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The Economist

Corporate intelligence
The bloodhounds of capitalism
It is a good time to be a corporate investigator


Jan 5th 2013 | NEW YORK | from the print edition


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SHERLOCK HOLMES once remarked that: “It is my business to know what other people don’t know.” These days, detective work is a huge business. Thanks to globalisation, there is a lot that companies would like to know but don’t, such as: is our prospective partner in Jakarta a crook?

Corporate detectives sniff out the facts, analyse them, share them with clients and pocket fat fees. Yet, oddly for a multi-billion-dollar industry devoted to discovering the truth, little is known about private investigators. So your correspondent took up his magnifying glass and set off in pursuit of the bloodhounds of capitalism.


The best-known is Kroll, founded by Jules Kroll, a former assistant district attorney, in 1972. Along with a dozen or so rivals, it can undertake assignments anywhere in the world, at short notice, deploying teams of former cops and prosecutors, computer whizzes, accountants, investigative journalists and others. These firms are the big dogs of private detection. The industry has, ahem, a long tail of thousands of smaller ones. The precise number is unknown since the business is unregulated in some countries.

There is plenty of work to go round. Assignments linked to mergers and acquisitions have dwindled along with the number of deals, but other areas are expanding. One big source of work is the growing complexity of business regulation. Multinationals can never be sure that some employee, somewhere has not violated America’s Foreign Corrupt Practices Act, or some other anti-bribery law. Corporate compliance departments often bring gumshoes in to assist their own investigations.

An increase in whistleblowing has created more work. So has the push by Western firms into emerging markets (see Schumpeter ). “It’s a business we win in America but serve in Asia, driven by the export of Western ethics,” says Tom Hartley, head of Kroll Advisory Solutions. “We’ve seen double-digit growth in each of the past four years.”

Another growth business is “due diligence” work, such as running background checks on a client’s potential hires or business partners. Last year Mintz Group, a medium-sized firm based in New York, conducted more than 20,000 checks, up 40% on 2010. “We tell clients to invest globally but investigate locally,” says Jim Mintz, the firm’s boss. Some clients ask for checks on everyone they deal with, even chauffeurs. Sleuths are also hired to probe the provenance of money. Amid a global crackdown on tax evasion, companies have grown warier of doing deals with dodgers.

Even downturns are not all bad for corporate gumshoes. Hard times often expose wrongdoing by causing scams to collapse. Industry figures report a rise in fraud litigation, asset-tracing and insolvency work. Headline-worthy mega-frauds, such as those perpetrated by Bernie Madoff and Allen Stanford, remind potential clients of the need for security.

Big jobs can occur anywhere. Kroll recently conducted a forensic audit of the failed Kabul Bank, from which nearly $1 billion was allegedly embezzled, for Afghanistan’s central bank. The client base is growing, too. Hedge funds and private-equity firms crave intelligence. In China, where accounts are unreliable, they vet acquisition targets by hiring sleuths to interview ex-employees. Post-Madoff, pension funds are doing more homework on their investments, often with outside help, says Ken Springer of Corporate Resolutions, an investigations and consulting firm.

You know my methods. Apply them

A curious development is the growth of what might be called “self due diligence”. Entrepreneurs from parts of the world where corruption is rife, such as eastern Europe and Africa, are increasingly hiring reputable corporate-intelligence firms to investigate them—sometimes with full access to their business records. If the investigator gives them a clean bill of health, they can wave it at banks, regulators or potential business partners who might doubt them. The head of one investigations firm says such work accounts for up to a third of its London office’s revenues.

Investigators have capitalised on the recent surge in cyberattacks and cyberspying. Some report an annual doubling of revenue in digital forensics. The least exciting digital work is possibly the most lucrative: electronic “discovery”, or the recovery and processing of e-documents to support litigation. Parties to big cases have to pass vast amounts of data to each other, especially in America. To cut costs, companies may hire a firm with smart technology to whittle down the e-material before the lawyers start expensively perusing it. This is done using programs that filter out e-mails and other documents that are irrelevant or privileged—though this “robotic” work needs to be supplemented with human judgment, says Vincent D’Eramo of Capstone Advisory.

Data! Data! Data!

In 2012 Kroll announced plans to double the size of its R&D team in e-discovery and data recovery over the next five years. Mr Hartley says the headcount in his division, the firm’s investigative core, grew by 15% in 2011 . The number of Certified Fraud Examiners (CFEs) in the world has grown by 72% since 2007, to 37,400. (One of them, Harry Markopolos, gave the profession street credibility by spotting the Madoff fraud long before regulators.)

Kathy Lavinder, a headhunter, reckons the war for talent has driven up salaries for sleuths and security consultants by 20-25% since 2010. Members of “incident response” teams, who are expected to hop on a plane at a moment’s notice and are thus prone to burnout, have begun to ask for and receive guarantees of occasional time away from the daily grind for training courses, says Ms Lavinder.

The choice of employer has expanded as new firms enter the business, disrupting the established order. Physical-security companies, such as Securitas, Allied Barton and Andrews International, are trying to move further into investigations as a way to boost margins, which are thin in the guard business. The big accounting firms, led by Deloitte, are hiring more cybersleuths—though much of their work is internal: ie, scrutinising clients of other parts of the group. Some investigative firms, including Kroll, have counter-attacked by pushing into accountancy.

Law firms have long been big clients of the gumshoes, but they too are looking to do more investigations in-house. To this end, some are striking deals with investigative companies: in August, for instance, Pepper Hamilton, an American law firm, acquired a highly regarded boutique led by Louis Freeh, a former FBI director.

Most corporate investigators are privately held and publish little financial information. Kroll, probably the biggest, has had ups and downs. Its zenith was its sale in 2004 to Marsh & McLennan, an insurance broker, for a tidy $1.9 billion. By 2010, when Kroll was sold on to Altegrity, a security group, its valuation had tumbled by 40%. One slip-up between those two deals was to take on Allen Stanford as a client.

The firm is still admired by its rivals, whose upper ranks are stuffed with former Kroll people. But these days many consider the best in the business to be FTI Consulting, which also happens to be the only publicly traded firm of any size. Its forensic and litigation consulting division had revenues of $177m and a profit margin of 17% in the first six months of 2012.


After dozens of small acquisitions, FTI now employs 3,800 people. Its boss, Jack Dunn, has poached some of Kroll’s best snoops. FTI won much of the work of piecing together Mr Madoff’s money trail; ten years ago the Madoff trustee would probably have given the lion’s share to Kroll. FTI also gets a lot of work as a “corporate monitor”, checking whether firms that have promised to mend their ways as part of a legal settlement keep their word. The industry loves these assignments: they typically last a couple of years, providing a recurring revenue stream.

Another threat to the old order comes from K2 Intelligence, backed by Mr Kroll and run by his son, Jeremy. This was set up in 2009, when a non-compete clause with his old firm expired. These days Mr Kroll senior, now 71, is more focused on Kroll Bond Ratings, an attempt to disrupt the credit-ratings oligopoly.

K2 has started to make a mark, conducting the investigation into alleged bribery that forced Alcoa, an American aluminium firm, into a $447m settlement with Alba, a Bahraini one. Convinced that the future belongs to those with the technological savvy to “tell the story” by interpreting vast quantities of data, Jeremy Kroll has joined forces with Palantir, a security-software firm with past links to PayPal. Palantir and K2 have been crunching through 18 terabytes of transactions, e-mails and phone records in the hope of connecting dots to support the Madoff trustee’s litigation against investors who took more out of the Ponzi scheme than they put in. One program draws visual webs that show the length, destination and other features of phone calls made by Mr Madoff and his staff, and then looks for patterns.

A fast-growing business where technology will be crucial is fighting money-laundering. Banks are under pressure to weed out suspicious transactions, but they are drowning in data. They are willing to throw a lot of money at the problem because the damage if they mess up can be enormous. Witness the $1.9 billion in fines that HSBC recently paid to settle allegations that it had abetted money-laundering by clients in Mexico and elsewhere.

Mr Springer of Corporate Resolutions describes several recent assignments that turned into a game of technological one-upmanship with suspected wrongdoers. In one, his team eventually got the better of an IT employee at a non-profit who was suspected of fraud, by sneaking a black box into his office at night, using former National Security Agency experts to crack the administrator code and then blind-copying themselves into his e-mails. In many cases, the key is to combine digital expertise with traditional investigative techniques, argues Mr Mintz. Part of the job will continue to be “tracking down the disgruntled former secretary or book-keeper who knows where the bodies are buried, and knowing how to coax information from them,” he says.

The dog that barked at the right time

Jeffrey Katz, a former Kroll man who heads London-based Bishop International, which began life investigating claims in the Lloyds insurance market, sees new opportunities popping up all the time. His firm has been carving niches in intellectual property, from anti-counterfeiting (such as gathering evidence on how a particular faker operates) to buying trademarks on behalf of big companies before they launch a new brand. This must be done quietly, so as not to arouse suspicion and drive up prices. Bishop did a good job for Apple with names similar to “iPad”.

But the industry faces challenges, too. Large clients are looking to build their own investigative capabilities, especially in cyber-security, says Michael DuBose of Kroll, who used to run the US Department of Justice’s computer-crime division. This could cut demand for outside help. Barriers to entry in digital forensics have fallen. Competition is intense. Some big assignments are decided in beauty contests with 15 or more participants.

And even as the industry profits by helping clients cope with red tape, it can expect tougher rules itself. Private investigators in Britain face possible regulation in the wake of the News Corporation phone-hacking scandal. In America, the SEC and Congress may tighten rules on investigators and “knowledge brokers” that work for hedge funds, some of them suspected of abetting insider trading. Corporate detective work is anything but elementar