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Central Indiana Chapter #52

ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Ponzi Schemes
A Brief History
Named after con artist, Charles Ponzi
Began in the 1920s with discounted postal reply coupons
Investors lost about $252 million (2018 in 2018 dollars)
Also known as "multi-level marketing schemes"
Ponzi Schemes offer extraordinary and near impossible returns

Common Pyramid Structure


Schemer For the Ponzi Scheme to succeed,
the initial schemer will need to have
a continuous flow of exponential
First Round investors to fund the previous tier.

Most people believe they will


Second Round
never fall into the scheme, but
savvy investors continue to find
Next Round new methods to recreate the
scheme.

Modern Ponzi Schemes


Schemes range from Bitcoins to "Hamilton" tickets
Bernie Madoff, scheme valued at $65 billion
Allen Stanford, stole around $7 billion in certificates of deposits
BitConnect (BCC), impossible 1% daily compounded interest rate
Ezubao, peer-to-peer lending scheme valued at $7.6 billion

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Embezzlement
A Brief History
Earliest documented cases date back to the 15th-Century
Illegal misappropriation of funds for personal uses
Differs from larceny in that assets comes into possession legally
Cases include skimming $1 off the register to large-scale transfers
Embezzlement may consist of property, vehicles, and resources

First National Bank of Chicago


Four rogue employees attempted to embezzle
nearly $70 million from customer accounts to
banks in Austria.

The scheme involved employees electronically


transferring funds to New York banks with offices in
Europe. The plan required significant information
and banking knowledge. Fortunately, Merrill Lynch &
Co. noticed the large over drafts and unraveled the
scheme.

Modern Embezzlement Schemes


Girl Scouts of America, scout leader embezzled from multiple accounts
Bay Presbyterian Church, accountant mismanaged nearly $300,000
Omar Siddiqui, set up dummy accounts and $80 million in kickbacks
Kenneth Lay, chairman of Enron abused corporate funds
Rita Crundwell, embezzled more than $53 million from Dixon, IL

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Money Laundering
A Brief History
Major surges during the 19330s Prohibition in the US
Transforming illegal profits from activities to legitimate assets
War on Drugs led to increased financial monitoring and drug laws
After 9/11, the Patriot Act put laundering money back in the spotlight
G7 Nations increased surveillance of global laundering activities

https://people.exeter.ac.uk/watupman/undergrad/ron/methods%20and%20stages.htm
Modern Money Laundering Schemes
Latin America, laundered money comes mainly from drugs and trafficking
Terrorism organizations use a reverse money laundering schemes
President Suharto, believed to have $73 billion pass through his accounts
Meyer Lansky, father of modern laundering was a former mob accountant
Al Capone, best known mobster known for using actual laundromats

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Insider Trading
A Brief History
Strong v. Repide established new precedents for "insiders"
US Court of Appeals in NY ruled that information must be disclosed
Insider trading applies to anyone with private knowledge to trading
SCOTUS said gifts of information to family are illegal
Hundreds of Wall Street investors have been convicted

Galleon Group

https://archive.nytimes.com/www.nytimes.com/interactive/2011/03/08/business/galleon-graphic.html?src=tp

Modern Insider Trading Schemes


Rajat Gupta, MD of McKinsey & Co. leaked boardroom secrets
SAC Capital Advisors, first large firm to confess to criminal conduct
Sandy Lewis, manipulated stock prices after observing short-selling
Martha Stewart, traded ImClone shares before bad news was public
Raj Rajaratnam, received one of the largest prison sentences for trading

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Real Estate Fraud


A Brief History
Rampant during the lates 90s and early 2000s
Real estate valued well above fair market value
Trigger to the 2008s housing crisis
Flipping houses may use inflated values for quick turnarounds
Appraisals may stem from bribery, blackmail, or extortion

https://www.fbi.gov/stats-services/publications/mortgage-fraud-2010

Modern Real Estate Fraud Schemes


Short sale occurs when specialist falsifies true value of property
Reverse mortgage occurs when manipulates seniors into purchasing loans
Affinity fraud occurs when groups of people are targeted
Occupancy fraud when a buyer uses the home instead of intended income
Straw buying is when someone makes a purchase for another

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Insurance Fraud
A Brief History
Causes safe consumer to pay more in the long-run
Act to defraud an insurance process
Hard fraud occurs when there is deliberate plan to commit a loss
Soft fraud occurs when policyholders exaggerate claims
Companies use statistical tools to look for abnormal/outlier claims

https://www.insurance-canada.ca/2013/03/24/fsco-protect-yourself-from-fraud-after-a-collision/

Modern Insurance Fraud Schemes


Life insurance, commonly with faking a death claiming loss of memory
Health care insurance, hiding information to receive medical benefits
Automobile, victims tend to be diagnosed with soft-tissue injuries
False claims, common whiplash exaggerations to pain
Property insurance, obtain payments worth more than the actual value

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

501 (c)(x) Classifications


List of 501 (c)(x) Classifications
501 (c)(3) are tax exempt entities that are typically charities
501 (c)(4) are social welfare organizations
501 (c)(5) are typically labor or agriculture organizations
501 (c)(6) are business leagues or trade boards
501 (c)(7) are social or recreational clubs
501 (c)(8) are fraternal benefit societies

Modern 501 (c)(3) Fraud Schemes


United Way of America, CEO diverted $1.2 million in charitable funds
Foundation for New Era, victims lost $135 million
Hale House, new directors stole over $700,000 from funds
Help Hospitalized Veterans, 25% of total funds raised went to help
Feed the Children, plagued by financial impropriety and mismanagement

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Corruption
A Brief History
Corruption dates back centuries to the beginning of mankind
Petty corruption deals with small scale public services
Grand corruption deal with high level officials participating in illicit deals
Systematic corruption happens with little transparency or impunity
Most prevalent in politics and business practices around the world

https://asiapacificreport.nz/2016/07/25/peter-solo-kinjap-corruption

Modern forms of Corruption


Campaign finances, Obama campaign fined by FEC for serious errors
Lobbying, growing concerns of foreign agents committing fraud
Military budget, Operation Ill Wind found DoD officials accepting bribes
Police, fraudulent activities peaked during the prohibition in the US
Business, Fortune 500 Companies bribe government officials regularly

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Government Agencies
List of Common Financial Government Agencies
Securities and Exchange Commission (SEC)
Enforce and regulate federal security laws
Federal Deposit Insurance Corporation (FDIC)
Provide insurance on bank deposits up to $250,000 per depositor
Federal Trade Commission (FTC)
Works to prevent fraudulent and unfair business practices
Federal Financial Institutions Examination Council
Supervise Federal Reserve System, FDIC, National Credit Union, OTS
Federal National Mortgage Association (Fannie Mae)
Purchase mortgages from banks to promote lending activity
Federal Home Loan Mortgage Corporation (Freddie Mac)
Promote stability by purchasing mortgages from smaller banks
Federal Reserve System
Central bank of the US and controls credit/monetary policies
Office of Thrift Supervision (OTS)
Supervise federal and state savings banks and loan associations
Commodity Futures Trading Commission (CFTC)
Protect commodity and future markets from fraud and manipulation
Financial Industry Regulatory Authority (FINRA)
Private corporation that is a self-regulates brokerage/exchange markets
Consumer Financial Protection Bureau
Provide educational material for consumers
Financial Crimes Enforcement Network
Bureau of the US Treasury that analyzes domestic/international finances
Export-Import Bank of the United States
Official credit agency of the US in facilitating import/exports
Defense Finance and Accounting Service
Financial agency for the DoD and military entities

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Offshore Financing
Facts
Shadow banks work outside of the normal banking regulations
Shell companies are corps. disguise business ownership
Financial Action Task Force issues blacklists of suspicious territories
Main reasons are for tax relief or money laundering
Some investors place money offshore during unstable economic times

https://www.icij.org/investigations/panama-papers/explore-panama-papers-key-figures/

Modern Offshore Financing Activities


Panama Papers, 11.5 million documents from Mossack Fonseca
Paradise Papers, 13.4 million documents related to offshore accounts
Bahamas Leaks, 1.3 million files from companies in the Bahamas
Caribbean Tax Havens, most nations do not have corporate tax
Luxembourg and Ireland, known for confidentiality and asset protection

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Sarbanes-Oxley Act
A Brief History
Act enacted on July 30, 2002 to regulate public/private entities
11 Sections cover responsibilities and criminal penalties
Sen. Paul Sarbanes (D-MD) and Rep. Michael Oxley (R-OH-4)
SEC may implement regulations and requirements
Written after major scandals including Enron fall and WorldCom

https://www.a2q2.com/blog/sox/sox-404-overview-approach/

Sarbanes-Oxley Act
Enron, energy company that fell due to accounting irregularities
Tyco International, violated Securities Act with earnings inflation
Adelphia, founder's family stole $100 million in company assets
Peregrine Systems, executives charged with conspiracy to commit fraud
WorldCom, SEC found that $11 billion in assets had been inflated
Arthur Anderson, audit company convicted for obstruction of justice

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Dodd-Frank Act
A Brief History
Act enacted on July 21, 2010 by President Obama
Sponsored by Barney Frank and Chris Dodd
Reshaped financial regulations and institutions
Established the Consumer Financial Protection Bureau
Improved financial stability and consumer protection (Brookings)

https://www.valuewalk.com/2016/05/dodd-frank-act-banks/

Dodd-Frank Act
US Government profited $68 billion from emergency bail out
Volcker Rule prohibits banks from trading hedge/equity funds
Lincoln Amendments must push out swaps to nonbank affiliates
Liquidity Coverage Ratio forces banks to hold a ratio of liquid assets
Net Stable Funding Ratio enforces institutions to limit runnable liabilities

Central Indiana Chapter #52


ASSOCIATION OF CERTIFIED FRAUD EXAMINERS PRESENTS

Glass-Steagall Act (1932)


A Brief History
Defines commercial and investment banking
Sponsored by Sen. Carter Glass and Rep. Henry Steagall
President Roosevelt signed the bill into law to reform banking
Prevents security firms and investment banks from taking deposits
Pecora Investigation of the '29 crash led to the GSA

https://www.laprogressive.com/reinstate-glass-steagall/

Glass-Steagall Act
Citibank and Salomon Smith Barney affiliation led to the act's decline
Critics of the act argued that GSA could not have prevented the '08 fall
Gramm-Leach-Bliley Act repealed two provisions with firms
Office of Comptroller of the Currency aggressively took on the act
President Clinton declared the act "no longer appropriate"

Central Indiana Chapter #52