunneling tactics included excessive executive compensation, loan
guarantees, expropriation of corporate opportunities, dilutive issues of
stock shares, and insider trading. Laws about conflicts of interest were
weak. There was no legal liability of the managers for leading the
companies towards bankruptcy. Tunneling occurs more often in civil law
countries, such as France, because civil law countries have a higher
proportion of private and family-owned companies. Common law countries,
such as the United Kingdom, give judges more discretion to prevent
self-dealing transactions. Tunneling occurred in the Asian financial
crisis that started in Thailand in 1997 and spread through Indonesia,
South Korea, Hong Kong, Malaysia, Laos, and the Philippines.
“Explore Dictionary of Finance,”
www.explore-finance.com/finance/T/
Tunneling_(fraud).html, Mar. 3, 2005.
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Rort
An informal 20th century Australian word for taking unfair advantage of a public
service for a person’s own benefit. A rort is a trick or a fraud. In 2004, a Member of Parliament (MP) of New South
Wales was
 accused of using travel allowances to visit beach resorts,
instead of traveling between the Parliament House in Sydney and his
hometown. He barely spent ten percent of his time in his hometown. The MP
also was accused of using his staff to compile a book, and write software
for a for-profit company. Five members of the Parliament of South Africa
were convicted in 2005 for rorting their travel expenses to pay for
flights for their families and friends, hire luxury cars, and eat in
expensive restaurants. The rorts cost taxpayers 17 million ZAR (South
African Rand) (US$2.5 million). The
investigations were done by the Scorpions, South Africa's elite FBI-style
anti-crime unit, started in 1999 and formally known as the Directorate of
Special Operations (DSO). A rort also
can involve an employee taking advantage of a company benefit that he
isn’t entitled to, or using it to the disadvantage of the public that the
company serves. Customers of an Australian airline complained about
airline employees who created phantom commercial bookings to protect seats
for airline staff travel, and upgraded the off-duty staff to first-class
seats, while business class passengers who earned the upgrades were
repeatedly denied.
Sean Nicholis, “MP Accused of Rorting $130,000,” Sydney
Morning Herald, July 6, 2004.
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Erector-set Fraud
A law enforcement phrase for a car
insurance scheme. The vehicle owner leaves an expensive car where it can
be stolen by prearrangement with his accomplices. The owner reports the
theft to the insurance company. The accomplices quickly strip most of the
parts off the car and leave the skeleton where the owner can find it and
report the “discovery” to the insurance company. The owner collects a big
insurance settlement, and cheaply buys the vandalized framework of the car
back from the insurance company. For the last part of the erector-set
fraud, the original vehicle owner and his accomplices rebuild the car with
the parts they previously stripped off. The owner resells the restored car
for another profit. The Insurance Research Council (www.ircweb.org)
conducts public attitude surveys and discovers the types of insurance
crimes the public considers “acceptable.” In one survey, six percent of the respondents
said it’s acceptable to abandon a car and report it stolen to an insurance
company. Residents of New York State are more tolerant of insurance fraud
than the rest of the U.S. The Louisiana State Police Insurance Fraud Unit
(www.lsp.org/ifu.html) has 17 red flags for vehicle theft fraud. These two red flags are related to erector-set fraud:
a vehicle is
recovered stripped within a short duration of time after the loss
allegedly occurred, and a salvage yard or repair garage takes unusual interest in a claim. Erector-set slang refers to educational toys
developed by Alfred Carlton Gilbert (1884 – 1962), a brilliant American
inventor and
 Olympic
gold medalist. The popular Erector®
kits include metal parts and motors for kids to assemble working models of
Ferris wheels, trains, robots, trucks and cars.
Ralph De Sola, “Crime Dictionary,” Facts On File,
Inc., New York, 1982, page 47.
Photo: Bill Bean Collection, http://erectorset.net/set01.html.
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Redfellas
A slang term for members of the
new Russian mafia who established organized crime operations in New York,
California, and Florida. The term Redfellas is a variation of “Goodfellas,”
depicted in
Martin Scorsese’s 1990 movie about wise guys and
 mobsters
in New
York City. Several books on law enforcement and business security,
published since 1998, discuss the growth of Redfellas and how to thwart
their transnational schemes. Regrettably, a new counterculture video game
for the Xbox®
allows players to run six crime syndicates, including the Russian Redfellas. Players develop their skills of corruption in racketeering,
forgery, bribery, assassination, drug distribution, and gang alliances.
“Redfellas,” www.agentsnotes.com/redfellas.html,
May 28, 2005.
Photo: barnesandnoble.com
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Prevaricate
To avoid giving a direct, honest
answer or opinion. To give crooked answers in court or deviate from the
straight line of truth. Prevaricate is derived from the Latin
praevaricari, which means to walk crookedly. Originally, it described
a person who can’t walk in a straight line because of a physical
condition, such as being bent over or knock-kneed, where his legs curve
inward at
 the
knees. In the 16th century, praevaricors was an
agricultural term for Roman farmers who walked in a zigzag pattern or
plowed a crooked furrow. Later, in English law, prevaricate meant to
collude or tell a lie. Today, prevaricate means to deliberately conceal or
misrepresent the truth by giving evasive or ambiguous evidence. To speak
or act misleadingly. To beat around the bush.
Hugh Rawson, “Devious Derivations,” Castle Books,
Edison, New Jersey, 2002, pages 164 - 165.
Photo: www.fla-playground.com/zigzag.jpg
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Tally
A record made with a series of marks, or an account of how much is given
or owed. Tally is derived from the Latin word talea that means twig, and
the French word tailler that means to cut. A “tally stick” is an ancient
device used to aid a person’s memory by
 recording numbers, quantities, and
messages. A
“single tally stick” is an elongated piece of wood that is marked with
notches carved with a knife. In England, for example, the value of a
shilling was marked with a thin cut without removing any wood, and twenty
pounds was marked with a gouge equal to the width of the little finger.
Medieval Europe was constantly short of coins and the population was
predominately illiterate, so tally sticks were a simple substitute. The
“split tally” became a common technique to record bilateral exchanges and
debts. A tally stick was commonly made of squared hazel wood. It was
marked with a system of notches and then split lengthwise. The names of
the persons involved were written in ink beside the notches. Wax seals
were applied on some tallies. Every notch matched along the split line, to
protect it from counterfeiting. Each person received a half of the stick
as proof of the transaction. When the corresponding sticks or twins were
reassembled, they made a completely identifiable unit. A tally could
change hands or be given to heirs without losing value. The split tally
was one of the first fraud prevention tools. Later, the technique was
refined to split the stick at a slight angle or curve, so the halves were
different lengths. The longer piece was called the “stock” and was given
to the person who gave money or goods to the receiver. The person with the
longer piece became known as the “stockholder.” The shorter part of the
tally stick was called the “foil” and was given to the person who received
the money or goods. Each person had an identifiable, tamper-proof record
of the amount paid or owed in the
 transaction. The British Empire used
tally sticks for 726 years. The Exchequer (treasurer) used the split tally
system until 1826 for the collection of taxes by the local sheriffs. Some
sticks were six feet long or more. Most English tallies were deliberately
destroyed in 1843 because newer banking systems and currencies were
created. The tallies were put into the furnace in the House of Lords, but
the fire overheated the flues and consequently burned down the old Houses
of Parliament. A few tallies survived and are displayed at the Museum of
the Public Record Office in London. Some civilizations used tallies made
of bone, ivory, stone, metal, ceramic, clay, or paper. Pliny the Elder (23
– 79 A.D.), a Roman scientist and author, wrote about wooden tally sticks.
Marco Polo (1254 – 1324) wrote about tallies used in China. A tally was
called chi-chi in Chinese, kerbholz (notched wood) in German,
teomin
(twins) in Hebrew, and symbolon (put together) in Greek. In the 20th
century, some rural areas along the Danube River and in Switzerland still
used the tally.
Dictionary.LaborLawTalk.com,
http://encyclopedia.laborlawtalk.com/
Tally_stick, May 28, 2005.
Photo 1: www.steveaylett.com/Pages/stickref.html.
Photo 2: www.nationalarchives.gov.uk/museum/
item.asp?item_id=6
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CFA (Chartered
Financial Analyst)
The CFA® designation covers the areas of investment principles, asset
valuation, and portfolio management. The first CFA was awarded in 1963 by
the Association for Investment Management and Research (AIMR), which was
renamed the CFA Institute in May 2004.
 The organization has 71,000
members in 120 countries, and 85 percent are Chartered Financial Analysts.
The CFA Institute has offices in Charlottesville, Virginia; London; and
Hong Kong. The “Financial Analysts Journal®” is published bimonthly and
the Web site has hundreds of articles about ethics, global differences,
professional standards, bribery, self-dealing, conflict disclosures, and
other fraud topics. CFAs are expected to display a working knowledge of
financial statement analysis, macroeconomics, microeconomics, quantitative
methods of investment analysis and management, financial markets and
instruments, and corporate finance. CFAs must demonstrate the ability to
analyze specific equity and fixed-income securities and other investments,
estimate expected investment return and risk, compare alternative
investment choices, and make investment recommendations. CFAs also must
demonstrate a thorough understanding of performance presentation standards
and measurement techniques. Some Chartered Financial Analysts are
Certified Fraud Examiners too.
www.cfainstitute.org, May 27, 2005.
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Larry C.
Adams, CFE, CPA, CIA, CISA, has experience as a forensic consultant,
director of auditing, financial controller, federal investigator and
regional manager on projects in United States, Latin America, and Asia. He
publishes the book and online editions of “Fraud In Other Words.” His Web
site is www.larry-adams.com. His e-mail address is fraudwritr@aol.com.
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Copyright 2005 Larry C. Adams.
All rights reserved.
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This article is in the
September/October 2005 issue of
FRAUD Magazine, the Journal of the Association of
Certified Fraud Examiners.
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