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    DIFA2004-Corruption & The Role of Forensic Accountant-A Survey of The Caribbean

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    Corruption & The Role of Forensic Accountant: A Survey of the Caribbean Research Project for Emerging Issues/Advanced Topics Course Diploma in Investigative and Forensic Accounting Program Prepared by Juliana Thorpe-Taitt July 1, 2004 For Prof. Leonard Brooks AKNOWLEDGEMENTS As I embark into this new and exciting field I would like to express my gratitude to Almighty God for the strength and grace given me to complete this study. Appreciation is also extended to my Supervisor Dr. Emily Dick-Forde whose guidance and input provided me with the important insight necessary to adequately craft the approach and ultimately to complete this important research, Finally, I wish to acknowledge the contribution of my family particularly my husband Kirk who helped me keep focused at various stages throughout this research and my daughters Johari and Zindzele for the laughter provided during stressful times and for being a source motivation. TABLE OF CONTENTS EXECUTIVE SUMMARY PURPOSE.. BACKGROUND... SECTION 1.1 DEFINITION! 1.1.1 CORRUPTION. 1.1.2 FRAUD... 1.1.3 COMMERCIAL CRIME 1.1.4 FORENSIC ACCOUNTING .. SECTION 2.1 THEORETICAL PERSPECTIVES ON CORRUPTION SECTION 3.1 EMERGENCE OF A SPECIALTY - FORENSIC ACCOUNTING AS 13 A PROFESSION... 3.2. ADDING VALUE - THE FORENSIC ACCOUNTANT AS AN EXPERT 3.3 SPOTLIGHTING THE WORK OF THE FORENSIC ACCOUNTANT. 3.4 LEGAL FRAMEWORK IN DEVELOPED COUNTRIES. SECTION 4. 4.1 DELINEATING THE CARIBBEAN. 4.2 INTERNATIONAL PERSPECTIVES ON CORRUPTION IN THE CARIBBEAN. 4.3 CORRUPTION IN THE CARIBBEAN: PAST AND PRESENT CASES. 4.3.1 TRINIDAD — PIARCO AIRPORT CONSTRUCTION SCANDAL 4.3.2 ANTIGUA ~ INQUIRY INTO THE MEDICAL BENEFITS SCHEME .. 4.3.3 BARBADOS — COMMISSION OF INQUIRY INTO THE COLLAPSE OF TRADE ‘CONFIRMERS (BARBADOS) LIMITED. 40 SECTION 5. 5.1 SURVEY ANALYSES ~ DID FORENSICS REALLY MAKE A DIFFERENCE?. 5.1.1 THE HISTORICAL CONTEXT .. 5.1.2 POLITICAL RAMIFICATIONS. : 5.1.3 THE LEGAL FRAMEWORK IN CARIBBEAN SOCIETIES 5.1.4 THE AGENCIES USED TO FIGHT CORRUPTION, SECTION 6.. 6.1 CONCLUSIONS, BIBLIOGRAPHY. ii EXECUTIVE SUMMARY Purpose Corruption is costly to the development of any nation. It undermines the rule of law, wastes resources, discourages investment and raises the cost of doing business. The increasing sophistication of those involved in the practice of corruption and the myriad of frauds used to cover their schemes, requires that the area of forensic accounting be added to the tools necessary to bring about the successful investigation and prosecution of those involved, This paper explores the role of the Forensic Accountant in incidents of corruption within the context of the Caribbean, It examines specific cases of corruption and fraud occurring in Antigua, Barbados and Trinidad. The study considers the legal environment within which the Forensic Accountant operates, in these territories, and an assessment made as to its impact on his effectiveness in investigating cases of corruption or fraud. An assessment will also be made of the agencies charged with the responsibility for investigating and prosecuting corruption in these Caribbean jurisdictions, their resource capability and the effectiveness or limitations of the methods employed. Sin al Za ‘The paper begins with an exploration of the definitions of the key terms used throughout the study. This is covered in Section 1. In section 2 we explore various theoretical perspectives on corruption. In section 3 an attempt is made to locate the Forensic Accountant within the sociological theory on professions, In light of this we examine this professional's role as a combatant in the fight against corruption. This section will also shed light on how the legal framework in developed countries supports the work of the Forensic Accountant. Section 4 highlights specific cases of corruption and fraud in three Caribbean islands, while in section 5 detailed analyses of these cases are presented. Section 6 provides conclusions on the research study, Background Over the past decade and for years earlier, the topic of corruption has attracted much attention from politicians, economists, accountants and people in general Corruption has been around for as long as many institutions of any sort and was ‘widespread in the period of the Greek and Roman empires'. Indeed, elements of corruption can also be seen in the pages of biblical texts, for example the reviled tax collector”. Modem democratic government has not evaded this scourge. Governments and public officials from various countries, England, Nigeria, China, Peru, Nicaragua, Antigua, have at various times all battled the effects of ; MauNukken,R (1988),Comruption & the Decline of Rome, Yale University Press * Zondervan NIV Study Bible 2002, Matthew chapter 19 vs 2 this dilemma. In the present day, particularly in the last five years corruption. scandals are widely reported in the press with a noted expansion in the breath of their ambit. No longer limited to Governments and public officials, these scandals have exposed a sinister trend of corruption in all walks of life including private enterprise, health care institutions, and public accounting firms. The Association of Certified Fraud Examiners, in its Report to the American nation on Occupational Fraud and Abuse 2002, estimated that six percent of revenues are lost as a result of fraud. Globalization of economies and technological trends such as electronic money transfers have helped to ease the ath of the fraudster and complicate the job of the investigator however, Inkster? noted that: the general consensus among countries is that the driving factors behind the current fraud and corruption problems are economic pressures and society's weakening values. The pervasiveness of corruption and varying levels of financial fraud has over time demanded an appropriate response from the accounting profession. Recent Enron and Worldcom scandals have poignantly placed the profession under the microscope and none more so than the role of the auditor and their responsibility or ability to circumvent such financial tragedies. In the wake of current disaffection with the effectiveness of an audit in uncovering fraud, the work of the forensic accountant has taken the spotlight. In the current * Inkster, CMA Magazine; Apr96, Vol. 70 issue 3, pl environment according to Inkster* “the visions of dead bodies once conjured up when one heard the term forensic accounting is now erased”. This accounting specialty is now enjoying hot status attributed according to Joseph Wells*: ...to the litigation environment, the wave of accounting fraud...and an awareness on the part of CPA’s that they can profit by offering fraud services. ‘ Inkster, pg 3 * As quoted by Wolosky H.W (2004) Forensic accounting to the Forefront, Practical Accountant, Section 1 1:1 Definitions In this paper, the terms corruption and fraud may at times be used interchangeably. This section covers the differences and similarities between the two terms. The concept of commercial or white collar crime will also be subsumed in use of the word fraud. This concept is also defined. 1.1.1 Corruption Webster's dictionary defines corruption as “an impairment of integrity, virtue, or moral principle; or an inducement to wrong by improper or unlawful means.” Corruption is most often defined in the context of public officials. In this context Transparency International defines it as “the misuse of public funds for private gain.” However even this most widely used definition may be an over simplification, Corruption comes in many guises in fact and generally involves céllusion between two or more persons to act in a manner that undermines or circumvents a system and allows them to benefit. Bribery, extortion, fraud, trafficking, embezzlement - but also nepotism and cronyism - are all different manifestations of it. Even the most straightforward acts of corruption need not always involve money. Other gifts or advantages, such as membership of an exclusive club, are used as "sweeteners" to clinch deals. Understanding the multifaceted dimension of corruption is essential in order to identify workable ways of coping with it. Unchecked corruption can have a debilitating effect on any society. It can endanger the political stability, undermine democracy, and jeopardize the social, political, and economic development of the society. Corruption facilitates criminal activities, such as money laundering, hinders economic development, inflates the costs of doing business, and undermines the legitimacy of the government and public trust. 1.1.2 Fraud Although included as part of the acts of corruption, fraud is a word that has many definitions. It can be defined as a tort, a crime, or by the group with which it is associated. We will look at some of these. As a crime, the Michigan Criminal law’ states that: Fraud is a generic term, and embraces all the multifarious means which human ingenuity can devise, which are resorted to by one individual to get an advantage over another by false representations. Asa tort, the United States Supreme Court 1887 provided a definition of fraud in the civil sense as: Michigan Criminal Law, Chapter 86, Sec 1529 1. that the defendant has made a representation in regard to a ‘material fact; 2. that such representation is false 3. that such representations was not believed by the defendant, on reasonable grounds, to be true 4, that it was made with the intent that it should be acted upon; 5. that it was acted upon by the complainant to his damage; and 6. that in so acting on it the complainant was ignorant of its falsity, and reasonably believed it to be true. In its definition by association, fraud can be take on various shades of meanings dependent on which grouping is being identified. Corporate fraud would relate to any fraud perpetrated by, for, or against a business, and Management Fraud would be defined as the intentional misrepresentation of corporate performance levels perpetrated by employees serving in management roles who seck to benefit from such frauds in terms of promotions, bonuses, or other economic incentives and status symbols. In short, we can say that fraud means dishonesty in the form of intentional deception or a willful mistepresentation of a material fact. It consists of coercing people to act against their own best interest. ‘The distinction between corruption and fraud is that there need not be any colluding partner(s) for fraud to occur. Fraud can occur either singly or through the activities of a group. It simply requires one dishonest person who intentionally or negligently causes loss. In this sense, fraudulent acts can be part and parcel of a corruption scheme, or can occur individually and independently of any wider corruption scheme. 1.1.3 Commercial Crime The term commercial crime is not a legal one and is often used as a substitute for the terms white-collar crime and economic crime. It is defined in The Dictionary of Criminal Justice Data Terminology as non-violent crime for financial gain committed by means of deception by persons whose occupational status is entrepreneurial, professional or semi professional and utilizing their special occupational skills and opportunities; also non-violent crime for financial gain utilizing deception and committed by anyone having special technical and professional knowledge of a business and government irrespective of the person’s occupation. However the CPA’s Handbook of Fraud and Commercial Crime’ narrows this definition and views commercial crime as “white collar crime committed by an individual or a group of individuals in a company for the benefit of that company and indirectly, themselves”. "The CPA’S Handbook of Fraud and Commercial Crime 1.1.4 Forensic Accounting Although relatively new to the accounting profession the role of the forensic expert in other professions has been in place for some time. According to Webster's dictionary the word “forensic” is defined as “belonging to, used in ot suitable to courts of judicature or to public discussions and debate” and the term Sorensic medicine is defined as “a science that deals with the relation and application of medical facts to legal problems”. Accordingly, the term forensic accounting deals with the relation and application of financial facts to legal problems. The work of the forensic accountant is therefore oriented to the court of law, subject to public scrutiny and must be able to withstand the rigor of cross-examination. In distinguishing forensic accounting from fraud auditing, Bologna and Lindquist note that unlike fraud auditors who are actively involved in prevention and detection in a corporate environment: The forensic accountant is almost always reactive. Forensic accountants are trained to react to complaints arising in criminal matters, statements of claim arising in civil litigation, and rumors and inquiries arising in Corporate investigations. The investigative findings of the forensic accountant will impact on individual and or a company in terms of their freedom or a financial award ot loss. * Bologna, J Lindquist, R (1995) Fraud Auditing and Forensic Accounting, New Tools and Techniques. tion 2 21 Theoretical Perspectives on Corruption Corruption in modem society is not limited in time, geography, or society. A Series of U.S. government audits revealed widespread mismanagement and corruption in economic aid programs in Central America ["U .S. Economic Aid Goes Badly Astray," 1984]. In Iran corruption was noted to have become ‘manifest in a variety of forms: bribery, favoritism, and nepotism, among others [Farazmand, 1987]. In China, the State Council reported that in the two years before the end of 1985 the amount related to discovered economic crimes was 8.9 billion. This phenomena has been blamed for the failure of some developing countries to develop, and recent empirical research reveals a link between higher perceived corruption and lower investment and growth (Mauro 1995; World bank 1997) Bowles’, using the agent-principal theory views corruption as “a problem of asymmetric information involving collusion between agents and outsiders, against principals, or between supervisors and agents against principals”. In Positing this theory Bowles distinguished corruption from extortion and fraud. The essence of corruption he noted is that two or more individuals or groups act in concert to further their own interests. Whereas the latter both involve a { Bowles, R.A. 1999 “Corruption” refereed entry 8500 in Boukaet & Be Geest (eds). Int’ Encyclopaedia of Law & Economics 10 Unilateral action by a person or group aimed at advancing their own interest at the expense of others, From the perspective of economic theory, Rashid"” offers a very different view. In what may be considered ‘an end justifies the means” philosophy he believes that in lesser-developed economies predominantly, some form of corruption e.g. bribery, “if kept within limits” is “pareto desirable”, That is, necessary in order to enhance economic efficiency. However Seyf''' disagrees with this position, He states that while powerful individuals may in fact benefit, the end result is actually a waste of resources at the macro-economic level. He proposes that the real condition that creates shortage is a weak productive base. This perspective applied to the economic framework of the net importing economies of the Caribbean underscores how the seed of corruption may be sown and fertilized in these economies. Briones’? identified several forms of corruption: Bureaucratic or administrative; syndicated or criminal; and political. These terms are not mutually exclusive, Government employees are the main perpetrators of bureaucratic corruption. Examples include petty thievery, bribes, secret commissions and bid rigging. Syndicated corruption is linked to organized crime; drug running for example. * As quoted by Seyf A, (2001) Corruption and Development: A Study of Conflict, Development in Practice Vol 11,#5. " Seyf, pe 8 *Briones, LM., "On Containing Graft and Corruption," International Journal of Government Auditing. 14, 2(April1987), pp. 13-14) i Political corruption is often identified with elected officials and includes improper contract awards, wrongfully influencing goverment policy, and using political influence to gain personal or political benefits, Geoffery Shepherd” states that “corruption occurs at the convergence of individual motivations to behave corruptly and the opportunity to misuse public funds.” Individual motivations could spring from individual and communal value systems. These systems are strongly influenced by the institutions of civil society namely, the family, schools, church and the media. They are also formed by an individual’s sense of equity and faimess. On the other hand, opportunities for corruption are largely determined by governance systems. That is, the political arrangements that prevail in the country, and the availability of public Tesources. The discretion accorded to public officials, the incentives they face in the use of these resources and the control exercised by the state over that discretion determine the opportunity afforded. Allowing persons to exercise control of resources that are in high demand substantially increases the possibility of corruption in a society, by creating opportunity for gain. "Shepherd G, Paper presented entitled “The Fight against Corruption in Latin America And the Caribbean: A World Bank Perspective” June 15-16 1998, Santa Cruz 12 Section 3 3.1 Emergence of A Specialty - Forensic Accounting as a Profession ‘The term forensic accountant and the concomitant tasks which they perform are relatively new in the classifications of accounting professions. In our attempt to understand the evolution of this profession, we will take a look at the ideology of professions. ‘Professions’ has been subject to a variety of theoretical schema that attempt to identify their unique characteristics or traits, that is, the features that can be regarded as the basis for discrimination between forms of occupational organization and control that are professional and those that are not.'*, This elaboration of the essential traits of professions is more than a professional discourse. It remains an influential strand within the ‘sociology of professions’ following from the Parsonian structural-functionalist'* analyses of professions. ‘What can be said to constitute a profession is of considerable interest for those occupations that regard themselves as possessing, or aspiring towards professional status. Occupations seek to attain or affirm the idea that their abbot, A. (1988). The system of professions: An essay on the Division of Expert Labor. Chicago: University of Chicago Press ® Goode, William 3,, "Community Within a Community: The Professions", American Sociological Review 22 (1957), 194-200 1B existence is the outcome of a social contract between an occupational group and the ‘public’ (Stacy 1954; Howitt 1966; Worsley 1985). This narrative suggests that in return for considerable autonomy in both organization and regulation, the occupation gains a monopoly in certain service or services in the society. The ‘contract’ is agreed because the profession is judged the most effective guardian of the public good which it elaborates through the fostering of a body of knowledge and expertise, backed upon by relevant disciplinary procedures. In the face of turbulent and troubled times for the accounting profession, the ‘forensic accountant’ has emerged as a response to the challenges of change and more specifically to address and neutralize the threat to the image of themselves as trustworthy, responsible and independent professionals. This behavior is congruent with Hughes postulation that professions by allowing individuals to shape their own work, ...makes evident the theoretically predicated essential feature of division of labor, namely that it is understood only by reference to the action of the pertinent individuals or neither technologically, nor ecologically, nor normatively determined, but can be occupational groups'®. Professional accountants therefore have an interest in combating corruption. First, the widespread presence of waste, fraud, and particularly financial statement fraud and abuse in the entities, which have been audited, would be destructive of the trust and credibility associated with the profession. Second, 2Giddens, A & Tumer,] (1987) Social Theory Today, Polity Press 14, ib. Sa based on the existing ‘societal contract’ combating corruption requires the technical skills, and ethical attitudes of the professional accountant; accountants who fight corruption may be rewarded by increased fees and reduced taxes due to greater cost effectiveness of public programs. In this context forensic accounting has become a potent tool in combating corruption. 2_Adding Value — The Forensic Accountant as an Expert To differentiate himself within the accounting profession, the forensic accountant had to go beyond the accounting, audit and business advisory services of his peers. This was achieved by forging a link between the disciplines of law, criminal investigations, finance and accounting. Regarding the work of the forensic accountant as an expert witness, Inkster!” noted that in Canada, ‘the trend began in the mid -1970's when financial experts were needed to assist the police in the escalating growth of white-collar criminal cases’. This was necessitated by manpower and budget constraints coupled with the fact that company auditors had neither the background nor the training to recognize fraud. Today, these factors have hardly changed and police often advise businesses and corporations to hire forensic accountants to put together a detailed case and near complete investigations before bringing it to the "Inkster, pg 1 15 authorities; giving rise to the practice now known as ‘investigative cost- sharing’. The forging of this relationship between the accounting profession and law enforcement has cemented the role of the forensic accountant in today's societies, and has helped to further differentiate it from other accounting functions. Unlike an assurance engagement involving financial audits the purpose of the financial investigation is not to express an opinion on ‘management's assertions, but to communicate the results of his investigations. Such results or conclusions will be based on his analysis of the evidence and facts as set before him or that came to light during the investigation. Hence, the financial investigation is not restricted to managements assertions but can encompass the accountant’s own deductions as well as reports of other Professionals. According to Bob Chambers, chairman of KPMG Investigations and Security Inc in Toronto “an accountant acts like a watchdog but a forensic. accountant is trained to act like a bloodhound”, In the context of corruption and fraud, the forensic accountant is of immense value. She can span the spectrum of part accountant, part detective and part legal expert. Using these range of skills he can help determine whether there has been any criminal activity associated with the company's financial records and "8 Inkster, pg 1 "Beth De LisiFoltowing the Money Trail, KPMG Interact, Sept. 1933, 225Spt also help in evaluating accounting and banking records of suspects whether employees, management or clients. Even though the involvement of the forensic accountant is almost always reactive, in the light of the findings of the investigation, she can also develop fraud-prevention strategies for the company. The forensic accountant will also be able to quantify the amount of the loss suffered by the company. However, the essence of the work of the forensic accountant is to produce a standard of work that can withstand the scrutiny of a court. To this end, the forensic accountant can produce a report detailing the work done and the findings and conclusions reached. This is classified as an expert report, and can be produced as a document for the court. Based on the findings outlined in his report, the forensic accountant can provide expert testimony in court. 3.3 Spotlighting The Work of the Forensic Accountant As the following case examples” would show, in more developed societies the forensic accountant has become a critical player in investigating fraud and corruption. A hospital, having received an anonymous phone tip that the parking supervisor and others were stealing from its three “pay-as-you-go” lots, decided to take it seriously since cash receipts from those lots were on the decline. The hospital's security and police investigated, but found it difficult to determine ® All case examples taken from Elzinga D & Ray D, “Ferreting out Fraud”, Security Management Feb 97, Vol.41 Issue 2, p32 17 how the money was being stolen and how much was the loss. Forensic accountants were called in and beginning by analyzing the cash register tapes was soon able to uncover a pattern of theft that had gone undetected for years. By removing or deactivating the tape at certain times during the day, the lot supervisor and his wife were able to pocket the money during this period. When questioned, the couple admitted to pocketing cash sales. The forensic accountant estimated that the hospital had lost approximately $300,000 over three years. Ina Fortune 500 manufacturing company the security department tried unsuccessfully to corroborate rumors of illegal activity against the manager of one of its largest plants. The genesis of the investigation was a specific allegation that he was selling the company’s scrap to a competitor. The company’s concem was also fuelled by the plants disappointing performance and decreased profits that coincided with the appointment of the new plant manager. In house investigations were unable to provide evidence of illegal behavior. Opting for a low-key approach, and theorizing that some form of collusion was likely, the forensic accountants examined all available documentation that related to dealings with external agents. Within days they discovered a document that convinced them he was colluding with a vendor. The document 18 Was a wining bid for a major supply contract with the plant. The winning bid had underbid on all but three items, and on the face of it, seemed to present the lowest overall bid, however those three items were the parts most frequently ordered by the company. When the volume on these three items was factored in, the winner's bid actually far exceeded those of the losers. In addition this same supplier was used to divert scrap parts to one of the company’s prime ‘competitors who in tum used the scrap to manufacture materials comparable to those made by the manager's company and sell them at a lower cost in the marketplace. The bid rigging and parts scam were costing the company millions. ‘The manager and his cohorts eventually resigned and agreed to pay restitution. The forensic accountants then assisted the company in developing a Procurement fraud prevention control system and helped prepare a fidelity insurance claim, Forensic accountants can also be drawn into political investigations. In February 2002 a federal grand jury subpoenaed records of Illinois's Governor George Ryan’s fund in connection with the campaign's report that it had discovered $156,000 in excess funds in a bank account. The elections board said the campaign would hire a forensic accountant to trace the origins of the cash. 19 One year and ten months later in December 2003, the governor was formally indicted on federal racketeering charges which included allegations that, over 10 years as Ilkinois secretary of state and governor, he took payoff in exchange for state contracts; wielded his influence to enrich himself, his friends and his family; committed tax fraud; and lied to investigators in an attempt to cover up those crimes. (USA Today Dee 17,2003) The indictment also claims that family members received cash, gifts and other services totalling some $167,000. In the United States the financial misdeeds at companies such as Enron Corporation and the former WorldCom. Inc brought forensic accountants into the House of Congress. Before Congress, forensic accountant Robert McCullough testified that “...An examination of just one of the many offshore entities used to mask Enron’s debts had found $2.7 billion in unreported losses.™! This after Enron had received unqualified audit reports from its auditor Arthur Anderson in the previous years. In Hong Kong, corruption related fraud brought the demise of Overseas Trust Bank, Before its collapse, the bank was the third largest local bank in Hong Kong with 43 local and 8 overseas branches, and total assets amounting to HK$14 billion (USS1.8B). The investigation team including professional 2 Teather D,The Guardian Newspaper January 1°,2002 ® Kwok Man wai, T, Corruption Related Fraud in the Financial Services Sector, Address to Financial Fraud Seminar Shanghai, 1995 20 forensic accountants and a senior lawyer uncovered a trail of incompetence, reckless lending, large-scale fraud, false accounting and corruption. ‘There were two main causes for the bank's collapse. The first involved the reckless lending to bank directors for their own speculation and private business and the second involved the penetration of the bank by a criminal and his group resulting in cheque kiting on a massive scale over a period of several years. When the bank finally collapsed, the cheque kiting had resulted in dishonored cheques being returned to the bank totalling US66.8 million. According to proper banking practice, the return of those dishonoured cheques should have prompted the bank to take legal action immediately to recover the loss and to make provisions against the full amount due from the Group, or for the loss in the account to be writt off by charging it against the bank’s profits for the year. However, the bank was persuaded by the criminal not to take legal action against him on the grounds that to take proper action against the loss would alert the public and threaten a run on the bank. The bank agreed. A cover up then took place by the bank directors and the criminal conspiring to create false loans purportedly given to bogus companies set up by the criminal's associates. The proceeds of the loans were used to cover up the cheque kiting loss. To avoid detection these loans were subsequently repaid by the creation of 21 fresh bogus loans until at the time of the bank's collapse, the loans, together with accrued interest, amounted to US$89.5M. rk in Developed Countries In each of the cases outlined above, the presence or use of a forensic accountant was pivotal in the uncovering of serious fraud and corruption. However the findings of the forensic accountants in and of themselves would not have resulted in any prosecutorial outcomes if there were no laws to support their work. In large part, the legal environment of the developed world, namely the United States of America, and Canada has over time provided a foundation upon which cases against persons involved in financial corruption and fraudulent acts can be prosecuted, ‘The Criminal Code of Canada includes offences which prohibit bribery (ss. 119, 120), frauds on the government (s. 121), fraud or a breach of trust in connection with the duties of office (s.122), municipal corruption (s. 123), selling or purchasing office (s. 124), influencing or negotiating appointments or dealing in offices (s. 125), willfully attempting to obstruct, pervert or defeat the course of justice through bribery or other corrupt means (s. 139(3)), fraud (s. 380), and secret commissions (s. 426). In addition, no person convicted of frauds on the government, of selling or purchasing office, or of selling defective stores to the government has, after that 22 conviction, the capacity to contract with the government or to receive any benefit under a contract between the government and any other person, or to hold government office (s. 750). Further, a number of Criminal Code provisions prohibit efforts to deceive others or to induce others to rely on inaccurate books and records (e.g. s. 321 [definition of "false document’ s. 362 [false pretence or false statement}; s. 366 [forgery); s. 380 [fraud]; s. 397 [falsification of books and documents); and s. 400 [false prospectus) The possession of property or proceeds obtained by crime (s. 354) and the laundering of property and proceeds of crime (s. 462.31) are criminal offences. Part XIL.2 of the Criminal Code deals with proceeds of crime. Regardless of where the offence occurs, the proceeds of crime may be seized or restrained and forfeited in Canada if the underlying conduct would constitute one of the listed offences in section 462.3 of the Criminal Code, had the activities been committed in Canada. In addition, Canada supports the confiscation of criminal assets, and the sharing of such assets, in cases where there has been international co-operation in investigation and prosecution. The Forfeited Property Sharing Regulations govern the sharing procedures. The Corruption of Foreign Public Officials Act entered into force on February 14, 1999. It criminalizes bribing a foreign public official, as well as possessing and laundering property and proceeds obtained or derived from such bribery, including property or proceeds found in Canada as a result of an act or omission outside Canada that, if it had occurred in Canada, would have constituted the offence of bribing a foreign public official. These proceeds of crime can be seized, restrained or forfeited. Police may use a wiretap and other electronic surveillance to gather evidence in the investigation of these offences. Canada has also ratified the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the Inter-American Convention against Corruption, and has signed the UN Convention Against Transnational Organized Crime. On the other hand, the United States was the first country to criminalize international bribery through the enactment of the Foreign Corrupt Practices Act (FCPA) of 1977. The FCPA makes it unlawful to bribe foreign government officials to obtain or retain business. The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value. FCPA does not require that a corrupt act succeed in its purpose. The offer or promise of a corrupt payment can constitute a violation of the statute, 24 Section 4 4.1 Delineating the Caribbean ‘The term "Caribbean' is used in different meanings so far as its scope and ‘coverage are concemed. Caribbean people generally tend to think of the region as consisting exclusively of the language area to which they belong. Hence, when Anglophones speak of the Caribbean they are normally referring to the countries of the Caribbean Community (Caricom), the group of 15 predominantly English- speaking states that includes all the former British colonies in the archipelago and the adjacent mainland, Formed nearly 25 years ago, Caricom has a sound background of cooperation in trade, external economic negotiations, education, sports, and culture. On the other hand, we have the Association of Caribbean States (ACS) that was formed by a Caricom initiative in 1995. The membership of the ACS extends to all the states bordering the Caribbean Sea on the South and Central American mainland. This may be called the "Greater Caribbean", but it is also referred to as the "Caribbean Basin", a term which reflects the US perspective. ‘The ACS’s Caribbean includes several countries also considered to belong to other "regions": Mexico, Colombia and Venezuela, which are major Latin American players in their own right and the members of the Central American Common Market. 25 "The Caribbean" in this paper, means all the islands in the Caribbean Sea plus four mainland entities with close historical and cultural affinity to the islands, ‘These are Bahamas, Suriname, Guyana and Belize. International Perspectives on Corrupti the bean In the international arena, the fight against corruption has been increasing in momentum over the last decade. Organizations such as the World Bank and the United Nations have become vocal in their concer over the global prevalence of this phenomenon. Geoffery Shepherd of the World Bank stated that “corruption is costly to development: it undermines the rule of law, wastes resources, discourages investment and raises the cost of doing business. It is injurious to the poor and undermines development assistance” ”*, For these reasons, he stated that “the bank had decided to deal with corruption explicitly and make the fight against corruption an important part of its development agenda.”™* From a World Bank perspective the Caribbean is included as part of the hemispheric region of Latin America. In their review, the World Bank has identified this region as “fertile ground for progress in the fight against corruption.””> This is predicated on the democratic traditions of the Caribbean ® Shepherd, pe 9 % Shepherd, pe? % Shepherd, pe 9 26 region, and the surge by ordinary citizens in demanding a public sector that is more responsive to their needs, better able to account for what it is doing and able to incorporate civil society into some of its decision-making processes. This perspective is supported as we will see, by the precipitating factors in the ‘Trinidad and Antiguan cases. Namely, a strong public outcry that demanded action. According to the annual survey by Transparency International”, the island of ‘Trinidad has a corruption perception index of 4.6. This index defines corruption as “the abuse of public office for private gain”. The index measures the degree to which corruption is perceived to exist among a country’s public officials and politicians. The scores range from 10 (squeaky clean) to zero (highly corrupt). The median score of 5.0 is the number Transparency International considers the borderline figure distinguishing countries that do and do not have a serious corruption problem. Applied to Trinidad’s 4.6 rating this would indicate that corruption is perceived to be a problem in the island although not as serious a concem as an istand such as Haiti, which has a rating of 1.5. The only other Caribbean islands given ratings by Transparency International were Cuba 4.6 and Jamaica 3.8. The failure of Transparency Intemational to provide ratings for territories such as Antigua and Barbados is in my opinion no way indicative of the absence of 2% Transparency International Perceptions Index, wws.transaparency.org, 27 tl corruption in these islands. Rather, it is a reflection of the unavailability of reliable data on which the rating is based. As international focus has sharpened around the issue of corruption, many organizations have tabled conventions aimed at engendering a global commitment to its elimination. The first of these was the Inter-American Convention against Corruption, adopted by the Organization of American States on March 29", 1996. This was followed by the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, adopted by the Organization for Economic Development and Cooperation on November 21", 1997 and the United Nations Convention against Corruption on December 11", 2003, During this period various other treaties were signed with relevance to cooperation between the Council of European nations as well as Head of States of the African Union. Between March 1996, and April 2001, many Caribbean countries had signed the Inter-American Convention against Corruption. These included Antigua and Barbuda, Barbados, Grenada, Guyana, Jamaica, St. Lucia, St.Vincent and Trinidad & Tobago. To date, Trinidad and Tobago and Barbados has signed the United Nations Convention against Couption. Signing a convention though is not enough. The convention must be ratified and implemented by the individual states. To date, all the islands noted with the exception of Barbados have ratified 28 the Inter-American Convention; all have yet to ratify the United Nations Convention. 29 4.3 Corruption in the Caribbean: Past and Present Cases 4.3.1 Trinidad — Piarco Airport Construction Scandal” Following the 1995 elections in Trinidad and Tobago, a new government came into office, There was a feeling that Trinidad and Tobago had outgrown its airport facilities and that it needed to consolidate its status as the Caribbean's industrial powerhouse. The existing terminal facility was a model neither of architectural grace nor economic dynamism; it was agreed that a new airport facility was required. At a cost of TT123 million, the new terminal was expected to be completed in early 2001. ‘The construction of the Piarco Airport terminal building was riddled with corruption allegations from the start, The controversy over an appropriate response to the charges essentially led to the collapse of the government and during the ensuing election campaign the sitting prime Minister Mr. Basdeo Panday called on the critics of corruption in his government to “produce evidence”! Investigations into the development project became a priority only after a new government had been installed. Initially contracted by the former government in September 2000 to examine the circumstances surrounding contractual arrangements made by certain Government State entities in various areas, Bob The main source of information has been a series of reports carried in the various print media, of the island. At the time of writing, this case is before the courts of Trinidad and Tobago. 30 Lindquist, a Canadian forensic accountant was again contracted by the new government in 2001 “with a greatly expanded mandate”, ‘The Anti-Corruption Investigations Bureau, with Lindquist’s team of forensic accountants, led a two and a half year investigation. This investigation uncovered massive fraud in the construction project. According to newspaper reports, The Lindquist report stated that there was conspiracy to “corrupt the contract selection process for the unjust enrichment of the ‘players’ and of defrauding the various state agencies of considerable sums” It also noted that “from all information received and from the examination of the available records and documents, we have found reasonable grounds to believe that fraudulent schemes were developed and promoted by various parties throughout the entire contracting period”. Government ministers and their associates in an attempt to funnel money from the project had created ghost companies. One such company created just prior to the start of the project and owned one hundred percent by Birk Hillman the consulting contractors of the airport, was a one-man show with no phone, and no employees. It was uncovered that requirements for bids were changed in one instance as late as two days before the contract was awarded, so that only two companies could meet the requirements on time. One company owned by a former government minister was awarded a contract to supply “specialty % Attomey General John Jeremie, Trinidad Express Thursday April 1,2004. 31 equipment” even though their price was one hundred percent above the engineer’s cost estimate. The probe’s initial results indicated that the tendering system was corrupt, money had been diverted into unauthorized accounts and public funds were abused. Lindquist identified eleven corrupt schemes which were uncovered (1) price fixing and bid rigging, (2) duplicate contract payments, (3) false invoicing, (A) defective pricing, (5) co-mingling of contracts, (6) conflict of interest, (7) false representation, (8) improper release of confidential information, (9) product substitutes, (10) tailored specifications, and (11) time limitations. The project, which began with six contracts, eventually expanded to thirteen, Final project cost had gone from TT 123 million (US 20m) to TT 1.6 billion (US 166M). ‘The investigation has led to forty-five legal charges. Eight persons including ‘two former finance ministers and five companies have been charged with conspiracy, and of corruptly receiving unlawful payments with intent to defraud the Airports Authority, the Government and the public by falsely pretending that the process involved in obtaining the contracts and payments was open, honest, and competitive although the fraud was facilitated by the accused themselves who then held strategic positions overseeing the project. At the time of completing this study, the cases are still before the law courts. 32 .2 Antigua — Inquiry into The Mc Benefits Scheme We were able to obtain and peruse the primary documents related to this case. These were the Commis joner’s Statement on the Proposed Procedure for Conducting the Inquiry, the Report of Royal Commission of Enquiry, and the Expert Report. In addition, we were also able to interview the External auditor for the Medical benefits Scheme. In 1978 the Government of Antigua set up the Medical Benefit scheme (MBS). ‘The original design of the scheme was contained in the Medical Benefits Act 1978 and the Medical Benefits Regulations 1980, Section 3 of the Act defined the purpose of the MBS as being “the provision of such financial and other assistance towards the cost of medical benefits to such class or classes of persons in such circumstances and subject to such conditions as may be prescribed by regulations”. The scheme was therefore intended to be a form of, contributory heath insurance. Section 3 (2) of the Act provided for individual contributions to be made to the scheme of 2 1/2 % of wages, with the employer contributing an equivalent amount, Beneficiaries of the scheme were identified by the 1980 Regulations a, An insured person who had paid medical benefits contributions in respect of at least 26 weeks in any calendar year or any period of 12 months; or b. A person certified by a medical practitioner to be suffering from any of nine diseases: hypertension, diabetes, cardiovascular disease, sickle cell ans ia, cancer, leprosy, certified lunacy, glaucoma; c. Apperson who is rendered permanently incapable of work by virtue of age; 4. A young person under 16 years. Under Section 4, the Public Services Commission was permitted to appoint the Superintendent who shall, ‘subject to the direction of the board, be responsible for the direction of the staff and for the management of the scheme’. Section 5(1) allowed for the establishment of a board of Control, which was made responsible for administering the Scheme. Under section 10 (2), the Minister was also given the exclusive power to authorize disbursements from the General Account of the Scheme, while Section 12 gave authority to the Minister to make regulations for the effective administering of the Sch The inquiry was precipitated by persistent cries about corruption in the scheme from the country’s opposition. Unrelenting in their call for an inquiry they garnered twelve thousand signatures of the island’s seventy thousand citizens and sidestepping the government, the petitioners presented the signatures to Antigua’s Head of State, Govemor Sir James Beethoven Carlise. The Governor General had no choice and quickly urged the Establishment of the Commission. Prime Minister Lester Bird acceded. 34 On July 16" 2001, the Commission of Inquiry into the Medical Benefits Scheme commenced, The terms of reference for the inquiry were: a) To enquire into the conduct and management of the Scheme from its inception October 1*, 1978; b) To inquire into the question as to whether there have been any violations of the Medical Benefits Act and Regulations and the Loans Act 1998, and standard accounting practices in respect of:- i) The disbursement of funds from each account established and operated under the Medical benefits Scheme; ii) The procurement policies and practices of the MBS for administrative, medical and pharmaceutical supplies and equipment, with regard to weaknesses and abuses of the said policies and practices; iii) The disbiursement of funds from any account held in the name of the MBS to the Mount St. John Medical Centre; iv) The overall financing of the construction of the Medical Benefits Pharmacy and community Clinics, and in particular to make inquiry, as to whether the projected costs were exceeded and if so the reasons therefor; V) The disbursement of funds to persons not qualified for benefits pursuant to the Medical Benefits Act. 35 vi) The overall operation of the MBS with a view to making recommendations for improvement in the management of the Scheme. A foret ic investigation team was assembled. This included Canadian forensic accountant, Doug Kalesnikoff and his team, and three experienced members of the Antiguan police. Investigations over the next year uncovered staggering fraud and comuption. Kalesnikoff discovered that from its inception, significant departures from the Act and Regulations were conceived and introduced without legislative authority, Within the first two years of operation beneficiaries were extended to include ‘ donations to the Ministry of Health.’ These ‘donations’ grew over the 1980's such that over that decade they represented 7% of the total expenditure of the MBS. They went on to escalate over the 1990s to reach 27% of total expenditure in that decade, By 1999, they had become 50% of the total expenditure, This represented a decreasing availability of benefits to contributing citizens for any urgent medical care, In fact just 33% of expenditure in 1999 was categorized as the cost of benefits. Over time the Scheme had become a primary source of financing for the Government Health Sector as a whole, Increases in contribution in 1994 from 21/2% to 31/2% for both employee and employer were necessitated to finance the construction of a new hospital for which the MBS was targeted to be the principal contributor. Also discovered was the fact that — again from inception ~ the Government had failed to pay any contributions to the scheme. It had neither paid its own percentage nor remitted the amounts subscribed by Government’s employees. ‘Since inception the scheme had been run on private sector contributions alone. At 1999, the contributions owing by the Government had exceeded EC120M US (S68M). Kalesnikoff concluded that the audited Financial Statements of the Scheme gave a false impression of the true financial situation. As at December they showed an accumulated surplus of ECS118 million, but this included the unpaid Government contributions of EC$120 million as revenue. In addition The MBS ‘was also found to be operating sixteen bank accounts through which cheque kiting was being practiced. Conflict of interest activities were also uncovered with the former superintendent of the Scheme. She was the sole proprietor of a company, which had benefited from lucrative business deals with the MBS, a conflict she had never declared. The superintendent had in fact countersigned most of the cheques paid by the MBS to her business. 37 Further conflict of interest issues included the Senior Auditor assigned to the audit of the MBS. He was contracted by the MBS to provide accounting services and from 1998 received in excess of $500,000 for such services. These payments were disguised, as payments to businesses owned by friends and family of the auditor. Other frauds and corrupt practices included, the fact that: "The scheme had been operating for over twenty years without an actuarial study having been done; * Contracts were awarded for construction work on various health care facilities for which no tendering process was entered. = Invoices and Costs estimates were prepared by an employee of MBS and approved without any evidence of checks by officials that the work was satisfactorily done. "= Multiple claims were made and paid to the Chief Surgeon of the island's sole Holberton Hospital in respect of procedures performed in a single operation even though as agreed by the surgeon “all patients there were public patients, non-fee paying.” In addition a claim was paid for stomach reduction surgery performed in Miami on the Chief of Surgery. = Extravagant Christmas parties were held for the scheme’s employees, their children and extended family members. Rising 38 from a cost of EC$7,000 in 1993 to more than EC$100,000 in 1999, This inquiry had a snowballing effect throughout the island of Antigua. By its completion, the superintendent and the accountant of the MBS had resigned, Following the release of the Commissioners report, the Minister of Health resigned and the Attorney General was fired. Prime Minister Bird issued statements to the public that government would undertake to pay to the scheme monies owed to it by government and implement the various recommendations on the administration of the scheme. However, he was to pay the ultimate political price. In subsequent general elections his party lost the government and he lost his seat in parliament, At present, Scotland Yard detectives are assisting local police in investigations into the criminal nature of some of the allegations contained in the report. 39 Confirmers (Barbados) Limited 4.3.3 Barbados — Commission of Inquiry Into The Collapse of Trade Confirmers (Barbados) Limited.” On the 31 March 1982, on the initiative of Trade Confirmers (Trinidad) Limited, Trade Confirmers (Barbados) Limited (TCBL) was incorporated under the Companies Act, with an authorized share capital of $5,000,000. TCBL offered a variety of financial services. It accepted deposits at very competitive rates while granting loans to individuals and firms for diverse purposes. ‘The objects of the company listed in the memorandum of association carried a multiplicity of operations. These included carrying on the business of financiers, discounting trade bills, acting as a confirming house, drawing bills of exchange, issuing promissory notes, acquiring shares of other companies, lending money to customers, guaranteeing the performance of their contracts and carrying on the business of insurers. Its lending activity was concentrated in short to medium terms loans. On April 8, 1983, Trade Confirmers was designated a financial institution by the Minister of Finance on recommendation of the Central Bank of Barbados. This enabled the bank to exercise a measure of control over the institution by making periodic inspections of its books and its accounts. Using an intensive advertising and sales promotional campaign, TCBL encouraged the public to make cash deposits with the institution. This campaign * Information for this case was obtained from the Commission of Inquiry Report, 1988 40 vwas also boosted by the promise to give higher interest rates on deposits than those offered by the established commercial banks. The campaign was successful and by the end of August 1983, total deposits received was BDS 4.7 million (US 2.4M). However, on October 9" 1987, the activities of the institution were brought to a halt, With one hundred and thirty-five deposit accounts totalling BDS2.4M (US 1.2M), TCBL was placed in receivership. On February 29" 1988, a Commission of Inquiry was appointed to investigate and report on: 1. the causes of the collapse of Trade Confirmers (Barbados) Ltd. 2. whether the business of Trade Confirmers was carried on negligently or with intent to defraud depositors or other creditors, and shareholders, or in anyway that was unfairly prejudicial to, or unfairly disregarded their interests; and 3. to make such recommendations as considered appropriate. The commission was comprised of a business man, a retired judge and an accountant. The Royal Barbados Police Force was used to summon witnesses and maintain order during the proceedings. What unfolded over the next three ‘months, painted a picture of ineptness from directors, management and auditors; revealed a blatant effort to mislead and deceive depositors and a lack of timely 41 action by Central Bank Authorities in dealing with the obvious breeches that were made by the institution, It was revealed that from the outset, Trade Confirmers was under capitalized and in breech of various financial regulations. The first Central Bank inspection conducted in May 1984, twelve months after start up, disclosed that the funding of the institution was provided by fixed deposits totalling $4.3M, share capital amounting to $973K and Bank borrowings amounting to $2.8M. The excess of deposits to share capital was a concen for the regulators as well as the fact that the deposit base was considered too narrow. Nine customers held deposits of $100K or more and two had balances in the region of $800K. This coupled with the fact that the majority of the deposits (83%) were for periods of two years and less, made the deposit base rather volatile. Withdrawal of either or both of these large deposits could have placed the institution in a serious liquidity position, Loans and advances at this date stood at $8.7M. This represented a loan to deposit ratio of 204% and indicated that the company was seriously over lent. ‘Twenty-two percent of the total value of the loans was adversely classified and $1.5M was classified as ‘sub-standard’. The inspectors also found that there was, a lack of up to date financial information on borrowers and that many of them had poor credit ratings at other financial institutions. There were also breeches of the Rate of Interest Act, the Hire Purchase Act, the Exchange Control Act, 42 and of the stipulations in relation to unsecured loans to directors. Two directors had obtained advances from the Company which were unsecured. Six months later in a second inspection, the regulators found that little had changed in the operations of the company since the previous inspection. The institution had remained undercapitalized, the deposit base remained narrow and volatile, and Trade Confirmers continued to be terribly over lent. The number of deposits had also decreased from ninety five to ninety one and borrowings from commercial banks had increased by thirty seven percent. In addition about, forty percent of the loans portfolio was classified as either ‘adverse’, ‘sub- standard’, or ‘doubtful’ The inquiry also uncovered incompetence and negligence by the auditors. In verbal testimonies at the Inquiry both the audit senior and the audit partner admitted that they had no experience in auditing financial institutions. This was contrary to the guidelines set out in the Handbook of the Institute of Chartered Accountants of Barbados, of which the auditors were members. This states that: ‘The auditor needs to have a level of knowledge of his client’s business and industry that will enable him to identify the events, transactions and practices that, in his judgment may have a significant effect on the financial information.” ® Handbook of Institute of Chartered Accountants of Barbados, Pg D4/3 paragraph 7 43 Audit working papers perused during the commission, showed a considerable lack of planning and failure to consider critical issues such as materiality, income recognition criteria, and Joan loss provision. In its first accounting period ending April 30" 1984, TCBL carried a loan and advances balance of $8M. Evidence from the 1984 working papers noted that “several loans were not backed by legally enforceable security...” and that “,, the growth in the company’s loan portfolio was being achieved to some extent by granting facilities to customers with relatively higher risks”, Not withstanding these circumstances, the audit Partner agreed a loan loss provision of $140K with management. This was down from $428K as recommended by the audit senior. Whereas Trade Confirmers reported an overall profit before tax of $230K in 1984, had the audit senior’s recommended provision of 428K been accepted the accounts of Trade Confirmers (B’dos) Limited would have reflected a loss of $47K instead. Further, correspondence between the auditors and management revealed that during the 1985 financial year the auditors expressed concern at management's ‘mechanism of “rolling over” loans which were delinquent. This they noted was used to present an improved financial position thereby reducing the need to provide for certain loans. In light of this the financial statements would NOT have reflected fairly the financial position of the company. Trade Confirmers received an unqualified audit report in 1985. In 1986, the question of loan loss provision continued to be a point of disagreement between management and the auditors. A final loan loss of 1.4M was provided and Trade Confirmers incurred a loss of $774K for that year. Inept management also contributed to the financial woes of the company. In spite of the obvious precarious position the company was in, the Board of Directors declared and paid a seven percent dividend in 1985 and 1986. This, was clearly an imprudent decision. The undercapitalization and the difficulty the company was having with high risk customers should have prompted a wiser decision, It was also revealed that in an agreement to provide rent-free accommodation to the Managing Director, the company bought the property owned by the Managing Director for $365K. Two hundred and sixty thousand shares were issued to the Managing Director in consideration of the purchase price. In a letter dated 30” September 1986, the auditors were informed that the proposed sale was cancelled, yet at December 31* 1987, the property was on the books as an asset and the managing director had drawn cheques on the company for $25,000 and 70,000 thousand as “part payment due on sale of Eden-On-Sea”, At the end of April 1987 the managing director also had loans totalling $380K which were all unsecured and unauthorised. There was no evidence of Board approval for any of the loans, and all the cheques carried only his signature. In cone instance, proceeds from a loan were used to purchase shares from a 45 shareholder in the name of the managing director’s son while the amount was charged to staff loans. ‘Throughout his tenure, the managing director engaged in a number of improper

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