Corruption, intimidation, robbery, violent assault, forgery, large-scale fraud. No, not the subject of the latest John Grisham novel, but sensational allegations, made public Apr. 4 by Hermitage Capital Management -- until recently the largest foreign portfolio investor in Russia. In a detailed and damning report, titled Criminal Justice -- Russian-Style, Hermitage alleges the fund's Russian subsidiaries have fallen victim to an elaborate con designed to defraud the fund of hundreds of millions of dollars. 
  
The most sensational part of Hermitage's allegations is that the attempted larceny was carried out with the direct connivance of officials in the Russian police. Hermitage alleges the police seized documents and equipment that were instrumental to the attempted fraud, which involved bogus court cases based on forged documents, the aim of which was to sue Hermitage subsidiaries for hundreds of millions of dollars. "The most shocking thing is not that there are corporate raiders in Russia who attempt to steal your shares," says Jamison Firestone, managing partner of Firestone Duncan, Hermitage's law firm. "The shocking thing is that the police worked hand-in-hand with them, and actually performed the theft of the documents so that the corporate raiders could then do their work."

So the two-pronged scam worked in one area and failed in another. The perpetrators weren’t able to steal the assets from us based on the fake court claims, but they were able to steal $230 million from the Russian government by filing amended tax returns on behalf of our stolen companies. What makes this story even more shocking is that we filed six 255-page criminal complaints with the Russian authorities in December last year, one month before the tax fraud took place, and they did nothing to stop it. Two complaints were sent to the Russian General Prosecutor, two to the Russian State Investigative Committee and two to the Internal Affairs Department of the Interior Ministry. There was enough information to prevent the fraud and indict a number of people behind it if the government had acted. 

Instead of doing anything to save the Russian state from this highly sophisticated and organized looting, two of our complaints were thrown out immediately; two were returned to the same Interior Ministry official we were complaining about (essentially, he was being asked to “investigate himself”); and one was thrown out for “lack of any crime committed.” Only one complaint was taken seriously. It was taken up by the Russian State Investigative Committee in early February, but before it could get any traction, the case was lowered to the South region of the Moscow district of the State Investigative Committee (the lowest level of the Committee) and by June, another senior Interior Ministry official whom we had named in our complaint had joined the “investigation” team (again, to “investigate himself”). To this day there has been no serious response by the Russian authorities to this massive fraud against the Russian state. 

As we described in our April letter, the problem of corporate “raiding” is now so endemic in Russia that President Medvedev speaks about it as one of the biggest problems faced by Russian businesses. In this case, raiders have taken this problem to a new and absurd extreme by “raiding” the Russian state itself and so far getting away with it. Together with HSBC, we will shortly be filing new criminal complaints with the Russian General Prosecutor and Russian State Investigative Committee as well as with many law enforcement authorities outside of Russia. It is hard to predict what will happen next in this unfolding and unbelievable saga, but as always we will keep you updated on any further developments as they arise.

Of course we see individual identity theft on a regular basis (actually as Ross Anderson points out its not really identity theft but poor controls on the bank's parts using SSNs as secrets and so on), but you dont see a major corporation stolen every day.

I would guess that every one of you reading this blog have a stock portfolio with 5 to 10 individual stocks or mutual funds. There are more than 5,000 publicly listed companies to choose from, and another 5,000 mutual funds. But, out of 10,000 possible companies you chose 10 to invest in. Why? Why did you reject the other 9,990 companies? Obviously there are more than 10 good companies to invest in. Other investors chose to invest their money in the other 9,990 companies…why not you?

I suppose the difference must be that many investors aren’t actively involved in their investments (maybe entrepreneurs are more so, since they have to know a certain investment space quite well)…

It sounds to me a lot like the editorial selection process for book manuscripts, articles, and so forth — editors receive a ton of submissions and they have to be choosy. Sometimes they don’t pick winners; sometimes they pick losers. More importantly, each has a personal style, opinions, preferences, and they are trying to appeal to a certain audience. It’s interesting to think that VCs are similar but makes sense–the end question of “What will be successful” really depends on the consumer base and industry, and VCs are just people who probably know and prefer to interact with a certain type of consumer base or audience.

One of my favorite banks in Thailand is K-Bank. With K-Bank I can simply walk up to an ATM machine and pay a mobile phone bill, purchase mutual funds, buy insurance, or transact an ever-growing list of services payable at the modern and sleek K-Bank ATM.

For example, tomorrow I fly to Chiang Mai in Northern Thailand and found K-Bank’s service amazingly better than in the US. For example, I booked my flight as usual (over the phone, but could have used the Internet) and told the reservation agent I was going to pay by ATM. He simply gave me a PayCode and told me I had three hours to go to the ATM and enter the PayCode to perfect my reservation.  I also got the PayCode via SMS.  This gave me the time I needed to make sure I had booked the perfect boutique hotel in Chiang Mai, the Fern Paradise.

Then, I went out into the beautiful Thai weather and completely my airplane reservation at the ATM machine; which also printed out a receipt with my flight details and reservation number.

It sometimes amazes me how much further advanced some services are in Thailand compared to the US. To me, it feels more secure not to use an on-line payment center or give out my credit card details over the phone. I can simply book a ticket, take a PayCode, and complete the transaction at a nice modern, shiny, K-Bank ATM machine.

Who knows, maybe soon I can select the perfect window seat at the ATM and the receipt will act as my boarding pass!

The answer is simple – the same reasons why even risk-averse investors were chasing after every Internet company in the late 90s – the attractiveness of the global scale and reduced costs of e-channels.

Over the years, payments and savings have always been a subject of the most advanced protection:

• Banknotes have watermarks and other security features to resist counterfeiting
• Cheques require the account holder's signature
• ATMs require both your card and your PIN, run secure software, and are physically tamper-resistant
• Point of Sale terminals in your favourite supermarket are protected from tampering and use dedicated secure connections to the payment processing network

These are all very sensible measures that work (to one degree or another) to protect customers' and banks' money.

Today, however, there is a huge imbalance between the value of electronically accessible funds and their security. This is being very effectively exploited by criminals and the banks are looking for a solution. Personal computers are not tamper proof sales terminals, therefore it is unfeasible to rely on the customer to keep them 100% secure. No one can take away online banking but banks can deploy new security measures, and solving this problem requires a new innovative approach that can equally address security, ease of use, and cost.

At Cronto, we identified this imbalance years ago. We also correctly predicted that the only solution to address this problem is transaction authentication (where the customer confirms each banking instruction). We then developed an innovative visual transaction signing solution. Based on our unique Visual Cryptogram, the Cronto solution supports multiple end user options allowing the bank to choose what is right for their customers whilst maintaining consistency in their backend systems.