Window dressing refers to a practice used by some companies to improve the appearance of financial information before the close of an accounting period and reporting to investors or creditors.

There are many forms of window dressing, ranging from simple accounting adjustments on the balance sheet to highly sophisticated schemes involving collaboration between multiple persons. For instance, a simple method used by investment fund managers involves selling underperforming or loss-making investments before reporting the portfolio holdings and replacing them with recent high-flying winners, so that the portfolio mix appears to contain attractive investments, encouraging investors to remain with the manager.

Of course, if investors are paying attention and receiving all information they will notice the changes in portfolio value and losses incurred.

A more complex form of window dressing involves the use of “round trip” transactions to fraudulently conceal underperforming assets or losses by transferring them off the books temporarily. This can be carried out by temporarily “selling” the under performing asset or replacing it with a receivable only to have the transaction unwound later.

In the receivable variant of window dressing, the reporting entity will transfer cash to a connected party borrower and record a receivable. The connected party then uses the cash advanced to it under the loan to “purchase” the underperforming assets at an overvalued price. In essence, the receivable has replaced the underperforming asset.

After the reporting period, the connected party will unwind the transaction by “selling” the asset back to the company at the overvalue price and using the cash to pay off the receivable. The transactions are often later used as a justification of the asset’s value and/or to demonstrate the creditworthiness/history of the borrower. In more extreme cases, the transactions can be used to generate false profits.

A key to the “round trip” scheme is concealment of the connected party’s role in the transactions. The company may go to great lengths to conceal the true identity of the borrower and the purchaser/seller. Recognition of patterns, caution with related parties, and vigilant adherence to Anti-Money Laundering’s Know Your Customer rules can increase the chance that schemes such as this will be recognised.

If you suspect that a company is conducting business fraudulently you should contact a local Certified Fraud Examiner who can assist you with considering the available options and whether to report the matter to the relevant local authorities, such as the Bermuda Police Service, the Bermuda Monetary Authority, or the Bermuda Financial Intelligence Agency.

KRyS Global, a fraud investigation and asset recovery firm based in Bermuda, wrote this article as a way to increase community awareness about fraud. For more information contact Mathew Clingerman, managing director, KRyS Global at Mathew.Clingerman@krys-global.com