AUSTRAC Guideline No. 4 - Enclosure 3
(Formerly Enclosure to CTRA Guideline No. 4)
Financial Transaction Reports Act 1988
Areas of Suspect ActivityCorporate Fraud
In order to further assist Merchant Bankers and Stock Brokers to understand and identify suspect transactions, set out below are examples of activities which may indicate a breach of the Corporations Act relating to corporate fraud. The examples, which are not meant to be exhaustive, may be used as a general guide for determining a basis for suspicion.
Abuse of Position
These examples are directed at identifying corporate fraud by persons who have both an ability to exercise power and a willingness to exploit that power. The first group of examples shows improper use of a position of power to gain personal advantage to the detriment of the corporation, shareholders and/or creditors:
(a) A listed public company, which has a strong chairman and a weak board of directors, seeks to restructure. There is some doubt as to the ongoing viability of the company and it becomes apparent during your involvement with the corporation that large sums have been transferred as management fees from the corporation to entities associated with the chairman. You suspect that the chairman may not have acted honestly in the discharge of his office.
(b) A director of a publicly listed building company is known to have recently completed his own development project. During the course of providing advice or arranging finance you become aware that the resources of the public company have been used to assist in completing this private development. You suspect that the public company may not have been reimbursed for this expenditure.
(c) A medium sized corporate customer, shortly before going into voluntary liquidation, sells its prime asset at apparently less than market value. At around the same time less desirable assets are purchased by the company from interests you suspect are associated with the directors, and at prices which, according to your information, are well in excess of their true value.
(d) A property trust company is controlled by one of your clients. It becomes apparent during the course of providing advice that secret commissions and other benefits are being received by your client. You understand that these commissions and other benefits are much beyond the level of remuneration authorised by the trust deed.
(e) You are asked to analyse the prospects of a small second board listed company. You discover that the results obtained are substantially less than the industry average and you receive confidential information that the executive directors have been systematically skimming profits for a number of years.
(f) A growing proportion of the assets of a listed company consist of receivables which have no connection with the trading activities of the firm. You are asked by the managing director to accept funds from the company on instructions to on-lend to persons you suspect are associates of the managing director. You suspect that the managing director is in breach of his fiduciary responsibility to shareholders.
(g) You are asked to arrange finance for the directors of a listed public company in a proposed management buy-out. Your clients advise you, in support of the lending proposal, that the deal is to be structured in such a way that their risk is all but eliminated. You suspect on learning more of the proposal that ordinary shareholders will be disadvantaged by the arrangement and that the directors are in breach of their duty to protect the interests of shareholders.
Gaining and Holding Power
The following are examples of attempts to gain or maintain a position of power by improper means:
(h) You are asked to assist in a restructuring proposal for a public company. You discover that the published profits were in the main generated either from fees booked at the end of the financial year (and subsequently reversed at the beginning of the next financial year) or from extraordinary profits on the sale of real estate to associated companies. You also find that there are substantial unrealised losses in off balance sheet companies within the group. You suspect that the group has been insolvent for some time and that the directors may have decided to trade-on, contrary to the interests of creditors.
(i) A known corporate raider has recently acquired a controlling interest in a listed company and has installed its directors on the board. During a relatively short period of time the substantial liquid assets of the public company are lent without adequate security to the corporate raider. The shares of the public company plummet and you suspect that the directors installed by the corporate raider have not acted in the interests of the listed company.
(j) You are asked to assist in a refinancing proposal. During the assignment you discover that the security for some of the existing borrowing is either over-valued or non-existent. You suspect that the company is insolvent and that fraud may have been committed.
(k) A new client seeks advice on the acquisition of an insurance company whose parent is in financial difficulty. You conclude that the client does not have access to sufficient funds to complete the purchase and you cease to act in the matter. Subsequently you are surprised to learn that the insurance company has been purchased by your former client. You are reliably informed that the insurance company's own assets were used in the settlement.
There are as many examples of suspect activity as there are ways to commit fraud. The examples in this enclosure are by no means exhaustive and may be used as a general guide for determining a basis for reporting suspect transactions.
Australian Transaction Reports and Analysis Centre (AUSTRAC)
PO Box 5516
West Chatswood NSW 1515
Telephone (02) 9950 0827 Facsimile (02) 9950 0071 DX AUSTRAC 29668