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Financial Crimes 2008

Financial Crimes Report to the Public
Fiscal Year 2008


Financial Crimes

The Federal Bureau of Investigation (FBI) investigates matters relating to fraud, theft, or embezzlement occurring within or against the national and international financial community. These crimes are characterized by deceit, concealment, or violation of trust, and are not dependent upon the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain personal or business advantage. The FBI focuses its financial crimes investigations on such criminal activities as corporate fraud, securities and commodities fraud, health care fraud, financial institution fraud, mortgage fraud, insurance fraud, mass marketing fraud, and money laundering. These are the identified priority crime problem areas of the Financial Crimes Section (FCS) of the FBI.

The mission of the FCS is to oversee the investigation of financial fraud, and to facilitate the forfeiture of assets from those engaging in federal crimes. In fiscal year (FY) 2009, the FCS is comprised of the Asset Forfeiture/Money Laundering Unit, the Economic Crimes Unit, the Health Care Fraud Unit, and the National Mortgage Fraud Team.

The Economic Crimes Unit is responsible for significant frauds targeted against individuals, businesses, and industries to include: corporate fraud, insurance fraud (non-health care related), securities and commodities fraud, mass marketing fraud, telemarketing fraud, high yield investment schemes, Ponzi schemes, advance fees schemes, and pyramid schemes.

The Health Care Fraud Unit oversees investigations targeting individuals and/or organizations who are defrauding public and private health care systems. Areas investigated under health care fraud include: billing for services not rendered, billing for a higher reimbursable service than performed (upcoding), performing unnecessary services, kickbacks, unbundling of tests and services to generate higher fees, durable medical equipment fraud, pharmaceutical drug diversion, outpatient surgery fraud, and Internet pharmacy sales.

The mission of the National Mortgage Fraud Team is to identify, target, disrupt, and dismantle criminal organizations and individuals who engage in fraud schemes which impact financial institutions particularly in the areas of mortgage fraud and bank failures.

The mission of the Asset Forfeiture/Money Laundering Unit (AF/MLU) as it relates to financial institution fraud is to identify, target, disrupt, and dismantle criminal organizations and individuals through the strategic use of asset forfeiture; and to ensure that field offices employ the money laundering violation in all investigations, where appropriate, to assist in the disruption and/or dismantlement of criminal enterprises.

The AF/MLU also has responsibilities for the management of the Forfeiture Support Project (FSP) in Calverton, Maryland. Although the FSP’s mission is closely tied to that of AF/MLU, it does have a separate mission statement which is documented as follows: The mission of the FSP is to support the forfeiture component of all major FBI investigations through data entry and analysis of financial documents, forensic accounting, and tracing assets subject to forfeiture.

Based upon field office crime surveys, current trends in the white collar crime arena, and directives established by the president, the attorney general, the Director, and the Criminal Investigative Division, the following national priorities for the White Collar Crime Program (WCCP) have been established: public corruption, corporate fraud/securities fraud, health care fraud, financial institution fraud (to include bank failures and mortgage fraud), money laundering, insurance fraud and mass marketing fraud.

Although public corruption is a national priority within the WCCP, it will not be addressed in this report. Each section of this report provides an overview, statistical accomplishments, and case examples of the identified priority crime problems specifically addressed by the Financial Crimes Section. Where appropriate, suggestions are made in order to protect the public from being victimized by fraudulent activity.


Corporate Fraud

I. General Overview

As the lead agency investigating corporate fraud, the FBI has focused its efforts on cases which involve accounting schemes, self-dealing by corporate executives, and obstruction of justice. The majority of corporate fraud cases pursued by the FBI involve accounting schemes designed to deceive investors, auditors, and analysts about the true financial condition of a corporation. Through the manipulation of financial data, the share price of a corporation remains artificially inflated based on fictitious performance indicators provided to the investing public. In addition to significant financial losses to investors, corporate fraud has the potential to cause immeasurable damage to the U.S. economy and investor confidence.

While the number of cases involving the falsification of financial information remains relatively stable, the FBI has recently observed a spike in the number of corporate fraud cases involving sub prime lending institutions, brokerage houses, home building firms, hedge funds, and financial institutions, as a result of the financial crisis partly caused by the collapse of the sub-prime market in the fall of 2007. As a result of the current financial crisis, trillions of dollars in shareholder value has been lost; several prominent companies, i.e., Lehman Brothers, have gone out of business; several prominent banks, i.e., IndyMac Bank and Washington Mutual, have failed; and the federal government has provided over a trillion dollars in relief to keep other companies from failing, i.e., American Insurance Group, General Motors, and CitiGroup.

A sub prime lender is a business that lends to borrowers who do not qualify for loans from mainstream lenders. Once the sub-prime loans have been issued, they are bundled and sold as securities, a process known as securitization. Fraud has been identified throughout the loan process, which commences with the borrower providing false information to the mortgage broker and/or lender. The next layer of potential fraud—the corporate fraud—occurs with the banks, brokerage houses, and other financial institutions that package loans through the securitization process. As the housing market declined, sub prime lenders have been forced to buy back a number of non performing loans. Many of these sub prime lenders have relied on a continuous increase in real estate values to allow the borrowers to refinance or sell their properties before going into default. However, based on the sales slowdown in the housing market, loan defaults increased, the secondary market for sub prime loans securities dwindled, and the securities lost value. As a result, publicly traded stocks dramatically decreased in value as financial institutions realized large losses due to the sub-prime securities they held or insured, resulting in financial difficulties and bankruptcies.

As publicly traded companies suffered financial difficulties due to sub-prime market, analyses of company financials have identified instances of false accounting entries, and fraudulently inflated assets and revenues. Investigations have determined that many of these companies manipulated their reported loan portfolio risks and used various accounting schemes to inflate their financial reports. In addition, before these companies’ stocks rapidly declined in value, executives with insider information sold their equity positions and profited illegally. The FBI is working with the U.S. Department of Justice (DOJ), the U.S. Securities and Exchange Commission (SEC) and other U.S. regulatory agencies to identify possible corporate fraud centered on violations of insider trading, securities fraud, and accounting fraud.

In addition to the sub-prime market issue, corporate fraud matters involving seal-dealing by corporate executives, particularly utilizing companies to perpetrate large scale Ponzi fraud schemes, continue to be an issue of concern. Traditionally, Ponzi schemes were perpetrated by individuals or small groups within a community environment. However, the current financial crisis resulted in the exposure of several large Ponzi schemes perpetrated not on an individual community level, but on a corporate national level by executives of what were once considered legitimate investment brokerages, i.e., Bernard L. Madoff Investment Services LLC.

Corporate fraud remains the highest priority of the Financial Crimes Section and the FBI is committed to dealing with this significant crime problem. As of the end of FY 2008, 545 corporate fraud cases are being pursued by FBI field offices throughout the U.S., several of which involve losses to public investors that individually exceed $1 billion.

Corporate fraud investigations involve the following activities:

(1) Falsification of financial information, including:

(a) False accounting entries;
(b) Bogus trades designed to inflate profit or hide losses; and,
(c) False transactions designed to evade regulatory oversight.

(2) Self-dealing by corporate insiders, including:

(a) Insider trading;
(b) Kickbacks;
(c) Backdating of executive stock options;
(d) Misuse of corporate property for personal gain; and,
(e) Individual tax violations related to self-dealing.

(3) Obstruction of justice designed to conceal any of the above-noted types of criminal conduct, particularly when the obstruction impedes the inquiries of the SEC, other regulatory agencies, and/or law enforcement agencies.

The FBI has formed partnerships with numerous agencies to capitalize on their expertise in specific areas such as securities, tax, pensions, energy, and commodities. The FBI has placed greater emphasis on investigating allegations of these frauds by working closely with the SEC, Financial Industry Regulation Authority, Internal Revenue Service (IRS), Department of Labor, Federal Energy Regulatory Commission, Commodity Futures Trading Commission, and U.S. Postal Inspection Service (USPIS). As reflected in the statistical accomplishments of the President’s Corporate Fraud Task Force (founded 2002), which includes the above-mentioned agencies, the cooperative and multi-agency investigative approach has resulted in highly successful prosecutions.

The FBI has also worked with numerous organizations in the private industry to increase public awareness about combating corporate fraud, to include: Public Company Accounting Oversight Board, American Institute of Certified Public Accountants, and the North American Securities Administrator’s Association, Inc. These organizations have been able to provide referrals for expert witnesses and other technical assistance regarding accounting and securities issues. In addition, the Financial Crimes Enforcement Network and Dun & Bradstreet have been able to provide significant background information on subject individuals and/or subject companies to further investigative efforts.

II. Overall Accomplishments

Through FY 2008, cases pursued by the FBI resulted in 158 indictments and 132 convictions of corporate criminals. Numerous cases are pending plea agreements and trials. During FY 2008, the FBI secured $8.1 billion in restitution orders and $199 million in fines from corporate criminals. The chart below reflects corporate fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—332 cases; FY 2005—423; FY 2006—486; FY 2007—529; and FY 2008—545 cases.

Corporate Fraud Pending Cases, Fiscal Years 2004 to 2008

III. Significant Cases

Peregrine Systems, Inc. (San Diego): Peregrine Systems, Inc. (Peregrine) was a business software company formerly headquartered in San Diego, California, and had been one of the region’s most celebrated technology companies. Shares of Peregrine were publicly traded on the NASDAQ, and for 10 consecutive quarters between 1999 and 2001, executives declared that Peregrine had met or exceeded Wall Street expectations for revenue and earnings. In truth, Stephen Parker Gardner (Gardner), former chief executive officer of Peregrine, and others fraudulently manipulated Peregrine’s financial statements in order to deceptively meet these numbers, thereby fraudulently inflating and sustaining the price of Peregrine’s stock. In an effort to avoid restating revenues that had already been reported to Wall Street, Gardner and his co-schemers took steps to conceal from investors the fact that millions of dollars of Peregrine’s accounts receivable had not been collected. In addition, in an effort to avoid scrutiny from the SEC, Gardner gave false and misleading testimony to the SEC about whether a series of “barter deals” booked by Peregrine were directly linked and predicated upon each other. During his time at the company, Gardner exercised stock options and sold thousands of shares of Peregrine stock, reaping approximately $8.2 million in net proceeds. Gardner also took annual bonuses from Peregrine that at one point exceeded $1 million. When Peregrine publicly disclosed its accounting improprieties in May 2002, the company’s stock price collapsed. Peregrine later sought federal bankruptcy protection and eventually sold itself to the Hewlett-Packard Company. Shareholders claimed losses in excess of $3 billion resulting from the fraudulent activities of Gardner and others.

On December 11, 2007, Gardner was sentenced to serve 97 months in custody based on his conviction on charges of conspiracy, securities fraud, and obstruction of justice, arising out of his participation in a scheme to defraud Peregrine’s shareholders between 1999 and 2002. In addition, Gardner was ordered to serve a three-year term of supervised release following his release from prison and to forfeit to the United States the proceeds from the sale of three parcels of real estate in Maine, approximately $970,032 from the sale of a fourth parcel of real estate, plus approximately $384,652 seized from his brokerage accounts. Gardner cooperated against his four co-conspirators who were all found guilty and sentenced in 2008.

Credit Suisse (New York City): Credit Suisse is a global financial services company, advising clients across the globe in all aspects of finance. ST Microelectronics (STM) is a Switzerland based semiconductor company with annual net revenue of US $9.85 billion in 2006. In 2006, STM invested $400 million with Credit Suisse in what was purportedly securities backed by student loans (to include investment statements); however, the funds were backed with sub prime loans. Credit Suisse tried unsuccessfully to settle the matter for $280 million. The two managers, Eric Butler and Julian Tzolov, have been indicted on securities fraud charges and were arrested in June 2008. Their trial is scheduled for April 2009. An indictment is merely a charge and the defendant is presumed innocent until proven guilty.

National Century Financial Enterprises (Cincinnati): National Century Financial Enterprises (NCFE), a healthcare financing company based in Columbus, Ohio, operated as a holding company organized to buy accounts receivables from health care providers. On May 19, 2006, a federal grand jury returned an indictment on seven former executives of NCFE, charging them with conspiring to defraud investors by lying about how the investors’ funds would be used, diverting the funds, and then hiding the shortfall by moving money back and forth between subsidiaries’ bank accounts. Former NCFE executives created phony reports and records to cover up the fraud scheme wherein they diverted investors’ funds to make unsecured advances and loans to healthcare companies owned by National Century or National Century’s owners. The 60-count indictment charged conspiracy, securities fraud, wire fraud, mail fraud, and money laundering. On October 1, 2008, the trial began against Lance Poulsen, former chief executive officer of NCFE, and on October 31, 2008, the jury convicted Poulsen on all counts. Poulsen was the last of seven former executives of NCFE found guilty for their facilitation of the fraud. In a prior court ruling on August 6, 2008, five of the co-conspirators were jointly ordered to pay approximately $2.384 billion in restitution and the largest ever corporate fraud forfeiture money judgment of approximately $1.7 billion was ordered. Poulsen is currently awaiting sentencing.


Securities and Commodities Fraud

I. General Overview

The continuing integration of global capital markets has created unprecedented opportunities for U.S. businesses to access capital and investors to diversify their portfolios. Whether through college savings plans or retirement accounts, larger numbers of Americans are choosing to invest in the securities and commodities markets. In fact, the SEC suggests that the number of people investing in securities and commodities has increased 600 percent since 1980. This large-scale investment growth, however, has also led to significant growth in the amount of fraud and misconduct seen in these markets. In addition, the current financial crisis has exposed prevalent fraud schemes that have been thriving in the global financial system. In the current environment, traditional fraud schemes such as Ponzi schemes and investment frauds are not new but they are coming to light as a result of market deterioration, and the destabilization of the U.S. economy. New opportunities for fraud have also developed in response to government programs that were established to support the financial markets. The FBI anticipates new iterations of traditional fraud schemes to develop as a result of the government spending programs such as the Troubled Asset Relief Program (TARP) and the Termed Asset-Backed Securities Loan Facility (TALF). As such, the combating of securities and commodities frauds remains a priority for the FBI’s White Collar Crime Program.

The losses are associated with depreciative market value of businesses, reduced or non-existent return on investments, and legal and investigative costs. The victims of securities and commodities frauds include individual investors, financial institutions, public and private companies, government entities, and retirement funds.

Now more than ever, the well-being of the global economy rests on the diligent enforcement of laws and regulations designed to ensure the fair and orderly operation of the capital markets. The FBI is not only cognizant of this critical requirement, but is uniquely positioned to help meet the U.S. government’s criminal investigative responsibilities in this area.

The FBI works closely with various governmental and private entities to investigate and prevent fraudulent activity in the securities markets. In an effort to help bolster these relationships and optimize workforce needs, many FBI field offices operate task forces and working groups with other law enforcement and regulatory agencies. These agencies include the SEC, U.S. Attorneys’ Offices (USAO), Commodities Futures Trading Commission (CFTC), National Association of Securities Dealers (NASD), U.S. Postal Inspection Service (USPIS), and the Internal Revenue Service (IRS). Cooperation among agencies helps the FBI address the problem of securities and commodities fraud more effectively and allows the FBI to more efficiently allocate its resources.

As of the end of FY 2008, the FBI was investigating 1,210 cases of securities and commodities fraud and had as many as 150 special sgents assigned to addressing this crime problem. Following are brief descriptions of some of the most prevalent types of fraud being encountered today:

Market Manipulation: These schemes, commonly referred to as “pump and dumps,” are effected by creating artificial buying pressure for a targeted security, generally a low-trading volume issuer in the over-the-counter securities market that is largely controlled by the fraud perpetrators. This artificially increased trading volume has the effect of artificially increasing the price of the targeted security (i.e., the “pump”), which is rapidly sold off into the inflated market for the security by the fraud perpetrators (i.e., the “dump”); resulting in illicit gains to the perpetrators and losses to innocent third party investors. Typically, the increased trading volume is generated by inducing unwitting investors to purchase shares of the targeted security through false or deceptive sales practices and/or public information releases.

A modern variation on these schemes involves largely foreign-based computer criminals gaining unauthorized access and intruding into the online brokerage accounts of unsuspecting victims in the U.S. These intruded victim accounts are then utilized to engage in coordinated online purchases of the targeted security to affect the pump portion of a manipulation, while the fraud perpetrators sell their pre-existing holdings in the targeted security into the inflated market to complete the dump.

High Yield Investment Fraud: High yield investment fraud schemes may take many forms, but are all characterized by offers of low- or no-risk investments that guarantee unusually high rates of return. Most common among this type of fraud are the following schemes:

The Ponzi Scheme: Named after its early 20th century creator, Charles Ponzi, these schemes use money collected from new ‘investors’ (i.e., victims), rather than profits from the purported underlying business venture, to pay the high rates of return promised to earlier victims. This arrangement gives victims the impression that there is a legitimate, money-making enterprise behind the perpetrator’s story when, in reality, victim monies are the only source of funding.

The Pyramid Scheme: As in Ponzi schemes, the money collected from newer victims of the fraud is paid to earlier victims to provide a veneer of legitimacy. In pyramid schemes, however, the victims themselves are induced to recruit further victims through the payment of recruitment commissions.

Prime Bank Scheme: Victims are induced to invest in financial instruments, allegedly issued by well-known institutions, which offer risk-free opportunities for high rates of return; benefits which are allegedly the result of the perpetrator’s access to a secret worldwide exchange ordinarily open only to the world’s largest financial institutions.

Advance Fee Fraud: This category of fraud encompasses a broad variety of schemes which are designed to induce their victims into remitting up-front payments in exchange for the promise of goods, services, and/or prizes. In the securities and commodities fraud context, victims are informed that in order to participate in a promising investment opportunity, they must first pay various taxes and/or fees. Advance fee fraud schemes are further discussed in the mass marketing fraud section of this report.

Hedge Fund Fraud: Hedge funds are private investment partnerships which have historically accepted only high-net worth clients willing to meet significant minimum investment thresholds. The industry as a whole has been largely unregulated but has become increasingly relevant to middle class investors through their exposure to hedge fund activities via ancillary investments (e.g., pension funds). The relative lack of regulatory scrutiny has made the industry vulnerable to fraud by fund managers, to include overstatement/misappropriation of fund assets; overcharging for fund management fees; insider trading; market timing; and late trading.

Commodities Fraud: These schemes typically involve the deceptive or fraudulent sale of commodities investments. In such instances, false or deceptive sales practices are used to solicit victim funds for commodities transactions that either never occur or are inconsistent with the original sales pitches. Alternatively, commodities market participants may attempt to illegally manipulate the market for a commodity by such actions as fraudulently reporting price information or cornering the market to artificially increase the price of the targeted commodity.

Foreign Exchange Fraud: These schemes are characterized by the use of false or deceptive sales practices, alleging high rates of return for minimal risk, to induce victims to invest in the foreign currency exchange market. In such instances, the touted transactions either never occur, are inconsistent with the original sales pitches or executed for the sole purpose of generating excessive trading commissions in breach of fiduciary responsibilities to the victim client. Alternatively, individual corrupt currency traders employed by large financial institutions may attempt to manipulate foreign currency exchange prices in an effort to generate illicit trading profits for their own enrichment.

Broker Embezzlement: These schemes involve illicit and unauthorized actions by brokers to steal directly from their clients. Such schemes may be facilitated by the forging of client documents, doctoring of account statements, unauthorized trading/funds transfer activities, or other conduct in breach of the broker’s fiduciary responsibilities to the victim client.

Late-Day Trading: These schemes involve the illicit purchase and sale of securities after regular market hours. Such trading is restricted in order to prevent individuals from profiting on market moving information which is released after the close of regular trading. Unscrupulous traders attempt to illegally exploit such opportunities by buying or selling securities at the market close price, secure in the knowledge that the market moving information will generate illicit profits at the opening of trading on the following day.

II. Overall Accomplishments

As of the end of FY 2008, the FBI was investigating 1,210 cases of securities and commodities fraud and had already recorded 357 indictments and 296 convictions. Additional notable accomplishments in FY 2008 include: $3.1 billion in restitution orders; $43.6 million in recoveries; $151.4 million in fines and $84.2 million in seizures. The chart below reflects securities and commodities fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—987cases; FY 2005—1,139 cases; FY 2006—1,165 cases; FY 2007—1,217 cases and FY 2008—1,210 cases.

Securities and Commodities Fraud Pending Cases, Fiscal Years 2004 to 2008


III. Significant Cases

Dale L. Graybill, dba Waldorf Corporation (New Haven): This investigation centered on investor solicitations by Dale L. Graybill, former owner of the Waldorf Corporation, to invest in his trading programs and promised investment returns of up to 25 percent per month at little or no risk. Graybill falsely represented to investors that he had special access to exclusive, government-backed trading programs that were originally opened only to the very wealthy, but which he could make available to them. When new investor money was received, Graybill diverted the new investor funds in order to pay previous investors and for his own personal gain. In conjunction with numerous other individuals, Graybill defrauded approximately 480 investors. On June 15, 2005, Graybill pled guilty to mail fraud and making and subscribing a false 2002 tax return. Graybill was sentenced to 48 months’ incarceration and ordered to pay $10.6 million in restitution.

Bayou Management (New York): Bayou was a Connecticut-based hedge fund founded in 1996 by James G. Marquez and Samuel Israel, III which, at its height, claimed assets under management in excess of $450 million. Marquez, Israel, and former Bayou Chief Financial Officer Daniel E. Marino had been providing investors with false earnings and fraudulent financial statements from almost the fund’s inception; resulting in client losses in excess of $400 million. On July 27, 2005, investors were informed of Bayou’s closure and the disbursement of investor funds which, in fact, never occurred. On September 29, 2005, Marino pled guilty to conspiracy, mail, wire, and investment advisor fraud and was sentenced on January 29, 2008, to 20 years’ incarceration. On December 14, 2006, Marquez pled guilty to conspiracy and investment advisor fraud and was sentenced on January 22, 2008, to 51 months’ incarceration and $6.26 million in restitution. On April 14, 2008, Israel pled guilty to conspiracy, mail fraud, and investment advisor fraud as well as a criminal forfeiture allegation seeking the forfeiture of $450 million. On April 14, 2008, Israel was sentenced to 20 years in federal prison and ordered to pay $300 million in restitution.

Gary L. McNaughton, dba The Haven Equity Company (Cleveland): From 1999 to 2003, Gary L. McNaughton, doing business as The Haven Equity Company (Haven Equity), defrauded over 200 investors in the United States and abroad via a Ponzi scheme where he claimed to be selling investors securities and investments in the form of promissory notes and demand notes. McNaughton informed the investors that their funds would be invested with an individual in Canada who used a unique trading strategy to generate returns. McNaughton promised investors returns that ranged from 15 percent to 35 percent with no risk on their investments. The U.S. victims were defrauded of approximately $17 million. McNaughton engaged in an affinity fraud, whereby he preyed on a group of investors—church members—by taking advantage of their trust and faith in bringing the new investments to Haven Equity. Some investors did not receive a monthly interest check, but instead rolled their interest back into their investments. McNaughton provided the investors with promissory notes and demand notes that denoted the amount invested and the interest payment the investor would receive. McNaughton operated a Ponzi scheme using new investor funds to pay previous investors their guaranteed monthly returns, as well as pay his personal expenses. McNaughton was indicted on November 14, 2006, on securities fraud, mail fraud, and money laundering charges. McNaughton pled guilty and was sentenced to 63 months in prison.


Health Care Fraud

I. General Overview

The FBI’s mission in the area of health care fraud is to oversee the FBI’s health care fraud initiatives by providing national guidance and assistance to support health care fraud investigations targeting individuals and organizations who are defrauding the public and private health care systems. The FBI, along with its federal, state, and local law enforcement partners, the Centers for Medicare and Medicaid Services (CMS), and other government and privately-sponsored program participants, work closely together to address vulnerabilities, fraud, and abuse.

All health care programs are subject to fraud, however, Medicare and Medicaid programs are the most visible. Estimates of fraudulent billings to health care programs, both public and private, are estimated between 3 and 10 percent of total health care expenditures. The fraud schemes are not specific to any area, but are found throughout the entire country. The schemes target large health care programs, public and private, as well as beneficiaries. Certain schemes tend to be worked more often in certain geographical areas, and certain ethnic or national groups tend to also employ the same fraud schemes. The fraud schemes have, over time, become more sophisticated and complex, and are now being perpetrated by more organized crime groups.

Health care fraud is expected to continue to rise as people live longer. This increase will produce a greater demand for Medicare benefits. As a result, it is expected that the utilization of long and short term care facilities such as skilled nursing, assisted living, and hospice services will expand substantially in the future. Additionally, fraudulent billings and medically unnecessary services billed to health care insurers are prevalent throughout the country. These activities are becoming increasingly complex and can be perpetrated by corporate-driven schemes and systematic abuse by providers.

The most recent CMS statistical estimates project the total health care expenditures will total $2.26 trillion, representing 16.2 percent of the Gross Domestic Product (GDP). By the year 2016, CMS estimates total health care spending to exceed $4.14 trillion, representing 19.6 percent of the GDP.

With health care expenditures rising at over twice the rate of inflation, it is especially important to coordinate all investigative efforts to combat fraud within the health care system. The FBI is the primary investigative agency in the fight against health care fraud and has jurisdiction over both the federal and private insurance programs. With more than $1 trillion being spent in the private sector on health care and its related services, the FBI’s efforts are crucial to the success of the overall program. The FBI leverages its resources in both the private and public arenas through investigative partnerships with agencies such as the U.S. Department of Health and Human Services-Office of Inspector General (HHS-OIG), the Food and Drug Administration (FDA), Drug Enforcement Agency (DEA), Defense Criminal Investigative Service, Office of Personnel Management, Internal Revenue Service-Criminal Investigative Division, and various state and local agencies. On the private side, the FBI is actively involved with national groups, such as the National Health Care Anti Fraud Association (NHCAA), the National Insurance Crime Bureau (NICB), the Blue Cross and Blue Shield Association (BCBSA), the American Association of Retired Persons, and the Coalition Against Insurance Fraud, as well as many other professional and grass roots efforts to expose and investigate fraud within the system.

In furtherance of the FBI’s efforts to combat health care fraud in the U.S., the FBI participates in various initiatives with federal, state, and local agencies. At the Headquarters level, the FBI participates in a senior level working group which includes the CMS, DOJ, HHS-OIG, and other agencies to identify and assess health care industry vulnerabilities and make recommendations to protect the industry and the public through a coordinated effort. At the Headquarters level, the FBI is also involved in bi-weekly coordination meetings at the DOJ which includes various DOJ components involved in the fight against health care fraud. National level liaison is also maintained with the DEA, FDA, Bureau of Immigration and Customs Enforcement, BCBSA, and other partners.

Throughout the country, FBI field offices participate in health care fraud working groups which involve law enforcement agencies, prosecutors, regulatory agencies, and health insurance industry professionals to identify the various crime problems involving health care fraud. The FBI develops national and local initiatives when large scale fraud is detected, which may involve participation by several FBI field offices and other law enforcement agencies.

Over the years, FBI national initiatives have addressed frauds involving medical transportation, durable medical equipment, hospital cost reporting, outpatient surgery centers, pharmaceutical fraud, and a variety of other specialized investigations. FBI offices also establish state and local initiatives to meet the needs of the community. Throughout the country, various field offices have conducted their own initiatives targeting clinic, pharmacy, medical equipment, home health agency, cosmetic surgery center, and other frauds which are of great concern within a community. The FBI participates in task forces whenever possible to address specific crime problems or groups of individuals. In order to meet the needs of the private insurance industry, the FBI works very closely with the NHCAA to identify crime trends and provide training to industry and law enforcement agency personnel. Most of the insurance companies utilize an internal Special Investigations Unit, whom work closely with the FBI and our law enforcement partners.

Health care fraud investigations are among the highest priority investigations within the FBI’s WCCP, ranking behind only public corruption and corporate fraud. National initiatives include the Internet Pharmacy Fraud Initiative, the Auto Accident Insurance Fraud Initiative, the Durable Medical Equipment Fraud Initiative, and the Infusion Therapy Fraud Initiative. Furthermore, numerous FBI field offices throughout the U.S. have proactively addressed significant crime problems through coordinated initiatives, task forces, and undercover operations to identify and pursue investigations against the most egregious offenders, which may include organized criminal activity and criminal enterprises. Organized criminal activity has been identified in the operation of medical clinics, independent diagnostic testing facilities, durable medical equipment companies, and other health care facilities. The FBI is committed to addressing this criminal activity through disruption, dismantlement, and prosecution of criminal organizations.

One of the most significant trends observed in recent health care fraud cases includes the willingness of medical professionals to risk patient harm in their schemes. FBI investigations in several offices are focusing on subjects who conduct unnecessary surgeries, prescribe dangerous drugs without medical necessity, and engage in abusive or sub-standard care practices. Recent trends also suggest that advances in technology and electronic medical data have caused health care fraud schemes to evolve. The FBI has developed a significant amount of expertise in investigating technical schemes involving medical data theft and other fraud schemes facilitated through the use of computers. Of course, fraud schemes continue to consist of traditional schemes that involve fraudulent billing such as billing for services not rendered and up coding of charges for services provided.

Cases initiated within the scope of the Internet pharmacy fraud Initiative focus on Internet websites, regarding individuals selling illegal prescription drugs and controlled substances. The overall goal of the Internet Pharmacy Fraud Initiative is to identify fraudulent Internet pharmacies, and target physicians who are willing to write prescriptions for financial gain outside of the doctor/patient relationship and with no legitimate medical purpose. Also in the scope of this initiative are investigations involving the sale of counterfeit and diverted pharmaceuticals on the Internet.

The Auto Accident Insurance Fraud Initiative was launched in 2005 to address fraud schemes, including organized staged accident rings and related fraudulent claims schemes. Further, the initiative targets a trend of increasingly aggressive participants in staged accident schemes who present a growing danger to others on the road. This crime problem is a threat to innocent drivers, the financial stability of the insurance industry, and the cost of auto insurance to the public. Utilizing undercover investigations and other sophisticated techniques, the FBI has enhanced its commitment to addressing organized auto accident insurance fraud and continues to work closely with our NICB and private insurance partners to address this growing crime problem.

In December 2006, the Durable Medical Equipment (DME) Initiative was developed to address the significant crime problem associated with DME providers. Information developed with assistance from the CMS, the NHCAA, and the FBI’s Financial Crimes Intelligence Unit (FCIU) identified DME providers as one of the top two provider types identified within all case referrals, preliminary investigations, and suspensions. The initiative was established to bring additional attention to DME fraud and the FBI’s commitment to addressing the crime problem. The primary goal of the initiative is to provide intelligence to field offices concerning suspect DME providers, focusing on cases involving multiple districts or divisions, unique schemes, advanced techniques and/or substantial loss amounts.

The Infusion Therapy Fraud Initiative, established in April 2008, is the newest of the initiatives. Its focus is on the billing of infusion-related services and medications that were not provided or were not medically necessary. An infusion is a method of intravenously introducing some substance into the human body. Receiving an infusion is more commonly referred to as “receiving an IV.” In infusion therapy fraud, most often the perpetrator bills insurance providers for expensive medications that are rarely, if ever, administered to patients. In many cases, the medications are extremely powerful drugs used in only a small number of patients and require extensive management by a physician.

The Medicare Prescription Drug Program (Part D), implemented on January 1, 2006, has become an increasing focus and concern for the FBI. Prior to the implementation date, FBI Headquarters personnel regularly met with representatives from CMS and DOJ to share information, as well as review fraud and abuse occurring during the enrollment period. After the implementation date, the FBI established a working group for Part D which includes representatives from CMS, DOJ, HHS-OIG, FDA, DEA, USPIS, and the Federal Trade Commission (FTC). This working group shares and discusses information which can be used by each agency in future investigations of fraud related to this program. The FBI has worked with CMS to obtain regional training for field office personnel of the various agencies represented in this working group. The FBI is also working through CMS to maintain dialogue with the Medicare Drug Integrity Contractors (MEDICs) who have been tasked by CMS to identify, review, and analyze cases of suspected fraud and abuse in the Part D Program.

During the past year, the FBI continued to identify and analyze industry fraud trends through input from private and public health care program experts. Present areas of concern include durable medical equipment, hospital fraud, physician fraud, home health agencies, beneficiary-sharing, chiropractic, pain management, and associated drug diversion, physical therapists, prescription drugs, multi-disciplinary fraud, and identity theft which involve physician identifiers used to fraudulently bill government and private insurance programs.

As part of our national strategy to address health care fraud, the FBI cooperates with the DOJ and the various U.S. Attorneys’ Offices throughout the country to pursue offenders through parallel criminal and civil remedies. These cases typically target large scale medical providers, such as hospitals and corporations, who engage in criminal activity and commit fraud against the government which undermines the credibility of the health care system. As a result, a great deal of emphasis is placed on recovering the illegal proceeds through seizure and forfeiture proceedings, as well as substantial civil settlements. Upon the successful conviction of health care fraud offenders, the FBI provides assistance to various regulatory and state agencies, which may seek exclusion of convicted medical providers from further participation in the Medicare and Medicaid health care systems.

The FBI and the health care industry continue to expand their technology and intelligence assessments through the use of sophisticated data mining techniques to identify patterns of fraud, systemic weaknesses, and aberrant billing activity.

In 2005, the Financial Crimes Section developed the Electronic Bank Records Initiative (EBRI). The EBRI was implemented to identify and develop a process for obtaining electronic (digital format) records from financial institutions. Historically, financial institutions have provided paper copies of records to law enforcement when they receive a subpoena from the government. These records are generally maintained by the banks in an electronic format. The time it takes the financial institution to make the copies of the records and for the investigative agencies to return the paper copies back to an electronic format for financial analysis creates a severe negative effect on the timeliness, effectiveness, and efficiency of investigations. In an effort to increase the efficiency of the process a subpoena attachment was developed by the DOJ, FBI, and the Internal Revenue Service-Criminal Investigative Division (IRS-CI) for the production of electronic records instead of paper copies. The development included significant coordination with the financial institutions and their associations. The subpoena attachment was not based upon new or expanded laws, regulations, or rules. The attachment is merely meant to standardize and clarify the requests for electronic records according to the current federal rules of criminal and civil procedure. In general terms, if a financial institution maintains records electronically, the requesting agency would be seeking to obtain the records electronically. In addition, the scope of the records requested has not changed due to the subpoena attachment, with the exception of seeking the records electronically.

The subpoena attachment was disseminated to FBI offices, IRS offices, and throughout the DOJ in November 2007. The goal of the DOJ, FBI, and IRS-CI is to inform and prepare financial institutions and their respective agencies for the use and response to the subpoena attachment. This includes working with financial institutions during the transition period in coordinating the requests and associated responses to subpoenas. In addition, it is anticipated the EBRI will greatly increase the efficiency of the financial records production process and provide significant costs savings to both the government and private industry.

II. Overall Accomplishments

Through FY 2008, 2,434 cases investigated by the FBI resulted in 764 informations/indictments and 696 convictions of health care fraud criminals. It should be noted that numerous cases are pending plea agreements and trials. The following notable statistical accomplishments are reflective in FY 2008 for health care fraud: $1.2 billion in restitutions, $120.2 million in recoveries, $21.5 million in fines, and $235.3 million in seizures. The chart below reflects health care fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—2,568 cases; FY 2005—2,547 cases; FY 2006—2,423 cases; FY 2007—2,493 cases; and FY 2008—2,434 cases.

Health Care Fraud Pending Cases, Fiscal Years 2004 to 2008

III. Significant Cases

HealthEssentials, Inc. (Louisville): HealthEssentials Solutions, Inc., provides long term care facilities with certified nurse practitioners who, in turn, provide medical and ancillary services to patients under the supervision of their physicians. The company, located in at least 15 states, maintains its corporate headquarters in Louisville, Kentucky. Through its corporate principals, the company was involved in a scheme to defraud the Medicare/Medicaid health care benefits programs. On June 16, 2008, the company entered a guilty plea for submitting false statements in violation of Title 18, U.S. Code, Section 1035. On September 15, 2008, HealthEssentials was sentenced to pay criminal restitution in the amount of $3,105,931 for submitting false statements to Medicare relating to health care matters. The company also agreed to pay $117 million in civil claims.

McLaren Anesthesia (Washington Field): Martin McLaren, a pain management specialist, billed Medicare more than $1 million in calendar year 2005, for severe acute pain treatments involving Toradol injections, used to manage moderately severe acute pain. The investigation also led to the conviction of four drug distributors who had distributed prescription medications obtained using prescriptions written by McLaren. In July 2008, McLaren was sentenced to 37 months’ incarceration.

Mehood Patel (New Orleans): Mehood M. Patel, a cardiologist in Lafayette, Louisiana for more than 25 years, billed Medicare and private insurance companies after performing unnecessary coronary procedures such as deploying angioplasty balloons and stints. He also falsified patient symptoms in medical records and falsified findings on medical tests. In February 2006, Patel was indicted on 91 counts involving 75 patients. After a three-month trial beginning on October 1, 2008, Patel was convicted on 51 counts of health care fraud.

Health care fraud is carried out by many segments of the health care system using various methods. Some of the most prevalent schemes include:

Billing for Services not Rendered: These schemes can have several meanings and could include any of the following:

  • No medical service of any kind was rendered.
  • The service was not rendered as described in the claim for payment.
  • The service was previously billed and the claim had been paid.

Upcoding of Services: This type of scheme involves a billing practice where the health care provider submits a bill using a procedure code that yields a higher payment than the code for the service that was truly rendered. The upcoding of services varies according to the provider type. Examples of service upcoding include:

  • A routine, follow-up doctor’s office visit being billed as an initial or comprehensive office visit.
  • Group therapy being billed as individual therapy.
  • Unilateral procedures being billed as bilateral procedures.
  • 30-minute sessions being billed as 50+ minute sessions.

Upcoding of Items: A medical supplier is upcoding when, for example, the supplier delivers to the patient a basic, manually propelled wheelchair, but bills the patient’s health insurance plan for a more expensive motorized version of the wheelchair.

Duplicate Claims: A duplicate claim usually involves a certain item or service for which two claims are filed. In this scheme, an exact copy of the claim is not filed a second time; rather, the provider usually changes a portion, most often the date of service on the claim so that the health insurer will not realize the claim is a duplicate. In other words, the exact claim is not filed twice, but one service is billed two times, in an attempt to be paid twice for one service.

Unbundling: This is the practice of submitting bills in a fragmented fashion in order to maximize the reimbursement for various tests or procedures that are required to be billed together at a reduced cost. For example, clinical laboratory tests may be ordered individually, or in a “panel” (i.e., a lipid panel, an arthritis panel, a hepatitis panel). Billing tests within each panel as though they were done individually on subsequent days is an example of unbundling.

Excessive Services: These schemes typically involve the provision of medical services or items which are in excess of the patient’s actual needs. Examples of excessive services include:

  • A medical supply company delivering and billing for 30 wound care kits per week for a nursing home patient who only requires a change of dressings once per day.
  • Daily medical office visits conducted and billed for when monthly office visits would be more than adequate.

Medically Unnecessary Services: A service is medically unnecessary and may give rise to a fraudulent scheme when the service is not justified by the patient’s medical condition or diagnosis. For example, a claim for payment for an electrocardiogram (EKG) test may be fraudulent if the patient has no conditions, complaints, or factors which would necessitate the test.

Kickbacks: A health care provider or other person engages in an illegal kickback scheme when he or she offers, solicits, pays, or accepts money, or something of value, in exchange for the referral of a patient for health care services that may be paid for by Medicare or Medicaid. A laboratory owner and doctor each violate the anti-kickback statute when the laboratory owner pays the doctor $50 for each Medicare patient a doctor sends to the laboratory for testing. Although kickbacks are often paid in cash based on a percentage of the amount paid by Medicare or Medicaid for a service, kickbacks may take other forms such as jewelry, free paid vacations, or other valuable items.

Health Care Fraud Prevention Measures

Health care fraud is not a victimless crime. It increases health care costs for everyone. It is as dangerous as identity theft. Fraud has left many thousands of people injured. Participation in health care fraud is a crime.

Keeping America’s health system free from fraud requires active participation from each of us. The large number of patients, treatments and complex billing practices attract criminals skilled in victimizing innocent people by committing fraud.

What is Health Care Fraud?

  • Altered or fabricated medical bills and other documents.
  • Excessive or unnecessary treatments.
  • Billing schemes, such as:
    • charging for a service more expensive than the one provided.
    • charging for services that were not provided.
    • duplicate charges.
  • False or exaggerated medical disability.
  • Collecting on multiple policies for the same illness or injury.

Tips to Protect Yourself Against Health Care Fraud

  • Protect your health insurance information card like a credit card.
  • Beware of free services—is it too good to be true?
  • Review your medical bills, such as your “explanation of benefits,” after receiving healthcare services.
    check to ensure the dates and services are correct to ensure you get what you paid for.

If you suspect health care fraud, call 1-877-327-2583. For more information, visit the website http://www.bcbs.com/blueresources/anti-fraud/antifraud_contacts.html.


Mortgage Fraud

I. General Overview

Since as early as December 2006, the first signs of a national mortgage crisis were evident as payment defaults on mortgage loans were becoming more pronounced. As the real estate market began declining, and delinquencies and foreclosure rates kept increasing, particularly among sub prime borrowers, it was clear that the mortgage crisis had begun and would continue to get worse. As a result, a number of prestigious and historic financial institutions throughout the world either collapsed or needed substantial government financial assistance during 2008. It became apparent that risky mortgage lending practices and sub prime loans issued in the U.S. had a negative impact in the credit crisis and overall economic downturn. The current financial crisis has exposed prevalent fraud schemes that have been thriving in the global financial system.

Mortgage fraud schemes employ some type of “material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan.” The FBI compiles data on mortgage fraud through suspicious activity reports (SARs) filed by federally-insured financial institutions, reports received from the Department of Housing and Urban Development-Office of the Inspector General (HUD-OIG), and complaints received from the public and mortgage industry at large.

While a significant portion of the mortgage industry is void of any mandatory fraud reporting and there is presently no central repository to collect all mortgage fraud complaints, SARs received from financial institutions have indicated a significant increase in mortgage fraud reporting. For example, during FY 2008, mortgage fraud SARs increased more than 36 percent to 63,173. The total dollar loss attributed to mortgage fraud is unknown since only 7 percent of SARs filed during FY 2008 indicated a specific dollar loss, which totaled more than $1.5 billion. The reason only 7 percent of SARs reported a dollar loss is because of the time lag between identifying a suspicious loan and liquidating the property through foreclosure and then calculating the loss amount.

The FBI initiates many of its mortgage fraud cases through the review of SARs. In fact, due to the vast amounts of intelligence contained in SARs, the FBI has developed a number of new analytical tools to further exploit this intelligence. The benefits have not only enhanced the Mortgage Fraud Program, but all other FBI investigative and intelligence programs as well. The FBI works closely with the Financial Crimes Enforcement Network (FinCEN) in sharing analytical strategies and trend data that both agencies develop from SARs.

From March 1, 2008 to June 18, 2008, the FBI and DOJ orchestrated a national mortgage fraud takedown named Operation Malicious Mortgage (OMM) that was announced on June 19, 2008. OMM primarily addressed three types of mortgage fraud schemes: lending fraud, foreclosure rescue scams, and mortgage-related bankruptcy schemes. OMM resulted in 144 mortgage fraud cases in which 406 defendants were charged for their involvement in mortgage fraud schemes that resulted in an estimated $1.07 billion in losses. Charges were brought in every region of the U.S. and in more than 50 judicial districts by U.S. Attorneys’ Offices based upon the law enforcement and investigative efforts of participating law enforcement agencies. In addition to the FBI, these agencies included IRS-CI, USPIS, U.S. Secret Service, U.S. Immigration and Customs Enforcement, HUD-OIG, Federal Deposit Insurance Corporation-Office of the Inspector General (FDIC-OIG), and the Department of Veterans Affairs-Office of the Inspector General. OMM was the most recent coordinated sweep in an ongoing law enforcement effort to combat mortgage fraud, which also included Operation Continued Action in 2004 and Operation Quick Flip in 2005.

The FBI investigates mortgage fraud in two distinct areas: fraud for profit, and fraud for housing. Fraud for profit is sometimes referred to as “industry insider fraud” and the motive is to revolve equity, falsely inflate the value of the property, or issue loans based on fictitious properties. Based on existing investigations and mortgage fraud reporting, a high percentage of all reported fraud losses involve collaboration or collusion by industry insiders. Fraud for housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan.

Although there are many mortgage fraud schemes, the FBI is focusing its efforts on those perpetrated by industry insiders. The FBI is engaged with the mortgage industry primarily in identifying fraud trends and educating the public. Some of the recent mortgage fraud schemes encountered by law enforcement include equity skimming, property flipping, and mortgage-related identity theft. Common equity skimming schemes involve the use of corporate shell companies, corporate identity theft, and the use or threat of bankruptcy/foreclosure to dupe homeowners and investors. Law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers, and shell companies, along with industry insiders to conceal their methods and override lender controls. Property flipping is best described as purchasing properties and artificially inflating their value through false appraisals. The artificially valued properties are then repurchased several times for a higher price by associates of the “flipper.” After several sham sales, the properties are foreclosed on by victim lenders.

The defrauding of mortgage lenders should not be compared to predatory lending practices which primarily affect borrowers. Predatory lending typically affects senior citizen, lower income, and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, sub prime or higher interest rates, and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on the mortgage payment, and undergoing foreclosure or forced refinancing.

The FBI has also seen the following emerging schemes associated with the downturn of the financial markets during 2008: builder-bailout, short-sale, and foreclosure rescue scams. A builder-bailout scheme can occur when a builder or developer experiences difficulty selling their inventory and resorts to using fraudulent means to unload them, such as excessive incentives to buyers that are not disclosed on the mortgage loan documents. A real estate short sale is a type of pre-foreclosure sale in which the lender agrees to sell a property for less than the mortgage owed. In the current rapidly declining U.S. housing market, short sales are becoming more and more frequent as banks are faced with taking on more and more homes through the official foreclosure process. A short sale fraud scheme is where the perpetrator uses a straw buyer to purchase and ultimately default on a home loan, creating a short sale situation so that the perpetrator himself can take advantage and purchase the home at a steep discount. Foreclosure rescue scams involve criminals who target legitimate homeowners in dire financial circumstances and fraudulently collect fees for foreclosure prevention services or obtain ownership interests in residential properties. As foreclosures continue to rise across the country, so too have the number of foreclosure rescue scams that take advantage of unsuspecting victims. These perpetrators will make promises to the distressed homeowners but typically make the situation worse by not taking any action at all. For instance, the homeowner may be paying rent to the perpetrator while the perpetrator falsely claims to be paying the mortgage or negotiating with the lender. Other times, the perpetrator will use manipulated and forged deeds to either sell the home or secure a second loan on the home without the homeowners’ knowledge. The FBI is working with other law enforcement and regulatory partners, as well as industry liaisons to target, disrupt, and dismantle the criminal organizations and/or individuals engaging in these fraud schemes.

In FY 2008, there are 16 mortgage fraud task forces and 38 working groups in the country. With representatives of federal, state, and local law enforcement, these task forces are strategically placed in areas identified as high threat areas for mortgage fraud. Partners are varied, but typically include representatives of the IRS-CID, USPIS, HUD-OIG, FDIC-OIG, as well as state and local law enforcement officers across the country. While the FBI has increased the number of agents around the country who investigate mortgage fraud cases, this multi-agency model serves as a force-multiplier, providing an array of resources to adequately identify the source of the fraud, as well as finding the most effective way to prosecute each case, particularly in active markets where fraud is widespread.

The FBI also works closely with individual lenders, as well as national associations such as the Mortgage Bankers Association, the National Association of Mortgage Brokers, the Appraisal Institute, and the National Notary Association, to define and combat the mortgage fraud problem.

Regional analysis of SARs indicating mortgage fraud violations shows that the western region of the U.S. led the nation with 38 percent of mortgage fraud-related SARs filed during FY 2008. Southeastern, north central, northeastern, and south central regions had 25, 19, 12, and 6 percent respectively of mortgage fraud-related SAR filings. However, FBI pending cases indicated the north central region had the majority of mortgage fraud cases with 27 percent, during 2008. The western, northeastern, southeastern, and south central regions had 24, 19, 16, and 14 percentages respectively.

Dollar Losses Reported of Mortgage Related Fraud Suspicious Activity Reports, Fiscal Years 2004 to 2008

 

Number of Violations of Mortgage Related Fraud Suspicious Activity Reports Received, Fiscal Years 2004 to 2008

Mapping data from FY 2007 SARs, FBI pending mortgage fraud cases, HUD-OIG, FinCEN, 2006 Mortgage Asset Research Institute (MARI), Federal National Mortgage Association (Fannie Mae), Realty Trac Inc., and Radian Guaranty Inc., reveal that the top 10 states for mortgage fraud activity during 2006 were: California, Florida, Georgia, Illinois, Indiana, Michigan, New York, Ohio, Texas, and Utah. Other areas significantly affected by mortgage fraud include: Arizona, Colorado, Maryland, Minnesota, Missouri, Nevada, North Carolina, Tennessee, and Virginia. (See map below).

2007 Mortgage Fraud Affected Areas

II. Overall Accomplishments

Through FY 2008, 1,644 cases resulted in 560 indictments and 338 convictions of mortgage fraud criminals. The following notable statistical accomplishments are reflective in FY 2008 for mortgage fraud: $1.1 billion in restitutions, $3.3 million in recoveries, $3.1 million in fines, and 68 seizures valued at $476.7 million. The chart below reflects mortgage fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—534 cases; FY 2005—721 cases; FY 2006—818 cases; FY 2007—1,204 cases; and FY 2008—1,644 cases.

Mortgage Fraud Pending Cases, Fiscal Years 2004 to 2008

III. Significant Cases

Cornelius Robinson (San Antonio): Cornelius Robinson, a former Austin, Texas resident who was convicted at trial for masterminding a multi-million dollar mortgage fraud scheme, was sentenced August 29, 2008, by the U.S. District Court for the Western District of Texas, to 327 months in federal prison and ordered to pay $918,971 in restitution. In addition to Robinson, the overall conspiracy involved 16 named co-defendants who either pled guilty or were convicted at trial; at least 33 properties; 19 financial institutions; and over $4.5 million in claimed losses. Most of the named co-defendants were unqualified “straw buyers” who were involved in purchasing and selling the properties, as well as several licensed real estate agents, a licensed attorney, and a personal banker. From September 1999 to 2008, Robinson and his co-defendants participated in a scheme to defraud mortgage lenders, including federally-insured financial institutions, by using real estate “flips” on real estate located in the Austin and San Antonio, Texas area. The defendants purchased property at one price and would immediately sell or “flip” the property to a “straw buyer” at a higher price. In doing so, the mortgage lenders were deceived as to the true nature of the transaction and the financial status of the straw buyers because of false statements and verifications provided to them. The straw buyers did not make the subsequent monthly mortgage payments, and all of the properties went into foreclosure proceedings.

Jacob Kim (Newark): On December 3, 2008, Jacob Kim, of Palisades Park, New Jersey, was sentenced to 12 years in prison for orchestrating a bank fraud scheme involving millions of dollars of fraudulent home equity and business lines of credit. Kim had pled guilty on July 28, 2008, was also ordered to make restitution in the amount of $10,485,114, which represented the losses incurred by the financial institutions.

Kim, who was the president of American Macro Growth (AMG), was indicted in June, 2007, along with four AMG employees and eight AMG clients. At his plea hearing, Kim admitted he engaged in a conspiracy with AMG employees and clients to fraudulently obtain millions of dollars in home equity and business lines of credit from at least 16 different lenders in northern New Jersey between February 2004, and November 2005. Kim also admitted receiving $59,519 in commission payments from one AMG client for assisting the client in obtaining lines of credit from 10 different banks, which totaled approximately $1.35 million, by using the same property as collateral for each of the loans. The scheme relied on the closing of multiple home equity lines of credit or Home Equity Lines of Credit (HELOCs), in a short period of time so that the earlier lenders’ security interests would not be publicly recorded at the time, when later lenders closed on subsequent loans. Kim used falsified income tax returns and submitted those returns on behalf of his clients, as well as instructing his employees in the means and methods of perpetrating the scheme. Sixteen other individuals, comprised of four former AMG employees, 11 former AMG clients, and Jacob Kim’s wife, have either been sentenced or are scheduled to be sentenced for their part in the scheme.

Michael Guy Carey (Dallas): On June 3, 2008, Michael Guy Cary of Hollywood, Florida, pled guilty in connection with his role in an extensive mortgage fraud scheme. Between August, 2004, and May, 2006, Cary purchased and sold 211 homes in the Eastern District of Texas using a variety of fraudulent transactions. Cary purchased the homes directly from home builders after which he arranged the transfers of the deeds into names deceptively similar to that of the home builders. Once the transfers had been completed, Cary had real estate appraisers artificially inflate the values of the homes and arranged their subsequent sale to out-of-state investors, who believed they were purchasing the homes directly from the home builders, and who qualified for mortgage loans on these inflated amounts based on fraudulent loan applications. Richard Kirkpatrick of Fort Worth, Texas, also pled guilty on June 3, 2008 to providing the inflated appraisals on 89 of the 211 homes.

On November 24, 2008, Cary was sentenced to 60 months in federal prison and ordered to forfeit approximately $6.1 million. Kirkpatrick was sentenced the same day to 31 months and agreed to forfeit his appraiser’s license.

Mortgage Fraud Indicators

Inflated Appraisals
• Exclusive use of one appraiser

Increased Commissions/Bonuses—Brokers and Appraisers
• Bonuses paid (outside or at settlement) for fee-based services
• Higher than customary fees

Falsifications on Loan Applications
• Buyers told/explained how to falsify the mortgage application
• Requested to sign blank application

Fake Supporting Loan Documentation
• Requested to sign blank employee or bank forms
• Requested to sign other types of blank forms

Purchase Loans Disguised as Refinance
• Purchase loans that are disguised as refinances requires less documentation/lender scrutiny

Investors-Short Term Investments with Guaranteed Re-Purchase
• Investors used to flip property prices for fixed percentage
• Multiple “holding companies” utilized to increase property values

Common Mortgage Fraud Schemes

Illegal Property Flipping: Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, doctored loan documentation, inflating buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme.

Silent Second: The buyer of a property borrows the down payment from the seller through the issuance of a non-disclosed second mortgage. The primary lender believes the borrower has invested his own money in the down payment, when in fact, it is borrowed. The second mortgage may not be recorded to further conceal its status from the primary lender.

Nominee Loans/Straw Buyers: The identity of the borrower is concealed through the use of a nominee who allows the borrower to use the nominee’s name and credit history to apply for a loan.

Fictitious/Stolen Identity: A fictitious/stolen identity may be used on the loan application. The applicant may be involved in an identity theft scheme: the applicant’s name, personal identifying information, and credit history are used without the true person’s knowledge.

Inflated Appraisals: An appraiser acts in collusion with a borrower and provides a misleading appraisal report to the lender. The report inaccurately states an inflated property value.

Foreclosure Schemes: The perpetrator identifies homeowners who are at risk of defaulting on loans, or whose houses are already in foreclosure. Perpetrators mislead the homeowners into believing they can save their homes in exchange for a transfer of the deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property or pocketing fees paid by the homeowner. The three most used foreclosure schemes are identified as: phantom help; bust-out; and the bait and switch.

Equity Skimming: An investor may use a straw buyer, false income documents, and false credit reports, to obtain a mortgage loan in the straw buyer’s name. Subsequent to closing, the straw buyer signs the property over to the investor in a quit claim deed which relinquishes all rights to the property and provides no guaranty to title. The investor does not make any mortgage payments, and rents the property until foreclosure takes place several months later.

Air Loans: This is a non-existent property loan where there is usually no collateral. An example of an air loan would be where a broker invents borrowers and properties, establishes accounts for payments, and maintains custodial accounts for escrows. They may set up an office with a bank of telephones, each one used as the employer, appraiser, credit agency, etc., for verification purposes.

Mortgage Fraud Prevention Measures

General Fraud Tips

Mortgage fraud is a growing problem throughout the U.S. People want their home’s equity to be greater than the mortgage loan on the home, and with housing booms going on throughout the U.S., there are people who try to capitalize on the situation, and make an easy profit.

Tips to Protect Yourself from Becoming a Victim of Mortgage Fraud

• Get referrals for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.

• If it sounds too good to be true, it probably is. An outrageous promise of extraordinary profit in a short period of time signals a problem.

• Be wary of strangers and unsolicited contacts, as well as high-pressure sales techniques.

• Look at written information to include recent comparable sales in the area, and other documents such as tax assessments to verify the value of the property.

• Understand what you are signing and agreeing to, Do not sign any blank forms. If you do not understand, re-read the documents, or seek assistance from an attorney or third party.

• Make sure the name on your application matches the name on your identification.

• Review the title history of the home you are anticipating to purchase, to determine if the property has been sold multiple times within a short period. It could mean that this property has been “flipped,” and the value falsely inflated.

• Know and understand the terms of your mortgage. Check your personal information against the information as listed on the loan documents to ensure it is accurate and complete.

• Never sign any loan documents that contain “blanks.” This leaves you vulnerable to fraud.

• Check out the tips on the MBA’s website at Stop Mortgage Fraud for additional advice on avoiding mortgage fraud.

Mortgage Debt Elimination Schemes

• Be aware of e-mails or web-based advertisements that promote the elimination of mortgage loans, credit card, and other debts while requesting an up-front fee to prepare documents to satisfy the debt. The documents are typically entitled Declaration of Voidance, Bond for Discharge of Debt, Bill of Exchange, Due Bill, Redemption Certificate, or other similar variations. These documents do not achieve what they purport.

• There is no easy methods to relieve you of debts you incurred.

• Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.

Foreclosure Fraud Schemes

Perpetrators mislead the homeowners into believing that they can save their homes in exchange for a transfer of the deed, usually in the form of a quit-claim deed and up-front fees. The perpetrator profits from these schemes by remortgaging the property, or pocketing fees paid by the homeowner, without preventing the foreclosure. The victim suffers the loss of the property as well as the up-front fees.

• Be aware of offers to “save” homeowners who are at risk of defaulting on loans, or whose houses are already in foreclosure.

• Seek a qualified credit counselor or attorney to assist.

Predatory Lending Schemes

• Before purchasing a home, research information about prices of homes in the neighborhood.

• Shop for a lender and compare costs. Beware of lenders who tell you that they are your only chance of getting a loan, or owning your own home.

• Beware of “no money down” loans. This is a gimmick used to entice consumers to purchase property that they likely cannot afford, or are not qualified to purchase. Be wary of mortgage professional who falsely alter information to qualify the consumer for the loan.

• Do not let anyone convince you to borrow more money than you can afford to repay.

• Do not let anyone persuade you into making a false statement, such as overstating your income, the source of your down payment, or the nature and length of your employment.

• Never sign a blank document or a document containing blanks.

• Read and carefully review all loan documents signed at closing or prior to closing for accuracy, completeness, and omissions.

• Be aware of cost, or loan terms, at closing that are not what you agreed to.

• Do not sign anything you do not understand.

• Be suspicious if the cost of a home improvement goes up if you accept the contractor’s financing.

• If it sounds too good to be true, it probably is!


Insurance Fraud

I. General Overview

Insurance fraud continues to be an investigative priority for the FBI’s Financial Crimes Section, due in large part to the insurance industry’s significant status in the U.S. economy. The U.S. insurance industry consists of thousands of companies and collects nearly $1 trillion in premiums each year. The size of the industry, unfortunately, makes it a prime target for criminal activity; the Coalition Against Insurance Fraud (CAIF) estimates that the cost of fraud in the industry is as high as $80 billion each year. This cost is passed on to consumers in the form of higher premiums. In fact, the National Insurance Crime Bureau (NICB) calculates that insurance fraud raises the yearly cost of premiums by $300 for the average household.

The downturn the U.S. economy has seen in 2008 places a strain on resources used to combat insurance fraud. Insurance companies also become a target for more individuals as a result of massive layoffs and higher unemployment. The FBI continues to identify the most prevalent schemes and the top echelon criminals defrauding the insurance industry in an effort to reduce insurance fraud. The FBI works closely with the National Association of Insurance Commissioners, NICB, CAIF, as well as state fraud bureaus, state insurance regulators, and other federal agencies to combat insurance fraud. In addition, the FBI is a member of the International Association of Insurance Fraud Agencies, an international non-profit organization whose mission is to maintain an international presence to address insurance and insurance-related financial crimes on a global basis. Currently, the FBI is focusing a majority of its resources relating to insurance fraud on the following schemes:

Insurance-Related Corporate Fraud: Although corporate fraud is not unique to any particular industry, there has been a recent trend involving insurance companies caught in the web of these schemes. The temptations for fraud within the corporate industry can be greater during periods of financial downturns. Insurance companies hold customer premiums which are forbidden from operational use by the company. However, when funding is needed, unscrupulous executives invade the premium accounts in order to pay corporate expenses. This leads to financial statement fraud because the company is required to “cover its tracks” to conceal the improper utilization of customer premium funds.

Premium Diversion/Unauthorized Entities: The most common type of fraud involves insurance agents and brokers diverting policyholder premiums for their own benefit. Additionally, there is a growing number of unauthorized and unregistered entities engaged in the sale of insurance-related products. As the insurance industry becomes open to foreign players, regulation becomes more difficult. Additionally, exponentially rising insurance costs in certain areas (i.e., terrorism insurance, directors’/officers’ insurance, and corporations), increases the possibility for this type of fraud.

Viatical Settlement Fraud: A viatical settlement is a discounted, pre-death sale of an existing life insurance policy on the life of a person known to have a terminal condition. The parties to a viatical settlement include the insured party, insurance agent/broker, insurance company, viatical company/broker, and the investor. Viatical settlement fraud occurs when misrepresentations are made on the insurance policy applications, in effect, hiding the fact that the party applying for a policy has already been diagnosed with a terminal condition. On the investor end, the fraud occurs when misrepresentations are made to the investors by the viatical companies about life expectancies of insured parties and guaranteed high rates of return.

Workers Compensation Fraud: The Professional Employer Organization (PEO) industry operates chiefly to provide workers compensation insurance coverage to small businesses by pooling businesses together to obtain reasonable rates. Workers compensation insurance accounts for as much as 46 percent of a small business owners’ general operating expenses. Due to this, small business owners have an incentive to shop workers compensation insurance on a regular basis. This has made it ripe for entities who purport to provide workers compensation insurance to enter the marketplace, offer reduced premium rates, and misappropriate funds without providing insurance. The focus of these investigations is on allegations that numerous entities within the PEO industry are selling unauthorized and non-admitted workers compensation coverage to businesses across the U.S. This insurance fraud scheme has left injured and deceased victims without workers compensation coverage to pay their medical bills.

With the cooperation of the insurance industry, through referrals from industry liaison and other law enforcement agencies, the FBI continues to target the individuals and organizations committing insurance fraud. The FBI continues to initiate and conduct traditional investigations as well as utilize sophisticated techniques, to include undercover investigations, to apprehend the fraudsters.

II. Overall Accomplishments

During FY 2008, 177 cases investigated by the FBI resulted in 72 indictments and 59 convictions of insurance fraud criminals. The following notable statistical accomplishments reflect FY 2008 for insurance fraud: $553.7 million in restitutions, $10.3 million in recoveries, and $25.3 million in seizures. The chart below reflects insurance fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—289 cases; FY 2005—270 cases; FY 2006—233 cases; FY 2007—209 cases; and FY 2008—177 cases.

Insurance Fraud Pending Cases, Fiscal Years 2004 to 2008

III. Significant Cases

Operation Direct Hit (New York): On October 30, 2008, 61 individuals and two corporations were charged with engaging in a widespread, multi-million dollar no-fault automobile insurance fraud scheme, which sought to defraud insurance carriers by intentionally staging accidents, submitting false medical and bodily injury claims and arranging for unneeded treatment and costly and unwarranted medical tests. The defendants in this case are charged with bilking insurance carriers out of more than $1.6 million they submitted for allegedly unnecessary medical services for exaggerated or fabricated injuries.


Mass Marketing Fraud

I. General Overview

Mass marketing fraud is a general term for frauds which exploit mass-communication media, such as telemarketing, mass mailings, and the Internet. Since the 1930’s, mass marketing has been a widely accepted and exercised practice. Advances in telecommunications and financial services technologies have further served to spur growth in mass marketing, both for legitimate business purposes, as well as for the perpetration of consumer frauds.

While these fraud schemes may take a wide variety of forms, they share a common theme; the use of false and/or deceptive representations to induce potential victims to make advance fee-type payments to fraud perpetrators. Although there are no comprehensive statistics on the subject, it is estimated mass marketing frauds victimize millions of Americans each year, and generate losses in the hundreds of millions of dollars. The following is a brief description of some of the key concepts and schemes associated with the mass marketing/advance fee fraud crime problem.

Advance Fee Fraud: This category of fraud encompasses a broad variety of schemes which are designed to induce their victims into remitting up-front payments in exchange for the promise of goods, services, and/or prizes. Some of the most prevalent schemes being encountered are the following:

Nigerian Letter Fraud: Victims are contacted regarding substantial sums of money held in foreign accounts and are requested to pay various fees to secure their transfer to the U.S., in exchange for a portion of the total proceeds. Alternatively, victims are asked to act as a U.S. agent in securing the release of such funds, and are provided with counterfeit instruments which are to be cashed in order to pay any required fees; only to discover they must reimburse their financial institution for cashing a counterfeit instrument. A variation of this fraud involves the use of fraudulent websites, which have been created to resemble web pages of legitimate financial institutions, to enhance the scheme’s credibility and swindle greater amounts of money from victims. The victims are directed to open accounts at the fictitious bank’s website into which the perpetrators transfer the victims’ funds. Victims cannot withdraw or transfer the funds when they log onto the fictitious bank websites and are prompted to pay additional taxes or fees before the funds can be released. The funds are never released.

Foreign Lottery/Sweepstakes Fraud: Victims are informed they have won a substantial prize in a foreign drawing, but must remit payment for various taxes/fees to receive their winnings. Alternatively, victims are provided with counterfeit instruments, representing a portion of the winnings, which are to be cashed in order to pay the required fees; only to discover they must reimburse their financial institution for cashing a counterfeit instrument.

Overpayment Fraud: Victims who have advertised some item for sale are contacted by buyers who remit counterfeit instruments, in excess of the purchase price, for payment. The victims are told to cash the payments, deduct any expenses, and return or forward the excess funds to an individual identified by the buyer; only to discover they must reimburse their financial institution for cashing a counterfeit instrument.

Recovery Schemes: Victims are contacted by perpetrators, posing as law enforcement officers, government employees, or lawyers, to inform victims that the persons responsible for the original fraud schemes have been arrested or successfully sued and their bank accounts have been seized. The victims are told the seized money is going to be returned to the victims, but the victims must first pay fees for processing and administrative services. Recovery pitches often target victims many months or years after the original fraud schemes.

The predominantly transnational nature of the mass marketing fraud crime problem presents significant impediments to effective investigation by any single agency or national jurisdiction. Typically, victims will reside in one or more countries, perpetrators will operate from another, and the financial/money services infrastructure of numerous additional countries are utilized for the rapid movement and laundering of funds. For these reasons, the FBI is uniquely positioned to assist in the investigation of these frauds through its network of legal attaché offices located in over 60 U.S. Embassies around the world. By leveraging its global presence and network of liaison contacts, the FBI has successfully cooperated with other domestic and foreign law enforcement agencies to combat, disrupt, and dismantle international mass marketing fraud groups. The FBI participates in the International Mass-Marketing Fraud Working Group (IMMFWG), a multi-agency working group established to facilitate the multinational exchange of information and intelligence, the coordination of cross-border operational matters, and the enhancement of public awareness of international mass marketing fraud schemes. The current membership of the IMMFWG consists of law enforcement, regulatory, and consumer protection agencies from six countries, including Australia, Belgium, Canada, the Netherlands, Nigeria, the United Kingdom, and the U.S.

Despite the best inter-agency enforcement efforts to combat mass marketing fraud, the FBI remains cognizant of the fact the only enduring remedy for this crime problem lies in consumer education and fraud prevention programs. Towards this end, the FBI has not only produced its own mass marketing fraud prevention pamphlet, but coordinates on other public information efforts with DOJ, FTC, and USPIS. The FBI also supports a consumer fraud prevention website in conjunction with USPIS which can be located on the web at: http://www.lookstoogoodtobetrue.com.

II. Overall Accomplishments

As of the end of FY 2008, the FBI was investigating 100 cases of mass marketing fraud and had already recorded 50 indictments and 23 convictions. Additional notable accomplishments in FY 2008 include: $4 million in restitution orders; $143,800 in recoveries; and $3,000 in fines. The chart below reflects mass marketing fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—192 cases; FY 2005—161 cases; FY 2006—147 cases; FY 2007—127 cases; and FY 2008—100 cases.

Mass Marketing Fraud Pending Cases, Fiscal Years 2004 to 2008

III. Significant Cases

Israeli-Based Telemarketing Fraud (New York): This investigation centered on the activities of an Israeli-based boiler room. The perpetrators, all residents of Israel, contacted hundreds of elderly victims in the U.S. to inform them they had won substantial cash prizes in an international sweepstakes lottery, but in order to claim these prizes, they first needed to pay several thousand dollars in fees. Victims who had already sent money were often contacted again by the managers to send additional money in order to claim their prizes. The total fraud proceeds are estimated to be in excess of $2 million. The perpetrators were arrested in Israel, September 2008, on provisional arrest warrants.

This investigation was worked by the FBI’s New York Field Office in cooperation with the Tel Aviv Fraud Division of the Israel National Police. This case involves the largest number of Israeli citizens ever to be provisionally arrested by Israel in anticipation of extradition.

Global Missions UN Limited (California): This investigation centered on the activities of Joseph Williams, Keith Vann, and William Little, Jr., who established a corporation called Global Missions UN Limited. Williams, Vann, and Little falsely represented to prospective donors to be a nonprofit church which provided humanitarian aid worldwide. Williams met with donors and convinced them to donate money and/or property to the organization, which they could claim as a charitable tax deduction. In one instance, Williams and his partners sold the donated property for $3.3 million and used the proceeds for their own benefit.

On April 21, 2008, Joseph Lawrence Williams, Keith Aaron Vann, and William Joseph Little, Jr., were arrested for their participation in this scheme. This investigation was worked jointly with the USPIS.

Ways to Protect Yourself from Mass Marketing Fraud

Things You Should Do:

• Insist on learning the full name, address, and contact information for any company soliciting your business, personal information, or assistance.

• Insist that all solicitors send materials to you in writing so that you are able to study the full details of the offer, as well as any guarantees, and/or refund policies.

• Research all solicitors through the Better Business Bureau, state attorney general’s office, and/or consumer protection service in the state or city where the company is located.

• Prior to making any significant financial decisions, consult a family member, friend, your attorney, accountant, and/or other trusted advisor for an objective opinion.

• To stop receiving telephone solicitations, instruct solicitors to delete your contact information from all call lists and register with the FTC’s “Do Not Call” Registry.

• Report suspicious telemarketing calls, mail solicitations, or advertisements to the FTC at 1-877-FTC-HELP or, online at http://www.ftc.gov.

Things You Should NOT Do:

• Do not make any payments to either secure a prize, or improve your chances of winning a prize.

• Do not be intimidated into making hasty financial decisions by high pressure sales tactics.

• Do not provide anyone with your sensitive personal or financial information unless:

a) it is to an entity whose legitimacy is personally known to you, and

b) you personally initiated the contact with the entity.

• Do not send funds via wire or electronic money transfer services unless:

a) it is to an entity whose legitimacy is personally known to you, and

b) you personally initiated the contact with the entity.

• Do not be lured by offers that are simply too good to be true—they almost certainly are.


Asset Forfeiture/Money Laundering

I. General Overview

The mission of the Asset Forfeiture/Money Laundering Unit (AF/MLU) is to promote the strategic use of the asset forfeiture and to ensure field offices employ the money laundering violation in all investigations, where appropriate, to disrupt and/or dismantle criminal enterprises. The asset forfeiture and money laundering process identifies, targets, disrupts, and dismantles criminal and terrorist organizations, and individuals engaged in fraud schemes which target our nation’s financial infrastructure.

The implementation of the asset forfeiture process to criminal investigation provides law enforcement with opportunity to remove the tools of crime from criminal organizations, deprives wrongdoers of the proceeds of their crimes, recovers property that may be used to compensate victims, and deters crimes. The asset forfeiture process can destroy the financial infrastructure of criminal enterprises, return funds to victims of large-scale fraud, and share forfeiture property with state and local law enforcement agencies.

The Asset Forfeiture Program and the Money Laundering Program provide support to all FBI Investigative programs, to include international and domestic terrorism. Read more about asset forfeiture.

Money Laundering

The Department of Justice defines money laundering in the following manner:

“Money laundering is the process by which criminals conceal or disguise the proceeds of their crimes or convert those proceeds into goods and services. It allows criminals to infuse their illegal money into the stream of commerce, thus corrupting financial institutions and the money supply, thereby giving criminal’s unwarranted economic power.”

It can be further described as follows:

A process...(a series of actions) through which income of illegal origin is concealed, disguised, or made to appear legitimate (main objective); and to evade detection, prosecution, seizure, and taxation.

The FBI maintains a proactive approach when investigating money laundering. It is two-pronged in nature:

Prong One: The investigation of the underlying criminal activity, in simple terms, if there is no criminal activity, or specified unlawful activity (SUA) that generates illicit proceeds, then there can be no money laundering.

Prong Two: A parallel financial investigation to uncover the financial infrastructure of the criminal organization. Following the money and discerning how the money flows in an organization in order to conceal, disguise, or hide the proceeds.

Asset Forfeiture

The FBI’s Asset Forfeiture Program is one of the most successful in all of law enforcement. In the WCCP, the bulk of the monies seized are returned to victims of the frauds that generated them. This is unique to the FBI and some other agencies. Most people associate the seizure and forfeiture of assets with narcotics trafficking. Although the FBI does seize assets from drug dealers and other criminals, the WCCP is the largest contributor to the FBI’s forfeiture program.

II. Overall Accomplishments

Through FY 2008, 402 cases investigated by the FBI resulted in 105 indictments and 130 convictions of money laundering fraud criminals. For FY 2008, the following money laundering most notable accomplishments were achieved for the WCCP: $222.4 million in restitutions, $25.6 million in recoveries, and $34.1 million in fines. The chart below reflects money laundering fraud pending cases from FY 2004 through FY 2008 as follows: FY 2004—509 cases; FY 2005—507 cases; FY 2006—473 cases; FY 2007—548 cases; and FY 2008—402 cases.

Money Laundering Pending Cases, Fiscal Years 2004 to 2008

III. Significant Cases

Party Gaming, Inc. (New York): Party Gaming Inc. provided online gambling services to persons residing in the U.S. Through this service, the company also provided money laundering services to members of Italian organized crime. To date, $100 million has been received for forfeiture which was processed in October, 2008. According to the plea agreement, another $100 million was to be received within 90 days, plus another $100 million to be paid at sentencing or no later than September 30, 2009. This $300 million total is all from Party Gaming Inc., whose principal, Anurag Dikshit, pled guilty. Additionally, $323,580,810 has already been forfeited from other subjects of this case.

Samuel Israel (New York): This renowned fugitive fraudster convinced investors there was a “secret market” among the world’s largest banks, and he could guarantee them exorbitant returns, as high as 100 percent on their investments. Israel’s scheme involved approximately $450 million in fraudulent transactions before his arrest. When released on bail, he faked his own death and became a fugitive from justice for several months before turning himself in. Criminal forfeiture of $106,541,628.64 was ordered in the case. A sum of $9,306,144.50 was located and forfeited during FY 2008.

Daniel Morar (Phoenix): This investigation focused on extensive mortgage fraud with estimated losses of $120 million incurred by financial institutions. The scheme was perpetrated by a large group of Romanian immigrants involved in an organized criminal enterprise, which included not only mortgage fraud, but also identity theft, health care fraud, and weapons trafficking. The subjects obtained cash/proceeds via fraudulent “cash back” mortgage transactions. The individuals found multiple properties, recruited straw buyers who are also Romanian immigrants to buy the properties at inflated values, and then sold the properties to other Romanians, at which time the involved parties split the proceeds and wired some of the money back to Romania. The investigation showed all of the loan documents pertaining to the transactions were false. The individuals involved infiltrated the Phoenix real estate market by becoming licensed realtors, mortgage brokers, licensed contractors, self-proclaimed real estate investors, and escrow officers. Additionally, the case has ties to corrupt law enforcement officers and corrupt employees of local law enforcement agencies. Investigation resulted in 10 indictments, eight arrests, one criminal complaint, and execution of nine search warrants, seizures of $250,000 in cash, approximately 40 weapons, and three vehicles.


Acronyms

BCBSA Blue Cross and Blue Shield Association
BICE Bureau of Immigration and Customs Enforcement
CAIF Coalition Against Insurance Fraud
CEO Chief Executive Officer
CFTC Commodities Futures Trading Commission
CI Criminal Investigative
CMS Centers for Medicare and Medicaid Services
DEA Drug Enforcement Agency
DOJ Department of Justice
EBRI Electronic Bank Records Initiative
FDA Food and Drug Administration
FIFU Financial Institution Fraud Unit
FinCEN Financial Crimes Enforcement Network
FTC Federal Trade Commission
FY Fiscal Year
FSP Forfeiture Support Project
GDP Gross Domestic Product
HF Hedge Fund
HHS Health and Human Services
HIPAA Health Insurance Portability and Accountability Act
HUD Housing and Urban Development
ICE Immigration and Customs Enforcement
IFTF Insurance Fraud Task Force
IRS Internal Revenue Service
MARI Mortgage Asset Research Institute
MBA Mortgage Bankers Association
MEDIC Medicare Drug Integrity Contractor
MICA Mortgage Insurance Companies of America
NAIC National Association of Insurance Commissioners
NAMB National Association of Mortgage Brokers
NHCAA National Health Care Anti Fraud Association
NICB National Insurance Crime Bureau
OIG Office of Inspector General
PEO Professional Employer Organization
RCMP Royal Canadian Mounted Police
SAR Suspicious Activity Reports
SEC Securities and Exchange Commission
UCO Undercover Operation
USAO U.S. Attorney’s Office
USPIS U.S. Postal Inspection Service
WCCP White Collar Crime Program