Fraud – And Everything you were afraid to Ask

1. Fraud – And Everything you were afraid to Ask Dr. Ted M. Hammett, DBA CPA Assoc. Professor – Accounting University of Arkansas – Monticello http://www.uamont.edu/Facultyweb/Hammett/

2. Definition of Fraud • General Definitiona deception made for personal gain Seven Specific Parts of Fraud 1. A representation… 2. about a material point… 3. which is false… 4. and intentionally or recklessly so… 5. which is believed… 6. and acted upon by the victim… 7. to the victim’s damage.

3. What Fraud is and is Not Fraud is not… • taken by physical force. • a mistake or error. • victimless. • insignificant because no one is hurt. • acceptable or justifiable. Fraud is… • intentional. • to trick or deceive someone out of his/her assets. • theft. • a crime.

4. Why people Commit Fraud Pressure Fraud Triangle Opportunity Rationalization

5. Pressure Divided into four main groups: • Financial pressures • Vices • Work-related pressures • Other pressures

6. Pressure Financial Pressures Common Financial Pressures: • Greed • Living beyond one’s means • High bills or personal debt • Poor credit • Personal financial losses • Unexpected financial needs

7. Pressure Vice Pressures Worse kind of pressures to commit fraud Examples include: • Gambling • Drugs • Alcohol • Expensive extramarital relationships

8. Pressure Vice Pressures Real-life examples: • Dad that embezzled his six-year-old son’s allowance • Women who stole money to fund her children's drug addiction • Man that used company money to fund his drug addiction • The parents who took their new-born baby from the hospital with heroine under its tongue

9. Pressure Work-related Pressures “Get even with the employer” Motivated by these factors: • Getting little recognition • Feeling job dissatisfaction • Fear of losing one’s job • Being overlooked for a promotion • Feeling underpaid

10. Pressure Other Pressures Spouse Pressures • Spouse’s lifestyle demands Life Pressures • Family Crisis Social Pressures • “Being successful”

11. Pressure

12. Opportunity Six major factors that increase opportunity: • Lack of controls • Inability to judge performance quality • Fail to discipline fraudsters • Lack of access to information • Ignorance, apathy and incapacity • Lack of audit trail

13. Rationalization • Common Rationalizations for fraud • “No One will miss it” • “I will pay it back” • “I deserve it” • “They owe it to me” • The list goes on….. And on.

14. Consumer Fraud

15. Consumer Fraud - Defined • Any fraud that targets individuals as victims. Two Primary Types of Consumer Fraud • Identity Theft • Consumer Scams

16. Consumer Fraud Statistics Seriousness of the Problem The US Federal Trade Commission released a statistical survey in 2004 with the following findings: • Nearly 25 million adults—11.2% of the adult population—were victims of fraud during the year studied. • 34% of American Indians and Alaska Natives were victims • 17% of African American were victims • 14% of Hispanics were victims • 6% of non-Hispanic, whites were victims

17. Consumer Fraud Statistics Numbers of Victims in the Top 10 Frauds • Advance-fee loan scams—4.55 million victims • Buyers’ clubs—4.05 million victims • Credit card insurance—3.35 million victims • Credit repair—2 million victims • Prize promotions—1.8 million victims

18. Consumer Fraud Statistics Numbers of Victims in the Top 10 Frauds • Internet services—1.75 million victims • Pyramid schemes—1.55 million victims • Information services—0.8 million victims • Government job offers—0.65 million victims • Business opportunities—0.45 million victims

19. Consumer Sentinel US FTC’s Response to Consumer Fraud Consumer Sentinel – a complaint database developed by the US Federal Trade Commission that tracks information about consumer fraud and identity theft and makes it available to law enforcement partners across the US and throughout the world. http://www.consumer.gov

20. Identity Theft The most common type of consumer fraud. 40% of the frauds reported to the FTC over the last few years have involved some type of identity theft.

21. Identity Theft Defined Circumstances when someone uses another person’s name, address, Social Security number, bank or credit card account number, or other identifying information to commit fraud or other crimes

22. Identity Theft by Age

23. The Identity Theft Cycle

24. Identity Theft Cycle – Stage 1 Discovery Gain Information Phase: • Searching trash • Stealing mail • Phishing • Scanning credit card information Information Verification Phase: • Telephone scams (Pretexting) • Trash searches

25. Identity Theft Cycle – Stage 2 Action Accumulating Documentation Phase: • Perpetrator gets the tools to commit the fraud (applying for credit cards, a driver’s license, or fake check in the victim’s name) Cover-up or Concealment Actions Phase: • Perpetrator takes steps to cover or hide the financial footprints left throughout the identity theft process. • Example: Changing the billing address on a credit card so that the statements go to the fraudster’s address.

26. Identity Theft Cycle – Stage 3 Trial 1st Dimensional Actions Phase: • First attempts to test the stolen information. • If the test works, the fraudster attempts more 2nd Dimensional Actions Phase: • Actions taken after the tests are successful • The fraudster usually attempts face-to-face transactions 3rd Dimensional Actions Phase: • Fraudster opens bank accounts, establishes phone accounts, secures auto loans, etc.

27. Identity Theft Personal Information  Financial Gain The perpetrator may… • Buy large-ticket items • Take out car, home, or other loans • Establish phone or wireless services • Use counterfeit checks or debit cards • Open new bank accounts • File for bankruptcy • Report victim’s name to police • Open new credit card accounts • Change victim’s mailing address

28. Identity Theft – How it’s Done Summary - Stealing a Victim’s Identity • Dumpster diving • Skimming • Social engineering • Stealing wallets/purses • Sneak into a victim’s home and steal information • Shoulder surfing • Phishing • Steal mail

29. How to Protect Yourself Minimizing the Risk • Guard your mail from theft • Opt out of preapproved credit cards • Check you personal credit information at least annually • Guard Social Security card and number • Safeguard all personal information • Guard trash from theft • Protect wallet and other valuables • Protect the home, computer, passwords

30. Prosecution of Identity Theft When identity theft is committed, the perpetrator can be prosecuted criminally and/or civilly. For prosecution, it is necessary to show the perpetrator acted with intent to defraud—usually easy to prove if evidence of the fake identity used to purchase an item, open an account, or obtain a credit card is collected.

31. Identity Theft Once Identity Theft Occurs Victims should… • Contact the Federal Trade Commission • Contact local FBI and/or US Secret Service agencies • Contact the credit reporting agencies • Contact the local Postal Inspection Service • Contact the Social Security Administration • Contact personal financial institutions • Change personal identification information

32. Investment/Consumer Scams Foreign Advance-Fee Scams Nigerian Money Offers Clearinghouse Scam Purchase of Real Estate Scam Sale of Crude Oil at below market price Disbursement of money from wills

33. Investment/Consumer Scams Work-at-Home Schemes Multilevel Marketing Pyramid Scheme Chain Letter, Mail Stuffing, Product Testing, and Craft Assembly

34. Investment/Consumer Scams Bogus Mystery Shopping Scams • Perpetrators promise victims a job to stroll through stores, enjoy the displays, shop for merchandise, and file reports about their experiences. • Fraudsters promise victims compensation ranging from $10–$40 an hour, plus the opportunity to keep all products evaluated. • Although some mystery shoppers’ advertisements are legitimate, the majority are not.

35. Investment/Consumer Scams Telemarketing Frauds Fraudsters set up giant rooms (referred to as boiler rooms) in rented offices where they train salespeople to find and defraud victims Unwary investors lose about $1 million every hour to investment fraud promoted over the telephone Telemarketing scams on the elderly

36. Investment/Consumer Scams Safeguards Against Telemarketing Frauds Never give a Social Security, credit card, or other information over the phone unless you initiate the call. Put your information on the “do no call” registry

37. Investment/Consumer Scams Investment Scams • Unreasonable promised rates of return • Investments that do not make sound business sense • Pressure to get in early on the investment • Use of a special tax loophole or a tax avoidance scheme • A business with a history of bankruptcy or scandals

38. Bankruptcy, Divorce and Tax Fraud

39. Bankruptcy and Divorce Fraud Bankruptcy or Divorce Resulting from Fraud When too few assets are left to pay the creditors and debtors as a result of fraud occurs and, bankruptcy is generally filed. When a marriage partner discovers his/her spouse has committed fraud, he/she often files for divorce.

40. Bankruptcy and Divorce Fraud Bankruptcy and Divorce used to Perpetrate Fraud During bankruptcy and divorce, an automatic stay is often granted. Some debtors use this time to fraudulently transfer assets to other organizations Some marriage partners fraudulently transfer assets to other (usually related) individuals.

41. Bankruptcy and Divorce Fraud Bankruptcy and Divorce used to Conceal Fraud Generally results in the books and record or the debtor or marital partner being destroyed, inaccurate, or hard to locate.

42. The Nature of Bankruptcy Definition When people or organizations are unable to pay their debts and have more liabilities than assets, they can file for bankruptcy by filing a bankruptcy petition with the courts.

43. The Nature of Bankruptcy Reasons behind Filing for Bankruptcy • Gives a debtor relief from creditor collection and foreclosure actions • Protects creditors from unfair collection efforts by other creditors • Allows the debtor to work out an orderly plan to settle debts or liquidate assets and distribute the proceeds to creditors in a way that is intended to treat creditors fairly.

44. Criminal Bankruptcy Statutes Concealment of Assets, False Oaths and Claims, and Bribery (18 USC 152) It is a crime to… • Conceal property of a debtor’s estate from creditors • Make a false oath or account in a bankruptcy case • Give, offer, receive, or attempt to obtain money or property, remuneration, compensation, reward, advantage or promise thereof for acting or forbearing to act in a bankruptcy case.

45. Criminal Bankruptcy Statutes Embezzlement Against the Debtor’s Estate (18 USC 153) It is a crime for such persons to “knowingly and fraudulently appropriate to [their] own use, embezzle, spend, or transfer” any property, or to hide or destroy any document, belonging to the debtor’s estate.

46. Criminal Bankruptcy Statutes Adverse Interest and Conduct of Officers (18 USC 154) It is a crime to knowingly… • Purchase, directly or indirectly, any property of the debtor’s estate of which the person is an officer in a bankruptcy case • Refuse to permit a reasonable opportunity for the inspection by parties in interest of the documents and accounts relating to the affairs of the estate in the person’s charge when directed by the court to do so.

47. Criminal Bankruptcy Statutes Bankruptcy Fraud It is a crime to do any of the following to execute or conceal a fraud scheme: • File a bankruptcy petition. • File a document in a bankruptcy proceeding. • Make a false or fraudulent representation, claim, or promise with respect to a bankruptcy proceeding, either before or after the bankruptcy petition is filed

48. Civil Bankruptcy Statutes Offenses Leading to Revocation of Debt Discharge (Section 1144 of the Bankruptcy Code) Example: If a debtor lied about (usually byunderstating) the amount of his or her assets inorder to get debts forgiven, the forgiveness ordischarge of the debts could be revoked.

49. Civil Bankruptcy Statutes Fraudulent Transfers(Section 548 of the BankruptcyCode) Atransfer made, or obligation incurred, within oneyear before the bankruptcy petition’s filing datethat was: • Made with the actual intent to hinder, delay,or defraud creditors • Made for less than reasonably equivalent value

50. Participants in the Bankruptcy Process The parties involved in the bankruptcy process: • Bankruptcy court • U.S. Trustee • Court-appointed or panel trustee • Examiners • Debtors • Creditors • Adjusters (operations or field agents)