17-3 Bankruptcy Fraud Overview The DOJ Bankruptcy Trustee Manual lists various frauds: Conceals property from the bankruptcy proceedings Makes a false oath or account in relation to a bankruptcy case Makes a false declaration, certification, verification, or statement in relation to a bankruptcy case. Makes a false proof of claim Receives a material amount of property from the debtor with intent to defeat the Bankruptcy Code Gives, offers, receives, or attempts to obtain money, property, reward, or advantage for acting or forbearing to act in a bankruptcy case Transfers or conceals property with the intent to defeat the Bankruptcy Code Conceals, destroys, mutilates, or falsifies documents relating to the debtor's property or affairs Withholds documents related to the debtor's property or financial affairs from the standing trustee or other officer of the court
17-4 Bankruptcy Fraud Penalties Typical penalty: a maximum of five years in prison or a maximum fine of $250,000, or both, per bankruptcy offense. Many cases include more various offenses. A typical bankruptcy case could involve false declarations, property concealment, conspiracy, mail fraud and money laundering. Section 802 of the Sarbanes-Oxley Act (SOX) of 2002: A possible 20 years in prison for one who knowingly alters, destroys, mutilates, conceals … with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case.
17-5 Frequent Bankruptcy Frauds Concealment of assets: the most common type of B fraud Fraudulent conveyances involve assist concealment Petition mills and multiple filing schemes are the second and third most common bankruptcy frauds. A petition mill typically involves unqualified persons who offer fee-based financial advice, credit counseling, and bankruptcy filing services. In multiple filing schemes, fraudsters typically file bankruptcy petitions in a number of states using different identities. Additional forms of bankruptcy fraud include trustee fraud, attorney fraud, forged filings, embezzlement, credit card fraud, and bust-outs.
17-6 Bankruptcy Proceedings Bankruptcy petitions are filed in federal bankruptcy courts, and the proceedings are administered by DOJ trustees. Bankruptcy trustees are responsible for maintaining fair and orderly proceedings as well as ensuring compliance with all bankruptcy laws. Trustees have an affirmative obligation to collect and review the required documentation and refer any cases of suspected fraud to the U.S. Attorney’s Office and sometimes to the FBI. They are also responsible for recommending to the U.S. Trustee the filing of a motion with the court for dismissal of the debtor’s petition if the debtor does not cooperate as required or commits fraud, or if the petition is abusive.
17-7 Filing of Documents, Discovery, and the Meeting of the Creditors The bankruptcy normally includes filing of many schedules, and federal tax returns, and detailed accounting and financial records, as well as financial statements for business debtors. Additional information can be obtained through discovery. Bankruptcy discovery rules incorporate the federal discovery rules and give any party in interest the right to obtain a court order to examine any entity involved with the case. In addition to the discovery process, all bankruptcy proceedings, with few exceptions, require debtors to appear in person at the first meeting of the creditors.
17-8 Sources of Discovery for Concealed Assets Tax Returns Bank, Brokerage, and Other Statements Loan Applications Cash Flow Analyses Credit Reports Public Records Unusual Assets Conveyances
17-9 Investigations of Businesses Review all sales records for sources of income Verify all vendors Review communications Scrutinize payments Verify the existence of inventories, fixed assets, and all other assets Study previous income tax returns and income statements for evidence of expenses for patents, R&D, and other intangible assets Review work in progress and unbilled work
17-10 Divorce Versus Bankruptcy Divorce attorneys do not always have the financial expertise that many bankruptcy attorneys have. Bankruptcy cases tend to involve creditors who could be engaged in asset concealment and who possess information-rich credit applications from debtors. Bankruptcy cases tend to involve fraudulent conveyances and hidden assets immediately prior to the filing. In divorce, however, one spouse could hide assets from the other for many years prior to the filing. While many bankruptcies genuinely have no assets to hide, divorcing couples are more likely to be solvent and have assets to hide.
17-11 Identity Theft The fastest growing crime in the United States, identity theft occurs when one person uses another’s personal identifying information, such as driver’s license or SSN, to obtain goods and/or services in the other person’s name. The problem of identity theft has existed throughout history, but it has become much more prevalent with the advent of the Internet and our electronic society.
17-12 Federal Laws Relating to Identity Theft The Identity Theft and Assumption Deterrence Act of 1998 This was the first major act passed to combat identify theft. It punishes anyone who …knowingly transfers or uses, without lawful authority, a means of identification of another person with the intent to commit, or to aid or abet, any unlawful activity that constitutes a violation of federal law, or that constitutes a felony under any applicable state or local law. Under this act, means of identification is broadly interpreted to include any type of information that can identify a particular individual such as numbers for social security, credit cards, and drivers’ licenses.
17-13 Identity Theft Penalty Enhancement Act Congress created the crime of aggravated identity theft-- identity theft, or intended identity theft, committed in connection with certain other listed crimes. The penalty for most crimes listed in it is a mandatory extra two years in prison. Examples of listed crimes include the following: Thefts relating to employee benefit plans. False impersonation of citizenship. False statements in the acquisition of a firearm. Crimes relating to mail, bank, and wire fraud. Crimes relating to nationality and citizenship, passports, and visas.
17-14 The Internet False Identification Prevention Act of 2000 This act makes selling counterfeit versions of certain official identification cards illegal. The law also makes it illegal to sell electronic templates for making counterfeit identification cards. There is a potential one-year prison sentence if one fake identification card is made from a given template, but the potential prison sentence increases to 20 years if the template is used to make five or more cards. Plenty of Web sites and message boards contain instructions on how to make false identification cards. The process is not terribly difficult with a computer.
17-15 Identify Theft Prevention People should be aware of possible fraudsters: Dumpster divers and garbage pickers. Shoulder surfers Hackers Company insiders Impersonators Mail thieves Public records diggers Scammers (includes phishers and phone scammers) Fake ATM Purse snatchers and pickpockets
17-16 Warning Signs of Identity Theft Unauthorized address changes A serious warning sign is evidence of any type of unauthorized change in a mailing address. Unauthorized account transactions All monthly statements should be carefully inspected for unauthorized activity. Improper transactions should be immediately reported. Incorrect information on credit reports Any significant incorrect information on a credit report could indicate identity fraud. Bill collectors Unfortunately, one of the first symptoms of identity fraud victimization could be phone calls or letters from bill collectors for unknown credit transactions.
17-17 Identity Theft Investigation Identity thieves can be caught various ways. Tracing The true identities of fraudsters can sometimes be obtained by using video surveillance records, telephone records, and the Internet methods discussed in the earlier chapter on forensic science to trace them. Catching thieves in the act In theory, identity thieves can be caught in the act of obtaining or using others’ identity information. This approach is not generally helpful because immediate arrests do not normally take place unless a law enforcement officer happens to be at the scene of the crime. Controlled delivery This is the strongest and most reliable way to catch identity thieves.