- Grant D. Ashley
- Executive Assistant Director, Law Enforcement Services
- Federal Bureau of Investigation
- Institute of Internal Auditors Fraud Seminar
- Chicago, Illinois
- November 21, 2005
It is great to be here with you today. As a kid, I never imagined I could one day be excited about attending an Internal Audit Conference, but here I am. I am truly happy to be here, and happy to be back in Chicago.
Early in my career as an FBI agent, I was assigned to the Chicago Field Office, and worked on the first violent crimes task force in the country. It was a dream come true for me to work side-by-side with other agents and state and local police, investigating kidnappings, extortion, murder-for-hire … you name it.
To be honest—though I'm not sure it's safe to say this in this crowd—I never actually planned to become an accountant. Ever since I was a kid, I wanted to be an FBI agent. When I was about 17, I called an FBI recruiter to ask if I could come to work for the Bureau. He asked me how old I was, laughed, and then told me to go to college and get an accounting degree so I would have a better chance of becoming a special agent.
That's exactly what I did—a little reluctantly, I'll admit. I wanted to be out catching bad guys, not sitting behind a desk. I wanted to be protecting and serving the American public, not crunching numbers. I wanted to be the stuff of heroes, and I didn't quite see what accounting had to do with it.
But I sat for the CPA exam and went to work as an accountant. And by the time I got the call from the FBI, and traded in my calculator for my badge and gun, I saw exactly what accounting had to do with it. I understood that accountants are every bit as critical to protecting and serving the public as law enforcement officers. Though our roles are different, we are both concerned with protecting the health of our economy and the safety of our citizens.
Today, I want to give you a "30,000-foot overview" of the financial crime and public corruption threats we are facing, and tell you what the FBI is doing to protect the American public and how you are integral to our success.
To give you a bit of history, the FBI was created in 1908 in order to address criminal activity that had begun crossing state lines. From combating gangsters to investigating Nazi spies to fighting organized crime, the FBI has built its reputation on successfully investigating crime and bringing criminals to justice.
Then came September 11, 2001. Overnight, the world changed. And so did the FBI. Our No. 1 priority is now counterterrorism, followed by counterintelligence and cyber—all under the umbrella of national security. But this heightened national security mission has not replaced our criminal mission. We are still upholding our criminal responsibilities in addition to preventing terrorism and protecting national security.
Combating crime, fraud, and public corruption are still among our top priorities. In fact, we have more agents working financial crimes and public corruption today than we did before the September 11 attacks. Currently, we have nearly 2,000 agents working white collar crime cases and over 500 working public corruption matters.
As you may know, the FBI investigates everything from major corporate fraud to money laundering. I mainly want to discuss our work in the area of combating corporate fraud—but let me give you a brief overview of some of the other threats we are confronting.
Public corruption is at the top of the list. We have all heard the expression "the love of money is the root of all evil." I don't know if this is true, but it is certainly the root of all public corruption. Unfortunately, there has always been a small number of individuals whose desire to make money overshadowed the desire to serve.
Corrupt public officials betray the trust of our society and threaten the foundations of our democracy. They allow illicit drugs and weapons to flow freely; they permit organized crime to operate with impunity; and they can open the door for terrorists who threaten our way of life. This is why public corruption is the FBI's No. 1 criminal priority.
As I said earlier, we have over 500 agents working on public corruption squads across the country. Just this month we formed a new public corruption task force in western New York. From Philadelphia to Phoenix and from Dallas to Detroit, we are investigating and rooting out corruption ranging from voter fraud to embezzlement to illegal kickbacks. We currently have over 940 open investigations targeting corrupt officials. In the last 12 months, we have indicted 469 public officials and convicted 634.
One of our most notable recent successes is "Operation Lively Green." You may have read the latest installment of this case in the weekend papers. In Arizona, we worked with federal law enforcement agencies and the Tucson Police Department on a three-and-a-half-year undercover operation targeting extensive public corruption along the U.S.-Mexico border. Current and former U.S. military and law enforcement officers were participating in what they believed was an illegal narcotics trafficking organization.
Though no drugs actually changed hands or crossed the border, the officers accepted over $800,000 in bribes to transport cocaine from undercover agents posing as drug traffickers. Some individuals also accepted cash bribes to recruit other public officials to help the fake drug ring. So far, dozens of officers have pled guilty to charges of bribery, extortion, and conspiracy, and we anticipate more indictments in the future.
On another front, identity theft has become one of the dominant white collar crime problems. You've probably all seen the Citibank commercials that feature the faces of identity theft victims speaking with the voices of credit card thieves, who list all the outlandish purchases they have made, saying, "It's not like I'm paying for it anyway."
They make us laugh, but they also drive home the point that anyone can be a victim of identity theft. A recent Federal Trade Commission survey revealed that about 4.6 percent of U.S. consumers have been victimized, resulting in losses of more than $52 billion. All too often, criminals steal identities and then commit other crimes, such as credit card fraud, check fraud, or mortgage fraud.
The FBI has been working with federal, state, local, and private sector partners to address this rapidly growing problem. Right here in Chicago, the Chicago Metro Identity Fraud Task Force has been instrumental in obtaining 11 indictments and 37 prosecutions. And in New York, the FBI teamed up with the Postal Inspection Service and the Secret Service to successfully investigate one of the largest identity theft cases ever prosecuted in the U.S.
In that case, a crooked insider at a Long Island company that provided customers with access to credit history bureaus downloaded over 30,000 credit histories. He then sold them to conspirators who used them to commit identity theft. They looted personal savings accounts and racked up credit card charges. Their crimes impacted over 30,000 victims and resulted in over $11 million in losses. The subject pled guilty, and was sentenced to 14 years in prison.
Another rapidly-growing threat the FBI investigates is mortgage fraud. Nearly 22,000 mortgage-related suspicious activity reports have been filed this year. Losses have increased from $429 million in 2004 to over $1 billion in 2005. Like corporate fraud, mortgage lending and the housing market have a significant impact on our nation's economy. Many people want to believe their homes are worth more than they are, and the recent housing booms across the U.S. have attracted criminals who want to exploit the situation to make a quick profit.
The FBI investigates mortgage fraud in two distinct areas: fraud for housing and fraud for profit. Fraud for housing represents illegal action perpetrated solely by the borrower—the motive being to acquire and maintain ownership of a house under false pretenses, such as misrepresenting income or employment history, or using a stolen identity for the transaction.
The FBI focuses the majority of its mortgage fraud efforts on fraud for profit. This is commonly referred to as "Industry Insider Fraud," which speaks for itself. We estimate that 80 percent of all reported fraud losses involve collaboration or collusion by industry leaders. Typically, their M.O. is revolving equity, falsely inflating property values, or issuing loans based on fictitious properties.
One current mortgage fraud trend is property flipping, which is best described as buying properties and then artificially inflating their value through false appraisals. Then, the properties are repurchased several times at a higher price by associates of the "flipper." Often, flipped properties are repurchased for 50 percent to 100 percent of their original value.
Another trend is equity skimming, which happens when corrupt insiders persuade unsophisticated borrowers to refinance their mortgages every few months. Corrupt employees target people with high mortgage interest rates and convince them to refinance at slightly lower rates. A few months later, they repeat the scheme with a slightly lower rate, but a higher loan amount is generated each time to pay the origination fees. In essence, the perpetrators strip the remaining equity from the properties and line their pockets with origination fees. Eventually the loans become too large for the borrowers, who are forced to default.
These are just some of the trends we are seeing, but we have been working hard to educate the public and to work with the mortgage industry to combat the problem. For example, we are collaborating with the Mortgage Bankers Association to improve and promote reporting of fraudulent mortgage activity through filing Suspicious Mortgage Activity reports. This will give us a more complete picture of the problem so we can more effectively disrupt and dismantle mortgage fraud.
Health care fraud is another area of great concern. And as people continue to live longer, criminals will continue their attempts to defraud health care programs. We are seeing criminal activity ranging from the traditionally unscrupulous—such as fraudulent billing—to the truly unconscionable, such as diluting cancer drugs and performing unnecessary surgeries.
Health care fraud puts the health and finances of all Americans at risk. And although we believe the problem will persist, especially as the elderly population continues to grow, we are making solid progress. In 2005, for example, we secured 402 indictments and 500 convictions.
The FBI is working to investigate all these crimes and bring perpetrators to justice. Much of that work is done behind the scenes and is not reported on the front pages. While many Americans are aware of these issues, they have not exploded on to the American consciousness in the dramatic way that corporate fraud did back in the summer of 2002.
Enron. Tyco. WorldCom. Adelphia. One after another, extensive and deceptive corporate fraud schemes were revealed. Stocks tumbled. Each revelation of corporate malfeasance further shook investor confidence. Even honest corporations fell under the shadow of suspicion.
To give you a sense of the scope of the problem, the number of corporate fraud cases the FBI has opened has increased over 300 percent between 2001 and 2005. At last count, we had 18 investigations in which investors have lost at least $1 billion. Two of these individual investigations represent $80 billion crimes.
The FBI investigates corporate fraud in publicly traded companies in which corporate insiders knowingly and willingly use improper accounting techniques in an effort to meet street analyst expectations. The schemes are typically contrived to overstate revenue and the related overstatement of earnings per share. I thought you probably hadn't heard enough technical terms today, so let me tell you a little about the six most common schemes that we see—in no particular order of prevalence.
The first is "phony sales," or making journal entries to book a sale that never took place.
The second is "parked inventory sales," or recording revenue for goods shipped to a location controlled by the seller, such as a warehouse or parking lot, to provide the appearance that a sale has occurred.
The third is "swap transactions," in which two companies conspire to exchange payment or service simply to inflate revenue.
The fourth is "channel stuffing," which is quite different from channel surfing. Channel stuffing involves overselling products to customers, resellers, or distributors, with an unwritten agreement that the customer will receive a discount on the full price at some point in the future.
The fifth is "accelerated revenues," or booking revenue in the current period which should be deferred until the earnings process is complete. Examples would be billing for an unshipped product or overestimating the percentage completion on a long-term construction contract.
And the sixth scheme we commonly see is "side deals," in which a seller books a sale, with an unwritten understanding that the buyer has the right to cancel the sales contract and return the product or get a full rebate in the future.
And on the expense side, corrupt companies will often capitalize and/or defer expenses, in order to impact earnings per share without affecting the revenue line—thereby meeting analyst expectations.
These are just some of the trends the FBI investigates. I've described them in very basic terms, but as you know, corporate fraud cases are incredibly complex, wide in scope, and extremely sensitive. And it is not just corrupt CEOs or managers who are affected. Individual shareholders, employee pension plans, mutual funds, financial institutions, and the securities markets have all felt the aftershocks.
I was heading up the FBI's Criminal Investigative Division at the height of corporate scandal season and lost many a night's sleep contemplating the consequences of approving investigations into giant, powerful corporations. It is a no-miss game: If you are wrong, you will damage reputations, hurt workers and investors, and impact the marketplace. And the same is true if you are right. But that's why the FBI has the responsibility for corporate fraud and public corruption investigations. Like internal auditors, we are one of the few agencies that is independent and can make the tough calls.
Once the corporate fraud scandals erupted, we decided not to extend the life of the problem, but to snuff it out decisively. Once we identified the fraud, we did not plan to negotiate. Too much was at stake, and protecting employees, investors, and the economy was paramount. Our goal was to work with cooperating employees, gather evidence, make arrests, and secure indictments.
We established a Corporate Fraud Reserve Team, composed of special agent accountants and financial analysts who fan out across the country, working on investigations such as Enron, Qwest, and HealthSouth. We participate on the President's Corporate Fraud Task Force, which was established in July 2002.
We also collaborate extensively with affected companies, federal partners, and private organizations like the American Institute of Certified Public Accountants. And we have further leveraged our resources in corporate fraud investigations by working side-by-side with our civil regulatory partners, most notably the Securities and Exchange Commission.
We often work with the SEC in a parallel investigation mode, whereby although we in no way direct their efforts, we share the results of our investigative efforts, as long as they did not stem from the grand jury process. At the end of these investigations, the civil investigation is stayed while the criminal case moves forward for adjudication.
This aggressive, interagency approach has been highly successful. Our collaborative efforts have produced 545 indictments, 365 convictions, and over $1 billion in restitutions in corporate fraud matters related to accounting fraud and insider trading.
The Enron Task Force has charged 34 individuals to date, including 21 executives, and has seized over $227 million. Andrew Fastow, Enron's former chief financial officer, pled guilty to conspiracy charges. He will serve a 10-year sentence and will cooperate with investigators concerning the role of other Enron executives. Additionally, Enron Chairman Kenneth Lay, CEO Jeffrey Skilling, and Chief Accounting Officer Richard Causey were indicted on an array of charges, including multiple counts of securities fraud, wire fraud, bank fraud, insider trading, and conspiracy.
In another example, the WorldCom investigation has resulted in six indictments and six convictions so far, including those of CEO Bernard Ebbers and CFO Scott Sullivan. And the Rite-Aid investigation has also netted six indictments and six convictions, including those of the chairman, president, and chief counsel.
We have made significant progress. In 2002, Jay Leno joked about the president calling for doubling the punishment for corporate fraud, saying, "That means they'll slap you on both wrists." Times have certainly changed—and so has federal legislation.
As you know, the Sarbanes Oxley Act, which Congress passed in July 2002, imposed new specific criminal felonies for securities fraud violations. It enhanced the penalties for mail fraud/wire fraud violations, which are charges typically filed in corporate fraud investigations, from five-year felonies to 20-year felonies. It also requires CEOs and CFOs to certify financial statements.
In addition, Sarbanes-Oxley made it a felony to obstruct justice in corporate fraud investigations by prohibiting anyone from altering, destroying, or otherwise impeding a federal law enforcement or regulatory investigation. In other words, if a secretary knowingly shreds something that should be sent to regulators, that secretary is just as culpable as the CEO who directed the action.
The old "I told him to ship the documents to the feds, but he heard 'rip the documents to shreds'" excuse will not work. CEOs and corporate managers have seen that we will not tolerate collusion and fraud and that corruption will be rooted out and punished severely.
In fact, there has been some debate in the public square over whether corporate fraud has been "over-enforced." Critics point to the prosecution and conviction of Martha Stewart as an example. But think back, for a moment, to the collapse of Enron and the wave of corporate scandals that followed. Think about the stature and power of the corrupt companies that were disgraced. And then think about the retirees whose lifelong savings were looted.
Think about the students whose parents can no longer afford to send them to college. Think of the elderly who can't pay for their medication. Monetary loss is just one part of the problem. It is impossible to quantify the magnitude of human loss that these criminals deliberately caused.
And that is why we must continue to work together to detect and investigate corporate fraud and bring corporate criminals to justice. Law enforcement and the justice system play a large role. But the importance of the auditing and accounting process cannot be overstated, and its role is equally important. By ensuring transparent and reliable financial reporting, accountants are critical to keeping us all honest and fair—from small businesses to vast federal agencies.
You are the first line of defense against corporate fraud—you are the beat cops and first responders. You are the conscience of the organizations you audit. You are the custodians of their ethics. You are not just checking boxes—you are constantly scanning the horizon for inconsistencies or irregularities, like an FBI agent conducting routine surveillance.
Just as my role has changed since 9/11, your role has changed since Enron and "SOX." If there is advice I could give you from the law enforcement perspective, it would be this: First, continue to be proactive. We know you are under pressure from many sides, but you must continue to alert the chain of command to possible fraud. And you also have to ask the tough questions, not just the "yes" or "no" questions, but more aggressive ones, such as "Tell me about the entries or accounting processes that you disagree with."
Second, continue to be independent. Your impartiality is a valuable asset, both during investigations and even on the stand. You make excellent witnesses, by the way. But here I'm going to have to poke all you internal auditors a bit … where were you for Enron? Where were you for Qwest? Where were you for WorldCom, and all the rest? We can't let this happen again.
Third, continue to work with the FBI—or, better yet, come work for the FBI. Now, technically I'm not an approved FBI recruiter, but I will tell you that 15 percent of new special agents hired in 2004 had backgrounds in accounting. Currently, we have about 1,230 special agent accountants, but nearly 300 of them are eligible to retire next month. But you don't have to carry a badge and gun. There are plenty of non-agent accountants in the FBI, and we are always looking for more. Just wanted to throw that out there!
But whether or not you bring your accounting skills to the Bureau so that I can retire, your work is critical to our success, and we must continue to work together. I like to think that the men and women of the FBI are the guardians of America's freedom. In a very important sense, the men and women of the accounting profession are the guardians of America's economy.
We are not so very different. In both professions, our mission is to protect the American public. As accountants, we seek truth. If we do our job right, we increase investor confidence in the marketplace—and the economy flourishes. Our goal as FBI agents is to protect Americans from threats, whether from terrorism, abuses of civil rights, or fraud. And if we do our job right, our fellow citizens are safer, they have more confidence in us—and freedom flourishes.
We also share common values. The core values instilled in every accountant —fairness, transparency, ethics, and integrity—are the same core values ingrained in every FBI agent. Guided by those values, we have dedicated ourselves to restoring confidence in our government and in our marketplace.
Together, we have exposed and investigated corruption. We have removed corrupt leaders from power. And we have worked hard to remind Americans that we are on their side. Whether by providing them with honest and sound financial statements, or conducting an ethical audit of company or government agency, or arresting a corrupt CEO, together we have made great strides towards repairing the damage that was done. And together, we will succeed in protecting the American public and the American marketplace.