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  • Joseph L. Ford
  • Associate Deputy Director
  • Federal Bureau of Investigation
  • American Institute of Certified Public Accountants National Conference on Fraud and Litigation Services
  • San Diego, California
  • September 27, 2007

Good morning. It’s great to be here. I have tremendous respect for the AICPA, and I’m honored to talk to you today. Besides, I try to never turn down a chance to get out of Washington for a couple of days. I never know when they’ll let me out again!

I’ve been with the FBI for over 25 years, and while I am not a CPA, I have spent most of my career working on the financial side of criminal investigations. In my experience, money is most often at the heart of all crimes. So it stands to reason that CPAs, CFEs, and financial analysts play a major role in the Bureau’s work.

Today I want to give you an overview of the role of CPAs and forensic accountants in the FBI in the context of cases I’ve worked. This will be “15 Minutes in the Life” of Joe Ford…or maybe a little more than 15 minutes…and I hope not to bore you too much! After that, I’d be more than happy to take some of your questions.

Anyone who’s been in the financial world for any length of time knows how fast that world is changing. Years ago, “balancing the books” literally involved poring through books and ledgers. Today’s business world is much more complex—we not only have databases and software, but multi-national companies worth billions of dollars.

The global economy makes it possible for an investor in New Delhi to electronically manage his stock portfolio in New York. It allows an entrepreneur in Jersey to run a business in Jakarta.

Globalization has been a boon to businesses around the world—but it has also created endless opportunities for bad guys willing to exploit weaknesses in internal controls.

These days, the Internet is as much a conduit for crime as it is for commerce. It enables crimes as diverse as drug trafficking, corporate fraud, and terrorism to jump from Sarajevo to San Diego with the click of a mouse. It opens up new possibilities for mobsters, computer hackers, spies, and terrorists.

For example, a significant percentage of cyber crimes actually originate in Romania, but their victims are either here in America or a number of other countries. Since the fall of the Iron Curtain, many of those employed in Romania’s intelligence apparatus have turned to cyber crime. Criminals exploit money transmission agencies, and have discovered that one quick fraud scheme can net them 10times what they might make in a month.

We’re also seeing criminals in Latvia and Estonia hacking into user accounts of online brokerage companies. These “pump and dump” schemes may start overseas, but they endup affecting our investors and our own stock market.

Whether the perpetrators are conmen committing online pharmacy fraud or terrorists recruiting supporters in chat rooms, the best way to stop them is to “follow the money.” All the high-tech surveillance equipment in the world can’t replace the value of combing through financial records and conducting interviews. CPAs and financial analysts in the FBI aren’t just formulating our budget. They are helping to unravel terrorist cells and put criminals behind bars.

Let me give you three examples from my own career.

In the late 1990s, I led the investigation of Columbia/HCA Healthcare. This wasn’t the glamorous, door-busting stuff you see on TV. It was several years of painstaking work.

During any investigation, including the HCA matter, it is customary to subpoena the auditor’s work papers and review anomalies they encountered during the audit. We subpoenaed multiple years’ worth of audit work papers. As I began poring through the 14-by-17 inch dusty green work papers, the audit process became clearer…and anomalies that tracked the fraud scheme became focused.

The auditors discovered the fraud, but did not recognize its significance. The auditors questioned some of the reserves that were linked to the criminal activity but did not pursue their questioning other than to satisfy themselves that proper reserves were established.

I pored through work papers AA-1 through HH-47. The work papers told a methodical and impressive story and provided tremendous lead value. We began interviewing the audit staff, and had them recall relevant and incriminating conversations with HCA managers.

But there was one hole in the work papers—and it was important. Missing from the reams of bound work papers was DD-55, which referenced a conversation the engagement partner had with his bosses and the HCA managers.

We conducted a thorough review of all the work papers to see if the document had been misplaced. No luck. We asked the auditors to conduct a similar review. No luck. A critical piece of evidence, work paper DD-55 was lost.

In the end, we convicted HCA without work paper DD-55. Columbia/HCA made amends, and implemented an aggressive compliance program. Not only were FBI CPAs used in the case, but we worked closely with the forensic accountants from PricewaterhouseCoopers on parts of the investigation. They did a tremendous amount of legwork, and provided the FBI with a blueprint for the investigation.

And this collaboration paid off— literally—with numerous convictions and a record $1.6 billion settlement. We not only convicted Columbia/HCA, but we were able to convict Olsten Home Health Care. The problems caused by DD-55 did not end with the Columbia/HCA case. DD-55 was a symptom of a more serious issue, but I’ll get to the rest of the story later.

In health-care fraud investigations, financial records act as great portals into the fraud schemes. In the HCA case, we obtained over 13,000 boxes of records. During the course of the investigation, many of those boxes were reviewed not just once, but multiple times. We also had to review terabytes of electronic media, including e-mail. As the fraud scheme unfolded, the subjects took a page out of the “ Jerry McGuire” screenplay. We uncovered numerous e-mail signed by managers saying “SHOW ME THE MONEY.” Talk about great evidence of intent.

Unfortunately, health care fraud is on the rise. Health care costs in the United States are higher per person than anywhere in the industrialized world. Health care spending was a little over 13 percent of the GDP in 2000 and is projected to be almost 19 percent of the GDP by 2012. As spending surges, the health care industry has become a profitable target for fraudulent schemes.

Health care fraud hurts in many ways. There are the traditionally unscrupulous—like fraudulent billing…to the truly unconscionable—like diluting life-saving cancer drugs. We estimate that 3 percent to 10 percent of health care expenditures can be attributed to fraud. Losses may exceed $50 billion annually—a figure we expect to increase as baby boomers age. And we all wind up paying for fraud, whether by higher premiums and co-pays or loss of coverage.

The FBI aggressively investigates health care fraud, in both government and privately-sponsored programs. In the last three fiscal years, the government has collected over $4.2 billion in fines, settlements, and restitutions.

Let’s turn for a minute to corporate fraud. As we were still reeling from the September 11 attacks, the corporate scandals began piling up. Enron. WorldCom. Qwest. Adelphia. We all saw up close the devastating effect that individualgreed can have on the collectivegood—from personal retirement accounts to global markets.

I was the Inspector in Charge of the Enron Task Force for more than a year. We worked closely with forensic accountants from Deloitte & Touche. They conducted an investigation on parts of the case and shared their findings with us—everything from interview summaries to hard numbers. They gave us valuable insights and pointed us in the right directions, so that we could build a solid case to present in court.

Enron was brought down by a culture of greed. The shareholders of Enron lost $60 billion. However, one aspect of the Enron case that is rarely mentioned was the bondholders. Bondholders had similar losses.

In the Arthur Andersen part of the Enron case, e-mail was again our friend. We had e-mail correspondence from Andersen corporate lawyers to partners discussing timing on document retention policies and shredding records.

The work of independent firms helped to identify some of the improper transactions that formed the basis for criminal charges against several executives. Ironically, had Andersen’s forensic accountants been brought in earlier, they might well have been able to identify breakdowns in Enron and Andersen internal controls and see key risk areas of the audit. They might well have been able to raise the red flags in time to mitigate some of the damage to both Enron and Andersen.

DD-55? No, it did not turn up in the Enron case.

Aside from Enron, the number of corporate fraud cases the FBI opened increased over300percent from 2001 to 2005. The FBI worked closely with partners in government and the private sector—including many CPA firms — to investigate these scandals and put the scammers behind bars.

This approach has been highly successful. Our collaborative efforts have resulted in almost 1,100 indictments and informations and over 850 convictions. But we still have over 500 open cases. Many of them involve shareholder losses of over $1 billion.

And we have seen a dramatic spike in the number of cases opened in the last year as a result of allegations of fraudulent backdating of Executive Stock Options.

Looking toward the horizon, we also expect to see a rise in fraud involving sub-prime mortgage lending companies. The sub-prime market grew from 2 percent of mortgages in 1998 to 20 percent in 2006. It is just a prediction, but we will likely see an increase in mortgage fraud cases where companies approved mortgages to homeowners that did not meet income, asset, or debt thresholds. We are already seeing an up-tick in foreclosures and public companies are now paying the price in loan defaults and decreased stock values.

As we examine their finances, we expect to find that many of the now bankrupt lenders made false accounting entries and fraudulently inflated assets and revenues. Investigators may even see evidence of insider trading. The FBI is on the case, and is working with our partners to identify possible corporate fraud and insider trading. With your help, we may even find a few DD-55s this time.

But back to my third example—terrorism financing, which is a significant part of the FBI’s counterterrorism efforts. Money is the lifeblood of terrorism. Without it, terrorists can’t train, plan, communicate, or execute their attacks. But with it, they can do immeasurable damage.

Look at the 9/11 hijackers. Their financial transactions flew below the radar. We were able to track their everyday purchases, at places like Wal-Mart, gas purchases, and to their airline travels throughout the country. As we reviewed their financial and spending patterns, things that might not have registered before suddenly took on enormoussignificance.

For example, the hijackers used cash or debit cards, but not credit cards. They had no Social Security numbers. They used their passports to open bank accounts. They moved their money in relatively small, non-suspicious amounts. The banks they used didn’t make it a priority to know their customers, and the terrorists took full advantage of it.

Our post-9/11 financial investigation conclusively linked the hijackers together. We identified transfers of funds between their accounts. But it is not enough to conduct a financial autopsy after an attack. It became clear that the law enforcement and intelligence communities needed to find early opportunities to identify terrorist networks, and the best way to do this is to scrutinize finances. When terrorists raise, store, move, and spend money, they leave trails. They are complex, but traceable and identifiable through global financial systems.

After the September 11 attacks, one of my responsibilities was to set up the Terrorist Financing Operations Section. In TFOS, our agents and analysts trace transactions and track patterns to help us identify leaders, associates, assets, and related crimes.

But this is not a straightforward task. Terrorists are determined and resourceful. They are not necessarily getting their allowance money from al Qaeda but raising it and moving it themselves, often through illegal and difficult-to-trace channels.

In some cases, terrorists resort to low-level crime to finance their activities. For example, the Madrid bombers sold drugs and pirated CDs. A group in North Carolina smuggled cigarettes and used the profits to fund Hezbollah in Lebanon. And just north of here in Torrance, California, members of a terrorist cell robbed gas stations to fund their activities. We are always looking for links among traditional crimes and terrorist activity.

We also investigate charities or non-governmental organizations that fraudulently obtain charitable donations and then divert them to support terrorism. This was the case with the Benevolence International Foundation case in Chicago, which was a front for al Qaeda. The executive director pled guilty to racketeering conspiracy and is now serving 11 years in federal prison.

Health care fraud, corporate fraud, and terrorism financing are just a few examples of what financial investigators in the Bureau are working on. We are making progress in all these areas, but unfortunately there is no shortage of work. And much of that work is the careful, methodical work of forensic accounting.

We realize that as forensic accountants, you may have your hands on the evidence long before we do. We want you to be as experienced as possible and to have the training you need. That’s why conferences like this one are so important, and we appreciate the way the AICPA has stepped up to the plate.

We can work best together when we are all on the same page—and I would bet we will be working together for the foreseeable future.

In the wake of Enron, WorldCom, and other scandals, companies started paying more attention to the risks of fraud and have hired many forensic accountants. And thanks to SAS 99, Sarbanes-Oxley, and the collapse of Arthur Andersen, auditing groups have been working more closely with their forensic accounting counterparts—often this means they are throwing more work at you.

We depend upon our financial investigators within the Bureau. And we also depend on our partners.

We depend upon you to maintain independence and to raise red flags when you see something that doesn’t add up. We depend upon you to be the conscience of your organizations, because as we have seen all too often, employees and leaders sometimes choose the unconscionable. They lose not just their independence, but also their moral compasses. The “if we don’t cheat, we can’t compete” mentality does extreme damage. Seemingly “minor” ethical lapses can have long-lasting consequences across an industry, a profession, and the economy—from public distrust of a company to share prices on tech stocks sinking.

You are the first line of defense against fraud. You are the beat cops—not just checking boxes, but actually conducting surveillance, and constantly scanning the horizon for irregularities. You have done an outstanding job, and have helped those of us in the Bureau to do our jobs better.

We need you to keep being proactive. Keep your independence. Keep asking the tough questions. Keep raising the red flags.

When you think about it, conducting an ethical audit of a company is just as vital as arresting a corrupt CEO.

The FBI and the AICPA have more in common than you might think at first blush. We are both concerned with protecting the health of our economy. We are both dedicated to protecting the American public. And we both adhere to the same system of values. The core values of fairness, transparency, ethics, and integrity are ingrained in every FBI employee, just as they are instilled in every CPA.

Guided by those values, we must keep working together to root out corruption, to inspire confidence in the American public, and to protect the American marketplace.

The movie “ Citizen Kane” opened with Charles Foster Kane mumbling the words “Rosebud” as he died. It was the mystery the reporter tried to solve throughout the movie. The movies can sometimes be a reflection of true life experiences and memories. I could see at some point in my life someone will find me in a nursing home mumbling….”DD-55.”

Thank you again for having me.

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