The FBI Mortgage Fraud 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.
Mass Marketing Fraud
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.
Forensic Accountant Program
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