Financial Crimes

Financial Crimes - Financial Crimes Financial Crimes The...

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Unformatted text preview: Financial Crimes Financial Crimes The Federal Bureau of Investigation (FBI) investigates matters relating to fraud, theft, or embezzlement occurring within or against the national and international financial community. These crimes are characterized by deceit, concealment, or violation of trust, and are not dependent upon the application or threat of physical force or violence. Such acts are committed by individuals and organizations to obtain personal or business advantage. The FBI focuses its financial crimes investigations on such criminal activities as corporate fraud, health care fraud, mortgage fraud, identity theft, 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. Financial Crimes The mission of the FCS is to oversee the investigation of financial fraud and to facilitate the forfeiture of assets from those engaging in federal crimes. The FCS is divided into four units: the Economic Crimes Unit, Health Care Fraud Unit, Financial Institution Fraud Unit the Asset Forfeiture/Money Laundering Unit. Economic Crimes Unit The Economic Crimes Unit is responsible for significant frauds targeted against individuals, businesses and industries to include: corporate fraud, insurance fraud (nonhealth care related), securities and commodities fraud, mass marketing fraud, telemarketing fraud, Ponzi schemes, advance fees schemes, and pyramid schemes. Health Care Fraud Unit The Health Care Fraud Unit oversees investigations targeting individuals and/or organizations who are defrauding public and private health care systems. Areas investigated under Health Care Fraud include: billing for services not rendered, billing for a higher reimbursable service than performed (upcoding), performing unnecessary services, kickbacks, unbundling of tests and services to generate higher fees, durable medical equipment fraud, pharmaceutical drug diversion, outpatient surgery fraud, and Internet pharmacy sales. Financial Institution Fraud Unit The mission of the Financial Institution Fraud Unit is to identify, target, disrupt, and dismantle criminal organizations and individuals engaged in fraud schemes which target our nation's financial institutions. Areas investigated in the financial institution fraud arena include: financial institution failures, insider fraud, check fraud, counterfeit negotiable instruments, check kiting, loan fraud, and mortgage fraud. The mission of the Asset Forfeiture/Money Laundering Unit (AF/MLU) is to promote the strategic use of asset forfeiture and to ensure that field offices employ the money laundering violation in all investigations, where appropriate, to disrupt and/or dismantle criminal enterprises. In addition to these responsibilities, the AF/MLU provides strategy and guidance to field offices as it relates to identity theft across all investigative programs. Asset Forfeiture/Money Laundering Unit SECURITIES AND COMMODITIES FRAUD With losses totaling approximately $40 billion per year, combating Securities and Commodities Fraud remains a priority for the FBI. The losses are associated with decreased 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. As of FY 2006, the FBI is investigating 1655 cases of Securities and Commodities Fraud and has 157 agents dedicated to the problem. The importance of this issue is further evidenced by the fact that these 157 agents represent a 25 percent increase in staffing for this type of fraud over the last two years. Why to study? The nation's economy is increasingly dependent on the success and integrity of the securities and commodities markets. As a result, there is a very real need to diligently prosecute criminal activity in the markets Whether through college savings plans or retirement accounts, more and more Americans are choosing to invest in the U.S. securities and commodities markets. In fact, the Securities and Exchange Commission (SEC) suggests that the number of people investing in securities and commodities has increased 600 percent since 1980. This large scale investment growth, however, has also led to significant growth in the amount of fraud and misconduct seen in these markets. Market Manipulation Market Manipulation or "Pump and Dump" schemes are based on the manipulation of lowervolume stocks purchased on small overthecounter markets. The basic goal of Market Manipulation fraud is to artificially inflate ("pump") the price of penny stocks so that the conspirators can sell ("dump") their shares at a large profit. The "pump" involves recruiting unwitting investors through false or deceptive sales practices, public information, or corporate filings. Boiler room Many of these schemes use "boiler room" methods where brokers, who are bribed by the conspirators, use high pressure sales tactics to increase the number of investors and therefore raise the price of the stock. Once the price of the targeted shares reaches a certain point, the perpetrators "dump" their shares at a huge profit and leave innocent investors to foot the bill. These schemes generate an estimated $6 billion in losses each year and have the ability to significantly impact investor confidence. Computer intrusion One recent trend seen in Market Manipulation cases involves "computer intrusion." Computer intrusion for the purpose of Market Manipulation often includes a criminal hacking into victims' personal online brokerage accounts and using them to purchase shares of a penny stock to inflate its price. As in normal "Pump and Dump" schemes, once the price of the stock reaches a certain point, the perpetrators dump their own shares and walk away with a large profit. High Yield Investment Fraud High Yield Investment Fraud schemes can take many forms, all of which are characterized by offers of low risk investments that guarantee an unusually high rate of return. Victims are enticed by the prospect of easy money and a fast turnaround. Ponzi scheme Pyramid scheme Prime bank investment fraud Ponzi scheme One common form of these frauds is the Ponzi Scheme, which is named after early 20th century criminal Charles Ponzi. These schemes use money collected from new victims, rather than profits from an underlying business venture, to pay the high rates of return promised to earlier investors. This arrangement gives investors the impression that there is a legitimate, money making enterprise behind the fraudster's story, but in reality, unwitting investors are the only source of funding. Pyramid scheme Pyramid Schemes are another common form of High Yield Investment Fraud. In Pyramid Schemes, as in Ponzi Schemes, money collected from new participants is paid to earlier participants. In Pyramid Schemes, however, participants receive commissions for recruiting new participants into the scam. Prime bank investment fraud Another type of High Yield Investment Fraud is Prime Bank Investment Fraud. In these schemes, victims are told that certain financial instruments (notes, letters of credit, debentures, or guarantees) have been issued by wellknown institutions such as the World Bank and offer a riskfree opportunity with high rates of return. Perpetrators often claim that the unusually high rates of return and low risk are the result of a worldwide secret exchange open only to the world's largest financial institutions. Victims are often drawn into Prime Bank Investment Frauds because the criminals use sophisticated terms, legal looking documents, and claim that the investments are insured against loss. Advanced Fee Schemes In these scams, victims are persuaded to advance relatively small sums of money in the hope of realizing a much larger gain. In Securities Fraud, victims are told that in order to have the opportunity to be an investor in an initial offering of a promising security, investment (business or land development) or commodity, the victim must first send funds to cover taxes or processing fees. Hedge Funds (HFs) are private investment partnerships that routinely accept only highwealth clients willing to invest at least hundreds of thousands of dollars. Historically, these high wealth investors were deemed "financially sophisticated," and, as a result, HFs have been unregulated and are not required to register with any federal or state regulatory agency. More recently, many middle class investors have been exposed to HFs through ancillary investments such as pensions and endowments. There are over 8,800 HFs currently operating, with over $1.3 trillion in assets under management. The lack of regulatory scrutiny has made the industry vulnerable to fraud by HF managers. The types of fraud associated with HFs include: overstatement of HF assets, misappropriation of assets, miscalculation of HF manager performance fees, trading on insider information, market timing, and late trading. Hedge Fund Fraud In May 2006, Kirk Sean Wright, the founder and Chief Executive Officer of International Management Associates (IMA), was charged with 22 counts of mail fraud and three counts of Securities Fraud relating to his improper operation of IMA. IMA is a highyield hedge fund managing more than $184 million in assets, including those of a group of current and former NFL players. The FBI investigation began when it learned that the athletes had been requesting disbursements from their investment accounts for several months without receiving any money. It is alleged that Wright had misappropriated the assets of these and other IMA investors. The loss associated with this fraud is estimated to be more than $150 million. In June 2006, Wright was arrested by the FBI on charges relating to this case. As of December 1, 2006, no trial date has been set. This case was a joint effort by the FBI, SEC, DOJ, and IRS. Case: International Management Associates Commodities Fraud Commodities fraud is perpetrated by firms or individuals that sell futures and options through illegal means. For example, investments in precious metals or commodities may be sold based on fraudulent sales pitches claiming high rates of return, with little risk, if clients purchase commodities through a financing agreement. Sometimes the perpetrators will offer the opportunity to speculate on movements in the price of commodities, without ever actually taking delivery of the commodity. Traders may also illegally manipulate the price of a commodity. In these cases, the traders report fraudulent pricing information or cornerthemarket on certain commodities in order to inflate the price for their profit. Case: British Petroleum In February 2004, British Petroleum (BP) began a scheme to manipulate the propane markets by purchasing propane and then conducting a "short squeeze." The short squeeze was an attempt to pressure "short" sellers of propane to purchase propane to cover their positions. In June 2006, a BP commodities trader pled guilty to one count of conspiracy to manipulate the price of a commodity and admitted to conspiring with others to manipulate the price of propane during February 2004. This investigation has been conducted jointly by the FBI, the Commodities Futures Trading Commission, DOJ, U.S. Attorney's Office and the U.S. Postal Inspection Service. As of December 1, 2006, a sentencing date has not been set. The perpetrators of these frauds are foreign currency trading firms that entice individuals into investing in the spot foreign currency (Forex) market by false claims and high pressure sales tactics. Additionally, individual currency traders employed by large financial institutions may manipulate Forex prices and divert profit to themselves. Corrupt currency trading firms use fraudulent sales practices including false and deceptive guarantees of future return on investment. These firms may even create artificial account statements that reflect a purported investment in the Forex market when, in reality, no such investment has been made. When the currency trading firms actually invest clients' funds into the Forex market, they do so not with intent to conduct a profitable trade for the client, but merely to "churn" the client's account. Churning creates large commission charges benefitting the trading firm at the expense of the client's interests. Foreign Currency Fraud Broker Embezzlement Investors and corporations must place a significant amount of trust in their brokers because these individuals have access to information related to their clients' personal or corporate wealth. Unfortunately, some unscrupulous brokers abuse this trust by stealing directly from their clients. These criminals may forge investor checks, transfer funds or securities without authorization, sell nonexistent securities, accept undisclosed kickbacks on the sale of investments or produce false and misleading statements in the sale of the investments. Late Day Trading is the illegal buying and selling of mutual funds after regular market hours. After the market closes each day, no one is allowed to trade mutual funds and therefore, the price remains constant. If any material information affecting a fund becomes public after hours, an opportunity is created for traders to capitalize on the set price. Traders illegally exploit this opportunity by buying or selling the fund at the closed price, knowing that the material information released will affect the value at the opening of the market and making significant illegal profits for their clients. Late Day Trading is like making your bet after you've seen your opponent's cards. Late Day Trading FBI accomplishments During FY 2006, the FBI investigated 1165 cases of Securities and Commodities fraud and recorded 302 indictments and 164 convictions. Many of these Securities Fraud cases are pending plea agreements or trials. The following notable statistical accomplishments are reflective in FY 2006 for Securities and Commodities Fraud: $1.9 billion in Restitutions, $20.6 million in Recoveries, $80.7 million in Fines, and $62.7 million in Seizures. The chart below is reflective of the number of pending cases from FY 2002 through FY 2006. Individual project Study on Whitecollar crimes Significant Case Rogue Trader Crushes Bank Societe Generale HEALTH CARE FRAUD All health care programs are subject to fraud, however, Medicare and Medicaid programs are the most visible. Estimates of fraudulent billings to health care programs, both public and private, are estimated between 3 and 10 percent of total health care expenditures. The fraud schemes are not specific to any area, but are found throughout the entire country. The schemes target large health care programs, public and private, as well as beneficiaries. Certain schemes tend to be worked more often in certain geographical areas, and certain ethnic or national groups tend to also employ the same fraud schemes. The fraud schemes have, over time, become more sophisticated and complex, and are now being perpetrated by more organized crime groups. Health Care Fraud is 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, followup 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. 30minute sessions being billed as 50+ minute sessions. Federal Criminal Offenses Mail Fraud 18 U.S.C. 1341 Wire Fraud 18 U.S.C. 1343 Health Care Fraud 18 U.S.C. 1347 Conspiracy 18 U.S.C. 371 Counterfeiting & Forgery 18 U.S.C. 470514 Embezzlement & Theft 18 U.S.C. 641649 Money Laundering 18 U.S.C. 1956, Racketeering 18 U.S.C. 19611964 Bribery 18 U.S.C. 201 Fraud and False Statements 18 U.S.C. 10011036, Obstruction of Justice 18 U.S.C. 15011518, Tax Crime 26 U.S.C. 72017217 Bank Fraud 18 U.S.C. 1344 Economic Espionage 18 U.S.C. 18311839 Telemarketing Fraud 18 U.S.C. 23252327 Corporate Crime Crimes committed either by a corporation or by individuals identified with corporation Corp. is business entity with separate legal personality from natural persons that either: Own it, manage its activities, or are employed by it 5th & 14th Amendment Due Process Clauses "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws." Corp. is a "person' to receive due process Corp can be charged with a crime Individuals can be charged with a crime Fines, imprisonment, home detention, community confinement, costs of prosecution, forfeitures, restitution, supervised release Amelioration White-Collar/Corp. Crime Penalties Sanctions can be lessened if: Defendant takes responsibility Assists with investigation Testifies against other perpetrators Some Corporate Crime Sites TOP TEN Corporate Crime Prosecutors 2004 TOP TEN Corporate Crime Defense Attorneys: tors081304.htm If you are the U.S. Attorney in Manhattan, you have little choice but to prosecute corporate crime. Manhattan is the corporate crime center of the universe. html TOP 100 CORPORATE CRIMINALS: Corporate Crime Enforcement Reform: Risks of Corporate & White-Collar Crime are Diffuse Victims Risks: General public & environmental quality (pollution) Consumer (price fixing, unsafe products) Employee (unsafe working conditions) Government (tax fraud) Competitor (pricefixing) Economic security, Safety, Government Integrity & Effectiveness, Market Integrity foreclosure scam ...
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