The Discreet Science
Taming the AML Monster (July Newsletter)
Dear Friends,
This month it was revealed that Bank of America had seen Mexican drug lords use the bank to hide money in its accounts and invest illegal proceeds. Then, if that revelation was not startling enough, a Senate subcommittee issued a remarkable report on the AML and OFAC deficiencies at HSBC.
That global bank was cited for numerous lapses that included a 3-year failure to do any AML monitoring on $15 billion in bulk cash transactions; more than 28,000 undisclosed OFAC-sensitive transactions involving $19.7 billion; and a backlog of 17,000 unreviewed suspicious activity alerts.
Because the Senate subcommittee’s report chastises the Office of the Comptroller of the Currency for allowing these problems to “fester,” it is hard to imagine an outcome from the hearings that does not include a massive new focus on AML and OFAC monitoring across the global banking landscape.
That new scrutiny will significantly add to the cost of compliance and increase the likelihood a financial institution will have its growth frozen by a red flag or its continuing operations hampered by the effort to comply with AML and OFAC monitoring regulations.
Fast, Effective AML/OFAC Monitoring
Now might be a good time for me to remind you that K2 Intelligence has developed a suite of AML/OFAC services that will allow financial institutions to deal with alerts and compliance needs with greater speed and cost-efficiency than the services that are currently in use today.
At the center of our AML/OFAC capability is our proprietary K2 Analytics program which will allow banks and other financial clearing houses to isolate, track and investigate transactions in the most effective manner.
The Problems at HSBC
Contrast that with what Reuters recently revealed about HSBC’s AML/OFAC programs:
“Former employees in the New Castle office describe a febrile boiler-room environment overseen by managers uninterested in investigating transactions with possible links to drug trafficking, terrorist financing, Iran and other countries under U.S. sanctions, and other illegal activities. Instead, they say, the single-minded focus was on clearing out the paperwork as fast as possible.”
No matter how overwhelming the task, AML/OFAC compliance should not be an exercise in clearing paperwork. Our AML/OFAC solutions are designed to swiftly discern and address real concerns without creating a backlog of make-work.
Join Us for Breakfast
On Tuesday, July 31st, we will be facilitating a discussion of AML and OFAC challenges over breakfast in our offices. We are most interested in hearing about your needs and concerns, especially in light of this extraordinary spate of news, we hope you’ll join us. Please register here for the event or feel free to get in touch directly.
Best,
Jeremy M. Kroll
CEO and Co-Founder
K2 Intelligence, LLC
K2Intelligence.com
Beware the Gatekeepers in Wine and Other Investments
On May 12, 2012, Rudy Kurniawan, a very well-known wine expert and collector, was charged with five counts of fraud primarily related to his selling of counterfeit wine and his defrauding of a California wine collector and the New York auction house Acker Merrall & Condit. The scope of his criminal enterprise was further illuminated as the FBI searched his home, uncovering thousands of wine labels for high-end wines, corks, sealing wax with vintage markings and instructions for fabricating labels. Kurniawan is estimated to have sold over $35 million in wine since approximately 2005 and the extent of his counterfeit sales is unknown.
Benjamin Wallace, in his May 2012 New York article “Chateau Sucker,” that profiles Kurniawan and his fraudulent activities, begins with a description of wine world’s distaste for inquiry:
…in the rare-wine world, doubts are endemic; murkiness is built into a product that is concealed by tinted glass and banded wooden cases and opaque provenance and the fog of history. At the same time, the whole apparatus of the rare-wine market is about converting doubt into mystique. Most wealthy collectors want to spend big and drink famous labels, not necessarily ask questions or hear the answers. Guests at tastings don’t want to bite the hand that quenches them. Auctioneers may not want to risk losing consignments by nitpicking ambiguous bottles. Winemakers don’t like to talk about counterfeiting, for fear of the taint.
While the Kurniawan case is interesting due to the scope and this allure of rare wine, the lessons an investor, collector or family might learn are far-reaching and universally applicable to business investment. “Gatekeepers” exist, no matter what the asset class, and it is necessary to evaluate their character and capabilities to protect any potential investment. The tools necessary for this analysis can be applied to a spectrum of cases, whether a stake is being sought in a public company, a mining operation or a lot of Bordeaux.
In this instance, associates, interested purchasers and significantly John Kapon, president and auction director of Acker, failed to ask direct questions into Kurniawan’s background and the legitimacy of his product. This vetting process would have involved at least two stages, including background research and provenance work. Armed with comprehensive due diligence, buyers might have avoided much of the havoc Kurniawan brought to the rare and investable wine market.
Chateau Sucker (New York Magazine)
Wipe Away the Confusion in Wine
The value of old wine has risen dramatically in recent years, New York reports, and the compelling success at auction of Rudy Kurniawan, a well-known wine expert charged with five counts of fraud in May 2012, has been partially credited for its boost.
In 2002, a 1945 DRC Romanee-Conti sold for $2,600; by 2011, the price tag had risen to $124,000. Collectors, however, have historically approached such high-end investments in wine differently from those in more “traditional” financial assets. Part of that difference, it seems, is because the measure of wine’s value is relatively unquantifiable. As such, it has not been treated with the same due diligence associated with other transactions.
Such inattention is steeped in cultural habits within wine circles that have little desire to question a “phenomenal” talent whose rallying personality raises the interest and, in this case, the value of an industry. As New York reported, “Among the privileged set [sic] Kurniawan’s quirks and resume gaps were of much less interest than his generosity.”
It is nonetheless important to note that “gatekeepers” exist, no matter what the asset class, and it is necessary to evaluate their character and capabilities to protect any potential investment.
- The first stage in vetting Kurniawan’s background would have included discreet interviews and a public records review – Kurniawan claimed to associates that his parents operated a major Guinness distributor in Indonesia, but provided few other details. Kurniawan also leveraged this nearly unknown background to “explain” what seemed to be a limitless resource of funds and initial seed money.
- A second focus of investigation, therefore, would be to determine Kurniawan’s true financial status. As is apparent now, several records indicating economic instability filed within the last decade would have raised suspicions about Kurniawan, especially considering his outwardly lavish lifestyle. It would also have signified a reason for Kurniawan to take risks for monetary gain.
One such disclosure would have been a $1 million lien “quietly” filed by Acker in 2007 on all of Kurniawan’s wine. According to the recent federal complaint, Kurniawan attempted to auction these wine holdings without Acker’s consent through Christie’s auction house on two occasions (most recently in November 2011). He had also arranged to repay $2.3 million in loans from a California collector through these unauthorized sales.
Chateau Sucker (New York Magazine)
Vino Without the Veritas
A second stage of research, advantageous to potential purchasers, would have focused on authenticating the wine Kurniawan brought to the rare-wine market. The necessity of this provenance-related work will be further discussed in a subsequent post.
The actions of John Kapon, president and auction director of Acker, represent the lack of oversight in the rare-wine collecting world that allowed for the long run of Rudy Kurniawan, a very well-known wine expert charged with selling counterfeit wine in May 2012. The compelling influence at auction and success of Kurniawan, considered a “phenomenal” talent and rallying individual, has been partially credited for a dramatic boost in prices within the rare-wine world within the last decade.
Kapon, one of several “victims” of the rare-wine world’s culture of personality, relied on other interested parties to conduct research into Kurniawan’s wine instead of engaging in his own direct questioning. The fallout from this complacent behavior was seen at a 2008 Acker auction, in which least 84 of 97 of Domaine Ponsot lots consigned by Kurniawan were found to be counterfeit. (Six of these lots were presented as Clos St. Denis wines bottled by Ponsot between 1945 and 1971; Ponsot, however, did not make wine from this vineyard until 1982.) Acker ultimately pulled the lots, not because of Kapon’s own inquiry, but because wine maker Laurent Ponsot attended the auction to ensure they were withdrawn. In LA Weekly, Kapon, explained their error, stating, “It happens. Maybe part of the reason is because no one was looking for it.”
Kapon, however, should have pushed for further “provenance” work – including archival research and inquiries – that could have disclosed this relatively straight-forward error in advance of the auction. Acker would have also benefitted from such background inquiries into Kurniawan as those outlined in a preceding post.
Kurniawan’s suspicious actions also fell under the radar of other participants in the high-end wine world. Such restaurants as the now-closed Cru, which boasted a 150,000 item wine portfolio, sent Kurniawan numerous empty bottles of the expensive labels he had purchased over the course of six years. According to New York, Kurniawan told the sommelier he was creating a “wine museum” in his garage.
Kurniawan’s apparent immunity ended in 2009 when Bill Koch, one of the country’s largest wine collectors, filed suit in California asserting that he had purchased counterfeit bottles through Acker attributed to the defendant. His complaint also outlines attempts by Kurniawan to defraud other wine consumers. Koch, through litigation, was first to recognize and pursue Kurniawan’s counterfeits sales as intentional, malicious actions and to hold him to a more significant level of responsibility. (Discovery in Koch’s suit began earlier this year. However, public records research conducted over the past three years would have yielded material case filings and provided a potential purchaser significant advance notice prior to investment.)
Prior to this action and even following the 2008 Acker auction, Kurniawan had been able to minimize personal damage and limitations to his future sales, first by characterizing counterfeits as inevitable in the industry, then by shifting the blame onto his own sources of wine, at least one of which was an entirely fabricated individual. Koch’s lawsuit stopped this cycle. It was also the plaintiff’s desire to restore the ethics and character of this culture of personality that caused him to file the most public censuring of Kurniawan prior to the May 2012 indictment.
Had questions been asked earlier, however, as is true with any asset class transactions, years of investments and millions of dollars could have been protected.
Chateau Sucker (New York Magazine)
Join Us July 31st: AML Breakfast
Jeremy Kroll, Vince D’Amelio, Tom Bock and Dana Irvis
invite you to a discussion and demonstration of
K2 Intelligence’s Anti-Money Laundering and Anti-Fraud compliance capabilities.
Understanding the Convergence in
AML Compliance & Fraud Detection/Prevention
We’d like to show you our powerful, cost-effective and proprietary technology
K2Analytics
and explain how it can greatly enhance your AML/BSA compliance.
Join us on July 31st (8:30am) at our offices for a brief introduction.
A light breakfast will be served.
June Newsletter: Our Clients Ask for Reputational Diligence
Dear Friends,
The recent embarrassment visited upon Yahoo!’s board of directors—and its former CEO Scott Thompson—reminds me of an important trend that I would like to bring to your attention.
Thompson, you will remember, padded his resume. Not satisfied with his college degree in accounting, the tech company CEO added a computer science degree to his CV, something a run-of-the-mill background check may not have picked up.
Only when an activist investor started really digging was it discovered that Thompson’s alma mater didn’t even have a Computer Science department in the 1970s when he attended. The story has received so much attention for the way it cast doubt upon the new CEO’s personal ethics and his fitness to run a large corporation.
But I draw a different conclusion: in today’s high-pressure communications environment, discovery is inevitable. There are too many interested parties with too much access and too many reasons to ferret out any detail about a prominent figure. The same applies to companies—only more so.
Reputational Diligence
Smart players in the global business world have begun to ask us to perform a thorough and independent review of their reputation and its basis in fact. You could call it Reputational Diligence. These assignements are designed to give the subject an understanding of how others will perceive their backgrounds, their actions or the corporate entities they own or operate through. Our clients know that they’re getting a window on what others see during a cursory search for information before an important meeting or what information might come to light in the heat of a deal.
A staple of modern corporate strategy is having the ability to uncover damaging information about one’s opponents. This practice, which began as opposition research in politics, has now become widespread in business. It is to our clients’ benefit to know ahead of time what their opponents might seize upon, what regulators might flag and what they can begin to ameliorate before engaging in a significant venture.
Reputational Diligence can take two forms: a check of public records or an in-depth reputational review covering a subject’s entire career, his or her ownership interests and any political connections that have played a role in his or her business. Proper reputational diligence also evaluates the subject’s operational behavior against an industry’s standards and practices.
Deep Diligence
Our background research goes beyond “due” diligence. Our client’s come to us for “deep” diligence. (It’s their word, actually.) That includes determining as best we can the truth of various allegations, understanding the subject’s social and media footprint and gauging sentiment about the subject and his or her actions.
We do our research using proprietary technology and in-depth interviews. Our in-house analysts research extensively and collaborate with knowledgable sources and investigators in cities around the world where the subject has had dealings. We look through holding companies and corporate entities then consult the relevant experts—whether local/national law enforcement or knowledgeable industry participants—to best determine reality and risks.
At the end, we produce a truly independent report that allows the subject to see himself or herself through the eyes of the rest of the world. Armed with this knowledge, our clients can explain, dispel or capitalize upon the impressions we’ve uncovered. Our work is confidential, frank and authoritative, an invaluable tool for anyone who wants to ensure they don’t get blind-sided or a rare opportunity to set the record straight before a reputation is unfairly diminished.
June, A Busy Month
June has a been a big month for us. I want to take a moment to share with you all that has happened. K2 Global Consulting became K2 Intelligence and we moved offices a few blocks in Manhattan to accommodate our growing staff, including:
- Louis Vetter who joined us as a forensic accountant. He has served as the expert to the trustee in a highly publicized Ponzi scheme and testified in numerous adversary proceedings.
- Dana Irvis who comes to us from the New York County District Attorney’s Office, where she most recently worked in the Major Economic Crimes Bureau investigating complex white-collar crimes including money laundering, commodities trading fraud and mortgage fraud.
- Mitch Silber will lead our new K2 Analytics division as it develops and deploys new products and services. He will be building upon his experience as the Director of the NYPD Intelligence Division’s Analytic and Cyber Units where he used some of the most sophisticated technologies available to the government. With K2 Intelligence, Mitch will be able to adapt those same tools to private sector uses.
One area of our work that Mitch will be helping to support is our Anti-Money Laundering Compliance and Fraud Detection and Prevention for financial institutions. We will be hosting a breakfast at our offices on July 31st where our practice leaders will explain more how AML and Anti-Fraud measures are converging. If you’d like to attend, please register here or feel free to get in touch.
Best,
Jeremy M. Kroll
CEO and Co-Founder
K2 Intelligence, LLC
K2Intelligence.com
