Auditing the Beautiful Game

Soccer is known as the beautiful game, but beyond the field it can get quite ugly. Soccer is rife with horrors: corruption, drugs, gangs, Nazism/racism, hooliganism, doping, match-fixing, and even money laundering. Soccer is a worldwide sport, spanning every single country and territory. Accounting and auditing for public multinational corporations is routine, but tough to navigate. Now imagine thousands of entities: a few public but most private, some large, many small, spanning every single country, including ones with no respect for international law and standards such as Iran and North Korea. Now imagine how accounting must vastly be different in this industry, and that is before we discuss how transactions being recorded in bizarre ways is the norm for soccer.

The best way for a large, differential industry to be more centralized and organized is for a worldwide, standard setting quasi-governmental body. That body is called Fédération Internationale de Football Association, or more commonly known as “FIFA.” As it turns out, FIFA does the opposite of setting a good example to trickle down to the rest of the soccer world. According to Cumming (2015), “in a 161-page indictment from the United States Department of Justice, it is alleged over $150 million in kickbacks and bribes were allegedly paid through bank accounts of officials of FIFA.” Bribes and kickbacks are typical money-laundering operations that banks should be able to detect and stop, especially some of that $150 million worth, right? Only a $1.2 million transaction, where an unnamed bank stopped, and flagged money being transferred from a Qatari bank account to members of a corrupt official’s family. The vast amount, $150 million of alleged bribes and kickbacks, is enough to show FIFA as an organization is rotten to the core. The Department of Justice case charged officials, unsealed indictments of officials (some were used as witnesses and wore wires) and charged two corporations all with wire fraud, racketeering, and money laundering. The fact that only $1.2 million out of $150 million of laundered money was detected leaves questions and concerns that bank officials were in collusion with FIFA officials. The banks involved include Caribbean offshore banks, JPMorgan, Citi, and community banks. The forms of payment include envelopes full of cash, checks, and many bank transfers, which the auditing community needs to look at to prevent in the future.

FIFA is a federation of national sports associations, and for tax purposes a non-profit organization, based in Switzerland, which until recently has had lax financial laws. Since it is not a public company, it is not required to disclose its financial statements. However, since 2003 it has voluntarily followed International Financial Reporting Standards and publishes an annual report on the FIFA website. Their annual report from the 2014 World Cup in Brazil showed $4.8 Billion in revenue and $2.2 Billion in expenses, a tidy profit of $2.6 Billion, according to Manfred (2015). FIFA generally distributes this money to national soccer associations around the world, to facilitate grassroots and youth soccer. Sometimes that is the case but often, as these indictments show, this money ends up in the hands of corrupt officials for personal use, in exchange for votes and other favors in FIFA, and little of it is used for building up soccer in nations, especially third-world nations. Many of the charges in these indictments involve bribes and kickbacks paid by “sports marketing companies for media rights” (Cumming 2015) to show soccer matches. Millions of dollars in payments were bribes paid to FIFA officials to vote for hosts of tournaments, including the ludicrous pick of Qatar to host the 2022 World Cup, a vote that led to skepticism and sparked the bulk of this investigation into FIFA. FIFA’s auditor was KPMG, one of the “big three” accounting firms, but following the intensive corruption investigation into their client FIFA they decided to resign from auditing FIFA in June of 2016. PricewaterhouseCoopers (PwC) has been appointed as FIFA’s new auditors.

FIFA is the best and possibly only way for the reckless accounting and business practices of its member associations and soccer clubs to be reined in. As we have seen, FIFA is corrupt and reckless itself, although the investigation into them has forced and encouraged some attempts at reform and accountability. Since FIFA is not the most responsible parent and influence, its children are likely even more reckless and rotten. Before we examine specific examples of their recklessness, we need to see methods of how criminality can occur through soccer clubs by their owners. Let’s look at the basics: ticket revenues. The Economist (2013) says that ticket revenues can be used to “run dirty takings through the turnstiles” to turn that illicit cash into legitimate income. “Conversely, if you need some petty cash you can siphon off the gate receipts—a tactic that some of Brazil’s football kingpins, the cartolas (“top hats”), are rumored to have employed in the past.”

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In most American sports, players are traded to other teams for another player, and a draft pick, and rarely cash or cash equivalents like salary cap space. In soccer, transfers of players between clubs are done almost exclusively in cash, via wire transfers. The two exchanging clubs are in two different countries and the player and his agent likely getting a cut of the transfer are based in another country. Bottino (2014) says “There are no limits to the role of agents. They manage their players but could also be managing the customer’s funds, giving tax advice, offering an image contract, or taking care of their publicity.”

These transactions are done through holding companies and offshore accounts. Third party ownership, although now banned by many football associations, was a viable way to add more layers to these transactions. Agents and companies would buy the rights to a player and then rent them to a club. Once this player was sold to another club, the third party would get a huge chunk of the transactions. These transactions are done through holding companies and often via offshore accounts. Sometimes owners will sell the rights of their star players to their own companies that are technically separate from the club, but not from the club’s owner. The worst of player transfers related to money laundering is the collusion between clubs to inflate or decrease player value, so that dirty money can be washed. Sometimes there is collusion between the national team and the club team to get a player more exposure in international competitions to increase their value. Soccer transfers involve large sums, ever-increasing year over year and the methods of recording the payments are getting more bizarre. To circumvent the Financial Fair Play regulations imposed upon European clubs by their regional association UEFA, the Qatari-owned French Club Paris-Saint Germain bought Brazilian superstar Neymar for nearly $275 million by hiring him as an ambassador for the 2022 Qatar World Cup. Yes, the government of Qatar paid $275 million to trigger a release clause in Neymar’s contract with his former Spanish club, all to have him as an “ambassador” for the World Cup, but in reality, a player for a club team they owned. This was all done to keep the majority of that $275 million off the books of Paris-Saint Germain. That caused an outraged in the soccer community, and to an auditor it would likely raise red flags, but unfortunately that is a legitimate transaction, just one that used loopholes. Soccer is at a point where an insanely large transaction through unorthodox methods is the norm, and we need to focus on transactions where actual illegality is happening before being able to close the loopholes.

Neymar v Barca

Transfers take on a whole new light when the cash, player value, agent fees, and player salaries are all put down onto the club’s financial documents. How are they accounted for? Well, remember the third-party owners of players? What they own are all or part of a player’s right to be used by a club. Since the players have a potential economic value to the club, they can be considered an intangible asset. Soccer is unique, because according to Oprean & Oprisor (2014), “the human resources management has impact on the assets of an economic entity. However, the international accounting standards do not accurately state the recognition of human resources in the asset category, but it rather offers the preconditions for accounting them.” In Europe, how a player is registered also depends on their valuation and how they are accounted for. In Europe there are three categories: players that come through the club’s academy, players that are registered on a transfer, and free agents that sign for club (known as a Bosman signing under European law). Players that are transferred have their “use rights” valuation determined by the transfer fee, agent fees, and contract. They could be capitalized and written-off as time goes on, as other intangible assets do. Capitalizing an asset means to delay the recognition of expenses over the long-term, expensing the cost of this asset over a longer period instead of immediately. This is less and less the case in Europe currently because European clubs must abide by internationally accepted accounting standards, and a 2002 International Accounting Standards Board regulation prevents player use rights to be capitalized as so.  Currently, the player use rights paid through the transfer fee is gradually written off. “In this case, the write-off will be carried out throughout the economic lifespan of the asset (meaning the duration of the contract).” Accounting regulations state these write-offs can occur no longer than a duration of five years, which is why most player contracts are less than 5 years. If the player ends up exceeding his economic value to the club (often via good performances on the field), then the value of the contract cannot be written up. To be written up in value would mean that a club could write-off a higher value of the asset in their write-offs in order to have less of a tax burden on their club as the club value can decrease quicker. This is in line with the prudence principle in accounting. Adversely, if a player is of lesser economic value to the club (through attitude, injury, shocking performances), then the “asset” can be written down. “In order to do so, the club must have a comparative value and a solid reason.” Free agents offer a new problem as there is no transfer fee so a value in a fair/free market is not achievable. How the club values this free agent cannot be done in a credible way. Free agents’ contracts as an installment premium cannot be written off over time as an intangible asset, because “there is no credible ground for valuation.” Academy youth players are resource consuming and therefore do not offer any economic value to the club and cannot enter into professional contracts, so the club cannot expense the value of the contract. When a player from a club’s academy signs a professional contract, they are accounted for as a free agent would be. Please note that these accounting standards only apply to European professional clubs as they must meet requirements to have a license from the European soccer body UEFA, and one of those requirements is that even though clubs in UEFA can use whichever accounting methods they desire, they must follow internationally accepted accounting standards, which leads to these aforementioned regulations.

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Match-Fixing and Fixing This Mess

Brazil is a great micro way to look at the macro issues of corruption and wild accounting in soccer. Brazil has a reputation for corruption. Brazil is also known for their extreme love for soccer. Brazil hosted the FIFA World Cup in 2014 and the nearly-as-corrupt Olympics in 2016. Bottino (2014) states that in the soccer world, and especially in Brazil, it does not help that “club managers [owners] are quite amateurs compared to any other business executives,” because “fans are blind to and even lenient with malpractices in club management.” This is behavior which “is in significant opposition to having active stakeholders of a company.” If the fans like what they see on the field they will not mind the backroom corruption much. In Brazil, there is still third-party ownership of players. There is a diversity of legal structures of clubs in Brazilian soccer: some are limited liability companies and corporations, some are holding companies, some are even foundations. Stadium activities are managed through different companies (that is like American sports, but there is more corrupt collusion in Brazilian sport). Since there is no regulation on how soccer clubs must operate and structure legally, “they are easy to acquire.” Which is why we have seen criminal cartels and kingpins take control of teams. In Brazil it is common for clubs to have highly-skilled young academy players that are then sold for large sums to teams in Europe, Asia, and the Middle East. These large sums of money and profits are great opportunities for money laundering. Despite the high sums of money coming into Brazilian clubs, many are struggling and desperate for cash. As is the case in even the world’s most lucrative leagues, clubs carry a lot of debt. This generally benefits them as debt is used as a tax write-off. The main purpose of these teams is to win, not to make profits for stakeholders (although some owners do attempt to make profits, and some clubs do have shareholders, a few are even publicly traded). In most countries, Brazil included, there is a system of promotion and relegation for soccer clubs. Based on their cumulative success throughout a season and overall final ranking in the league, a certain number of spots are given to teams to get promoted to top divisions and a certain number go down to lower divisions. The top division is most lucrative with sponsors and television deals. To win the coveted top division, teams need to spend money to buy players and spend elsewhere on and off the field for success. Massive spending without winning can be detrimental to a team’s finances. Then there is the prospect of losing your place in the top division and being relegated. This causes teams to spend massive amounts, so they will not lose top division revenue the following season. Often teams fail and are relegated, spending a lot to stay up and then losing the expected revenue for next season from the top division. Then they might spend a lot to attempt to get back into the top division. Should they fail to do so again, they will have spent far beyond their means. It’s a vicious cycle, and these teams become desperate. Mix a demand to succeed, desperation, and an already corrupt culture in both soccer and Brazil, and you have the perfect storm for bad actors to get their grubby hands in the game.

Match-fixing is one way for clubs, players, and referees to make a quick buck, while also spitting on the integrity of the game. Match-fixing is when a game is predetermined, unbeknown to officials and fans. Betting and now online betting lead to many incentives and opportunities for match-fixing. Here’s how it works: A crooked team owner, coach, player, referee, or a combination of those, carry out the pre-determined action (like a corner kick, substitution, or goal at a certain minute) or score line that was bet on. These bets are placed in another country, by generally foreign actors, adding layers that makes it impossible or not worthwhile for law enforcement to chase. Once the bet winnings are received, the ones on the field who made it happen will generally get a cut of the winnings. For many lower leagues and poor countries, where regulation is little, players sometimes get by and survive on these match-fixing winnings. These crimes are nearly impossible to trace money-wise, and the only remedy thus far is for football associations to ban players and those in the soccer industry from gambling and accepting gambling winnings.

brazil

The biggest issue with corruption in soccer in Brazil is that the police and lawmakers really do not care. These “difficult to prosecute crimes,” tax evasion and private corruption, often play second fiddle in terms of the anti-corruption enforcement resources used to tackle the rampant corruption of public officials. According to Bottino (2014), since 2012, the Anti-Money Laundering Act of 2012 has made “private corruption practices such as extortion, mail fraud, and kickback payments” punishable. These offenses can be punishable are only if the proceeds from them have “acts of concealment, layering, or recycling.”

It’s hard to get law enforcement and politicians to put effort towards curbing and prosecuting private corruption. It is even harder to get witnesses and informants to comply. One of the biggest wheeler-dealers in the soccer world was American Chuck Blazer. In his various roles, including the vice president of the North/Central American soccer association (known as CONCACAF), he offered favors and votes in exchange for bribes. He was rich from his corruption in the game, having a Trump Tower apartment just for his cats. Eventually United States Justice Department officials and the Federal Bureau of Investigation caught up to him. He was more than willing to comply, going as far as to offer himself up to wear a wire to listen in on corrupt FIFA meetings. He ended up being a key witness and him wearing a wire opened the investigation wide. Chuck Blazer was a rare one, willing to comply in such a great way. Why? Despite all of this, he was still going to serve jail time. He was old, overweight, and in failing health. Some articles describe a scene of federal officials putting a wire on him while he stands in his living room in a diaper, and then going off on his scooter because he cannot walk. He just recently passed away, adding complications to prosecuting many in the investigation. Besides a less guilty conscious, it is hard to understand why he made the decision to comply that he did. Those of us demanding an end to corruption in the game will be grateful, but realize that an old, dying, diapered man and (what spurred the investigation) a soccer-crazed Internal Revenue Service criminal investigations agent should not be what is enough and relied upon to sniff out an end corruption within soccer. This will not be enough to get cooperative witnesses. Brazil is looking to change that, as Brazilian Law 12.683/2012 (Brazilian Anti-Money Laundering Act) “has created the incentive to cooperate with authorities during an investigation in exchange for reduced – or even extinguished – penalties for criminals who spontaneously cooperate with authorities, provide insight leading to the investigation of criminal offenses, identify authors, co-authors and participants of the crime, or identify the location of the washed assets.” (Bottino 2014) This law also states that “soccer agents and soccer clubs must disclose data related to its commercial and financial activities, ensuring added deterrence and control over money laundering.”

Conclusion

Accounting and auditing in soccer is chaos. The minor exceptions being (mostly Western) Europe, the United States, Brazil, and a few other places that have requirements to follow certain accounting and auditing standards for teams to be sanctioned to participate, as well as the teeth to enforce these rules, laws, and regulations. While that curbs some control of clubs by criminal enterprises, the other behind the scenes and backroom deals, ones that plagued FIFA, are nearly impossible to detect and following current worldwide and United States audit standards would not help. Not to mention third world and less developed regions/nations where corruption can run rampant with no oversight. There needs to be more regulations by countries, bodies like the European Union, and regulations and standards set by FIFA and continental soccer associations (similar to what UEFA currently does). There also needs to be a change of culture in soccer overall and in these places where organized crime runs rampant. Tougher enforcement of laws on the books, more staff, and officials to participate in and complete financial crimes investigations, and a more accepting of whistleblower culture will allow for corruption to slowly be run out of soccer. The investigation of FIFA was started because the United States losing a bid to host the 2022 World Cup to Qatar. What if the United States had won that bid, would there have been no investigation? What if an Internal Revenue Service agent had not contacted the prosecutor involved in the FIFA case and offered to use his offshore money-tracking skills, would that investigation have lost steam? The FIFA Investigation and the Brazilian Anti-Money Laundering Act is a start, but more must be done as soccer is a worldwide game. What auditors must do is take a good look at the uniqueness of soccer and set standards and requirements that soccer (and other sports teams for that matter) must follow. It is in the public interest for bodies such as International Accounting Standards Board which sets the International Financial Reporting Standards, to take focus on the specifics of soccer and overall accounting of sports. The International Accounting Standards Board should be working with continental and national soccer associations to set specific standards so that soccer teams are unable to gain sanction to play in these associations unless standards and obligations are met. Sports are a sense of national and community pride, they bring jobs to local communities, keep youth out of trouble, keeps people in shape, and is a daily part of billions of lives around the world. We, as those in the accounting and audit community, owe it to our youth to make sure they have a great environment and industry in which they can grow, thrive and reach their sporting potential.

References

Cumming, C. (2015). FIFA Scandal Will Test Banks’ Anti-Money-Laundering Liability. American Banker, 180.

Hardach, S., & Couret, J. (2013, July 13). Welcome to the beautiful game. Retrieved March 05, 2018, from https://www.economist.com/news/international/21581724-football-clubs-can-easily-be-used-stealing-machines-here-instruction-manual

Dimitropoulos, P. (2016). Audit Selection in the European Football Industry under Union of European Football Associations Financial Fair Play. International Journal of Economics and Financial Issues, 6(3), mersin.

Oprean, V., & Oprisor, T. (2014). Accounting for Soccer Players: Capitalization Paradigm vs. Expenditure. Procedia Economics and Finance, 15, 1647-1654. doi:10.1016/s2212-5671(14)00636-4

Bottino, T. (2014). SYMPOSIUM: SPORTING EVENTS AS SITES OF INTERNATIONAL LAW, SOCIETY, AND GOVERNANCE: THE 2014 BRAZILIAN WORLD CUP: INTERNATIONAL RESPONSES TO CORRUPTION AND MONEY LAUNDERING: BRAZIL’S APPROACH TO BATTLING SOCCER CORRUPTION THROUGH ANTI-MONEY LAUNDERING LEGISLATION. 21 Sw. J. Int’l L. 125.


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