Hedge funds a fraud threat

A banking lawyer who spent two years in US federal prison in the early 1990s following a racketeering conviction told a Cayman conference this week that failing hedge funds are fertile ground for money launderers.

Kenneth Rijock

Kenneth Rijock

Kenneth Rijock now earns his living as a financial crime consultant for the banking industry helping spot questionable investments before cash from those schemes enters the financial system.

‘I’m afraid of hedge funds,’ Mr. Rijock told the Global Compliance Solutions conference at the Marriott Resort on Monday.

‘If I’m a money launderer, I’m going to look for some hedge funds that are very distressed and maybe even about to go under,’ Mr. Rijock said. ‘And I’m going to be the angel, the saviour. I’m going to come in there and say that I represent some South African investor, or some other well-contrived story.’

‘I’m going to put enough cash in (the fund) so that the manager can refund money, knowing that I’m not going to get a huge amount of due diligence (in determining where that money came from).’

‘(Bank compliance officers) should understand, if you have a hedge fund you’re working with, and all of a sudden they have a major problem and then later, a huge influx in capital — I’d sure like to know what the source of funds is on that.’

Mr. Rijock said there’s been a lot of international press lately on problems with the US sub-prime lending market which has affected hedge fund investments. However, he said there are other investments hedge funds make in what are usually called ‘traded life’ or ‘life settlement’ policies which he considers equally troubling.

‘It’s part of the reason why (hedge funds) are failing,’ Mr. Rijock said.

To help explain those types of investments, he set out a fictitious scenario for conference attendees. In that scenario, the retiring vice president of a prominent US automaker decides he doesn’t want to keep the $8 million key-employee insurance policy his company had on him because the premium payments are too high.

The $8 million policy in Mr. Rijock’s scenario is sold to an insurance broker for $4 million. The broker turns around and sells it to a life settlement company for $6 million, who in turn sells it to an investor for $8 million.

‘Hedge funds have been buying up these policies — because they know the returns are so high,’ Mr. Rijock said. ‘The problem is, that some of the companies are marginally unethical and they play with these (life settlement policy) figures. They modify and alter some of these items, and some of these companies are just fraudsters.

‘So you have a bunch of hedge funds (that) are holding assets which are not performing. This is fertile ground for some money launderer to get in there.’

Mr. Rijock listed failing hedge funds among the new areas which those seeking to launder money from illicit drug sales or other illegal activities may use to hide their profits.

Other threats

Another major problem emerging on the money laundering front is Venezuela and its President Hugo Chavez, said Mr. Rijock.

‘Last month, $200 million Venezuelan dollars showed up in Panama,’ Mr Rijock said. ‘That cannot be legitimate money. (Venezuela) is a money launderer’s paradise.’

Mr. Rijock said sources in the South American country had told him that virtually no banking compliance is occurring in Venezuela and that untold millions of dollars are leaving the country unchecked.

‘I cannot stress enough how dangerous it is to do business with anyone bringing money out of that country,’ he said.

He also noted the use of bearer negotiable instruments, like bank drafts or bearer bonds, have replaced cash in many international money laundering schemes since they’re obviously much easier to transport.

‘It’s all about the source of funds,’ Mr. Rijock said. ‘If you cannot identify source of funds, don’t take their money.’

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