Financial Crimes Report 2007
Financial Crimes Report to the Public 2007
October 1, 2006 - September 30, 2007
The 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. The FCS is divided into three units: the Economic Crimes Unit - I, Economic Crimes Unit - II (formerly Financial Institution Fraud and Asset Forfeiture/Money Laundering Units), and the Health Care Fraud Unit.
The Economic Crimes Unit - I 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, 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 Economic Crimes Unit - II as it relates to Financial Institution Fraud is to identify, target, disrupt, and dismantle criminal organizations and individuals engaged in fraud schemes that target our nation's financial institutions. Areas investigated in the financial institution fraud arena include: financial institution failures, insider fraud, check fraud, counterfeit negotiable instruments, check kiting, loan fraud, and mortgage fraud.
The ECU - II mission as it relates to Asset Forfeiture/Money Laundering is to promote 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.
Economic Crimes Unit - II 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 Asset Forfeiture/Money Laundering, it does have a separate mission: 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, insurance fraud, and money laundering.
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.
I. General Overview
As the lead agency investigating corporate fraud, the FBI has focused its efforts on cases that 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 subprime mortgage lending companies. A subprime lender is a business that lends to borrowers who do not qualify for loans from mainstream lenders. The subprime market has grown from two percent of mortgages in 1998 to 20 percent of mortgages in 2006. Currently, the total value of subprime loans outstanding is estimated at $1.3 trillion, while total mortgage loans outstanding is $4.5 trillion.
As the housing market declines, subprime lenders have been forced to buy back a number of non-performing loans. Many of these subprime 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 have increased, and the secondary market for sub prime loans has dwindled. As a result, subprime lenders' publicly traded stocks have dramatically decreased in value, resulting in financial difficulties and bankruptcies.
As publicly traded subprime lenders have suffered financial difficulties due to rising defaults, analyses of company financials have identified instances of false accounting entries, and fraudulently inflated assets and revenues. Investigations have determined that many of these bankrupt subprime lenders manipulated their reported loan portfolio risks and used various accounting schemes to inflate their financial reports. In addition, before these sub prime lenders' 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 subprime lenders engaged in corporate fraud and iInsider trading.
In addition to the subprime mortgage issue, corporate fraud matters involving the backdating of executive stock options continue to be an issue of concern. Stock options are corporate incentives that allow the holder to purchase stock at a fixed "strike" price sometime in the future, regardless of the prevailing market price. Generally, the strike price is the cost of the stock on the date the options were granted. The benefit to the options holder is the difference between the strike price and the later sales price. When stock options are backdated, however, the date of the options is set to a time in the past when the price of the stock was lower than on the date the options were actually issued. Backdating stock options inflates their value to the holder at the expense of regular shareholders. Some corporate executives have also changed their stock options exercise date (the date the option can be converted to stock) to avoid paying income tax. As of the end of Fiscal Year 2007, the FBI was investigating over 70 cases involving the manipulation of executive stock options.
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 Fiscal Year 2007, 529 corporate fraud cases were 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;
(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 in 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 (FinCEN) 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 2007, cases pursued by the FBI resulted in 183 indictments and 173 convictions of corporate criminals. Numerous cases are pending plea agreements and trials. During Fiscal Year 2007, the FBI secured $12.6 billion in restitution orders and $38.6 million in fines from corporate criminals. The chart below reflects corporate fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 279 cases; Fiscal Year 2004 - 332; Fiscal Year 2005 - 423; Fiscal Year 2006 - 486; and Fiscal Year 2008 - 529 cases.
III. Significant Cases
BROCADE COMMUNICATIONS SYSTEMS, INC. (SAN FRANCISCO): Brocade Communications Systems, Inc. (Brocade), a technology company based in San Jose, California, routinely used stock options to compensate its employees. In July 2006, former Chief Executive Officer (CEO) Gregory L. Reyes and former Vice-President of Human Resources Stephanie Jensen were charged in connection with a scheme to backdate stock option grants. The two executives made fraudulent entries into Brocade's financial books and records, made false statements to auditors, and filed false financial statements with the SEC in furtherance of the scheme. After internal auditors restated earnings for the years 1999 through 2004, it was estimated that the cost to Brocade exceeded $400 million. On August 7, 2007, a jury convicted Reyes of ten counts of conspiracy and securities fraud. Reyes was the first person to be tried on charges related to stock options backdating and was sentenced to 21 months in prison. On December 5, 2007, a jury convicted Jensen of conspiracy to commit securities fraud and falsifying corporate records. Jensen is currently awaiting sentencing.
QWEST COMMUNICATIONS (DENVER): Qwest Communications (Qwest) is a Fortune 500 company and one of the largest providers of telecommunications services in the U.S. In 2000 and 2001, the company reported sales revenues of $16 billion and $19 billion, respectively, in its published financial statements. In 2002, Qwest issued a press release that acknowledged the company had improperly recorded $1.1 billion in revenue since 1999, and the FBI opened a criminal investigation. Five executives were indicted and either pled guilty or were convicted of securities fraud or insider trading. This included the former CEO Joseph Nacchio, who was convicted of insider trading on April 19, 2007. He was sentenced to six years in prison, ordered to forfeit $52 million gained as a result of his illegal stock sales, and fined $19 million.
HOLLINGER INTERNATIONAL, INC. (CHICAGO): Hollinger International (Hollinger) is an international newspaper holding company and owner of the Chicago Sun Times and The Daily Telegraph newspapers. This case was initiated based on allegations that $32 million in non-competition payments were made to CEO and Chairman of the Board Conrad Black and three other corporate executives in conjunction with newspaper sales without proper authority. It was also alleged that newspaper circulation numbers were overstated for the purpose of misleading advertising companies and causing them to pay more in advertising fees. In November 2005, Black and three others were indicted on 15 counts of racketeering, mail and wire fraud, money laundering, obstruction of justice, and tax fraud. On July 13, 2007, Black and the three other co-defendants were convicted after a four-month jury trial. On December 10, 2007, Black was sentenced to 78 months imprisonment.
BRITISH PETROLEUM, INC. (ANCHORAGE): On October 25, 2007, British Petroleum (BP) and several of its subsidiaries agreed to pay $373 million in fines and restitution for environmental violations stemming from a fatal explosion at a Texas refinery that occurred in March 2005 and from leaks of crude oil from pipelines in Alaska in March 2006, as well as for conspiring to manipulate the price of propane.
The settlement included the following:
• BP Products North America, Inc. (BPPNA) agreed to plead guilty to an information charging it with one felony count of violating the Clean Air Act. BPPNA also agreed to pay a $50 million fine and will be subject to three years probation. This settlement results from a catastrophic explosion at the BPPNA Texas City refinery on March 23, 2005 that caused the deaths of 15 contract employees. BP admitted that several procedures required under the Clean Air Act for ensuring the mechanical integrity and a safe startup of the raffinate splitter had either not been established or were being ignored.
• BP Exploration Alaska (BPXA) agreed to plead guilty to one count of violating the Clean Water Act. BPXA also agreed to pay $20 million in fines and will be subject to three years probation. This settlement results from a March 2, 2006 oil spill of at least 200,000 gallons at the BPXA facility on the North Slope of Alaska. The spill occurred as a result of corrosion in the pipeline used to transfer oil. The investigation revealed that financial reports to the public relating to money spent by BPXA on the corrosion program were falsified and inflated. This allowed BPXA managers to claim that corrosion goals were met, entitling them to bonuses of cash, options, gifts, and trips.
• BP America (BPA) entered into a deferred prosecution agreement related to a charge of conspiracy to violate the Commodity Exchange Act and to commit mail and wire fraud related to the manipulation of the Texas Eastern Transport (TET) propane market in February 2004. BPA also agreed to pay civil and criminal penalties totaling $250 million and restitution of approximately $53 million.
In addition to the settlement, four employees of BPA were indicted for conspiring to manipulate and corner the TET propane market and to sell TET propane at an artificially inflated index price in violation of federal mail and wire fraud statutes, along with substantive violations of the Commodity Exchange Act and wire fraud.
MERCURY FINANCE, INC. (CHICAGO): Mercury Finance Company (Mercury) was a subprime lender whose corporate officers intentionally misstated the company's financial records. Mercury executives falsely reported a 1996 profit of more than $120 million instead of a loss of $30 million. Executives provided materially false financial statements to more than 20 financial institutions, enabling Mercury to obtain more than $1.5 billion in loan commitments and lines of credit. When the fraud was discovered, Mercury's stock price dropped significantly, costing shareholders nearly $2 billion in market value. In addition, lenders lost over $40 million in loans extended to the company. Lawrence Borowiak, former Accounting Manager, was sentenced to 12 months in prison and ordered to pay $585,000 in restitution after pleading guilty to insider trading charges. Former Treasurer Bradley Vallem pled guilty to wire and bank fraud and was sentenced to 20 months in prison. In October 2006, former Chief Executive Officer John Brincat, Sr., pled guilty to wire fraud and making a false statement to a bank. On May 23, 2007, Brincat was sentenced to 10 years imprisonment.
XUJIA WANG, VICE PRESIDENT OF FINANCE - MORGAN STANLEY (NEW YORK): This investigation was initiated on the basis of regulatory reporting related to suspicious options trading activity in Genesis Healthcare Corporation (GHC) immediately preceding the acquisition of GHC by private equity firms. Through her employment as Vice President of Finance for Morgan Stanley, Xujia Wang obtained material non-public information on GHC and other acquisitions, which she and her husband, Ruopian Chen, used to execute illicit trades in an account held in the name of a family member. On September 5, 2007, Wang and Chen pleaded guilty to charges of securities fraud and conspiracy to commit securities fraud for their roles in this insider trading scheme that resulted in illicit trading profits in excess of $600,000. On December 4, 2007, Wang and Chen were each sentenced to 18 months imprisonment and required to forfeit $611,248.
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 line with these trends, the Securities and Exchange Commission estimates that two-thirds of U.S. investors in 2007 owned securities of non-U.S. companies, representing a 30 percent increase in foreign company investment in just the last five years. With this increased opportunity, however, has come a commensurate increase in the risk for fraud. As such, the combating of securities and commodities frauds remains a priority for the FBI's White Collar Crime Program.
The losses associated with these types of fraud range from the macroeconomic level (i.e., erosion of investor confidence in the U.S. capital markets), to the corporate (i.e., reduction in the economic health of corporations/industries due to decreased market capitalization) and to the intensely personal (i.e., devastation of retirement and investment portfolios). The victims of these frauds similarly range from the likes of government entities to corporations, financial institutions, pension funds, all the way down to the individual investor. To add insult to injury, the costs associated with these sophisticated frauds are further compounded by the administrative, investigative, and legal expenses incurred in the pursuit of redress for harmed investors.
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.
As of the end of Fiscal Year 2007, the FBI was investigating 1,217 cases of securities and commodities fraud and had as many as 155 special agents 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 effect 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; the benefits 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 that 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 that 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 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 are 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, by the doctoring account statements, or by 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 Fiscal Year 2007, the FBI was investigating 1,217 cases of securities and commodities fraud and had already recorded 320 indictments and 289 convictions. Additional notable accomplishments in Fiscal Year 2007 include: $1.7 billion in restitution orders; $24 million in recoveries; and $202.7 million in fines. The chart below reflects securities and commodities fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 937 cases; Fiscal Year 2004 - 987cases; Fiscal Year 2005 - 1,139 cases; Fiscal Year 2006 - 1,165 cases; and Fiscal Year 2007 - 1,217 cases.
III. Significant Cases
PINNACLE DEVELOPMENT PARTNERS LLC (ATLANTA): This investigation centered on investor solicitations by Pinnacle Development Partners LLC (Pinnacle) and its principals who represented having raised $60 million from over 2,000 investors in 33 states through a nationwide campaign that promised a 25 percent return in 60 days through investment in foreclosed properties. In October 2006, the SEC filed parallel civil fraud charges against Pinnacle and its founder, Gene O'Neal, for the operation of a Ponzi scheme. Pinnacle's assets were frozen, and the company consented to a court-appointed receiver to review its assets.
Subsequently, on July 3, 2007, the FBI's criminal inquiry resulted in O'Neal's guilty pleas to one count each of wire and mail fraud for his principal role in this multi-million dollar real estate investment scheme. On September 17, 2007, O'Neal was sentenced to 144 months incarceration and $22 million in restitution. This investigation was worked in cooperation between the FBI, USPIS, and the SEC.
ALBERT EUGENE PARISH JR. (COLUMBIA): This investigation centered on the activities of Albert Eugene Parish Jr., a former economics professor at Charleston Southern University, and his investment advisory company, Parish Economics LLC, which defrauded hundreds of investors across the U.S. of millions of dollars. In furtherance of the fraud, Parish falsified client account statements and other documents which grossly misrepresented the assets and profitability of various investment funds under his control.
On May 9, 2007, Parish was indicted by a federal grand jury for his operation of an investment scheme which drew in excess of $50 million in investor funds. Ultimately, on October 5, 2007, Parish pleaded guilty to two counts of mail fraud and one count of making false statements to the SEC, which conducted a parallel civil regulatory inquiry into his investment advisory activities. A sentencing date in this matter has yet to be determined. This investigation was worked in cooperation between the FBI, the South Carolina State Law Enforcement Division, the South Carolina Attorney General's Office, and the SEC.
SAMUEL CURRIN (CHARLOTTE): This investigation centered on the activities of Samuel T. Currin, a former U.S. Attorney for the Eastern District of North Carolina, and co-conspirators who engaged in a securities fraud scheme involving manipulative trading and money laundering activities. Specifically, the subjects of this investigation created and released to the public false financial information relative to multiple publically traded entities whose share prices they sought to artificially inflate by inducing innocent investors to create buying pressure through false and fraudulent means. The subjects, in a classic pump and dump scheme, profited by their deception by selling their own pre-existing positions in the targeted securities into the inflated market. Currin's personal involvement in the fraudulent manipulation of multiple securities resulted in investor losses in excess of $30 million.
The FBI's criminal inquiry subsequently resulted in Currin's October 4, 2006 guilty pleas to charges of obstruction of justice, money laundering conspiracy, and obstruction due to administration of the IRS. On September 4, 2007, Currin was sentenced to 70 months incarceration. This investigation was worked in cooperation between the FBI and the IRS.
I. General Overview
The FBI's mission in this area 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 for Fiscal Year 2007 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 that 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, and the Outpatient Surgery Center 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 upcoding of charges for services provided.
Cases initiated within the scope of the Internet Pharmacy Fraud Initiative focus on Internet websites through which individuals sell 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.
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 to 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, U.S. Postal Inspection Services (USPIS), and the Federal Trade Commission (FTC). This working group shares and discusses information that 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. Attorney's 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 that 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 that 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 and 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 that 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 Fiscal Year 2007, 2,493 cases investigated by the FBI resulted in 839 indictments and 635 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 Fiscal Year 2007 for health care fraud: $1.12 billion in restitutions, $4.4 million in recoveries, $34 million in fines, and 308 seizures valued at $61.2 million. The chart below reflects health care fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 2,262 cases; Fiscal Year 2004 - 2,568 cases; Fiscal Year 2005 - 2,547 cases; Fiscal Year 2006 - 2,423 cases; and Fiscal Year 2007 - 2,493 cases.
III. Significant Cases
MEDICARE STRIKE FORCE (MIAMI): A multi-agency team of federal, state, and local investigators designed to investigate Medicare fraud was established in Southern Florida during March 2007. The strike force combats fraud by reviewing real time Medicare billing data and acting promptly to make arrests and prosecutions. The strike force teams include a federal prosecutor and agents from FBI, Health and Human Services-Office of Inspector General, and local law enforcement agencies. To date, the strike force has arrested 120 subjects and obtained 111 indictments. Of those arrested, 83 have been convicted to date. The remaining are pending adjudication. Recoveries include a 2004 Phantom Rolls Royce, jewelry, and other assets currently in negotiation.
AFFPOWER (SAN DIEGO): In July 2007, a 313 count indictment charged 18 individuals with operating an online pharmaceutical distribution network known as AFFPOWER throughout the United States and abroad. Defendants included three physicians; two pharmacists and one pharmacy operator; an administrator and manager; two recruiters of physicians and pharmacies; a credit card processor; and eight affiliate website operators. From August 2004 through June 2006, the AFFPOWER enterprise allegedly received over one million Internet orders for controlled and non-controlled prescription pharmaceuticals from customers in all 50 states and generated in excess of $126 million in gross revenue. The defendants were charged variously with racketeering and conspiracy to commit racketeering; distribution and dispensing of controlled substances and conspiracy to distribute and dispense controlled substances; mail and wire fraud; conspiracy to commit mail and wire fraud; conspiracy to commit money laundering; and conspiracy to dispense and dispensing of misbranded drugs with the intent to defraud and mislead. The investigation was worked jointly with ICE, FDA, IRS, USPIS, and state and local agencies.
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 healthcare 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
• 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 bill," 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, please contact your local FBI field office or submit a tip online at https://tips.fbi.gov/
I. General Overview
The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market. Investors may lose faith and require higher returns from mortgage backed securities. This may result in higher interest rates and fees paid by borrowers and limit the amount of investment funds available for mortgage loans.
The increased reliance by both financial institutions and non-financial institution lenders on third-party brokers has created opportunities for organized fraud groups, particularly where mortgage industry professionals are involved.
Combating significant mortgage industry fraud is a priority, because mortgage lending and the housing market have a significant overall effect on the nation's economy. All retail mortgage fraud investigations are managed within the Economic Crimes Unit II.
Each mortgage fraud scheme contains 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 and the Department of Housing and Urban Development-Office of Inspector General (HUD-OIG) reports. The FBI also receives complaints from the mortgage industry at large.
A significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, as initial mortgage products are repackaged and sold on secondary markets, the sale of the mortgages in many cases conceal or distort the fraud, causing it not to be reported. Therefore, the true level of mortgage fraud is largely unknown. However, based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing. For example, SARs in Fiscal Year 2005 were over 35,000; Fiscal Year 2006 were over 46,000; and the 1st Quarter of Fiscal Year 2007 were 14,916, which extrapolates to 60,000 SARs.
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, 80 percent 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.
The defrauding of mortgage lenders should not be compared to predatory lending practices that primarily affect borrowers. Predatory lending typically effects senior citizens, lower income, and challenged credit borrowers. Predatory lending forces borrowers to pay exorbitant loan origination/settlement fees, subprime or higher interest rates, and in some cases, unreasonable service fees. These practices often result in the borrower defaulting on his mortgage payment and undergoing foreclosure or forced refinancing.
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 current rising mortgage fraud trends include: equity skimming, property flipping, and mortgage related identity theft. Equity skimming is a tried and true method of committing mortgage fraud. Today's 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. Property flipping is nothing new; however, once again law enforcement is faced with an educated criminal element that is using identity theft, straw borrowers, 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 three or four sham sales, the properties are foreclosed on by victim lenders. Often flipped properties are ultimately repurchased for 50 to 100 percent of their original value.
Since 1999, the FBI has been actively investigating mortgage fraud in various cities across the U.S. The FBI also focuses on fostering relationships and partnerships with the mortgage industry to promote mortgage fraud awareness. To raise awareness of this issue and provide easy accessibility to investigative personnel, the FBI has provided points of contact to relevant groups including the Mortgage Bankers Association (MBA), the Mortgage Asset Research Institute (MARI), the Mortgage Insurance Companies of America, Fannie Mae, Freddie Mac, and others.
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 FinCEN in sharing analytical strategies and trend data that both agencies develop from SARs.
The FBI also works closely with individual lenders, as well as national associations such as the MBA, the Appraisal Institute, the National Association of Mortgage Brokers, and the National Notary Association, to define and combat the mortgage fraud problem. In addition, on a case-by-case basis, the FBI receives close cooperation from lenders. An example of this is the usage of Real Estate Owned properties from lender inventories to facilitate mortgage fraud undercover operations.
SAR Identified Mortgage Assignment Fraud
A SAR and follow up liaison contacts with the filing bank initiated an investigation into the fraudulent sale of purported investments in mortgage assignments. The SAR noted unusual and large wire transfer deposits into the subject’s accounts and unusual withdrawal activity.
Further investigation revealed that the subject solicited and received $3.4 million from investors/victims for investments in mortgage assignments. The investigation also showed the subject used this money for personal use and benefit, for such things as trips, a home, motorcycles, and lulling payments to victims. Two bank accounts totaling over $60,000 and a motorcycle were seized and forfeited during the investigation.
After pleading guilty to charges of wire fraud and money laundering, the subject was sentenced to 46 months imprisonment and ordered to pay restitution to victims in the amount of over $2.6 million.
During this investigation, an additional SAR was filed by a second bank for accounts opened by the subject. This SAR enhanced this investigation by identifying additional accounts utilized in the scheme.
Regional analysis of SARS indicating mortgage fraud violations indicates that the Western region of the U.S. led the nation with 37 percent of mortgage fraud related SARs filed during Fiscal Year 2007. Southeastern, North Central, Northeastern, and South Central regions had 23, 19, 12, and nine percent respectively of mortgage fraud related SAR filings. However, FBI pending cases indicated that the North Central region had the majority of mortgage fraud cases ( 29 percent) during 2007. The Western, Southeastern, South Central, and Northeastern had 24, 21, 17, and nine percentages respectively. FBI pending cases by region are consistent with MARI reporting which indicated that five of the top ten mortgage fraud affected states in 2006 were located in the Central region.
Mapping data from Fiscal Year 2007 SARs, FBI pending mortgage fraud cases, HUD-OIG, FinCEN, 2006 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 are: 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).
II. Overall Accomplishments
Through Fiscal Year 2007, 1,204 cases resulted in 321 indictments and 260 convictions of mortgage fraud criminals. The following notable statistical accomplishments are reflective in Fiscal Year 2007 for mortgage fraud: $595.9 million in restitutions, $21.8 million in recoveries, and $1.7 in fines. The chart below reflects mortgage fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 436 cases; Fiscal Year 2004 - 534 cases; Fiscal Year 2005 - 721 cases; Fiscal Year 2006 - 818 cases; and Fiscal Year 2007 - 1,204 cases.
III. Significant Cases
RAYMOND JOSEPH COSTANZO, JR.(ATLANTA): From late 2004 to early 2006, Raymond Joseph Costanzo, Jr., an attorney, participated in closing millions of dollars in fraudulently inflated mortgage loans for unqualified straw borrowers. These straw borrowers were paid as much as $600,000 from fraudulently obtained loan proceeds through shell companies. Costanzo himself obtained mortgage loans totaling over $1.5 million by providing the lender with false qualifying information and falsified down payments. Costanzo received $250,000 in scheme proceeds from this transaction and arranged for disbursements of fraudulently obtained loan proceeds to co-conspirators from this and other loans. On February 1, 2008, Costanzo was sentenced to three years, five months in prison to be followed by four years supervised release and ordered to pay $7,843,184 in restitution. On October 17, 2006, Costanzo pleaded guilty to these charges and surrendered his license to practice law.
GHANDI BEN MORKA (DALLAS): Gandhi Ben Morka, a real estate appraiser who was convicted at trial of several offenses related to his involvement in a mortgage fraud scheme, was sentenced January 23, 2008, by U.S. District Court for the Northern District of Texas, to 60 months in prison and ordered to pay more than $2.3 million in restitution. Morka was arrested in May 2007 and indicted along with seven others for various offenses related to a mortgage fraud scheme to defraud Countrywide Home Loans, doing business as America Wholesale Lender (Countrywide). Morka conspired with co-defendants to defraud Countrywide by locating single family residences in and around the Dallas area and recruiting straw purchasers and borrowers to purchase the targeted residences. Morka would prepare appraisals
on the properties, inflating the value to an amount far greater than the fair market value. Then he and co-conspirators prepared and submitted false and fraudulent loan applications in the names of the straw purchasers to secure mortgage loans from Countrywide in amounts substantially greater than the fair market value of the purchased property. Morka and the co-conspirators paid the original owners of the properties and distributed the remaining fraudulent proceeds obtained from the loan proceeds among themselves. The scheme resulted in millions of dollars of losses to Countrywide.
DARRYL L. COOPER (ATLANTA): On January, 11, 2008, Darryl L. Cooper of Decatur, Georgia was sentenced to one year, six months in federal prison, followed by three years of supervised release, for a scheme to defraud mortgage lenders by creating fraudulent appraisals that reflected completed construction.
Cooper was recruited by builder/co-conspirator Jeffrey Allen Teague to prepare fraudulent appraisals reflecting photographs and $5 million in appraisal valuations for 15 completed houses in the Greenleaf Subdivision of Forsyth County, when Teague had not completed the construction of these homes. A California lender relied on Cooper's fraudulent appraisals that reflected completed construction to make $4.7 million in mortgage loans secured by these properties, which in fact had no value at all.
U.S. Attorney David E. Nahmias said of the case, "This case highlights the problems created by mortgage fraud in which the appraiser conspired with the builder to misrepresent that construction on homes was complete, compounded by out-of-state 'investors,' who sign for loans without inspecting the properties. The partially built houses in this case may be subject to condemnation, as the portions completed were not built to code, leaving mortgage lenders with little security for their loans, 'investors' with nothing to resell, and neighborhoods full of vacant and uninhabitable houses."
Cooper pleaded guilty to a one-count criminal information on November 7, 2007, on a charge of mortgage fraud conspiracy and has been ordered to pay $4,720,500 in restitution. Teague was sentenced on October 26, 2007, to 15 years, eight months in prison and ordered to pay $7,803,701 in restitution for his part in the fraud.
NELSON MILLER, FREEDOM FINANCIAL (LITTLE ROCK): The top ten executives of Freedom Financial and Absolute Abstract and Title, at one time the largest mortgage broker in the state of Arkansas, were charged criminally for their part in devising, implementing, and carrying out various fraud schemes that involved falsification of hundreds of loan files. The analysis of seized documents revealed employees of Freedom Financial has submitted Uniform Residential Loan Applications and supporting documents to lenders containing false and fraudulent information. This false information in all its variations was submitted by the employees of Freedom Financial to lenders to induce the lenders to fund loans or make loans in larger amounts than would normally be given if there had been truthful and complete disclosure. Seven of the nine defendants in this case entered guilty pleas, and two of the defendants were convicted on August 31, 2006, and January 28, 2008, respectively.
CHRISTOPHER CRAIG (SACRAMENTO): In May 2007, Christopher Craig of Auburn, California pled guilty to bank fraud charges related to a foreclosure scheme. Craig approached homeowners who were on the verge of foreclosure and promised to loan them money. Instead, he created documents deeding away their properties to straw buyers, then applied for home equity loans from Washington Mutual Bank. Washington Mutual disbursed $1.2 million in loan proceeds to Craig based on the false loan applications. Craig was sentenced in the Eastern District of California to five years in federal prison and ordered to pay $974,452 in restitution. Property and cash was also seized for asset forfeiture from Craig including a 2007 GMC, Hummer SUV.
MORTGAGE FRAUD INDICATORS
• 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
Property Flipping - Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is that 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. A home worth $20,000 may be appraised for $80,000 or higher in this type of 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 that 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 wwitch.
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 United States. 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 you 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 and do not sign any blank forms. If you do not understand, re-read the documents or seek assistance from an attorney.
• 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 http://www.StopMortgageFraud.com 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 method to relieve yourself of debts you have 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!
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 one trillion dollars 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 insurance fraud raises the yearly cost of premiums by $300 for the average household.
The FBI continues to identify the most prevalent schemes and the top echelon criminals defrauding the insurance industry in an effort to reduce this type of 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:
Arson Fraud Related to Mortgage Industry Credit Crisis - Whether unable or unwilling to meet their mortgage obligations, it is believed that some number of distressed homeowners, property flippers, and/or other real estate investors have resorted to committing arson to avoid real estate foreclosure. The insurance policy holders for these properties are then able to extract otherwise unattainable proceeds/profits through the filing of false insurance claims. This inherently dangerous and illicit means of collecting insurance proceeds and avoiding loan delinquency is being prioritized as a focus of inquiry due to market forecasts calling for increasing numbers of real estate foreclosures.
Hurricane Katrina Insurance Fraud - In late August 2005, Hurricane Katrina made landfall along America's Gulf Coast, severely damaging the region and causing approximately $100 billion in damages. According to the CAIF, Katrina generated approximately 1.6 million insurance claims totaling $34.4 billion in insured losses. The destruction caused by the storm has resulted in a marked increase in insurance fraud in the area. Of the more than 80 billion government dollars appropriated for reconstruction efforts in the region, it is estimated insurance fraud accounts for between $4 and $6 billion. The Insurance Fraud Task Force (IFTF) was created to investigate the spike in insurance fraud related to Katrina.
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 United States. 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 Fiscal Year 2007, 209 cases investigated by the FBI resulted in 39 indictments and 47 convictions of insurance fraud criminals. The number of cases and subsequent arrest and conviction statistics will likely rise in the near future as more fraud is uncovered in the wake of Hurricane Katrina. The Jackson Division has hosted the IFTF that continues to investigate insurance fraud related to Katrina. The following notable statistical accomplishments reflect Fiscal Year 2007 for insurance fraud: $27.2 million in restitutions and $427,000 in fines. The chart below reflects insurance fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 326 cases; Fiscal Year 2004 - 289 cases; Fiscal Year 2005 - 270 cases; Fiscal Year 2006 - 233 cases; and Fiscal Year 2007 - 209 cases.
III. Significant Cases
MUTUAL BENEFITS CORPORATION (MIAMI): Mutual Benefits Corporation (MBC) was a viatical settlement company offering interests in insurance policies to investors worldwide. Over 30,000 investors worldwide were defrauded of approximately one billion dollars by the principals of MBC, who misrepresented the investment and failed to disclose prior regulatory actions. Additionally, MBC falsified the life expectancies of the insured and paid kickbacks to physicians for signing fraudulent documents that were provided to investors. In October 2006, Peter Lombardi, former MBC President, pled guilty to securities fraud and received a 20-year sentence. In 2007, six additional subjects were charged as part of the scheme, and five have been convicted. Sentences for the additional subjects range between one and 10 years. The SEC and IRS are assisting with this investigation.
I. General Overview
Mass marketing fraud is a general term for frauds that exploit mass-communication media, such as telemarketing, mass mailings, and the Internet. Since the 1930s, 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 that 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 that 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 (419 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 that 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.
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.
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 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 Attache 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.
Despite the best inter-agency enforcement efforts to combat mass farketing fraud, the FBI remains cognizant of the fact that 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 farketing fraud prevention pamphlet but coordinates on other public information efforts with the DOJ, FTC, and the USPIS. The FBI also supports a consumer fraud prevention website in conjunction with the USPIS which can be located on the web at: http://www.lookstoogoodtobetrue.gov.
II. Overall Accomplishments
As of the end of Fiscal Year 2007, the FBI was investigating 127 cases of mass farketing fraud and had already recorded 12 indictments and 11 convictions. Additional notable accomplishments in Fiscal Year 2007 include: $30.6 million in restitution orders; $278,500 in recoveries; and $52,500 in fines. The chart below reflects mass farketing fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 236 cases; Fiscal Year 2004 - 192 cases; Fiscal Year 2005 - 161 cases; Fiscal Year 2006 - 147 cases; and Fiscal Year 2007 - 127 cases.
III. Significant Cases
AMERICAN FRAUD WATCH SERVICES (LOS ANGELES): This investigation centered on the activities of a Canadian couple who operated two fraudulent telemarketing schemes purporting to sell credit card protection services to thousands of elderly victims across the United States. Doing business under the names American Fraud Watch Services and Debt Service International, the subjects are alleged to have charged as much as $299 per victim credit card for illegitimate fraud protection services, with total fraud proceeds estimated to be in excess of $10 million. At the request of the U.S. government, the subjects were arrested in British Columbia, Canada, by officers of the Royal Canadian Mounted Police (RCMP), and a formal extradition request remains pending.
This investigation was worked in partnership with the Project Emptor Task Force in British Columbia, Canada. The task force focuses on cross-border mass marketing frauds and brings together the collective expertise and experience of the following participating agencies: FBI, RCMP, U.S. Attorney's Office in Los Angeles, USPIS, FTC, Canadian Border Services Agency, Canadian Competition Bureau, and British Columbia Consumer Protection Authority.
PARKER LEASING AND FINANCE SERVICE (MIAMI): This investigation centered on the activities of Robert Parker and Gary N. Parker who operated a purported commercial equipment financing and leasing business called Parker Leasing and Finance Service in Fort Lauderdale, Florida. The Parkers engaged in making material misrepresentations to victims from around the world in order to induce their victims to apply for commercial lease funding in an international advance fee fraud scheme. The Parkers ultimately fleeced their victims for approximately $4 million and were subsequently convicted of all charges, to include mail and wire fraud, money laundering, and tax evasion, at the conclusion of a jury trial on
May 17, 2007.
On July 19, 2007, Robert Parker was sentenced to 135 months incarceration and $1.8 million in restitution; Gary N. Parker was sentenced to 240 months incarceration and $1.8 million in restitution. This investigation was worked in cooperation between the FBI, IRS, and the Broward County Sheriff's Office.
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 to 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.
I. General Overview
Another aspect of the Economic Crimes Unit II is the oversight of the FBI's asset forfeiture and money laundering programs. The mission of these programs is to promote the strategic use of asset forfeiture and to ensure that field offices employ the money laundering violation in all investigations, where appropriate, to disrupt and/or dismantle criminal enterprises. Following the money and then properly utilizing the asset forfeiture statutes will disrupt and dismantle criminal and/or terrorist organizations.
The ECU - II has successfully coordinated with the Counterterrorism Division in a variety of training programs to instruct agents and task force officers how to incorporate asset forfeiture and money laundering into terrorism investigations.
The asset forfeiture program and the money laundering program provide support to all FBI investigative programs, including international and domestic terrorism.
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 criminals 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.
Anyway you look at it, money laundering is the process by which criminal proceeds are made to appear to come from a legitimate source. 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.
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 Fiscal Year 2007, 548 cases investigated by the FBI resulted in 141 indictments and 112 convictions of money laundering fraud criminals. For Fiscal Year 2007, the following money laundering most notable accomplishments were achieved for the WCCP: $66.9 million in restitutions, $2.6 million in recoveries, and $11.4 million in fines. The chart below reflects money laundering fraud pending cases from Fiscal Year 2003 through Fiscal Year 2007 as follows: Fiscal Year 2003 - 496 cases; Fiscal Year 2004 - 509 cases; Fiscal Year 2005 - 507 cases; Fiscal Year 2006 - 473 cases; and Fiscal Year 2007 - 548 cases.
III. Significant Cases
RESERVE FOUNDATION TRUST (DENVER): On May 29, 2007, Norman Schmidt and Charles Lewis were found guilty of conspiracy to commit mail fraud, wire fraud, securities fraud, and money laundering. From April 1999 through April 2003, Schmidt and Lewis developed a scheme to defraud investors using a "high-yield investment program." Schmidt and Lewis, with assistance from others, falsely stated that they would invest the victims' money, promising rates of return from two percent to 400 percent per month. To perpetuate the scheme, the defendants sent investors fraudulent monthly statements, which falsely reflected the growth of and earnings on their invested funds. To lure and reassure investors, the defendants made false representations that the investments were safe because invested funds could not be moved and that the investments were insured from loss by various high profile insurance companies. Entities involved in the scheme include the Reserve Foundation Trust, Smitty's Investments, Capital Holdings, Monarch Capital Holdings, and Fast Track. The scheme unraveled as the FBI and IRS conducted a detailed financial analysis of subpoenaed bank and investment documents. This analysis revealed that the defendants used investor funds for loan payments, personal expenses, acquisition of unrelated businesses, and lavish personal items. Many of these items were seized and forfeited, including the Redstone Castle, valued at $6.3 million, seven NASCAR race cars, two semi-trucks, two trailers, and $17 million from 66 bank accounts. A $24 million money judgement was also ordered by the court. The proceeds will be distributed to up to 1,200 victims.
CASHTARICA (NEW YORK): On July 18, 2007, a felony Information was filed in the Southern District of New York against NETeller PLC, an Internet-payment business based in the Isle of Man. NETeller has admitted to criminal wrongdoing and has agreed to forfeit $136 million in illegal proceeds through a civil forfeiture action as part of an agreement to defer prosecution of NETeller for its participation in a conspiracy to promote Internet gambling businesses and to operate an unlicensed money transmitting business. The information also contained a criminal forfeiture allegation against all property involved in or derived from the criminal wrongdoing in the amount of at least $1 billion. The investigation into this criminal enterprise, conducted by the New York Division of the FBI, revealed that Stephen Eric Lawrence and John David Lefebvre developed an Internet-payment system that was used by NETeller and its predecessors to provide online payment services to Internet gambling companies. Lawrence and Lefebvre have pleaded guilty to charges that they conspired with others to operate an unlicensed money transmitting business and to promote illegal gambling by providing payment services to enable offshore Internet gambling businesses to access customers in the United States. Lawrence and Lefebvre also admitted to forfeiture allegations requiring them to personally forfeit an additional $100 million, which they are expected to pay in full prior to sentencing.
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
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