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29-08-2013, 07:40 PM
An honorable member of the Coffee Shop Has Just Posted the Following:
I have had talked about the Kong Hee & Sun Ho case to a few of my British friends and I have had to explain to them what "round-tripping" was. Since it is not that well explained on Wikipedia, I thought I shall attempt to give you a simple explanation using some eggs! I have seen some quite complicated illustrations in the press and I'm like, duh - why are you making it so complicated? Welcome to economics 101 with Limpeh. Allow me to break down the concept of round-tripping to you in a most simple way in my kitchen.
Some essential background info: any organisation - be it a business, a church, a charity or a university - will have some financial assets. They need to have some money readily in the bank to pay for stuff, eg. phone bills, rent, electricity bills, paying contractors, buying stock etc. Also, the organisation may be sitting on the money because they have a major project in the near future they need the money for. Even individuals would need to keep some money in their current accounts to pay the bills and have some money to spend on things like food and transport - so as you can imagine, the bigger the company, the more financial assets they would have just sitting around.
Some companies are lazy and keep these in current accounts, earning virtually no interest. Whilst others have better arrangements with their financial advisers and keep this money in schemes which yield a bit more interest but are still easily accessible with daily or weekly liquidity. This is actually quite a big and lucrative business within financial services as some of these big organizations are literally sitting on millions of dollars which are earning little or no interest. These institutional pots of money are of great interest to any bank or asset manager who welcome the opportunity to manage that money.
Please note that I am will be explaining the concept of "round-tripping" - it is a rather big topic and not everything I say may be applicable to the Kong Hee & Sun Ho case which is still under investigation and let's allow the case to run its course through the justice system. This is merely a simple lesson in economics for those of you who are fascinated by the case so far. Firstly, you should know what a 'bond' is as this is a crucial part of the explanation. It's a really simple concept and as most of you know what a bond is already, I shall not bother explaining it, but if you're not 100% clear, there's always the wikipedia page on bonds. Right, time for some photos in my kitchen.
1. The ten eggs in the picture represent the assets of the organization. Let's imagine that each egg represents several million dollars of assets. As we're dealing with eggs today, let's call the company Chicken-Hen-Company, or CHC for short. We start off with ten eggs.
http://4.bp.blogspot.com/-FWll7QpS6mk/T_CdBo9vj7I/AAAAAAAACZw/7NR-9IDlRu0/s400/IMG-20120701-00012.jpg
2. The CEO of CHC wishes to invest in a lame-ass singer Donkey Kong's career, as represented by this donkey here. But he cannot do so directly as it would be a crazy gamble of the company's money and would not pass any kind of audit as Ms Kong's business plan is crap and there is nobody to keep her ego in check in America.
http://2.bp.blogspot.com/-6vVVPJiaAEM/T_Cdns-2LfI/AAAAAAAACaA/8pLwNY9C8Y4/s400/IMG-20120701-00014.jpg
In order to disguise the investment, the CEO invests in an investment vehicle represented by the blue bowl here - we shall call it the "Blue Bowl Limited", but it is in fact a shell because the money is not going to stay in the Blue Bowl Limited - no, the money then makes its way from the Blue Bowl Limited to the donkey's music fund (as represented by the square bowl).
This is sometimes known as a 'scam bond' as the assets of the investment are not retained by the Blue Bowl Limited - but it simply retains just enough to pay out a dividend to the original investor CHC so it does look like a low-yielding bond that is never redeemed. It may look like a bad investment decision to some, but it doesn't appear illegal to an outsider who doesn't realize that this bond has no underlying assets.
http://2.bp.blogspot.com/-JNKy-KRRAYA/T_CddxUjvhI/AAAAAAAACZ4/EYjVI7ojClc/s400/IMG-20120701-00015.jpg
I am simplifying this a lot - shell companies like the Blue Bowl Limited would go out of their way to obfuscate the paper trail so you would find it very, very hard to uncover their shell/scam bond schemes. So let's say, three eggs are channelled towards Donkey Kong's career - from the egg carton to the square bowl via the blue bowl and the three eggs are worth, ooh approximately S$24 million.
http://2.bp.blogspot.com/-Z93qQ5yCb_E/T_CjRPkHALI/AAAAAAAACas/ZulMQovV0dU/s400/IMG-20120701-00026.jpg
4. Time passes. Donkey Kong has spent 24 million dollars but none of her hits have charted - there is no return on this investment. Three eggs are effectively taken out of the system because they have been used to pay record producers, music video directors, choreographers and other artistes Ms Kong has collaborated with in America (oh and Ms Kong rented this gorgeous mansion in Hollywood whilst she was living in Los Angeles).
http://2.bp.blogspot.com/-lMcoFMFNwNk/T_CeDRKK-9I/AAAAAAAACaI/4p_3L9eyRxY/s400/IMG-20120701-00016.jpg
5. The CEO of CHC realizes, oh shit I'm in trouble, how am I going to cover up this hole in our finances? He decides to cover his tracks by engaging in "round-tripping". There is still plenty of money in his company, as represented by the eggs still left in the plastic egg carton. So takes another 3 eggs from the carton and invests it in another company which we shall call the "Wooden Bowl Inc" as a scam bond. Wooden Bowl Inc is just a shell company, like Blue Bowl Limited.
http://1.bp.blogspot.com/-bzYrUyY93Ko/T_Cez0wkgrI/AAAAAAAACaQ/rliY2JjrTRU/s400/IMG-20120701-00020.jpg
6. The 3 eggs moves from Wooden Bowl Inc to Blue Bowl Limited through a series of complex transactions so the links between the two companies are hard to trace.
http://4.bp.blogspot.com/-o_A5kJsRw-Y/T_CfeDEyXtI/AAAAAAAACaY/r7q3TGbdipM/s400/IMG-20120701-00021.jpg
7. Once the money reaches Blue Bowl Inc, the CEO of CHC is able to redeem his bond in full from Blue Bowl Inc and say to the auditors, "See? It is a legitimate investment! Look, there are still 3 eggs in the Blue Bowl - so it is not a scam bond!"
http://4.bp.blogspot.com/-RILqTP2AD4E/T_CjtFOW3DI/AAAAAAAACa0/Ah8L8fJxyIc/s400/IMG-20120701-00023.jpg
Just to make a point, the CEO goes ahead and redeems his 3 eggs from the Blue Bowl just to show that the redemption is complete to give the original investment a sense of legitimacy. But look at the bottom of the screen - the Wooden Bowl Inc is empty and no matter how you move the eggs around, you can't run away from the fact that 3 eggs have been taken out of the system. No matter where they are moved, there are 7 eggs in the picture, not 10 as 3 have been removed and the CEO of CHC is using round tripping to give the impression that there are 10 eggs still when really, he is left with 7 eggs.
The only way to solve the problem is to somehow find another 3 eggs to put back into the system. If the organization was a profit making company, then fair enough - it may be able to make some profits in a good year and resolve the issue. But if it is a charity which technically doesn't make a profit, then there is simply no way to get out of this mess. You just have to keep on confusing the auditors with more and more round-tripping and hope not to be caught - this can only be achieved with very devious (and well paid) accountants and if the auditors (and authorities) are not suspecting any wrong-doing. What the accountants are doing is highly illegal and you need to reward them handsomely for doing this because they know that if they are caught, they can go to jail for a very long time.
http://3.bp.blogspot.com/-NDJ6dCA17ak/T_CgEhL3FtI/AAAAAAAACag/63d8oJ_v6pg/s400/IMG-20120701-00024.jpg
8. So on paper, for now, everything looks legit despite the fact the loss of 24 million (spent on Donkey Kong's failed music career). CHC keeps quiet about the loss of $24 million to avoid bad publicity and questions about accountability to shareholders and the authorities. The skilful accountants can make any one bowl in the system look full for the purpose of an audit simply by moving the eggs around to the right place at the right time - but once you're under scrutiny, it can get harder and harder to hide the fact that you're missing 3 eggs.
9. If anyone starts to question the status of the investment in Wooden Bowl Inc, the CEO merely engages in another cycle of round-tripping, redeems the assets and makes it look legit to the world. The round-tripping gets more and more complex with more and more shell vehicles involved to make the paper trail more and more complex, in a bid to confuse the auditors. Sometimes, this actually works!
http://2.bp.blogspot.com/-HTblnCQLsa4/T_ClF8QTgDI/AAAAAAAACa8/c1Zefh6B5EI/s400/IMG-20120701-00028.jpg
10. How do people get away with this? Simple. It is very obvious where the assets lie when you're looking at eggs in bowls on a table. But in reality, we keep our assets in banks, in stocks, in bonds, in various investment schemes which are just numbers on a computer screen. I currently have about £7 (S$14) in cash in my wallet - if I need to buy something that costs more than £7, I simply use my credit card. People do not carry much cash with them, neither do businesses today. So if you spread your assets out in many different "bowls" (ref: the picture above), then you can create the impression that every bowl is full even if you take 3 eggs out of the system - as long as you keep moving them around skilfully enough. This is round tripping - it is financial fraud and it is illegal.
Hence when it comes to an audit, the auditor has to go through many accounts detailing the organization's investments and the more complex the paper trail, the harder it is for an auditor to make sense of it. After all, if you have a statement claiming, "This organisation has 24 million dollars invested in this bond scheme" - it is up to the auditor to decide if it is true or false and if it can be believed. It cannot ask the organisation to liquidate the bond to prove that it is worth 24 million - it has to instead follow the paper trail to check what the underlying assets are for the bonds in question and if the assets exists (and if so, what they're worth). People who are determined to commit financial fraud know how to confuse and mislead auditors and with money going from one investment vehicle to another through different jurisdictions, this kind of fraud is frightfully difficult to expose and usually depends on someone on the inside leaking information to the authorities.
Can I just repeat please, that I have merely been talking about hens' eggs in china and various bowls to explain the concept of round-tripping. None of what I said above should be taken in reference to the on-going case of Kong Hee and Sun Ho which is still an ongoing investigation. I hope you've enjoyed your lesson about financial fraud with Limpeh today.
I shall leave you with one of the diagrams that tries to explain what happened but I found rather confusing. I hope that the photos from my kitchen were a lot more straight forward in breaking down what actually happened for you. Any other questions, please leave a comment, thanks! Kum siah!
http://3.bp.blogspot.com/-tw2jtFZ0aig/T_CqgoqEcdI/AAAAAAAACbI/pVXyNiiSUNk/s1600/diagram.jpg
*The author blogs at limpehft.blogspot.com
Click here to view the whole thread at www.sammyboy.com (http://sammyboy.com/showthread.php?161404-This-blogger-sibei-hor-in-explaining-CHC-saga&goto=newpost).
I have had talked about the Kong Hee & Sun Ho case to a few of my British friends and I have had to explain to them what "round-tripping" was. Since it is not that well explained on Wikipedia, I thought I shall attempt to give you a simple explanation using some eggs! I have seen some quite complicated illustrations in the press and I'm like, duh - why are you making it so complicated? Welcome to economics 101 with Limpeh. Allow me to break down the concept of round-tripping to you in a most simple way in my kitchen.
Some essential background info: any organisation - be it a business, a church, a charity or a university - will have some financial assets. They need to have some money readily in the bank to pay for stuff, eg. phone bills, rent, electricity bills, paying contractors, buying stock etc. Also, the organisation may be sitting on the money because they have a major project in the near future they need the money for. Even individuals would need to keep some money in their current accounts to pay the bills and have some money to spend on things like food and transport - so as you can imagine, the bigger the company, the more financial assets they would have just sitting around.
Some companies are lazy and keep these in current accounts, earning virtually no interest. Whilst others have better arrangements with their financial advisers and keep this money in schemes which yield a bit more interest but are still easily accessible with daily or weekly liquidity. This is actually quite a big and lucrative business within financial services as some of these big organizations are literally sitting on millions of dollars which are earning little or no interest. These institutional pots of money are of great interest to any bank or asset manager who welcome the opportunity to manage that money.
Please note that I am will be explaining the concept of "round-tripping" - it is a rather big topic and not everything I say may be applicable to the Kong Hee & Sun Ho case which is still under investigation and let's allow the case to run its course through the justice system. This is merely a simple lesson in economics for those of you who are fascinated by the case so far. Firstly, you should know what a 'bond' is as this is a crucial part of the explanation. It's a really simple concept and as most of you know what a bond is already, I shall not bother explaining it, but if you're not 100% clear, there's always the wikipedia page on bonds. Right, time for some photos in my kitchen.
1. The ten eggs in the picture represent the assets of the organization. Let's imagine that each egg represents several million dollars of assets. As we're dealing with eggs today, let's call the company Chicken-Hen-Company, or CHC for short. We start off with ten eggs.
http://4.bp.blogspot.com/-FWll7QpS6mk/T_CdBo9vj7I/AAAAAAAACZw/7NR-9IDlRu0/s400/IMG-20120701-00012.jpg
2. The CEO of CHC wishes to invest in a lame-ass singer Donkey Kong's career, as represented by this donkey here. But he cannot do so directly as it would be a crazy gamble of the company's money and would not pass any kind of audit as Ms Kong's business plan is crap and there is nobody to keep her ego in check in America.
http://2.bp.blogspot.com/-6vVVPJiaAEM/T_Cdns-2LfI/AAAAAAAACaA/8pLwNY9C8Y4/s400/IMG-20120701-00014.jpg
In order to disguise the investment, the CEO invests in an investment vehicle represented by the blue bowl here - we shall call it the "Blue Bowl Limited", but it is in fact a shell because the money is not going to stay in the Blue Bowl Limited - no, the money then makes its way from the Blue Bowl Limited to the donkey's music fund (as represented by the square bowl).
This is sometimes known as a 'scam bond' as the assets of the investment are not retained by the Blue Bowl Limited - but it simply retains just enough to pay out a dividend to the original investor CHC so it does look like a low-yielding bond that is never redeemed. It may look like a bad investment decision to some, but it doesn't appear illegal to an outsider who doesn't realize that this bond has no underlying assets.
http://2.bp.blogspot.com/-JNKy-KRRAYA/T_CddxUjvhI/AAAAAAAACZ4/EYjVI7ojClc/s400/IMG-20120701-00015.jpg
I am simplifying this a lot - shell companies like the Blue Bowl Limited would go out of their way to obfuscate the paper trail so you would find it very, very hard to uncover their shell/scam bond schemes. So let's say, three eggs are channelled towards Donkey Kong's career - from the egg carton to the square bowl via the blue bowl and the three eggs are worth, ooh approximately S$24 million.
http://2.bp.blogspot.com/-Z93qQ5yCb_E/T_CjRPkHALI/AAAAAAAACas/ZulMQovV0dU/s400/IMG-20120701-00026.jpg
4. Time passes. Donkey Kong has spent 24 million dollars but none of her hits have charted - there is no return on this investment. Three eggs are effectively taken out of the system because they have been used to pay record producers, music video directors, choreographers and other artistes Ms Kong has collaborated with in America (oh and Ms Kong rented this gorgeous mansion in Hollywood whilst she was living in Los Angeles).
http://2.bp.blogspot.com/-lMcoFMFNwNk/T_CeDRKK-9I/AAAAAAAACaI/4p_3L9eyRxY/s400/IMG-20120701-00016.jpg
5. The CEO of CHC realizes, oh shit I'm in trouble, how am I going to cover up this hole in our finances? He decides to cover his tracks by engaging in "round-tripping". There is still plenty of money in his company, as represented by the eggs still left in the plastic egg carton. So takes another 3 eggs from the carton and invests it in another company which we shall call the "Wooden Bowl Inc" as a scam bond. Wooden Bowl Inc is just a shell company, like Blue Bowl Limited.
http://1.bp.blogspot.com/-bzYrUyY93Ko/T_Cez0wkgrI/AAAAAAAACaQ/rliY2JjrTRU/s400/IMG-20120701-00020.jpg
6. The 3 eggs moves from Wooden Bowl Inc to Blue Bowl Limited through a series of complex transactions so the links between the two companies are hard to trace.
http://4.bp.blogspot.com/-o_A5kJsRw-Y/T_CfeDEyXtI/AAAAAAAACaY/r7q3TGbdipM/s400/IMG-20120701-00021.jpg
7. Once the money reaches Blue Bowl Inc, the CEO of CHC is able to redeem his bond in full from Blue Bowl Inc and say to the auditors, "See? It is a legitimate investment! Look, there are still 3 eggs in the Blue Bowl - so it is not a scam bond!"
http://4.bp.blogspot.com/-RILqTP2AD4E/T_CjtFOW3DI/AAAAAAAACa0/Ah8L8fJxyIc/s400/IMG-20120701-00023.jpg
Just to make a point, the CEO goes ahead and redeems his 3 eggs from the Blue Bowl just to show that the redemption is complete to give the original investment a sense of legitimacy. But look at the bottom of the screen - the Wooden Bowl Inc is empty and no matter how you move the eggs around, you can't run away from the fact that 3 eggs have been taken out of the system. No matter where they are moved, there are 7 eggs in the picture, not 10 as 3 have been removed and the CEO of CHC is using round tripping to give the impression that there are 10 eggs still when really, he is left with 7 eggs.
The only way to solve the problem is to somehow find another 3 eggs to put back into the system. If the organization was a profit making company, then fair enough - it may be able to make some profits in a good year and resolve the issue. But if it is a charity which technically doesn't make a profit, then there is simply no way to get out of this mess. You just have to keep on confusing the auditors with more and more round-tripping and hope not to be caught - this can only be achieved with very devious (and well paid) accountants and if the auditors (and authorities) are not suspecting any wrong-doing. What the accountants are doing is highly illegal and you need to reward them handsomely for doing this because they know that if they are caught, they can go to jail for a very long time.
http://3.bp.blogspot.com/-NDJ6dCA17ak/T_CgEhL3FtI/AAAAAAAACag/63d8oJ_v6pg/s400/IMG-20120701-00024.jpg
8. So on paper, for now, everything looks legit despite the fact the loss of 24 million (spent on Donkey Kong's failed music career). CHC keeps quiet about the loss of $24 million to avoid bad publicity and questions about accountability to shareholders and the authorities. The skilful accountants can make any one bowl in the system look full for the purpose of an audit simply by moving the eggs around to the right place at the right time - but once you're under scrutiny, it can get harder and harder to hide the fact that you're missing 3 eggs.
9. If anyone starts to question the status of the investment in Wooden Bowl Inc, the CEO merely engages in another cycle of round-tripping, redeems the assets and makes it look legit to the world. The round-tripping gets more and more complex with more and more shell vehicles involved to make the paper trail more and more complex, in a bid to confuse the auditors. Sometimes, this actually works!
http://2.bp.blogspot.com/-HTblnCQLsa4/T_ClF8QTgDI/AAAAAAAACa8/c1Zefh6B5EI/s400/IMG-20120701-00028.jpg
10. How do people get away with this? Simple. It is very obvious where the assets lie when you're looking at eggs in bowls on a table. But in reality, we keep our assets in banks, in stocks, in bonds, in various investment schemes which are just numbers on a computer screen. I currently have about £7 (S$14) in cash in my wallet - if I need to buy something that costs more than £7, I simply use my credit card. People do not carry much cash with them, neither do businesses today. So if you spread your assets out in many different "bowls" (ref: the picture above), then you can create the impression that every bowl is full even if you take 3 eggs out of the system - as long as you keep moving them around skilfully enough. This is round tripping - it is financial fraud and it is illegal.
Hence when it comes to an audit, the auditor has to go through many accounts detailing the organization's investments and the more complex the paper trail, the harder it is for an auditor to make sense of it. After all, if you have a statement claiming, "This organisation has 24 million dollars invested in this bond scheme" - it is up to the auditor to decide if it is true or false and if it can be believed. It cannot ask the organisation to liquidate the bond to prove that it is worth 24 million - it has to instead follow the paper trail to check what the underlying assets are for the bonds in question and if the assets exists (and if so, what they're worth). People who are determined to commit financial fraud know how to confuse and mislead auditors and with money going from one investment vehicle to another through different jurisdictions, this kind of fraud is frightfully difficult to expose and usually depends on someone on the inside leaking information to the authorities.
Can I just repeat please, that I have merely been talking about hens' eggs in china and various bowls to explain the concept of round-tripping. None of what I said above should be taken in reference to the on-going case of Kong Hee and Sun Ho which is still an ongoing investigation. I hope you've enjoyed your lesson about financial fraud with Limpeh today.
I shall leave you with one of the diagrams that tries to explain what happened but I found rather confusing. I hope that the photos from my kitchen were a lot more straight forward in breaking down what actually happened for you. Any other questions, please leave a comment, thanks! Kum siah!
http://3.bp.blogspot.com/-tw2jtFZ0aig/T_CqgoqEcdI/AAAAAAAACbI/pVXyNiiSUNk/s1600/diagram.jpg
*The author blogs at limpehft.blogspot.com
Click here to view the whole thread at www.sammyboy.com (http://sammyboy.com/showthread.php?161404-This-blogger-sibei-hor-in-explaining-CHC-saga&goto=newpost).