Fraud in Paradise

Fraud in Paradise

The dynamics of international capital flow in 2018 are rapidly changing. Economic superpowers such as the United States and China have been leading the world in technological advancements created by dynamic entrepreneurs. However, several aspiring regional players must be recognized. With the opportunities available in emerging markets there are risks that go along with them. Cyber-attacks and fraudulent cryptocurrency exchanges dominate the news cycle in new markets, but they tell only a part of the story. While not as tweet-able as the latest hacking catastrophe and now-daily release of millions of people’s private information, investment fraud remains a major problem in emerging economies. Two vastly different countries share these challenges; Brazil and Cyprus, which serve as examples of fraudulent hot zones. Our goal at Interfor is to highlight and inform you about fraud in order to provide the broadest picture of global threats.

From a macro level, investment fraud involves a party extracting something of value — such as money or property — from a victim by passing off false claims as the truth. This epidemic occurs across many sectors, such as real estate and securities investments, where losses to fraud can reach into the millions. A simple fraud can be as inconspicuous as paying a client’s family members under the table to facilitate a business relationship.

Brazil was once referred to as the country of the future. As the world economy continues to evolve at a dizzying pace, Brazil’s promise might come to fruition. After hosting the 2016 Olympics, ascending politically in Latin America, (thanks to a booming economy and growing population), it has taken its place as the most influential country in that region. A significant amount of wealth is being generated in Brazil, compounded by outside investors pouring capital into the country. It’s no secret that political corruption, as well as rampant fraud, are commonplace. While the government has taken steps to curb fraud, such as stopping illegal mining of cryptocurrencies, efforts have not been enough to curtail the behavior. As the crackdown on corruption continues, firms like Interfor are able to develop new approaches to uncover illicit dealings.

A recent notable example of a multi-million-dollar Brazilian fraud was the case of Providence Global Lt. Based in Guernsey, they operated in southern Florida and invested in a Brazilian factoring company, Providence Fomento Mercantil, Investimentos e Participações Ltda (Providence Fomento). The perpetrators committed mail fraud, funneling money they raised (half of it from American investors) into a variety of other holdings. Another recent example of fraud, involving tax evasion and money laundering, occurred with Dolly, one of the region’s’ largest carbonated soft drink companies. Fraud started from the top as the owner of the company, Laerte Codonho and several of his senior executives were arrested.

Both Brazil and Cyprus share the status of sunny vacation spots with beautiful beaches, and environments of rampant fraud. Cyprus has cultivated an environment where wealthy individuals are able to hide their assets in offshore accounts, using the island’s 10% flat tax rate as a tax haven. Notoriously, Russian oligarchs and billionaires have hidden assets in geographically accessible Cypress which offers less hassle than dealing with Western European institutions; that permissiveness has created an environment where fraud is prevalent.

It’s not just Russian billionaires flying in on private jets to vacation at the beach. In Cyprus, like Brazil, fraud occurs at the highest levels. A few years ago, Theodoros Aristodemou, one of Cyprus’s biggest real estate developers (who sat as chairman of its largest bank) was arrested on conspiracy and fraud charges. This facilitation from the top leads to an environment of fraud and corruption which makes it attractive to those looking to hide their money somewhere.

Interfor addresses this onslaught of Wild West schemes on cyber safety and cryptocurrencies. While these environments may be popular hosts for fraud, traditional (investment) fraud continues to be quite real as a threat to investors in emerging markets. When looking to conduct due diligence on investments in emerging markets consider Interfor’s resources to shine light where there is darkness.