Financial Crimes Report 2009
2009 Financial Crimes Report
Fiscal Year 2009 (October 1, 2008—September 30, 2009)
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. In Fiscal Year (FY) 2009, the FCS was comprised of the Asset Forfeiture/Money Laundering Unit (AF/MLU), the Economic Crimes Unit (ECU), the Health Care Fraud Unit (HCFU), the Forensic Accountant Unit (FAU), and the National Mortgage Fraud Team (NMFT).
The ECU is responsible for significant frauds targeted against individuals, businesses, and industries to include: corporate fraud, insurance fraud (non-health care related), securities and commodities fraud, mass marketing fraud, telemarketing fraud, high yield investment schemes, Ponzi schemes, advance fees schemes, and pyramid schemes.
The HCFU oversees investigations targeting individuals and/or organizations who are defrauding public and private health care systems. Areas investigated under the HCFU 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 (DME) fraud, pharmaceutical drug diversion, outpatient surgery fraud, and Internet pharmacy sales.
The mission of the NMFT is to identify, target, disrupt, and dismantle criminal organizations and individuals who engage in fraud schemes which impact financial institutions particularly in the areas of mortgage fraud and bank failures.
The mission of the AF/MLU as it relates to financial institution fraud (FIF) is to identify, target, disrupt, and dismantle criminal organizations and individuals through the strategic use of asset forfeiture; and to ensure that field offices employ the money laundering violation in all investigations, where appropriate, to assist in the disruption and/or dismantlement of criminal enterprises.
The AF/MLU also has responsibilities for the management of the Forfeiture Support Project (FSP) in Calverton, Maryland. Although the FSP's mission is closely tied to that of the AF/MLU, it does have a separate mission statement which is documented as follows: The mission of the FSP is to support the forfeiture component of all major FBI investigations through data entry and analysis of financial documents, forensic accounting, and tracing assets subject to forfeiture.
The FAU was established in March 2009 to support all FBI investigative matters requiring a forensic financial investigation. The FAU provides oversight of the Forensic Accountant (FoA) and Financial Analyst (FA) Programs, ensuring that the FBI’s financial investigative needs and priorities are continuously addressed. Key to the FAU’s mission is developing, managing, and enhancing the FoA and FA Programs, to ensure that FBI financial investigative matters are expedited with the high level of expertise required in an increasingly complex global financial system.
Based upon field office crime surveys, current trends in the White Collar Crime (WCC) arena, and directives established by the President, the Attorney General, the Director, and the Criminal Investigative Division (CID), the following national priorities for the WCC Program (WCCP) have been established: public corruption, corporate fraud/securities fraud, health care fraud, FIF (to include bank failures and mortgage fraud), money laundering, insurance fraud, and mass marketing fraud.
Although public corruption is a national priority within the WCCP, it will not be addressed in this report. Each section of this report provides an overview, statistical accomplishments, and case examples of the identified priority crime problems specifically addressed by the FCS. 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 which involve accounting schemes, self-dealing by corporate executives, and obstruction of justice. The majority of corporate fraud cases pursued by the FBI involve accounting schemes designed to deceive investors, auditors, and analysts about the true financial condition of a corporation. Through the manipulation of financial data, the share price of a corporation remains artificially inflated based on fictitious performance indicators provided to the investing public. In addition to significant financial losses to investors, corporate fraud has the potential to cause immeasurable damage to the U.S. economy and investor confidence.
While the number of cases involving the falsification of financial information remains relatively stable, the FBI has observed a spike in the number of corporate fraud cases involving subprime lending institutions, brokerage houses, home-building firms, hedge funds and financial institutions, as a result of the financial crisis partly caused by the collapse of the subprime mortgage market in the fall of 2007. As a result of the current financial crisis, trillions of dollars in shareholder value have been lost, several prominent companies, i.e., Lehman Brothers, have gone out of business, several prominent banks, i.e., IndyMac Bank and Washington Mutual, have failed, and the Federal Government has provided over a trillion dollars in relief to keep other companies from failing, i.e., American Insurance Group, General Motors, and CitiGroup.
A subprime mortgage lender is a business that lends to borrowers who do not qualify for loans from mainstream lenders. Once the subprime loans have been issued, they are bundled and sold as securities -- a process known as securitization. Fraud has been identified throughout the loan process, which commences with the borrower providing false information to the mortgage broker and/or lender. The next layer of potential fraud, the corporate fraud, occurs with the banks, brokerage houses, and other financial institutions that package loans through the securitization process. As the housing market declined, subprime lenders have been forced to buy back a number of nonperforming 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 increased, the secondary market for subprime securities dwindled, and the securities lost value. As a result, publicly traded stocks dramatically decreased in value as financial institutions realized large losses due to the sub prime securities they held or insured, resulting in financial difficulties and bankruptcies.
As publicly traded companies suffered financial difficulties due to subprime market, analyses of company financials have identified instances of false accounting entries and fraudulently inflated assets and revenues. Investigations have determined that several of these companies manipulated their reported loan portfolio risks and used various accounting schemes to inflate their financial reports. In addition, before these companies' stocks rapidly declined in value, executives with insider information sold their equity positions and profited illegally. The FBI is working with the U.S. Department of Justice (DOJ), the U.S. Securities and Exchange Commission (SEC), and other U.S. regulatory agencies to identify possible corporate fraud centered on violations of insider trading, securities fraud, and accounting fraud.
In addition to the subprime market issue, corporate fraud matters involving seal-dealing by corporate executives, particularly utilizing companies to perpetrate large-scale Ponzi fraud schemes, continue to be an issue of concern. Traditionally, Ponzi schemes were perpetrated by individuals, or small groups, within a community environment. However, the current financial crisis resulted in the exposure of several large Ponzi schemes perpetrated not on an individual community level, but on a corporate national level by executives of what were once considered legitimate companies, i.e., Petters Company, Inc. (see page 8).
Corporate fraud remains one of the highest priorities for the FBI. At the end of 2009, 592 corporate fraud cases were being pursued by FBI field offices throughout the United States, several of which involved 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 (FINRA), Internal Revenue Service (IRS), Department of Labor, Federal Energy Regulatory Commission, Commodity Futures Trading Commission (CFTC), U.S. Postal Inspection Service (USPIS), and Special Inspector General for the Troubled Asset Relief Program (SIGTARP). In addition, the FBI is an active member of the Financial Fraud Enforcement Task Force (FFETF) created by Presidential Executive Order in November 2009. As reflected in the statistical accomplishments of the FBI, the cooperative and multiagency 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, Association of Certified Fraud Examiners, 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 2009, cases pursued by the FBI resulted in 153 indictments/informations and 156 convictions of corporate criminals. Numerous cases are pending plea agreements and trials. During FY 2009, the FBI secured $6.1 billion in restitution orders and $5.4 million in fines from corporate criminals. The chart below reflects corporate fraud pending cases from FY 2005 through FY 2009 as follows: FY 2005— 423 cases; FY 2006—486 cases; FY 2007—529 cases; FY 2008—545 cases; and FY 2009—592 cases.
CORPORATE FRAUD PENDING CASES
III. Significant Cases
Petters Company, Inc. (Minneapolis): Thomas J. Petters, through his company, Petters Group Worldwide LLC (PGW), obtained loans from hedge funds and investment groups for the stated purpose of financing sales to well-known big box retailers, such as Costco and Sam's Club. The investigation revealed that the purchase and subsequent sale of merchandise to the retailers were actually fabricated transactions supported by fictional documentation. Thomas J. Petters was indicted for mail and wire fraud, conspiracy, and money laundering in December 2008 for his role in a $3.4 billion corporate fraud scheme. Six individuals have been indicted during the course of the investigation for various roles in the scheme, including the production of false banking transaction documentation. Petters’ trial began on October 28, 2009, and Petters was convicted on December 2, 2009, following an 18-day trial, on all counts of the indictment. It is anticipated that Petters will be sentenced sometime in 2010.
Credit Suisse (New York): Credit Suisse is a global financial services company, advising clients across the globe in all aspects of finance. ST Microelectronics (STM) is a Switzerland‑based semiconductor company with annual net revenue of US $9.85 billion in 2006. In 2006, STM invested $400 million with Credit Suisse in what were purportedly securities backed by student loans (to include investment statements); however, the funds were backed with subprime loans. Credit Suisse tried unsuccessfully to settle the matter for $280 million. The two managers, Eric Butler and Julian Tzolov, were indicted on securities fraud charges and arrested in June 2008. Tzolov pled guilty and testified as a key witness for the government in the trial against Butler. After several weeks of trial, Butler was convicted in August 2009 by the jury and later sentenced to five years in prison. It is anticipated that Tzolov will be sentenced in 2010.
1031 Tax Group (Richmond): From August 2005 through April 2007, Edward Okun, former owner of 1031 Tax Group LLP (1031 Tax Group) and Investment Properties of America (IPofA), and Lara Coleman, former Chief Financial Officer (CFO) of IPofA, and two other conspirators used 1031 Tax Group and its subsidiaries in a scheme to defraud clients through false pretenses. Section 1031 of the Internal Revenue Code allows investment property owners to defer the capital gains tax that would otherwise be due on properties sold, dependent on the use of the proceeds to purchase new property in a specified time frame. Okun and Coleman obtained funds by promising clients their money would be used solely to effect 1031 exchanges as outlined in the exchange agreements. After making such promises, Okun and Coleman misappropriated approximately $132 million in client funds to support Okun's lavish lifestyle, pay operating expenses for his various companies, invest in commercial real estate, and purchase additional qualified intermediary companies to obtain access to additional client funds. Okun and Coleman also instructed employees to withdraw cash from a company bank account and smuggle the cash to Okun's personal yacht on Paradise Island in the Bahamas to avoid federal currency reporting requirements. The two additional conspirators, Robert D. Field II and Richard E. Simring, were the CFO and Chief Legal Officer, respectively, of a holding company set up to oversee both IPofA and the 1031 Tax Group. Both pled guilty and were sentenced to five years and three years, respectively. After pleading guilty, Coleman was sentenced to 10 years in prison. Okun received a prison sentence of 100 years after he was found guilty at trial.
Securities and Commodities Fraud
I. General Overview
The recent financial crisis saw the Dow Jones Industrial Average fall from its high of 14,164 in October 2007 to 6,547 in March 2009. As a result, the FBI witnessed a prolific rise in Ponzi and other High Yield Investment Fraud (HYIF) schemes as the frauds were exposed as investors sought redemptions. With the development of new schemes, such as securities market manipulation via cyber intrusion, and the trend in exposure of Ponzi schemes due to market deterioration, securities and commodities fraud is on the rise. Over the last five years, open securities and commodities fraud investigations have increased by 33 percent. During this time period, the losses associated with these types of schemes have increased to billions of dollars.
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 (e.g. 401k plans), more and more Americans are choosing to invest in the U.S. securities and commodities markets. A 2008 joint study by the Securities Industry and Financial Markets Association and Investment Company Institute suggests that approximately 47 percent of U.S. households participate in the market through equity or bond ownership, up from 39 percent in 1989. This large-scale investment growth, however, has also led to significant growth in the amount of fraud and misconduct seen in these markets. The creation of diversified investment vehicles and the tremendous increase in the amount of money being invested have created greater opportunities for individuals and businesses to perpetrate fraudulent investment schemes.
New opportunities for fraud have also developed in response to government programs that were established to support the financial markets. The FBI anticipates new iterations of traditional fraud schemes to develop as a result of the government-spending programs such as the Troubled Asset Relief Program and the Termed Asset-Backed Securities Loan Facility. As such, combating securities and commodities frauds remains a top priority for the FBI.
The losses are associated with depreciative market value of businesses, reduced or nonexistent return on investments, and legal and investigative costs. The victims of securities and commodities frauds include individual investors, financial institutions, public and private companies, government entities, and retirement funds.
Now more than ever, the well-being of the global economy rests on the diligent enforcement of laws and regulations designed to ensure the fair and orderly operation of the capital markets. The FBI is not only cognizant of this critical requirement, but is uniquely positioned to help meet the U.S. Government's criminal investigative responsibilities in this area.
The FBI works closely with various governmental and private entities to investigate and prevent fraudulent activity in the securities markets. In an effort to help bolster these relationships and optimize workforce needs, many FBI field offices operate task forces and working groups with other law enforcement and regulatory agencies. These agencies include the SEC, U. S. Attorney’s Office (USAO), CFTC, FINRA, USPIS, and the IRS. Cooperation among agencies helps the FBI address the problem of securities and commodities fraud more effectively and allows the FBI to more efficiently allocate its resources.
At the end of FY 2009, the FBI was investigating 1,510 cases of securities and commodities fraud and had 177 Special Agents assigned to address 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 United States. These intruded victim accounts are then utilized to engage in coordinated online purchases of the targeted security to affect manipulation, while the fraud perpetrators sell their preexisting holdings in the targeted security into the inflated market.
High Yield Investment Fraud: HYIF schemes may take many forms but are all characterized by offers of low or no risk investments that guarantee unusually high rates of return. Most common among this type of fraud are the following schemes:
The Ponzi Scheme—Named after its early 20th century creator, Charles Ponzi, these schemes use money collected from new 'investors' (i.e., victims), rather than profits from the purported underlying business venture, to pay the high rates of return promised to earlier victims. This arrangement gives victims the impression that there is a legitimate, money-making enterprise behind the perpetrator's story when, in reality, victim monies are the only source of funding.
The Pyramid Scheme—As in Ponzi Schemes, the money collected from newer victims of the fraud is paid to earlier victims to provide a veneer of legitimacy. In Pyramid Schemes, however, the victims themselves are induced to recruit further victims through the payment of recruitment commissions.
Prime Bank Scheme—Victims are induced to invest in financial instruments, allegedly issued by well-known institutions, which offer risk-free opportunities for high rates of return; benefits which are allegedly the result of the perpetrator's access to a secret worldwide exchange ordinarily open only to the world's largest financial institutions.
Advance Fee Fraud: This category of fraud encompasses a broad variety of schemes which are designed to induce their victims into remitting up-front payments in exchange for the promise of goods, services, and/or prizes. In the securities and commodities fraud context, victims are informed that in order to participate in a promising investment opportunity, they must first pay various taxes and/or fees. Advance fee fraud schemes are further discussed in the mass marketing fraud section of this report.
Hedge Fund Fraud: Hedge funds are private investment partnerships which have historically accepted only high-net worth clients willing to meet significant minimum investment thresholds. The industry as a whole has been largely unregulated but has become increasingly relevant to middle class investors through their exposure to hedge fund activities via ancillary investments (e.g., pension funds). The relative lack of regulatory scrutiny has made the industry vulnerable to fraud by fund managers, to include overstatement/misappropriation of fund assets; overcharging for fund management fees; insider trading; market timing; and late trading.
Commodities Fraud: These schemes typically involve the deceptive or fraudulent sale of commodities investments. In such instances, false or deceptive sales practices are used to solicit victim funds for commodities transactions that either never occur or are inconsistent with the original sales pitches. Alternatively, commodities market participants may attempt to illegally manipulate the market for a commodity by such actions as fraudulently reporting price information or cornering the market to artificially increase the price of the targeted commodity.
Foreign Exchange Fraud: These schemes are characterized by the use of false or deceptive sales practices, alleging high rates of return for minimal risk, to induce victims to invest in the foreign currency exchange market. In such instances, the touted transactions 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, doctoring of account statements, unauthorized trading/funds transfer activities, or other conduct in breach of the broker's fiduciary responsibilities to the victim client.
Late-Day Trading: These schemes involve the illicit purchase and sale of securities after regular market hours. Such trading is restricted in order to prevent individuals from profiting on market-moving information which is released after the close of regular trading. Unscrupulous traders attempt to illegally exploit such opportunities by buying or selling securities at the market close price, secure in the knowledge that the market-moving information will generate illicit profits at the opening of trading on the following day.
II. Overall Accomplishments
As of the end of FY 2009, the FBI was investigating 1,510 cases of securities and commodities fraud and had already recorded 412 indictments/informations and 306 convictions. Additional notable accomplishments in FY 2009 include: $8.1 billion in restitution orders; $63.4 million in recoveries; $12.8 million in fines; and $126 million in seizures. The chart below reflects securities and commodities fraud pending cases from FY 2005 through FY 2009 as follows: FY 2005—1,139 cases; FY 2006—1,165 cases; FY 2007—1,217 cases; FY 2008—1,210 cases; and FY 2009— 1,510 cases.
III. Significant Cases
Bernard L. Madoff Investment Securities (New York): This investigation centered on Bernard L. Madoff, founder of BLM Investment Services LLC (BLMIS), who was arrested in December 2008 on charges of securities fraud. The complaint charged Madoff with running a $64 billion Ponzi scheme. Madoff is the founder of BLMIS, a securities broker dealer, and former Chairman of the NASDAQ Stock Market. Madoff made statements to his employees that his business was a giant Ponzi scheme and that the business had been insolvent for years. Madoff provided clients with monthly investment statements and trade confirmation for transactions that never actually occurred. For decades, Madoff has utilized new client funds to pay profits and redemptions to existing clients. Madoff pled guilty to the indictment and was sentenced to 150 years in prison in June 2009. Thus far, nearly $1 billion in property and assets have been seized, of which approximately $750 million have been forfeited.
Richard Monroe Harkless, dba MX Factors LLC (Los Angeles): This investigation centered on Richard Monroe Harkless who operated a Ponzi scheme from 2000 through 2003 via his company MX Factors. Harkless informed clients that he was investing their money in government-guaranteed construction loans, which provided returns as high as 14 percent every three months. In reality, Harkless diverted the investor funds to Belize and Mexico to pay for personal expenses. Hundreds of individuals invested more than $60 million, with losses in excess of $39 million. The losses by individual investors ranged from $10,000 to more than $500,000. In September 2009, Harkless was sentenced to more than 100 years in prison. This investigation was worked jointly with the IRS and USPIS.
Curtis Somoza (Los Angeles): This investigation centered on Curtis Somoza who ran an investment scheme whereby 63 California and Texas investors were defrauded out of $64 million. Somoza guaranteed large returns for investments in a bond-trading program and life insurance pool that would benefit churches in South Los Angeles. Somoza was convicted in 2008 and was sentenced in November 2009 to 25 years in prison for his involvement in this large investment scheme.
I. General Overview
The FBI's mission in the area of health care fraud (HCF) is to oversee the FBI's HCF initiatives by providing national guidance and assistance to support HCF 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 three and ten percent of total health care expenditures. The fraud schemes are not specific to any area, but they 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.
HCF is expected to continue to rise as people live longer. This increase will produce a greater demand for Medicare benefits. As a result, it is expected that the utilization of long and short-term care facilities such as skilled nursing, assisted living, and hospice services will expand substantially in the future. Additionally, fraudulent billings and medically unnecessary services billed to health care insurers are prevalent throughout the country. These activities are becoming increasingly complex and can be perpetrated by corporate-driven schemes and systematic abuse by providers.
The most recent CMS statistical estimates project the total health care expenditures will total $2.26 trillion, representing 16.2 percent of the Gross Domestic Product (GDP). By the year 2016, CMS estimates total health care spending to exceed $4.14 trillion, representing 19.6 percent of the GDP.
With health care expenditures rising at over twice the rate of inflation, it is especially important to coordinate all investigative efforts to combat fraud within the health care system. The FBI is the primary investigative agency in the fight against HCF, 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, IRS-CID, 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 HCF in the United States, 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 biweekly coordination meetings at the DOJ which includes various DOJ components involved in the fight against HCF. National-level liaison is also maintained with the DEA, FDA, Bureau of Immigration and Customs Enforcement (ICE), BCBSA, and other partners.
Throughout the country, FBI field offices participate in HCF Working Groups which involve law enforcement agencies, prosecutors, regulatory agencies, and health insurance industry professionals to identify the various crime problems involving HCF. 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, DME, 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, which works closely with the FBI and our law enforcement partners.
HCF investigations are among the highest priority investigations within the FBI's WCCP, ranking behind only public corruption and corporate fraud. National initiatives include the DME Fraud Initiative, the Infusion Therapy Fraud Initiative, and the Home Health Care Fraud Initiative (HHCFI). Furthermore, numerous FBI field offices throughout the United States 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, DME, 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 HCF 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 HCF 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.
In December 2006, the DME Initiative was developed to address the significant crime problem associated with DME providers. Information developed with assistance from the CMS, the NHCAA, and the FBI's Financial Crimes Intelligence Unit (FCIU) identified DME providers as one of the top two provider types identified within all case referrals, preliminary investigations, and suspensions. The initiative was established to bring additional attention to DME fraud and the FBI's commitment to addressing the crime problem. The primary goal of the initiative is to provide intelligence to field offices concerning suspect DME providers, focusing on cases involving multiple districts or divisions, unique schemes, advanced techniques, and/or substantial loss amounts.
Infusion therapy fraud was established in April 2008. Its focus is on the billing of infusion-related services and medications that were not provided or were not medically necessary. An infusion is a method of intravenously introducing some substance into the human body. Receiving an infusion is more commonly referred to as "receiving an IV." In infusion therapy fraud, most often the perpetrator bills insurance providers for expensive medications that are rarely, if ever, administered to patients. In many cases, the medications are extremely powerful drugs used in only a small number of patients and require extensive management by a physician.
The HHCFI, established in January 2010, is the newest of the initiatives. Home health care makes up approximately $15.1 billion of the health care market and continues to grow. The expanding market is a target for perpetrators who are seeking to acquire a more significant share of illicit proceeds by exploiting expensive Home Health Agency (HHA) services. One of the more common HHA schemes, representing $4.5 billion and 30 percent of the overall industry, involves HHA providers who are inflating HHA diabetic episodes to create outlier payments which are in excess of the national 60-day episode payments. This scheme is projected to cost Medicare $1 billion in 2009, according to the CMS.
The Medicare Prescription Drug Program (Part D), implemented on January 1, 2006, has become an increasing focus and concern for the FBI. Prior to the implementation date, FBI Headquarters personnel regularly met with representatives from CMS and DOJ to share information, as well as review fraud and abuse occurring during the enrollment period. After the implementation date, the FBI established a working group for Part D which includes representatives from CMS, DOJ, HHS-OIG, FDA, DEA, USPIS, and the FTC. This working group shares and discusses information which can be used by each agency in future investigations of fraud related to this program. The FBI has worked with CMS to obtain regional training for field office personnel of the various agencies represented in this working group. The FBI is also working through CMS to maintain dialogue with the Medicare Drug Integrity Contractors (MEDICs) who have been tasked by CMS to identify, review, and analyze cases of suspected fraud and abuse in the Part D Program.
During the past year, the FBI continued to identify and analyze industry fraud trends through input from private and public health care program experts. Present areas of concern include DME, hospital fraud, physician fraud, home health agencies, beneficiary-sharing, chiropractic, pain management, and associated drug diversion, physical therapists, prescription drugs, multidisciplinary 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 HCF, the FBI cooperates with the DOJ and the various USAOs throughout the country to pursue offenders through parallel criminal and civil remedies. These cases typically target large-scale medical providers, such as hospitals and corporations, who engage in criminal activity and commit fraud against the Government which undermines the credibility of the health care system. As a result, a great deal of emphasis is placed on recovering the illegal proceeds through seizure and forfeiture proceedings, as well as substantial civil settlements. Upon the successful conviction of HCF offenders, the FBI provides assistance to various regulatory and state agencies, which may seek exclusion of convicted medical providers from further participation in the Medicare and Medicaid health care systems.
The FBI and the health care industry continue to expand their technology and intelligence assessments through the use of sophisticated data-mining techniques to identify patterns of fraud, systemic weaknesses, and aberrant billing activity.
In 2005, the FCS 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 IRS-CID for the production of electronic records instead of paper copies. The development included significant coordination with the financial institutions and their associations. The subpoena attachment was not based upon new or expanded laws, regulations, or rules. The attachment is merely meant to standardize and clarify the requests for electronic records according to the current Federal Rules of Criminal and Civil Procedure. In general terms, if a financial institution maintains records electronically, the requesting agency would be seeking to obtain the records electronically. In addition, the scope of the records requested has not changed due to the subpoena attachment, with the exception of seeking the records electronically.
The subpoena attachment was disseminated to FBI offices, IRS offices, and throughout the DOJ in November 2007. The goal of the DOJ, FBI, and IRS-CID is to inform and prepare financial institutions and their respective agencies for the use and response to the subpoena attachment. This includes working with financial institutions during the transition period in coordinating the requests and associated responses to subpoenas. In addition, it is anticipated the EBRI will greatly increase the efficiency of the financial records production process and provide significant costs savings to both the government and private industry.
II. Overall Accomplishments
Through FY 2009, 2,494 cases investigated by the FBI resulted in 945 indictments and 640 convictions of HCF criminals. It should be noted that numerous cases are pending plea agreements and trials. The following notable statistical accomplishments are reflective in FY 2009 for HCF: $1.6 billion in restitutions, $853 million in recoveries, $68 million in fines, and $54 million in seizures. The chart below reflects HCF pending cases from FY 2005 through FY 2009 as follows: FY 2005—2,547 cases; FY 2006—2,423 cases; FY 2007—2,493 cases; FY 2008—2,434 cases; and FY 2009—2,494 cases.
III. Significant Cases
Dr. Hany M. Iskander (Cleveland): Dr. Hany M. Iskander, an Egyptian national here on work visa, executed a scheme to defraud Medicare, Medicaid, and other health care benefit programs through his pain management business located in Bucyrus, Ohio, and Lewis Center, Ohio. The scheme involved millions of dollars of fraudulent claims for payment for medical services which were either not performed or which had no medical necessity to be performed. On October 2, 2009, Dr. Iskander and his wife, Evat Hanna, were found guilty of obstruction of justice by shredding and concealing medical records to impede a federal investigation. Pursuant to a plea agreement, Dr. Iskander agreed to serve at least 51 months’ imprisonment to be determined by the sentencing judge, at a hearing set for February 2, 2010. Iskander also agreed to forfeit his medical license and to be deported to Egypt following his release from prison. The government has entered into a plea agreement with Iskander’s wife recommending a sentence of home detention for one year, following which she will also be deported.
Pfizer Inc. (Boston): Investigation was predicated in August 2004 upon the receipt of qui tam information from the FDA that Pfizer employees may have destroyed records sought in a federal civil investigation and that company employees had been engaged in a series of transactions involving off-label promotions and kickbacks. Between 2001 and 2005, Pfizer northeast regional manager Mary Holloway directed approximately 100 sales employees to market the painkiller Valdecoxib (Bextra) for uses specifically prohibited by the FDA. On March 30, 2009, Holloway pled by criminal information to one count of distribution of a misbranded drug. Holloway was sentenced to 24 months’ probation and a $75,000 fine on June 18, 2009. Holloway is the second subject convicted in this case. Thomas Farina, a New York-area sales manager for Pfizer was indicted in March 2008, and pled guilty to obstruction later that month. In January 2009, Pfizer agreed to pay the U.S. Government $2.3 billion to settle claims involving the drugs Bextra, Zyvox, Goedon, and Lyrica. Valdecoxib (Bextra) was a nonsteroidal anti-inflammatory prescription drug, administered in tablet form, which was used in the treatment of arthritis, inflammation, pain, and menstrual symptoms. Bextra was approved by the FDA for distribution in the United States in 2001. Pfizer withdrew Bextra from the U.S. market in 2005, after the FDA cited increased incidence of heart attacks, strokes, and serious skin reactions to the drug.
Operation Therascam (Miami):This HCF investigation was a large‑scale joint investigation between the FBI, the HHS-OIG, USAO, Southern District of Florida, and DOJ trial attorneys from D.C. It was predicated on companies offering kickbacks to individuals who had access to patients residing in assisted living facilities for the purpose of billing for fraudulent claims to the Medicare program. During the initial stage of the investigation, a massive kickback network was uncovered involving a multitude of patients, physicians, DME companies, and pharmacies. The case led to more than 20 search warrants over the last several years, and the investigation resulted in more than 200 consensual recordings which resulted in the recovery of over $100,000 in kickback payments.
IV. Health Care Fraud Schemes
HCF 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 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.
V. Health Care Fraud Prevention Measures
HCF is not a victimless crime. It increases health care costs for everyone. It is as dangerous as identity theft. Fraud has left many thousands of people injured. Participation in HCF is a crime.
Keeping America's health system free from fraud requires active participation from each of us. The large number of patients, treatments, and complex billing practices attract criminals skilled in victimizing innocent people by committing fraud.
What is Health Care Fraud?
- Altered or fabricated medical bills and other documents.
- Excessive or unnecessary treatments.
- Billing schemes, such as:
- charging for a service more expensive than the one provided.
- charging for services that were not provided.
- duplicate charges.
- False or exaggerated medical disability.
- Collecting on multiple policies for the same illness or injury.
Tips to protect yourself against Health Care Fraud
- Protect your health insurance information card like a credit card.
- Beware of free services--is it too good to be true?
- Review your medical bills, such as your "explanation of benefits," after receiving health care services.
- Check to ensure the dates and services are correct to ensure you get what you paid for.
- If you suspect HCF, call 1-877-327-2583. For more information, visit the web site at http://www.bcbs.com/antifraud.
I. General Overview
In 2009, the continuing deterioration of the real estate market and the dramatic rise in mortgage delinquencies and foreclosures helped fuel the financial crisis and exposed fraudulent practices that were prevalent throughout the mortgage industry. Weak underwriting standards and unsound risk management practices, which had allowed mortgage fraud perpetrators to exploit lending institutions and avoid detection, became evident once the housing market began declining in 2006.
Mortgage fraud schemes employ some type of material misstatement,
misrepresentation, or omission relating to the property or potential borrower which is relied on by an underwriter or lender to fund, purchase, or insure a loan. These misstatements, misrepresentations, or omissions are indicative of mortgage fraud and include the following:
- Inflated Appraisals
- Fictitious/Stolen Identities
- Nominee/Straw Buyers
- False Loan Application
- Fraudulent Supporting Loan Documentation
Although there are many different types of schemes, mortgage fraud can be summarized as a form of bank robbery where the bank is not even aware it has been robbed until months or years later. Mortgage fraud perpetrators often obtain loans based on falsely representing the value of the collateral or their qualifications to receive the loan and steal the proceeds without an intention of repaying the borrowed funds. Lending institutions are subsequently left holding the inflated collateral and incurring significant losses.
Mortgage fraud is a part of the FIF subprogram within the FBI’s WCCP. The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit, and Fraud for Housing. Those who commit mortgage fraud for profit are often industry insiders using their specialized knowledge or authority to commit or facilitate the fraud. Current investigations and widespread reporting indicate a high percentage of mortgage fraud involves collusion by industry insiders, such as appraisers, mortgage brokers, attorneys, loan originators, and other professionals engaged in the industry. Fraud for Housing typically represents illegal actions conducted solely by the borrower, who is motivated to acquire and maintain ownership of a house under false pretenses such as misrepresented income and asset information on a loan application.
One of the ways the FBI becomes aware of mortgage fraud is through the analysis of Suspicious Activity Reports (SARs), which are filed by federally-insured financial institutions. Mortgage fraud SARs have increased from 6,936 in FY 2003 to 67,190 in FY 2009. These SARs provide valuable intelligence in mortgage fraud trends and can lead to the initiation of mortgage fraud cases, as well as the enhancement of current FBI investigations.
In response to the increase in mortgage fraud, the FBI has continued to add investigative resources to combat the mortgage fraud problem. In December 2008, the FBI dedicated resources to create the NMFT at FBI Headquarters in Washington, D.C. The NMFT has the specific responsibility for all management of the mortgage fraud program at both the origination and corporate level. The NMFT assists the field offices in addressing the mortgage fraud problem at all levels. The current financial crisis, however, has required the FBI to move resources from other WCC and criminal programs in order to appropriately address the crime problem. Since January 2007, the FBI has increased its agent and analyst manpower working mortgage fraud investigations. The NMFT provides tools to identify the most egregious mortgage fraud perpetrators, prioritize pending investigations, and provide information to evaluate where additional manpower is needed.
In September 2009, the FBI established the Financial Intelligence Center (FIC) to provide tactical analysis of intelligence datasets and financial databases. The FIC uses evolving technology and data exploitation techniques to create targeting packages to identify the most egregious criminal enterprises and to enhance current criminal investigations. The FIC has worked jointly with the NMFT to assist the field offices by creating mortgage fraud targeting packages.
One of the best tools the FBI has in its arsenal for combating mortgage fraud is its long-standing partnerships with other federal, state, and local law enforcement. This is not a new tool employed by the FBI. Collaboration, communication, and information sharing have long been a proven solution to the nation’s most difficult crimes. In response to a growing gang problem, for example, the FBI formed Safe Streets Task Forces across the country. In response to crimes in Indian Country, the FBI developed the Safe Trails Task Force Program. In response to this new threat, the FBI created Mortgage Fraud Task Forces (MFTF) and Mortgage Fraud Working Groups (MFWG). As of FY 2009, there are 15 MFTFs and 62 MFWGs across the country. With representatives of federal, state, and local law enforcement, these task forces and working groups are strategically placed in locations identified as high-threat areas for mortgage fraud. Partners are varied but typically include representatives of the Federal Deposit Insurance Corporation-OIG, the USPIS, the IRS-CID, FinCEN, and the HUD-OIG, as well as state and local law enforcement officers across the nation.
While the FBI has increased the number of agents around the country who investigate mortgage fraud cases from 120 Special Agents in FY 2007 to 300 Special Agents in FY 2009, this multiagency model serves as a force-multiplier, providing an array of resources to adequately identify the source of the fraud, as well as finding the most effective way to prosecute each case, particularly in active markets where fraud is widespread. We are pleased to report that the model is working.
From the end of January 2009 through October 31, 2009, the FBI and DOJ orchestrated a coordinated mortgage fraud “surge” in the FBI’s Jacksonville and Tampa Divisions. The “surge” specifically targeted industry insiders, including loan brokers, lenders, and real estate agents engaged in a variety of mortgage fraud schemes. This effort resulted in charges against more than 100 defendants. The charges involved more than $400 million in loans on more than 700 properties allegedly procured through fraud. This “surge” was launched in response to the epidemic of mortgage fraud throughout the state of Florida. To address this problem, the FBI divisions in both Tampa and Jacksonville, along with the USAO in the Middle District of Florida, began an intensive effort to identify, investigate, and prosecute mortgage fraud in all of its forms. These efforts were led by an FBI MFTF in Florida and involved the cooperation of multiple federal, state, and local law enforcement and governmental agencies.
These valuable partnerships have been instrumental in orchestrating national mortgage fraud takedowns, or “sweeps,” during the last few years. By coordinating a number of smaller mortgage fraud cases into a nationwide takedown, the FBI and its partners have been able to raise public awareness of its enforcement efforts and send a strong message aimed at deterring future fraud. These takedowns include Operation Malicious Mortgage in 2008, which resulted in charges against more than 400 defendants in cases across the nation; Operation Quick Flip in 2005, resulting in approximately 156 mortgage fraud defendants; and Operation Continued Action in 2004, which was responsible for initiating more than 150 cases in more than 35 states. Each operation was a success because of the coordination between the FBI and all of its federal, state, and local law enforcement partners.
In addition to the effort placed in creating these task forces and working groups, the FBI is one of the DOJ participants in the national MFWG which meets monthly within Washington, D.C. The national MFWG represents the collaborative effort of multiple federal agencies and facilitates the information-sharing process across the aforementioned agencies, as well as private organizations. Together, we are building on existing FBI intelligence databases to identify large industry insiders and criminal enterprises conducting systemic mortgage fraud.
The FBI has also partnered with a new interagency FFETF to combat financial crime. The FFETF, which is chaired by the Attorney General, is designed to strengthen the collective efforts of federal, state, and local partners to investigate and prosecute significant financial crimes relating to the current financial crisis; to recover ill-gotten gains; and to ensure just and effective punishment for those who perpetrate financial crimes. The mission of the FFETF is not just to hold accountable those who helped bring about the financial meltdown, but to help prevent another meltdown from happening.
In short, the FBI remains committed to its responsibility to aggressively investigate mortgage fraud, as well as engage with the mortgage industry in identifying fraud trends and educating the public. To maximize our current resources, we are relying on intelligence collection and analysis to identify emerging trends and egregious offenders. We will also continue to rely heavily on the strong relationships we have with both our law enforcement and regulatory agency partners to combat mortgage fraud and to target, disrupt, and dismantle the criminal organizations and individuals engaging in these fraud schemes.
Regional analysis of SARs containing mortgage fraud violations indicate the Western region of the United States led the nation with 38 percent of mortgage fraud‑related SARs filed during FY 2009. Southeastern, North Central, Northeastern, and South Central regions had 28, 17, 11, and 6 percent, respectively, of mortgage fraud-related SAR filings. FBI pending cases indicate the Western region also had the majority of mortgage fraud cases, with 29 percent during 2009. The Southeastern, North Central, Northeastern, and South Central regions had 24, 20, 15, and 12 percent, respectively.
Dollar Losses Reported of Mortgage Related Fraud SARs
Dollar Losses in Millions
Number of Violations of Mortgage Related Fraud SARs Reported
II. Overall Accomplishments
Through FY 2009, 2,794 cases resulted in 822 indictments and 494 convictions of mortgage fraud criminals. The following notable statistical accomplishments are reflective in FY 2009 for mortgage fraud: $2.5 billion in restitutions, $7.5 million in recoveries, and $58.4 million in fines; 128 seizures valued at $5.06 million and 226 criminal indicted assets valued at $510.1 million. The chart below reflects mortgage fraud pending cases from FY 2005 through FY 2009 as follows: FY 2005—721 cases; FY 2006—818 cases; FY 2007—1,204 cases; FY 2008—1,644 cases; and FY 2009—2,794 cases.
III. Significant Cases
Wayne Puff, Affordable Homes Corp. (Newark): From 1998 to 2005, Puff and his coconspirators recruited 1,200 investors from across the country, who poured $123.3 million into New Jersey Affordable Homes Corp. (NJAH). Mr. Puff drew investors by advertising guaranteed annual returns of 15 to 20 percent from his business of buying, renovating, and reselling real estate. The scheme relied on false claims of the company’s profits and phony mortgage documents. Puff’s co-conspirators included John Kurzel, an NJAH mortgage loan processor, who was sentenced to 20 months in prison; Michael Meehan, a former licensed real estate appraiser, and Anthony Natale, a closing attorney, who were both sentenced to 30 months in prison; Mitchell Fishman, an attorney, and Lucesita Santiago, an NJAH account manager, who were both sentenced to 18 months in prison; and Sydney Raposo, a paralegal for Natale, who was sentenced to six months’ home detention. Two defendants are awaiting sentencing. On January 15, 2010, Wayne Puff, the founder of NJAH, a purported real estate investment business, was sentenced to 18 years in prison for defrauding mortgage lenders and investors.
Viktor Kobzar, Kobay Financial (Seattle): Vladislav Baydovskiy, Kobzar and others purchased luxury homes and flipped them to straw buyers, or otherwise unqualified borrowers, using false W-2s, paystubs, bank statements, tax returns, and other fraudulent documents. The loans were brokered through Kobay Financial, which was operated by Baydovskiy and Kobzar. Kobay Financial ceased operations and became Nationwide Home Lending, operated by Alla Sobol, Baydovskiy, and Kobzar. The conspirators closed the loans at Emerald City Escrow, which enabled the subjects to direct loan proceeds to themselves and others. David Sobol (Alla Sobol’s husband) and Donata Baydovskiy, aka Netta Brenner (Vladislav Baydovskiy’s wife), operated Emerald City Escrow. Brenner and David Sobol assisted in the fraud by preparing double and triple HUD-1 forms to conceal the true loan disbursements and acted as a notary for many transactions. Wade Entezar, a builder, also participated in the fraud scheme. The investigation identified $9 million in loan proceeds diverted to the subjects. Approximately 400 loans were brokered by Kobay/Nationwide, and most are pending review. In addition to Kobzar, Vladislav Baydovskiy, a former mortgage broker, was sentenced to five years in prison; Camie Byron, a loan officer, Alla Sobol, a mortgage broker, and David Sobol, a real estate agent, were each sentenced to two years in prison; Sandra Thorpe, an accountant, was sentenced to probation and 200 hours of community service; and Donata Baydovskiy was sentenced to 265 days in prison and two months of home detention. On January 8, 2010, Victor Kobzar was sentenced to five years in prison for his role as a mortgage broker in a mortgage fraud conspiracy involving at least 68 fraudulent loans resulting in $46 million in loan proceeds.
Robert A. Penn; Stephen S. Brown; Tamara E. Scott (Indianapolis):Between November 2003 and August 2005, Penn, with the aid of Stephen Brown and Tamara Scott, solicited and obtained at least 136 loans from various lenders including Argent Mortgage Company, The MoneyStation, and People’s Choice Mortgage/Countrywide Home Loans. Brown was responsible for submitting approximately 43 fraudulent loan applications supported by false documents and inflated appraisals, for which he received between $1,500 and $2,000 per application. Tamara Scott was responsible for attending the mortgage closings, signing fraudulent documents, and receiving checks for loan proceeds. Scott participated in approximately 130 of the fraudulent loans. Brown was sentenced to 37 months in prison and Scott was sentenced to 24 months. In addition, restitution was ordered to be paid by Penn in the amount of $11,411,722; Scott in the amount of $2,793,412; and Brown in the amount of $11,122,891. On January 7, 2010, Robert Penn was sentenced to seven years in prison for his role in brokering approximately $16 million on at least 136 fraudulent mortgages through his various business entities.
IV. Mortgage Fraud Schemes and Trends
Illegal Property Flipping - Property is purchased, falsely appraised at a higher value, and then quickly sold. What makes property flipping illegal is the appraisal information is fraudulent. The schemes typically involve one or more of the following: fraudulent appraisals, falsified loan documentation, inflated buyer income, etc. Kickbacks to buyers, investors, property/loan brokers, appraisers, and title company employees are common in this scheme.
Foreclosure Rescue Schemes—The perpetrators identify homeowners who are in foreclosure or at risk of defaulting on their mortgage loan. The perpetrators then mislead the homeowners into believing they can save their homes by transferring the deed or putting the property in the name of an investor. The perpetrators profit by selling the property to an investor or straw borrower, creating equity using a fraudulent appraisal, and stealing the seller proceeds or fees paid by the homeowners. The homeowners are told they can pay rent for at least a year and repurchase the property once their credit has been reestablished. However, the perpetrators fail to make the mortgage payments and usually the property goes into foreclosure.
Loan Modification Programs—Scammers purport to assist homeowners who are delinquent in their mortgage payments and are on the verge of losing their home by offering to renegotiate the terms of the homeowners' loan with the lender. The scammers, however, demand large fees up-front and often negotiate unfavorable terms for the clients, or do not negotiate at all. Usually, the homeowners ultimately lose their homes. This scheme is similar to a foreclosure rescue scam.
Builder Bailout/Condo Conversion—Builders facing rising inventory and declining demand for newly constructed homes employ bailout schemes to offset losses. Builders find buyers who obtain loans for the properties. The buyers then allow the properties to go into foreclosure. In a condo-conversion scheme, apartment complexes purchased by developers during a housing boom are converted into condos. When the market declines, developers have excess inventory of units. Developers recruit straw buyers with cash-back incentives and inflate the value of the condos to obtain a larger sales price at closing. In addition to failing to disclose the cash-back incentives to the lender, the straw buyers’ income and asset information are often inflated in order for them to qualify for properties that they otherwise would be ineligible or unqualified to purchase.
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.
Silent Second—The buyer of a property borrows the down payment from the seller through the issuance of a nondisclosed 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.
Home Equity Conversion Mortgage (HECM)- An HECM is a reverse mortgage loan product insured by the Federal Housing Administration (FHA) to borrowers who are 62 years or older, own their own property (or have a small mortgage balance), occupy the property as their primary residence, and participate in HECM counseling. It provides homeowners access to equity in their homes usually in a lump sum payment. Perpetrators recruit seniors through local churches, investment seminars, and television, radio, billboard, and mailer advertisements. The scammers then obtain an HECM in the name of the recruited homeowner to convert equity in the homes into cash. The scammers keep the cash and pay a fee to the senior citizen or take the full amount unbeknownst to the senior citizen. No loan payment or repayment is required until the borrower no longer uses the house as a primary residence. In the scheme, the appraisals on the home are vastly inflated and the lender does not detect the fraud until the homeowner dies and the true value of the property is discovered.
Commercial Real Estate Loans—Owners of distressed commercial real estate obtain financing by creating bogus leases and using these fake leases to exaggerate the building's profitability, thus inflating their appraisal values using the income method approach. These false leases and appraisals trick lenders into extending loans to the owner. As cash flows are restricted to the borrower, property repairs are neglected. By the time the commercial loans are in default, the lender is oftentimes left with dilapidated and unusable or difficult to rent commercial property. Many of the methods of committing mortgage fraud that are found in residential real estate are also present in commercial loan fraud.
Neighborhood Stabilization Program (NSP)—The NSP is a HUD program in which block grants are paid to states, local governments, and nonprofit organizations to encourage the purchase and redevelopment of foreclosed and abandoned properties. Scammers establish nonprofit organizations using shell companies in order to appear qualified to receive grants through the NSP. Additionally, individuals perpetrate traditional loan origination schemes such as false statements and invoices in order to receive funding. Instead of using the funds for redevelopment, the funds are used to enrich the perpetrators.
First-Time Homebuyer Rebate Scheme—Perpetrators take advantage of the American Recovery and Reinvestment Act of 2009 (Stimulus Plan) authorizing a tax credit of up to $8,000 for qualified first-time homebuyers. Subjects create false first-time homebuyer credit claims using the personal information of others, such as relatives or recruited individuals, and receive a check for $8,000 either in the mail or deposited directly into their accounts. Also, scammers obtain the rebates prior to closing and then cancel the real estate contract.
Air Loans—This is a nonexistent 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 fake employer, appraiser, credit agency, etc., to fraudulently deceive creditors who attempt to verify information on loan applications.
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 your debts.
- Borrowers may end up paying thousands of dollars in fees without the elimination or reduction of any debt.
Foreclosure Fraud Schemes
- 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 professionals 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 in the event you accept the contractor's financing.
- If it sounds too good to be true--it probably is!
Mortgage Fraud Prevention Measures
Tips to protect Yourself against Mortgage Fraud
- Get referrals for real estate and mortgage professionals. Check the licenses of the industry professionals with state, county, or city regulatory agencies.
- 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. If you do not understand, re-read the documents or seek assistance from an attorney or third party.
- 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
- Check out the tips on the Mortgage Bankers Association’s (MBA) website at http://www.StopMortgageFraud.com for additional advice on avoiding Mortgage Fraud.
I. General Overview
Insurance fraud continues to be an investigative priority for the FBI, due in large part to the insurance industry’s significant role in the U.S. economy. The U.S. insurance industry consists of thousands of companies and collects nearly $1 trillion in premiums each year. The size of the industry, unfortunately, makes it a prime target for criminal activity; the Coalition Against Insurance Fraud (CAIF) estimates that the cost of fraud in the industry is as high as $80 billion each year. This cost is passed on to consumers in the form of higher premiums.
The downturn in the U.S. economy due to the financial crisis has led to an increase in insurance fraud. The FBI continues to identify the most prevalent schemes and the top echelon criminals defrauding the insurance industry in an effort to reduce insurance fraud. The FBI works closely with the National Association of Insurance Commissioners, NICB, CAIF, as well as state fraud bureaus, state insurance regulators, and other federal agencies to combat Insurance Fraud. In addition, the FBI is a member of the International Association of Insurance Fraud Agencies, an international nonprofit organization whose mission is to maintain an international presence to address insurance and insurance-related financial crimes on a global basis. Currently, the FBI is focusing a majority of its resources relating to insurance fraud on the following schemes:
Insurance-Related Corporate Fraud—Although corporate fraud is not unique to any particular industry, there have been instances 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 are 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), increase 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 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 that 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.
Disaster Fraud— When a disaster occurs, there are many organizations and individuals soliciting contributions for the victims of this disaster. Most of the organizations and individuals involved are legitimate; however, there are some who are not. Victims may be approached by unsolicited e-mails asking for donations to a legitimate-sounding organization. The schemer will instruct the victim to send a donation via a money transfer. Other types of disaster fraud include false or exaggerated claims by policyholders; misclassification of flood damage as wind, fire, or theft; claims filed by individuals residing hundreds of miles outside the disaster zone; bid-rigging by contractors; falsely inflating the cost of repairs; and contractors requiring up-front payment for services, then failing to perform the agreed upon repairs.
Staged Auto Accidents—Perpetrators of staged auto accidents will either stage an accident with coconspirators, or maneuver innocent motorists into accidents. Although the resulting property damage may be small, the perpetrators make large—and illegal— claims for fake injuries and property damage. This type of fraud results in higher insurance premiums for all drivers.
Property Insurance Fraud—Perpetrators of property insurance fraud seek to obtain payment that is higher than the value of the property damaged or destroyed, or intentionally destroy property that could not be sold. Common examples include arson, scuttling of boats, and the ditching of vehicles in lakes or canals.
II. Overall Accomplishments
During FY 2009, 152 cases investigated by the FBI resulted in 43 indictments/informations, 22 arrests, and 42 convictions of insurance fraud criminals. The following notable statistical accomplishments reflect FY 2009 for insurance fraud: $22.9 million in restitutions and $31.4 million in recoveries and $618,480 in seizures. The following reflects insurance fraud pending cases from FY 2005 through FY 2009 as follows: FY 2005—270 cases; FY 2006—233 cases; FY 2007—209 cases; FY 2008 -177 cases; and FY 2009 —152 cases. Although the FBI has focused its efforts on higher priority WCC matters, insurance fraud investigations continue to be addressed utilizing liaison efforts in conjunction with other federal, state, and local law enforcement.
III. Significant Case
John Wayne Goff, dba The Goff Group (Birmingham): On June 2, 2009, a former insurance executive who was convicted of mail fraud, embezzlement, and filing a false report with the state insurance department was sentenced to 12 years in prison. The executive was the former owner of a company that collected workers’ compensation premiums for insurance companies. The executive willfully failed to remit to the insurance companies their fair share of the premiums. The executive unlawfully and illegally withheld approximately $3 million in premiums. The executive instead spent the money for his own personal expenditures, including an exorbitant salary, lavish lifestyle, corporate aircraft, and real estate investments. He was indicted on April 2, 2008, for 26 counts of mail fraud, embezzlement of insurance company funds, conspiracy, and false statements to a state department of insurance. He was convicted on February 18, 2009, on 23 counts of mail fraud, false statements to the state department of insurance, and embezzlement.
I. General Overview
Mass marketing fraud is a general term for frauds which exploit mass-communication media, such as telemarketing, mass mailings, and the Internet. Since the 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 mass marketing frauds victimize millions of Americans each year and generate losses in the hundreds of millions of dollars. The following is a brief description of some of the key concepts and schemes associated with the mass marketing/ advance fee fraud crime problem.
Advance Fee Fraud—This category of fraud encompasses a broad variety of schemes which are designed to induce their victims into remitting up-front payments in exchange for the promise of goods, services, and/or prizes. Some of the most prevalent schemes being encountered are the following:
Nigerian Letter Fraud—Victims are contacted regarding substantial sums of money held in foreign accounts and are requested to pay various fees to secure their transfer to the United States, in exchange for a portion of the total proceeds. Alternatively, victims are asked to act as a U.S. agent in securing the release of such funds and are provided with counterfeit instruments which are to be cashed in order to pay any required fees, only to discover they must reimburse their financial institution for cashing a counterfeit instrument. A variation of this fraud involves the use of fraudulent websites, which have been created to resemble website pages of legitimate financial institutions, to enhance the scheme's credibility and swindle greater amounts of money from victims. The victims are directed to open accounts at the fictitious banks’ websites into which the perpetrators transfer the victims' funds. Victims cannot withdraw or transfer the funds when they log onto the fictitious bank websites and are prompted to pay additional taxes or fees before the funds can be released. The funds are never released.
Foreign Lottery/Sweepstakes Fraud—Victims are informed they have won a substantial prize in a foreign drawing, but must remit payment for various taxes/fees to receive their winnings. Alternatively, victims are provided with counterfeit instruments, representing a portion of the winnings, which are to be cashed in order to pay the required fees, only to discover they must reimburse their financial institution for cashing a counterfeit instrument.
Overpayment Fraud—Victims who have advertised some item for sale are contacted by buyers who remit counterfeit instruments, in excess of the purchase price, for payment. The victims are told to cash the payments, deduct any expenses, and return or forward the excess funds to an individual identified by the buyer, only to discover they must reimburse their financial institution for cashing a counterfeit instrument.
Recovery Schemes—Victims are contacted by perpetrators posing as law enforcement officers, government employees, or lawyers to inform victims that the persons responsible for the original fraud schemes have been arrested or successfully sued and their bank accounts have been seized. The victims are told the seized money is going to be returned to the victims, but the victims must first pay fees for processing and administrative services. Recovery pitches often target victims many months or years after the original fraud schemes.
The predominantly transnational nature of the mass marketing fraud crime problem presents significant impediments to effective investigation by any single agency or national jurisdiction. Typically, victims will reside in one or more countries, perpetrators will operate from another, and the financial/money services infrastructure of numerous additional countries are utilized for the rapid movement and laundering of funds. For these reasons, the FBI is uniquely positioned to assist in the investigation of these frauds through its network of Legal Attache (Legat) Offices located in over 60 U.S. embassies around the world. By leveraging its global presence and network of liaison contacts, the FBI has successfully cooperated with other domestic and foreign law enforcement agencies to combat, disrupt, and dismantle international Mass Marketing Fraud groups. The FBI participates in the International Mass Marketing Fraud Working Group (IMMFWG), a multiagency working group established to facilitate the multinational exchange of information and intelligence, the coordination of cross-border operational matters, and the enhancement of public awareness of international mass marketing fraud schemes. The current membership of the IMMFWG consists of law enforcement, regulatory, and consumer protection agencies from seven countries, including Australia, Belgium, Canada, the Netherlands, Nigeria, the United Kingdom, and the United States.
Despite the best interagency enforcement efforts to combat mass marketing fraud, the FBI remains cognizant of the fact the only enduring remedy for this crime problem lies in consumer education and fraud prevention programs. Towards this end, the FBI has not only produced its own mass marketing fraud prevention pamphlet, but coordinates on other public information efforts with 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:
II. Overall Accomplishments
As of the end of FY 2009, the FBI was investigating 89 cases of mass marketing fraud and had already recorded multiple indictments and convictions. The following reflects mass marketing fraud pending cases from FY 2005 through FY 2009 as follows: FY 2005—161 cases; FY 2006—147 cases; FY 2007—127 cases; FY 2008—100 cases; and FY 2009—89 cases. Although the FBI has focused its efforts on higher priority WCC matters, mass marketing fraud investigations continue to be addressed utilizing liaison efforts in conjunction with other federal, state, and local law enforcement agencies and the IMMFWG.
III. Significant Cases
Israeli-Based Telemarketing Fraud (New York): This investigation centered on the activities of an Israeli-based boiler room. The perpetrators, all residents of Israel, contacted hundreds of elderly victims in the United States to inform them they had won substantial cash prizes in an international sweepstakes lottery, but in order to claim these prizes, they first needed to pay several thousand dollars in fees. Victims who had already sent money were often contacted again by the managers to send additional money in order to claim their prizes. The total fraud proceeds are estimated to be in excess of $2 million. During 2009, a total of eight subjects were arrested as a result of this investigation. This investigation was worked by FBI New York, in cooperation with the Tel Aviv Fraud Division of the Israel National Police. This case involves the largest number of Israeli citizens ever to be provisionally arrested by Israel in anticipation of extradition.
Vancouver-Based Telemarketing Fraud (Los Angeles): This investigation centered on the activities of a Vancouver-based fraudulent telemarketing and money transfer operation. The perpetrators, residents of Vancouver, British Columbia, mailed letters to thousands of elderly U.S. victims that falsely represented they were winners of a monetary prize, such as a lottery or sweepstakes. Included with the letters was a fraudulent check, which the perpetrators claimed was sent to help them pay some required fees. The victims were instructed to utilize a money transfer service, such as MoneyGram, to pay these fees. Many victims wired these fees before realizing that the checks they received were fraudulent. As a result of this scheme, victims lost in excess of $10 million in money transfer payments. During 2009, two subjects were arrested as a result of this investigation.
This investigation was worked by FBI Los Angeles, in cooperation with the Royal Canadian Mounted Police Project Emptor Task Force, the USPIS, and FTC.
Tips to Protect Yourself from Mass Marketing Fraud
Things you should do:
- Insist on learning the full name, address, and contact information for any company soliciting your business, personal information, or assistance.
- Insist that all solicitors send materials to you in writing so that you are able to study the full details of the offer, as well as any guarantees, and/or refund policies.
- Research all solicitors through the Better Business Bureau, state Attorney General's Office, and/or consumer protection service in the state or city where the company is located.
- Prior to making any significant financial decisions, consult a family member, friend, your attorney, accountant, and/or other trusted advisor for an objective opinion.
- To stop receiving telephone solicitations, instruct solicitors to delete your contact information from all call lists and register with the FTC's "Do Not Call" Registry.
- Report suspicious telemarketing calls, mail solicitations, or advertisements to the FTC at 1-877-FTC-HELP or online at http://www.ftc.gov.
Things you should NOT do:
- Do not make any payments to either secure a prize or improve your chances of winning a prize.
- Do not be intimidated into making hasty financial decisions by high-pressure sales tactics.
- Do not provide anyone with your sensitive personal or financial information unless:
a) it is to an entity whose legitimacy is personally known to you, and
b) you personally initiated the contact with the entity.
- Do not send funds via wire or electronic money transfer services unless:
a) it is to an entity whose legitimacy is personally known to you, and
b) you personally initiated the contact with the entity.
- Do not be lured by offers that are simply too good to be true...they almost certainly are.
Asset Forfeiture/Money Laundering
I. General Overview
The mission of the AF/MLU is to promote the strategic use of the asset forfeiture and to ensure field offices employ the money laundering violation in all investigations, where appropriate, to disrupt and/or dismantle criminal enterprises. The asset forfeiture and money laundering process identifies targets, disrupts, and dismantles criminal and terrorist organizations and individuals engaged in fraud schemes which target our nation’s financial infrastructure.
The implementation of the asset forfeiture process to criminal investigation provides law enforcement with opportunity to remove the tools of crime from criminal organizations, deprives wrongdoers of the proceeds of their crimes, recovers property that may be used to compensate victims, and deters crimes. The asset forfeiture process can destroy the financial infrastructure of criminal enterprises, return funds to victims of large-scale fraud, and share forfeiture property with state and local law enforcement agencies.
The AF Program and the ML Program provide support to all FBI investigative programs, to include International and Domestic Terrorism.
The DOJ defines money laundering in the following manner:
"Money laundering is the process by which criminals conceal or disguise the proceeds of their crimes or convert those proceeds into goods and services. It allows criminals to infuse their illegal money into the stream of commerce, thus corrupting financial institutions and the money supply, thereby giving criminal’s unwarranted economic power."
The FBI maintains a proactive approach when investigating money
laundering. After identifying a Specified Unlawful Activity that generates illicit proceeds, a parallel financial investigation is conducted in order to locate the proceeds and prove their connection to the underlying crime.
The FBI's AF Program is one of the most successful in all of law enforcement. In the WCCP, the bulk of the monies seized are returned to victims of the frauds that generated them. This is unique to the FBI and some other agencies. Most people associate the seizure and forfeiture of assets with narcotics trafficking. Although the FBI does seize assets from drug dealers and other criminals, the WCCP is the largest contributor to the FBI's forfeiture program.
II. Overall Accomplishments:
Through FY 2009, 350 cases investigated by the FBI resulted in 43 indictments and 84 convictions of ML fraud criminals. For FY 2009, the following ML most notable accomplishments were achieved for the WCCP: $81.9 million in restitutions, $643,000 in recoveries, and $1.5 million in fines. The chart below reflects ML pending cases from FY 2005 through FY 2009 as follows: FY 2005—507 cases; FY 2006— 473 cases; FY 2007—548 cases; FY 2008—402 cases; and FY 2009—350 cases.
Money Laundering Pending Cases
III. Significant Cases
Cashtrica (New York): FBI New York Agents participated in a joint investigation with Rockland County, NY, law enforcement, targeting La Cosa Nostra (LCN) subjects that were running a multimillion-dollar Internet gambling operation out of Costa Rica. Based on experience garnered in that investigation, agents formulated a plan to attack the entire internet gambling industry by targeting all facets to include; online gaming companies, banks, money transfer businesses, and the owners of same. Significant targets included: Neteller PLC, Partygaming PLC, Sportingbet PLC, Fireone Group PLC, HSBC, Dresdner Bank, and Canaccord Capital, to name a few. As a result of investigation to date, the targets listed above, as well as several others, are fully cooperating with the FBI. Key cooperators have recently been tasked to identify companies, individuals, assets, and to conduct consensual recordings. Liaison with Legats in Canada, Europe, South America, and the Bahamas has been necessary to the success of this ongoing investigation into what has become a virtually worldwide criminal industry. This investigation thus far has obtained evidence of money laundering, mail fraud, wire fraud, bank fraud, securities fraud, credit card fraud, and illegal gambling. There has also been clear indication of an expertise in moving vast sums of money around the world while effectively masking the associated transactions. Forfeiture to date: $364,265,995.86.
Hassan Nemazee (New York): Hassan Nemazee is a multimillionaire Iranian-American investment banker. Nemazee is one of the top political donors in the United States. Nemazee obtained approximately $230,000,000 in loans from Bank of America (BoA), HSBC, and other banks. It was determined that the collateral securing the loans was based on false and misleading information. Nemazee was arrested as he was attempting to flee to Italy. A meeting was held with Daylight FAs, retained by BoA to trace the flow of illegal proceeds. Numerous seizure warrants were executed against various accounts owned/controlled by Nemazee. Having learned that they were in possession of illegal proceeds, Citibank wired $75,000,000 to the U.S. Marshals Asset Forfeiture Account for forfeiture. Plea negotiations with Nemazee's partner are continuing, which could lead to the receipt of another $40 million.
Bernard Madoff (New York): On December 10, 2008, Bernard L. Madoff was arrested for perpetrating the largest Ponzi scheme in history, $64 billion, through the Madoff Investment Advisory (MIA). The fraud involved thousands of victims and numerous targets. The Madoff office space contained approximately 3,000 banking boxes of potential evidence; additionally, a warehouse contained approximately 9,000 more banking boxes of evidence. Madoff conspired with two computer programmers who created a proprietary software system which was used to document false trades and issue bogus statements. The system was the foundation for the Ponzi scheme. The fraudulent documents were so effective the fraud went on for decades and cleared audits by the SEC as well as major financial institutions. Various institutions and individual funds invested their clients' funds into the Madoff Ponzi scheme. These entities are referred to as "feeder funds" because they "fed" the MIA Ponzi fraud. Without this consistent injection of capital the fraud could not have been maintained for the length of time that it was. As many as 50 funds fed the MIA. Many of the feeder fund managers appear to have been excessively compensated. Finally, Madoff used an elaborate flow of funds from domestic banks to offshore banks to cloak the fraudulent activity in the MIA.
I. General Overview
In March 2009, the FBI created the Forensic Accountant Program (FAP) and instituted the Forensic Accountant Unit (FAU) within the CID, FCS. The Forensic Accountant position was developed in an effort to attract and retain top-tier accounting professionals who possess the ability to conduct complex, thorough forensic financial investigations.
The FAP is the culmination of years of effort to advance and professionalize the FBI’s financial investigative capabilities. The FBI’s FoAs will be expected to testify as expert witnesses in judicial proceedings and essentially retain ownership of the financial investigative portion of complex investigations with little guidance from the respective Case Agent(s).
The mission of the FAU is to support all FBI investigative matters requiring a forensic financial investigation and to ensure the FBI’s financial investigative priorities are continually addressed. The FAU seeks to provide the highest caliber of financial investigative work-product and support as well as contributing to the FBI’s Intelligence Cycle. The FAU is developing and implementing a rigorous training curriculum and partnering with an array of public and private organizations in an effort to cultivate a workforce that provides superior results both in the field offices and at FBIHQ.
Forensic Accountant Core Training Session Training Course
In FY 2009, the FAU initiated development of a rigorous training curriculum titled the Forensic Accountant Core Training Session (“FACTS”). FACTS is a comprehensive introductory program of instruction designed to increase an FoA’s proficiency in the critical areas necessary to conduct a financial investigation. This extensive course will develop the FoAs aptitude and knowledge in handling a financial investigation according to pertinent rules and regulations across a wide variety of subject matters. The FAU developed the FACTS training curriculum and will be responsible for administering the training. The material covered will focus primarily on providing an overview of FBI programs and systems, financial investigative topics and techniques, resources available to develop an investigation, legal training, and expert witness-testifying techniques.
BankScan is an in-house-created software application which translates physical bank and credit card statements into an electronic medium, thus dramatically decreasing the time-consuming data-entry process. In FY 2009, FAU deployed the BankScan training initiative, “Train the Trainer” with the goal of full field office deployment by the end of FY 2010. The Train the Trainer Initiative was completed, and each field office “Trainer” received the requisite training and was supplied with the necessary software and equipment to implement the BankScan Project. Since its implementation, the FBI has benefited through an exponential increase in financial investigative efficiency and productivity.
Electronic Subpoena Production
The Electronic Subpoena Production initiative represents a joint undertaking of the FBI's CID, DOJ's Criminal Division Fraud Section, and the IRS. Electronic Subpoena Production requires financial institutions to digitally produce account data stored electronically by relying on existing Rule 17 of the Federal Rules of Criminal Procedure. When used in conjunction with BankScan, the introduction of this new process will substantially increase the efficiency and effectiveness of FBI forensic financial investigations.
Financial Analyst Conversion
In FY 2009, the FAU developed a selective conversion process to transition qualified FAs to the FoAP to provide the FBI's investigative programs with the highest caliber of financial investigative work-product and support. This effort will ensure only those individuals who meet the FoA requirements are selectively converted to the FoAP.
III. Significant Cases
The FAU has provided substantial support to major cases such as the Madoff, Stanford, and Bad Medicine (health care fraud) investigations.
Madoff Investigation: The FAU provided substantial support to the New York Field Office to address the Madoff investigation. The FAU coordinated with several field offices to provide three Forensic Accountants, equipment, and resources to support this investigation over a five-month period. The critical work performed by the FoAs significantly advanced the investigation and the respective statistical accomplishments.
Stanford Financial Group: The FAU supported Houston Field Office by providing an FA to support the Stanford Financial Group investigation. This $7 billion Ponzi scheme has resulted in numerous indictments and guilty pleas. The financial investigation performed by the FA was a key contribution in furthering this investigation.
Bad Medicine:The FAU coordinated with multiple field offices to provide three FAs to expedite this financial investigation. To date, 168 indictments charging 107 individuals have been returned. The forensic financial analysis performed by the FAs was critical to the investigation and the resulting indictments.
Scott Rothstein: The FAU augmented the Miami Field Office providing Forensic Accountants and FAs in the ongoing Scott Rothstein financial investigation. The investigation into this $1 billion Ponzi scheme was advanced by the contributions of the FAs and FoAs and contributed to the five-count indictment and the subsequent guilty plea entered by the defendant.
AF/MLU Asset Forfeiture/Money Laundering Unit
BCBSA Blue Cross and Blue Shield Association
BLMIS Bernard L. Madoff Investment Services, LLC
BoA Bank of America
CAIF Coalition Against Insurance Fraud
CFO Chief Financial Officer
CFTC Commodities Futures Trading Commission
CID Criminal Investigative Division
CMS Centers for Medicare and Medicaid Services
DBA Doing Business As
DEA Drug Enforcement Administration
DME Durable Medical Equipment
DOJ Department of Justice
EBRI Electronic Bank Records Initiative
ECU Economic Crimes Unit
FA Financial Analyst
FACTS Forensic Accountant Core Training Session
FAP Forensic Accountant Program
FAU Forensic Accountant Unit
FBI Federal Bureau of Investigation
FCIU Financial Crimes Intelligence Unit
FCS Financial Crimes Section
FDA Food and Drug Administration
FFETF Financial Fraud Enforcement Task Force
FHA Federal Housing Administration
FIC Financial Intelligence Center
FIF Financial Institution Fraud
FIFU Financial Institution Fraud Unit
FinCEN Financial Crimes Enforcement Network
FINRA Financial Industry Regulation Authority
FoA Forensic Accountant
FSP Forfeiture Support Project
FTC Federal Trade Commission
FY Fiscal Year
GDP Gross Domestic Product
HCF Health Care Fraud
HCFU Health Care Fraud Unit
HECM Home Equity Conversion Mortgage
HHA Home Health Agency
HHCFI Home Health Care Fraud Initiative
HHS Health and Human Services
HUD Housing and Urban Development
HYIF High Yield Investment Fraud
ICE Immigration and Customs Enforcement
IMMFWG International Mass Marketing Fraud Working Group
IPofA Investment Properties of America
IRS Internal Revenue Service
LCN La Cosa Nostra
LEGAT Legal Attache
MBA Mortgage Bankers Association
MFTF Mortgage Fraud Task Force
MFWG Mortgage Fraud Working Group
MIA Madoff Investment Advisory
NJAH New Jersey Affordable Homes
NMFT National Mortgage Fraud Team
NHCAA National Health Care Anti‑Fraud Association
NICB National Insurance Crime Bureau
NSP Neighborhood Stabilization Program
OIG Office of Inspector General
PEO Professional Employer Organization
SAR Suspicious Activity Reports
SEC Securities and Exchange Commission
SIGTARP Special Inspector General for the Trouble Asset Relief Program
STM ST Microelectronics
USAO U.S. Attorney's Office
USPIS U.S. Postal Inspection Service
WCC White Collar Crime
WCCP White Collar Crime Program