FOR IMMEDIATE RELEASE June 5, 2009

CONTACT: Steve Hudak (703) 905-3770

FinCEN Moves to Streamline Mutual Fund BSA Requirements Proposal Would Require Mutual Funds to File CTRs

VIENNA, Va. - The Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) that would replace a mutual fund requirement to file IRS/FinCEN Form 8300 - Report of Cash Payments Over $10,000 Received in a Trade or Business - with a requirement to file FinCEN Form 104, Currency Transaction Report (CTR), which is standard for financial institutions. Both forms document a transaction in currency above $10,000, but differ in some technical aspects.

"If adopted this proposal will bring the mutual fund industry into greater conformity with the rest of the financial industry, which currently files CTRs," said FinCEN Director James H. Freis, Jr. "The proposal would also free mutual funds from having to report applicable transactions involving certain negotiable instruments by moving to the CTR filing requirement and reduce paperwork for mutual funds and help FinCEN more directly identify suspicious activity involving money laundering and fraud."

To make the change, FinCEN is proposing to include mutual funds within the general definition of "financial institution" in rules implementing the Bank Secrecy Act (BSA). By being defined as such, they will be subject to the scope of rules that require the filing of CTRs and the creation, retention, and transmittal of records or information on transmittals of funds and other specified transactions. Mutual funds are already subject to many similar regulatory requirements and BSA program rules. This change will serve to streamline their reporting requirements and make the information they provide more quickly available, and formatted more consistently, for use by law enforcement investigators.

The definition of "currency" for purposes of the CTR rule is different from and less inclusive than the definition of "currency" in the rule for Form 8300, therefore, mutual funds would only be required to file CTRs on cash transactions. The $10,000 threshold applies to transactions conducted during a single business day. Under the CTR rule, a financial institution must treat multiple transactions as a single transaction if the financial institution has knowledge that the transactions are conducted by or on behalf of the same person.

The proposed rule as published in the Federal Register is available on www.FinCEN.Gov. Comments are due to FinCEN by September 3, 2009.

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Obama overhaul could stoke risk manager demand

Wednesday, Jun 17, 2009 3:47AM UTC
By Chavon Sutton

NEW YORK (Reuters) - Risk management, an area once seen as a dreary necessity on a Wall Street obsessed with high-stakes trading bets, is suddenly hot.

Demand for risk professionals, which has already picked up, is likely to be stoked further after the Obama Administration announces what are expected to be sweeping changes to the financial regulatory framework on Wednesday.

Risk managers are charged with balancing the risk-reward equation at financial firms, by using quantitative and qualitative inputs to make investment decisions.

But in the years prior to the financial meltdown, risk managers at financial institutions lacked clout and independence. The result was the failure of banks that wagered too much using borrowed money, like Bear Stearns and Lehman Brothers.

"In many instances risk managers did perform, given the constraints presented to them by senior management, but their advice wasn't taken," said Richard Apostolik, chief executive of the Global Association of Risk Professionals.

"Organizations didn't perceive the risk function as important and a bigger concern was the lack of independence."

The Obama administration's reform will include increased reporting requirements for issuers of asset-backed securities and derivatives, require brokers to hold a certain level of financial interest in the products they sell, and reduce reliance on credit rating agencies--measures that are expected to fuel demand for a wide range of risk professionals.

"The reform's focus on the complex structured products that got us into this mess will increase demand particularly at investment banks, hedge funds, and mutual funds in the short-term," said Craig Termotto, a recruiter for financial services recruiting firm Michael Page International.

'BOMBARDED WITH CALLS'

"We'll see rapid growth over the next 12 months and then a slowing, but it will continue better than it was."

Until now, risk management has been viewed as a cost center. But that is rapidly changing in today's risk-obsessed environment and creating opportunities particularly for professionals with prior lending or risk experience.

"I've been bombarded with calls from headhunters looking for experienced risk professionals," said Kevin Blakely, former Chief Executive of the Risk Management Association.

"Last year, I would get a call every three weeks for credit risk officers, but now I get three to four calls a week."

Blakely was poached from his position at the RMA and appointed Chief Risk Officer for Columbus, Ohio-based Huntington Bancshares on June 10.

Michael Page International said the risk group is its busiest.

Both U.S. and international "credit and counterparty, market, and quantitative risk job postings are up 20-25 percent from last year," Termotto said.

But despite a glut of finance professionals available in the market place, Blakely has found that finding strong credit risk officers and credit work-out professionals is like "finding a needle in a haystack."

Recruiters say that one reason for the difficulty is that candidates are being enticed by buyside firms, bond insurers, and smaller boutique firms that are untainted by having received bailout funds from the government's Troubled Asset Relief Program (TARP).

"The institutions who need more risk professionals are the sell side," said Gustavo Dolfino, president & founder of The WhiteRock Group, a financial services recruitment firm. "Good risk people aren't attracted to these firms because TARP makes it hard to pay people."

Still, the government's insistence on strong risk controls is making risk management -- once seen as a Wall Street backwater -- an increasingly lucrative career path.

"Three years ago, a managing director in investment banking made three times more than his risk counterpart," said Alan Johnson, managing director of compensation consultancy Johnson Associates. "Today, they only make twice as much and a lot of investment bankers don't have jobs, while risk managers do."

(Reporting by Chavon Sutton; Editing by Christian Plumb)

Does the recent Level 6 Influenza Pandemic Announcement Indicate a Force Majeure Event?

The World Health Organization (WHO) has announced a Level 6 flu pandemic, which may prompt many businesses to call a force majeure on their contracts. The Level 6 pandemic is being called by WHO because the swine flu (H1N1 virus) has developed into an out-of-control, world-wide pandemic and drastic measures must be taken.

The announcement came at 10:00 GMT in a closed-door meeting emergency meeting in Geneva, Switzerland -- representing the first time a Level 6 pandemic has been announced in 41 years. The last time such a pandemic was announced was in 1968 when the Hong Kong flu of 1968 claimed an estimated one million deaths.

The effect reaches far beyond the immediate impact on local, regional or global health. There is a lot of chatter in blogs and elsewhere about the effect on the global economy and the abilities of organizations to provide contracted goods and services. One of the ripple effects could likely be realized within many business contracts, under the force majeure clause.

A force measure usually indicates an Act of God, be it earthquake, landslide, flood, or any other act or occurance that is 'beyond human control'. Acts of Terrorism and other forms of violent conflict also would often fall under this same contractual provision.

A force majeure clause is usually placed within business contracts to allow one or more parties in a contract to stop meeting their obligations for that contract, because a situation has occurred that is beyond everyone’s control. Pandemics are typically listed as one of the reasons for calling a force majeure.

So how will this affect commerce and business contracts in place?

This could have significant (and potentially far-reaching) consequences that go far beyond the immediate impact of the moment. What would be the impact -- either regionally or locally -- from large numbers of employees at firms who have the flu?

Day-to-day performance levels of companies are already being affected - sometimes drastically - in parts of the world by high levels of employee absenteeism due to H1N1 outbreaks, either because employees are sick themselves or because they are caring for family members who are. Add to this the by still more employees who stay home to avoid getting sick.

With the world seemingly becoming smaller by the day, the far-reaching effects of this situation remain to be fully realized. There is no doubt that this will likely have a markedly negative impact on the global economy. Many experts are comparing the current outbreak of H1N1 virus to the 2003 outbreak of Severe Acute Respiratory Syndrome (SARS), which is estimated to have cost cost the region between $18bn and $60bn in lost output - or 0.5-2.0% of regional GDP (according to estimates by the Asia Development Bank).

As this story continues to unfold, it certainly seems that the time has already come for firms to review contracts that are in place to determine how this escalating situation could affect their operations and their abilities to provide goods and services. Likewise this situation should sound a gong within organizations concerning performing due diligence both on existing contracts and on future relationships and agreements. The impact on the operational security of organizations and the effect on the bottom line are too great not to assess how this situation may touch your organization.

The following article from ACFE highlights an issue that in distressed economic times is of critical importance:

ACFE Report Says AP-Related Insider Fraud Is Costing a Bundle

October 2008

Don’t look now, but there’s a good chance your own organization’s employees are creating phony invoices, tampering with checks, and padding their expense reports. It’s tough to think that a co-worker is trying to slip a fraud past AP, but it does happen.

Dishonest employees cost U.S. organizations an estimated $994 billion a year in occupational fraud losses. The average company loses 7 percent of its annual revenues to this type of fraud, according to the 2008 Report to the Nation on Occupational Fraud & Abuse, from the Association of Certified Fraud Examiners (ACFE).

Occupational fraud that affects AP is categorized as asset misappropriation, which is one of the three categories the ACFE uses to describe this type of fraud. The other two are corruption and fraudulent financial statements. Asset misappropriation is, by far, the most common, occurring in 89 percent of the 959 cases the ACFE reviewed.

Bogus Invoices Most Common

Fraudulent invoicing, what the ACFE calls "billing" fraud, involves any scheme in which a person causes his or her employer to issue a payment by submitting invoices for fictitious goods or services, inflated invoices, or invoices for personal purchases. Typically, an employee will create a shell company and then bill the employer for nonexistent services. Or an employee will purchase personal items and submit an invoice for payment.

This type of disbursement fraud is the most common, occurring in 23.9 percent of the cases ACFE studied (see the graphic on page 1). However, the median loss is higher for check tampering, which occurred in 14.7 percent of the cases with a median loss of $138,000. The median loss from phony invoices was $100,000. Expense reimbursement abuse yielded a median loss of $25,000.

Who Is Doing This?

As Exhibit 1 illustrates, most of the fraudsters were either employees (39.7 percent) or managers (37.1 percent). Owners and executives made up about a quarter of the perpetrators.

Not surprisingly, the higher the position of the employee committing a fraud, the greater the loss to the business. Those with significant authority have more access to business resources and, therefore, more ability to override controls that might otherwise disclose fraud.

The ACFE study found that fraud committed by owners and executives resulted in a median loss of $834,000. That’s over five times greater than the median loss caused by managers and nearly 12 times higher than that perpetrated by employees.

The study also compared the type of scheme committed with the department in which the perpetrator worked. The goal was to provide data that could be useful to organizations in structuring their anti-fraud controls by identifying the departments most commonly associated with certain types of occupational fraud.

Employees in accounting or executives and upper management were the ones most likely to commit the four types of fraud that most affect AP. For example, over half (54.1 percent) of all billing and invoice schemes were committed by accounting personnel or the top brass (see Exhibit 2 below).

Accounting staffers were the most likely to commit expense reimbursement fraud, followed by executives and upper management and employees in operations and sales. How does the accounting staff—who are less likely to be traveling on company business—get involved with this scheme? Most likely on the other end of the fraud by processing knowingly false expense reports for payment—reports filed by executives, sales personnel, and others.

Two-thirds (67.4 percent) of check tampering is perpetrated by someone in the accounting department (see Exhibit 2). This typically happens when an employee steals blank-check stock and then makes them out to himself or herself or an accomplice. It can also commonly occur by the employee stealing an outgoing check to a vendor, then depositing it in his or her own bank account. Executives who engage in check tampering are typically those with signatory authority who write company checks to pay personal expenses.

Detecting the Fraud

More often than not, occupational fraud goes undetected for years before it’s discovered. When it is detected, it usually comes to light by tips rather than by other means, including internal and external audits. Tips account for almost half (46.2 percent) of the initial detection of occupational fraud. One in five is detected "by accident"; internal and external audits account for 19.4 percent and 9.1 percent of the detection, respectively; and 23.3 percent of cases are discovered by internal controls.

What to do: Because the most common detection method is by a tip, anonymous fraud reporting mechanisms are a key component to effective anti-fraud prevention. For instance, organizations with anonymous fraud reporting hotlines suffer fewer losses than those without hotlines.

The majority of tips (57.7 percent) were received from employees (see Exhibit 3). However, a significant number of tips came from outside sources.

What to do: When designing a fraud reporting system, be sure to include not only employees but also third parties, such as customers and vendors.

For More Information

The full 68-page 2008 Report to the Nation on Occupational Fraud & Abuse is available at www.acfe.com.

Exhibit 2. AP-Related Fraud Perpetrators, by Department
		Expense
	Billing	Reimbursement	Check
	Schemes	Schemes	Tampering
Accounting	33.2%	26.9%	67.4%
Executive /Upper Management	20.9	25.0	15.5
Operations	12.2	10.2	3.1
Sales	10.2	10.2	1.6
Purchasing	5.6	3.7	–
Finance	4.1	4.6	5.4
Manufacturing and Production	4.1	3.7	1.6
Information Technology	2.6	2.8	–
Customer Service	2.0	2.8	0.8
Marketing/Public Relations	1.5	3.7	–
Board of Directors	1.0	0.9	1.6
Research & Development	1.0	1.9	–
Human Resources	0.5	–	0.8
Internal Audit	0.5	2.8	0.8
Legal	0.5	0.9	1.6
(Source: 2008 ACFE Report to the Nation)

Perhaps an assessment of such issues within your organization might be in order?