$100 Million Fraud at ABB in only 2 years

This one is a few years old now, it goes back to 2017, but there’s still a mystery here and $100 million is a lot of money.

ABB is a global Fortune 500, publicly traded electrical engineering conglomerate with Swedish-Swiss roots. In early February of 2017, an ABB executive in their South Korean operation named Myeong-se Oh disappeared. There were early reports that an internal investigation triggered the disappearance. Later reports indicate that his disappearance was a surprise.

It wasn’t only Mr. Oh who disappeared, more than $100 million US was missing. It’s now 2023 and I’m not able to find any reports of the capture of Mr Oh. In a rare case, he appears to have gotten away with it. Mr. Oh is reported to have fled to Hong Kong and then disappeared. It is believed he fled to mainland China which does not have an extradition treaty with South Korea.

How did we get here? Even for a company the size of ABB, $100 million is a lot of money. Their South Korean operation did roughly $525 million in revenue in 2015 when this theft is alleged to have started. and by early 2017, Mr. Oh was gone. Insurance payouts covered roughly $30 million of the loss, but pre-tax net income was impacted by roughly $73 million or about a 4% hit to net profit. Ouch.

Reports vary, but Mr. Oh was in his fifties and a 25-year veteran of the company. Until 2010, he had been the chief compliance officer. In 2017 he was the South Korean organization’s treasurer and one of two integrity ombudsmen. He was one of the officers designated to receive reports of ethical violations. Oh’s fraud has been described as a “sophisticated criminal scheme” and that seems incredibly appropriate.

Fraud-Magazine.com has some of the most detailed information based on their reporting and reporting by a German magazine Bilantz. I’ve not been able to drill back to the Bilantz source. Essentially Oh’s fraud had three prongs:

  1. Mr. Oh opened bank accounts at various institutions in his name and in the name of a KW Industry for who he was listed as CEO. Mr. Oh then transferred $75 million of ABB cash into his accounts. Simple theft at its finest.
  2. Oh borrowed $16 million on behalf of ABB and funneled the money to his own accounts.
  3. Oh also factored ABB’s receivables to the tune of $12 million and funneled the cash to his accounts.

Quick math gets us to $106 million US. How was this all possible? From the Fraud-Magazine.com article:

Many Asian governments require that each of their businesses must have a single, official red-ink corporate seal for validating legal contracts. Each South Korean business must register its unique handmade seal, the “beobin ingam,” with the government. By law, only the representative director can use the seal. However, the courts will presume that a company has “agreed to be legally bound … if a contract is stamped with the beobin ingam” even if the representative director didn’t use it, according to “Law in Korea.”

A beobin ingam costs about $27, so whether Oh had permission to use ABB’s or fraudulently obtained one, he had the apparent authority to execute the moves.

Additionally, a report by EY concluded “ABB Ltd has not maintained effective internal control over financial reporting as of December 31, 201.” ABB has also admitted “because of his position in the firm, might have had “Omnipotent Super User” rights within ABB’s enterprise resource planning (ERP) system:”

Finally, “ABB did not maintain adequate segregation of duties in the treasury function in its South Korean subsidiary and failed to identify certain inappropriate access levels to the local enterprise resource planning system,” Chief Executive Ulrich Spiesshofer and Chief Financial Officer Eric Elzvik wrote in a joint letter to shareholders.

Mr. Oh seems to the be last person one would suspect to commit a crime like this. This appears to have been a systemic failure of internal controls. ABB took a $100 million hit to their reputation, a 4% hit to their bottom line, and replaced all of their South Korean top management post-scandal. As with last week’s Apple case, this is a major corporation with major controls and they still suffered a $100 million fraud. There is simply no substitute for appropriate controls.

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