Fraud: Its butterfly effect

Nelson Celis, TMT / August 12, 2020
Posted by CenPEG Aug. 14, 2020

THE butterfly effect was observed by Edward Lorenz (1961), the father of chaos theory, when he was processing weather forecasts in the computer program that he developed at the Massachusetts Institute of Technology. He said, “When a butterfly flutters its wings in one part of the world, it can eventually cause a hurricane in another.” A simple example of the butterfly effect may be found in playing billiards — the slightest differences in the angle and speed with which you hit the cue ball will always cause the pack of balls to spread in different directions. In 1975, the chaos theory was proven by mathematician James Yorke.

An example of the butterfly effect is the case of Facebook. It started in 2003 as FaceMash that allowed its visitors to compare two female student pictures and let them pick who was more beautiful. Now, the Facebook application is not only for social media purposes, but it is also being used in business. In our business environment, one may have observed how small startup companies years ago gradually flourished and later acquired competitors just to dominate the market.

In our government offices, we have had butterfly effect experiences. A typical example is the infamous ComeLeak in March 2016, a few weeks before the 2016 elections, as the incident created humongous consequences: 1) publicly accessible 80 million records of registered voters, overseas Filipino voters, fingerprints, agency payroll, etc. which were dumped by hackers in deep web; 2) perceived mistrust of the Commission on Elections’ handling of the 2016 elections; 3) perceived mistrust of Comelec’s capability to protect its IT infrastructure; and 4) the ComeLeak incident is considered the biggest government data breach in Philippine history, if not in the world.

In February 2016, the illegal transfer of $101 million from a Federal Reserve Bank of New York account belonging to Bangladesh Bank was traced to Sri Lanka (i.e., $20 million) and to five separate accounts with the Rizal Commercial Banking Corp. or RCBC (i.e., $81 million) in the Philippines. The butterfly effect in this Bangladesh Bank cyberheist resulted in: 1) the cooperation among our government offices to handle this incident like the Bangko Sentral ng Pilipinas, National Bureau of Investigation, Anti-Money Laundering Council (AMLC), Philippine Amusement and Gaming Corp., etc.; 2) AMLC filing a money laundering complaint before the Department of Justice against RCBC branch manager et al.; 3) congressional hearings; 4) RCBC reorganization by increasing the number of independent directors from 4 to 7; and others.

The two preceding butterfly effects were caused by not adopting corporate and IT governance best practices resulting in information security vulnerabilities and fraud. And most common bigtime fraud in both private and public organizations are related to personal financial gain. Black’s Law Dictionary (Garner, 2004) defines fraud as “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” The Association of Certified Fraud Examiners (ACFE) further explained that “fraud can encompass any crime for gain that uses deception as its principal modus operandus. Consequently, fraud includes any intentional or deliberate act to deprive another of property or money by guile, deception, or other unfair means.” ACFE elucidated that “internal fraud, also called occupational fraud, defines it as the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the organization’s resources or assets, while ‘external fraud’ against a company covers dishonest vendors engage in bid-rigging schemes, bill the company for goods or services not provided, or demand bribes from employees.”

The book Financial Crime in the Philippines: Overview (Calimon, Chua, Veloso, Amoroso, Salazar & Tan, 2020) presents the major applicable laws related to fraud that are embodied in the Penal Code, Civil Code, Tax Code, Access Devices Law (Republic Act 8484) and Cybercrime Prevention Act (RA 10175). It also shows laws related to bribery and corruption that are governed by the Penal Code, Anti-graft and Corrupt Practices Act (RA 3019), Ethical Standards Act (RA 6713), Presidential Decree 46 concerning the giving of gifts to public officers, and Ease of Doing Business Act (RA 11032). Lastly, it also presents other related laws like the Anti-money Laundering Act (RA 9160 as amended by RA 10365) and Terrorism Financing Prevention and Suppression Act (RA 10168) and matters related to financial record-keeping, due diligence, corporate liability, immunity and leniency and whistleblowing.

The 2020 PwC “Global Economic Crime and Fraud Survey — The Philippine Report” cites that the economic crime and fraud landscape in the Philippines continues to grow exponentially” and that “bribery and corruption is…the second most disruptive economic crime in the Philippines.” The report cited that in “the Transparency International Index for 2019, the Philippines landed at 113/180 (from 99/180 in 2018), while Thailand ranked 101/180, and Vietnam ranked 96/180.2 In 2020, 21 percent of respondents said they were asked to pay a bribe while 14 percent of respondents said they lost an opportunity to a competitor who they believed paid a bribe.” Malacañang responded to this report by saying that “it’s the fault of the private sector.” PwC rejoined that “It is partially true. It is also true that between the government and the private sector, it’s the former that has the power.”

In another note, Finance Secretary Carlos Dominguez 3rd has highlighted the need for concerned government authorities to improve their law enforcement efforts against financial fraudsters. He said, “…focus on enforcement — detection, prosecution and conviction.”

In June 2020, the Philippine Health Insurance Corp. (PhilHealth) received a P27-billion subsidy from the national government. Under RA 11469, or the “Bayanihan to Heal as One Act” or “Bayanihan 1,” PhilHealth is tasked to shoulder all medical expenses of public and private health workers exposed to Covid-19 or any work-related injury or disease during the duration of the pandemic. And recently, PhilHealth has been under fire after its former anti-fraud legal officer, Thorrsson Montes Keith, resigned due to corruption in the agency, claiming that a “mafia” was behind it.
If Keith’s claim is true, what could be the butterfly effect?

To be continued on Aug. 19, 2020


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