A Complex Financial Crime Story

Stephen Flatow, a grieving father, charged that Iran financed the Gaza bus bombing that killed his 20-year-old daughter in 1995. Buried in court filings, the suit alleged that money from a charity “fronted” financial transfers to terrorists from the Iranian government. In fact, the charity, known as the Alavi Foundation, actually operated and owned a gleaming office tower on Fifth Avenue in Manhattan. In 2006, prosecutors began a complex “house of cards” investigation that ultimately led to illegal dealings with BNP Paribus, a France-based bank group. Credit Suisse and Lloyds, two of the world’s most prestigious banks, acted as Iran’s portals to the United States financial system and disguised the illicit transactions by stripping out the Iranian government bank names from wire transfers that went to the Fifth Avenue charity and affiliated entities.

Questions:

1. The analyst at the district attorney’s office, Eitan Arusy, took a keen interest in the grieving father’s accusations. Why?
2. Explain what the records showed from the Alavi Foundation and how the Iranian funds were disguised.
3. Two investigations into the “front” charity were actually going on at the same time. What two groups were looking at the Alavi Foundation?
4. What type of evidence was beneficial to understanding banking executive strategies in masterminding the illicit transaction schemes?
5. What amount of illicit transactions had actually been funneled to the Alavi Foundation?
6. Would you consider these investigations to be forensic accounting investigations? What types of “red flags” existed?

Source:
Silver-Greenberg, J. and B. Protess. (2014). A Grieving Father Pulls a Thread That Unravels BNP’s Illegal Deals. The New York Times, June 30 (Retrievable online at http://dealbook.nytimes.com/2014/06/30/a-grieving-father-pulls-a-thread-that-unravels-illegal-bank-deals/?_php=true&_type=blogs&hp&action=click&pgtype=Homepage&version=HpSumSmallMediaHigh&module=second-column-region&region=top-news&WT.nav=top-news&_r=0)



Maybe This Will Catch On?

shake-shack-london-shackburger

Complaining of low profit margins that generally accompany inexpensive menu items, most fast-food restaurants try to keep wages down. However, some fast food chains are seeing the benefit in paying employees above minimum wage and even above the median hourly wage for fast-food workers nationwide of $8.83, because it allows their workers to opportunities to achieve more and treat customers better than any other restaurant chains. Who are these fast-food crusaders? Two of them are Boloco, a fresh and healthy burrito restaurant, offers a median hourly wage of $11.50 and Shake Shack, a high-quality burger restaurant, offering a median hourly wage of $10.70.

Questions:

1. What are the major benefits of paying higher wages to fast-food workers, according to the article?
2. What additional benefits does Shake Shack provide to employees and how would they record these as journal entries?
3. Do you agree with Zeynep Ton, a professor at the M.I.T. Sloan School of Management? Discuss.
4. Check out the M.I.T. Living Wage Calculator for your state. Discuss your results and what you think it means in terms of the future of fast-food restaurants in your state.

Source:
Greenhouse, S. and S. Strom. (2014). Paying Employees to Stay, Not to Go. The New York Times, July 4 (Retrievable online at http://www.nytimes.com/2014/07/05/business/economy/boloco-and-shake-shack-offer-above-average-pay.html?src=me&module=Ribbon&version=origin&region=Header&action=click&contentCollection=Most%20Emailed&pgtype=article&_r=0)

boloco



The Dirty Little Secret of “Cramming!”

On July 1, 2014, the Federal Trade Commission (FTC) accused wireless carrier T-Mobile of adding bogus charges to customers’ accounts without their consent, in U.S. District Court.

Questions:
1. How long did T-Mobile use the practice of “cramming” on customer mobile phone bills and what is the estimated amount of the total fraudulent charges?
2. How does the length and amount of this fraudulent practice compare to the averages presented in the Association for Certified Fraud Examiner’s 2014 Report to the Nation?
3. Which company is considering a merger with T-Mobile? What amount of money is involved in this merger?
4. What is the FTC’s goal in this case? How do you think T-Mobile should record its fees collected from customers under unauthorized practices?
5. What types of measures is T-Mobile taking in order to distance itself from competitors? What types of costs do you think that T-Mobile must consider as part of this campaign?

Source:
Molina, B. and M. Snider. (2014). FTC: T-Mobile knowingly added bogus charges to bills. USA Today, July 1 (Retrievable online at http://www.usatoday.com/story/tech/2014/07/01/ftc-tmobile/11913151/)

T-Mobile



The worth of an employee?

CEOs talk about what valuable assets employees are, but these assets do not show up on the company’s balance sheet. Why? Because the company does not and cannot own its employees, even though it may seem so at times. However, employers can put a value on your life through company-owned life insurance (COLI).

Questions:
1. What percentage of all new life insurance is taken out by companies on their employees?
2. How does a 2006 federal law try to limit the practice of COLI?
3. Why is better disclosure needed on COLI?
4. Research what companies have received very bad press on COLI and why.

Source:
Tritch, T. (2014). What Are You Really Worth to Your Employer? The New York Times, June 25 (Retrievable online at http://takingnote.blogs.nytimes.com/2014/06/25/what-are-you-really-worth-to-your-employer/?action=click&pgtype=Homepage&version=Moth&module=inside-nyt-region&region=inside-nyt-region&WT.nav=inside-nyt-region)

Met Life



Barclay’s Dark Pool

Despite Barclay’s private and public assurances to investors in its pool that they were continually shielded from high-speed trading, the bank is being sued for actively attracting high-speed traders to its venue, as well as bolstering high-speed trader strategies with privileged information about the pool.

Questions:
1. Summarize why the article essentially called this a private stock exchange.
2. How much equity trading in the United States and Europe is done outside the public exchanges?
3. What major banks also run dark pools?
4. What is needed to provide more transparency and order for this financial systems?
5. What, to you, was the most surprising information in this article?

Source:

Editorial Board. (2014). The Dark Pool Iceberg. The New York Times, June 28 (Retrievable online at http://www.nytimes.com/2014/06/29/opinion/sunday/lawsuit-against-barclays-shows-need-for-more-scrutiny.html?action=click&pgtype=Homepage&version=Moth&module=inside-nyt-region&region=inside-nyt-region&WT.nav=inside-nyt-region&_r=1)

Barclays



The Untouchable Alaska Bypass

Under a federal program exclusive to Alaska, the Postal Service is responsible for shipping more than 100 million pounds a year of apples, frozen meat, dog food, diapers and countless other consumer items to off-road villages in the sparsely populated outposts known as the bush. Over three decades acting as freight forwarder, the agency has lost $2.5 billion.

Questions:

1. Based on the article, argue the costs and benefits of continuing the Alaska Bypass.
2. What is the universal service weight allowed in the 48 states? What is it in Alaska?
3. Using the information presented in the article along with assumptions that you detail in your answer, estimate the gross profit that the grocery store in Hooper Bay, Alaska is making on each 12-pack of Coke.
4. Using the information presented in the article along with assumptions that you detail in your answer, estimate the loss that the U.S. Postal service has for each pallet of Coke shipped to Hooper Bay, Alaska.

Source:
Rein, L. (2014). U.S. Postal Service losing tens of millions annually subsidizing shipments to Alaska. The Washington Post, June 28 (Retrievable online at http://www.washingtonpost.com/politics/us-postal-service-losing-tens-of-millions-annually-subsidizing-shipments-to-alaska/2014/06/28/3d007fd6-e51a-11e3-afc6-a1dd9407abcf_story.html?hpid=z1)



How much do you have to make to get a checking account?

Zikomo Fields makes more than $100,000 a year in his job as a software engineer in Kansas City. However, he cannot get a bank account because of a little-known database that tracks financial transgressions, known as ChexSystems. Financial institutions who subscribe to this service view it as fraud prevention. However, New York Attorney General Eric T. Schneiderman sees this as an improper application of the information and is suing banks like Capital One and Wells Fargo for denying some consumers accounts. Until this is resolved, people like Mr. Fields will walk around with $23,000 saved on a prepaid debit card.

Questions:

1. What types of actions earn you a spot in ChexSystems database?
2. How many years does an involuntary account closure stay on your credit record?
3. Rather than carry around a prepaid debit card with $23,000 on it, what would you recommend that Mr. Fields do about his situation?
4. Mr. Fields said that he literally had no other option but to let the account at U.S. Bank overdrawn until he was employed again. If he were your friend, what would you have advised him to do?

Source:
Douglas, D. (2014). Why a guy making $100,000 a year can’t get a bank account. The Washington Post, June 19 (Retrievable online at http://www.washingtonpost.com/blogs/wonkblog/wp/2014/06/19/why-a-guy-making-100000-a-year-cant-get-a-bank-account/?tid=pm_pop)
money_ballbe



Mmmmmmmmm! But watch out for the Mac & Cheese!

Some are calling this the new “Cheeseapocalypse” as Kraft Foods Group recalls 260 cases of Velveeta sold to Walmart because the batches lack enough preservatives and could “spoil prematurely and/or lead to food borne illness.”

Questions:

1. What states are affected by the recall?
2. What ingredient is causing the recall?
3. What types of costs would Kraft Foods have for their liquid gold campaign and how should they be recorded in the financial statements?
4. What types of costs would Kraft Foods have for their recall of the product and how should these be recorded in the financial statements?
5. Since the recall have either Kraft Foods or Walmart stocks gone down in the market? Could this be due to the recall? Explain.

Source:
Picchi, A. (2014). With Velveeta Recall, A New ‘Cheesapocalypse.’ CBS News Watch, June 20 (Retrievable online at http://www.cbsnews.com/news/with-velveeta-recall-a-new-cheesapocalypse-emerges/)



When is a Raise Too Small?

Deeb Salem, a former Goldman Sachs trader, says that after making the company in excess of $7 billion in 2010, his $8.25 million raise was not enough compensation.

Questions:

1. What percentage drop was Salem’s 2010 raise as compared to his 2009 raise? What percentage drop was Salem’s 2011 raise as compared to his 2010 raise?
2. What did Salem discuss in his self evaluation in 2007? Why did this upset Goldman Sach’s administration?
3. When Goldman Sachs records the journal entries for Salem’s bonuses, what accounts and financial statements are affected?

Source:
Peterson, K. (2014). Trader Sues Over Skimpy $8.25 Million Bonus. CBS Newswatch, June 20 (Retrievable online at http://www.cbsnews.com/news/trader-sues-over-skimpy-8-25-million-bonus/)

Money-file-2



Separation of Power

Netflix shareholders will vote on at the company’s annual meeting on Monday is a proposal by two public pension funds to separate the roles of chairman and chief executive. Both are held by Reed Hastings, Netflix’s co-founder.

Questions:
1. Who are the backers of this corporate governance issue and why do you think they are pursuing this?
2. What other firms have been pressured to do this in recent years? Is this a good thing? Discuss in terms of costs and benefits.
3. What are some of the recent battles that Netflix has encountered? Discuss whether any of these could be related to this corporate governance issue.

Source:
De La Merced, M.K. (2014). Netflix Investors to Vote on C.E.O.-Chairman Split. The New York Times, June 8 (Retrievable online at http://dealbook.nytimes.com/2014/06/08/netflix-investors-to-vote-on-c-e-o-chairman-split/?rref=homepage&module=Ribbon&version=origin&region=Header&action=click&contentCollection=Home%20Page&pgtype=article)
netflix