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The Digital Detectives

The Burgeoning World of Corporate Security Has Gone From Cloak and Dagger to Computers and Databases
Daren Fonda
From the Print Edition:
Denzel Washington, Jan/Feb 98

(continued from page 1)

Foraging along the paths of stolen millions isn't unusual for Kroll Associates. The detective agency has tracked and nabbed assets plundered by some of the world's most notorious thieves--from Saddam Hussein to former Russian government officials who plundered state enterprises. Kroll clients include some of the biggest names in corporate America: Time Inc., General Motors, KMart, Goldman Sachs. The U.S. government has even been known to call on Kroll. When federal prosecutors were planning a sting against Charles Keating's Lincoln Savings and Loan empire, Kroll handled the job: in 1989, a Kroll SWAT team, led by a former Green Beret commando, raided two of Keating's Arizona hotels, securing computer data, financial documents and paintings worth millions. In the mid-'90s, Orange County, California, paid Kroll to investigate its management procedures after county officials lost more than $1.7 billion trading derivatives.

Based in New York, Kroll has 26 offices worldwide, with 350 employees and a support network of more than 1,000 freelance investigators. With its recent merger with the O'Gara Co.--an armored-vehicle maker and security services firm--it is at the center of a burgeoning service industry for corporate America. For Kroll and hundreds of other detective agencies, corporate investigations are booming. Though clients rarely admit hiring detectives, demand for PIs has grown sharply. The number of licensed U.S. private investigators rose 28 percent between 1990 and 1994, to more than 90,000. Expenditures on private eyes is expected to top $4.6 billion by 2000, up from $850 million in 1980, according to the American Society for Industrial Security. Some firms, which once earned most of their cash tailing wayward spouses, now report 70 percent of their income from corporate investigative work.

The media still labels them muckrakers of the flashbulb-and-trenchcoat set. But they are more than Sam Spades in suits. Out in the field, they sport hacking software, laptops and cell phones. They also boast advanced degrees and impeccable crime-fighting credentials. Their ranks include forensic accountants, former organized-crime prosecutors, attorneys versed in environmental and securities law, computer security experts and Ph.Ds in the behavioral sciences. Top firms attract some of the nation's top law enforcement officials. The president of I.G.I.--a well-connected Washington, D.C.-based agency--is Larry Potts, a former deputy director of the FBI. And until last May, Kroll's president was Robert McGuire, a former New York police commissioner.

Industry analysts say companies hire private eyes as part of standard "risk management." Investigators sell peace of mind: a background check on a job candidate; an assurance that executives aren't padding expense accounts. "Companies don't want to be found negligent for failing to do a background check," says one New York investigator. "That can have consequences for insurance claims and could expose companies to criminal liability, civil penalties and risk to their business reputation." He points out that a routine legal pre-transaction assignment--like a due diligence report for a new business partnership--now often requires extensive profiles of the target firm's senior managers, their medical histories, financial backgrounds and personal relationships.

Of course, companies caught bankrolling private eyes to dig dirt on their enemies risk a public relations nightmare. In the mid-'60s, the media pounced on General Motors when detectives for the automaker were caught trying to discredit consumer advocate Ralph Nader, who was publicizing defects in GM's ill-fated Corvair. Recently, claimants in a class-action lawsuit against Texaco sued the company and its private investigator for privacy and civil rights violations. The investigator allegedly obtained claimants' telephone logs, work histories and records of unpaid traffic tickets, among other personal facts, in an attempt to sabotage their litigation claims.

Why are some of the nation's largest corporations hiring PIs? "Companies have learned that if they're victimized and do nothing about it, they may be victimized again," says Bart Schwartz, president and chief executive officer of Decision Strategies/Fairfax International, a New York-based agency. "They're afraid of the schemes that are out there."

Schwartz is an ex-Kroll executive and a former U.S. Attorney under Rudy Giuliani in New York. He opened his shop as a solo practitioner in 1991 and now has dozens of investigators on staff. Last August, he merged his firm with The Fairfax Group, a Virginia-based agency. The new company will operate from 20 offices around the world and supply an array of fraud detection and investigative services.

Part of the reason for the industry's growth, Schwartz says, is that corporations think they're more vulnerable to in-house crimes. At scores of large companies, layoff waves from the early 1990s left more power consolidated among fewer employees. With fewer checks and balances in the system, opportunities for kickback schemes, money laundering and plain old pilfering have mulitplied. Employees haven't necessarily become more dishonest, says Schwartz. There are just more ways for them to take advantage of loopholes in labyrnthine accounting systems. "The crimes are more complicated," says Schwartz, "and companies don't want to spend the money retraining their own security departments."

Corporate detectives also seem to be capitalizing on the wave of U.S. companies setting up joint ventures abroad. Firms want to know if their foreign business partners may be fronts for money laundering, if their factories are producing counterfeit goods (a problem rampant in the fashion industry), or if government contracts have been won through bribes or kickbacks. Detectives aren't the only ones investigating such matters. Consulting firms such as Price Waterhouse, with their own investigative divisions, also proffer "business intelligence." But detective agencies are often employed for their surveillance expertise and international espionage network. The breakup of the Soviet Union left thousands of former Cold War spies jobless, and many now conduct covert operations for private eyes. With contacts in intelligence agencies, former spies can develop information on local business leaders and government officials that detectives may then sell to their customers.

Naturally, not all jobs involve extensive espionage. Agencies such as Decision Strategies are often hired just to stamp clients with a clean bill of health. In 1996, for instance, Schwartz conducted an eight-month internal probe for Western Beef, the $300 million publicly traded supermarket chain. Investors were avoiding the company because of allegations that it had links to the Gambino crime family. The company's chief executive, Peter Castellana Jr., enlisted Schwartz to investigate the company's books and records and help clear his name. Schwartz's detectives scrutinized the financial dealings of top managers and executives and analyzed accounting records. Their report found no evidence of wrongdoing and the company's stock rose considerably once the findings came out.

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