CHAPTER Consumer Fraud Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After studying this chapter, you should be able to:  Define what consumer fraud is and understand its seriousness.  Understand identity theft.  Classify the various types of investment and consumer frauds. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 2  Consumer fraud  Any fraud that targets individuals as victims  Examples  Telephone fraud  Magazine fraud  Sweepstakes fraud  Foreign money offers  Counterfeit drugs  Internet auctions  Identity theft  Bogus multilevel marketing schemes Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 3  Federal Trade Commission survey results  Estimated that more than 25 million adults—10.8 percent of the adult population—were victims of fraud during 2011  Identified characteristics of victims of consumer fraud  Ranked top-five most frequently reported types of consumer fraud 1. Weight-loss products (estimated 5.1 million victims) 2. Prize promotions (estimated 2.4 million victims) 3. Unauthorized billing—buyers’ club memberships (estimated 1.9 million victims) 4. Unauthorized billing—Internet services (estimated 1.9 million victims) 5. Work-at-home programs (estimated 1.8 million victims) Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 4  Identity theft is used to describe those circumstances when someone uses another person’s name, address, Social Security number (SSN), bank or credit card account number, or other identifying information to commit fraud or other crimes.  The most detrimental consequence of identity theft isn’t the actual loss of money, but rather the loss of credit and reputation along with introduction of erroneous information that is extremely difficult to restore or fix. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 5  Perpetrators of identity theft follow a common pattern after they have stolen a victim’s identity.  Although some fraudsters perpetrate their frauds in slightly different ways, most generally follow the stages in the cycle shown in Figure 15.1. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 6 Stage 1. Discovery 1. Perpetrators gain information. 2. Perpetrators verify information. Stage 2. Action 1. Perpetrators accumulate documentation. 2. Perpetrators conceive cover-up or concealment actions. Stage 3. Trial 1. First dimensional actions— Small thefts to test the stolen information. 2. Second dimensional actions— Larger thefts, often involving personal interaction, without much chance of getting caught. 3. Third dimensional actions— Largest thefts committed after perpetrators have confidence that their schemes are working. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 7  Buying large-ticket items  Taking out car, home, or other loans  Establishing phone or wireless service in victim’s name  Using counterfeit checks or debit cards  Opening a new bank account  Filing for bankruptcy under the victim’s name  Reporting a victim’s name to police in lieu of their own  Opening new credit card accounts  Changing victim’s mailing address Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 8  Common ways to steal someone’s identity  Posing as a legitimate employee, government official, or representative of an organization with which the victim conducts business  Shoulder surfing—watching or listening as a victim enters a credit card number  Dumpster diving—rummaging through consumers’ trash to gain access to preapproved credit card applications, tax information, receipts containing credit card numbers, social security receipts, or financial records  Skimming—using a storage device to gain access to valuable information when a credit card is processed Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 9  Skimming is predominantly used to commit credit card fraud but it is gaining in popularity among identity thieves.  Skimming devices are small and easy to hide  Skimming occurs during transactions at common locations including:  Restaurants  ATM machines  Gas pumps  Stores Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 10  Gathering information from businesses  Stealing wallets or purses  Breaking into victims’ homes  Stealing mail  Completing “change of address” forms  Shoulder surfing  Phishing Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 11  Guard your mail from theft  Opt out of preapproved credit cards  Check your personal credit information (credit report) at least annually  Protect SSNs  Safeguard personal information  Guard trash from theft  Protect wallet and other valuables  Use strong passwords  Protect your home  Protect your computer  Opt out of information sharing Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 12  When people commit identity theft, they can face criminal charges, civil actions, or both.  Every state, as well as the federal government, has statutes prohibiting identity theft in its various forms.  Table 15.1 lists some of the more common identity fraud federal statutes that every fraud examiner should know about. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 13 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 14  Contact the Federal Trade Commission (FTC).  Contact financial institutions where your identity might have been used to establish a fraudulent account.  Consider changing personal identification numbers (PINs), bank account cards, checks, and other personal identifying data. Organizations and agencies that provide assistance to victims of identity theft  Federal Trade Commission (FTC)  Federal Bureau of Investigation (FBI)  U.S. Secret Service  U.S. Postal Inspection Service  Internal Revenue Service  Social Security Administration  Credit reporting agencies  Check verification companies Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 15 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 16  Identity theft is not the only type of consumer fraud.  Other types of scams target consumers.  These scams fall into five categories:  Foreign advance-fee scams  Work-at-home schemes  Bogus mystery shopping scams  Telemarketing fraud  Investment scams Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 17  Nigerian money offers  Other foreign-advance fee scams  Clearinghouse scam  Purchase of real estate scam  Sale of crude oil at below market price  Disbursement of money from wills Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 18 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 19  Multilevel marketing  Fraudulent multilevel marketing organization (pyramid or Ponzi scheme)      Headhunter fees Front loading Opportunity meetings Snake oil plans Ground floor opportunity  International multilevel marketing schemes  Chain letters  Mail stuffing  Product testing  Craft assembly Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 20 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 21  Perpetrators promise victims a job that involves strolling through stores, shopping for merchandise, and then filing reports on their experiences.  Consumers are asked to pay an “application charge” and they are promised supplies with a list of places and companies that may hire mystery shoppers.  This list is a simple collection of department store addresses and contact information.  Other scams require that consumers buy merchandise from a particular Web site.  Although some mystery shoppers’ advertisements are legitimate, the majority are not. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 22 2  Figure 15.4 provides an example of three mystery shopping letters. 1 3 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 23  Basics  Boiler rooms  Target lists  Scripts  Promises  Scams that prey on the elderly  Safeguards against telemarketing fraud  Avoid sales calls  Telemarketing fraud involves large and small transactions Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 24  Investment fraud is any fraud that is related to stocks, bonds, commodities, limited partnerships, real estate, or other types of investments.  In investment fraud, perpetrators usually make fraudulent promises or misstatements of fact to induce people to make investments.  Investment frauds are often set up as Ponzi schemes.  Investments frauds can occur within or outside business organizations. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 25  Mortgage fraud involves falsifying or omitting information when obtaining a mortgage loan.  The goal is to obtain a higher loan than would be provided if the truth was disclosed. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 26  During the subprime mortgage crisis, banks and mortgage brokers were encouraging and even, in some cases, creating fictitious information.  This is an unusual form of consumer fraud in that consumers can play both roles as perpetrator and victim.  In many cases, consumers were encouraged to commit fraud for the purpose of getting a loan on a home that they could not afford.  In the end, they become victims of the lender who gained fees to originate their loan.  The ensuing subprime mortgage crisis, which was arguably the result of multiple frauds, led to massive worldwide economic consequences of epic proportions. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 15 27 CHAPTER Bankruptcy, Divorce, and Tax Fraud Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After studying this chapter, you should be able to:  Explain why fraud is so prevalent in bankruptcy, tax, and divorce cases.  Describe the nature of bankruptcy and be familiar with bankruptcy codes.  Understand civil and criminal bankruptcy fraud statutes.  Identify the participants involved in the bankruptcy process.  Recognize different bankruptcy and divorce fraud schemes.  Understand how perpetrators fraudulently conceal and transfer assets and income in bankruptcies and divorces.  Define tax fraud and be familiar with common tax fraud schemes.  Understand how money laundering is used to commit fraud. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 2  Fraud is common in bankruptcies, divorces, and tax payments because, in all three situations, assets are being taken away from someone or some organization and given to someone else.  In bankruptcy cases, assets are given to creditors.  In divorces, assets are given to spouses and attorneys representing spouses.  In tax cases, assets are claimed by the government.  To keep assets from being taken, individuals often attempt to fraudulently hide or transfer assets so that those assets remain unknown or cannot be discovered.  Transfers of assets to offshore bank accounts, relatives, friends, and other hiding places are all too common in bankruptcy, divorce, and tax fraud.  Both bankruptcy and divorce fraud can be criminal or civil matters.  Tax fraud cases are usually criminal matters. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 3  CPAs and other fraud examiners can play an important role in both investigating and testifying in bankruptcy and divorce fraud cases and in testifying in tax fraud cases.  The arm of the IRS that investigates tax fraud is known as Criminal Investigation (CI). Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 4  Roles that fraud examiners can assume in divorce and bankruptcy cases include the following:  Serve as an examiner or a trustee in bankruptcy cases  Serve on creditors’ committees or represent creditors’ committees by investigating the debtor’s financial affairs and preparing investigation reports in bankruptcy cases  Assist the U.S. Department of Justice, the Office of the United States Trustee, panel trustees, and others by preparing detailed reports of investigation findings in bankruptcy cases  Assist in recovering assets for creditors in both divorce and bankruptcy cases  Serve as private investigators to find hidden assets or examine lifestyles of divorce or bankruptcy participants Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 5  Several different types of bankruptcy and divorce frauds are noteworthy:  Bankruptcy or divorce resulting from fraud  Bankruptcy and divorce used to perpetrate fraud  Bankruptcy and divorce used to conceal fraud Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 6  Tax fraud can be committed against any organization that collects taxes, including the federal government, state governments, local governments, or other taxing authorities.  If the IRS suspects that an individual or entity is underpaying its taxes, the individual’s or entity’s tax return will be audited by an IRS tax compliance auditor.  If the audit reveals that taxes were underpaid, the auditor can either assess civil fines and penalties or, worse, refer the case to the IRS’s Criminal Investigation division. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 7  The IRS’s CI division is directed at the taxpayers who willfully and intentionally violate their known legal duty of voluntarily filing income tax returns or paying the correct amount of income, employment, or excise taxes.  CI’s fraud work  Encompasses a wide variety of cases involving tax and money laundering crimes  CI investigations  Involve a broad spectrum of individuals and industries from all facets of the economy, including small business owners, selfemployed individuals, and large corporations Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 8 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 9 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 10 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 11 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 12  The party attempting to prove divorce fraud must prove all three of the following:  A false representation, usually one of fact, was made by the other party.  The defendant had knowledge or belief that the representation was false or made the representation with reckless indifference to the truth.  The defendant had intent to induce the plaintiff to act or refrain from acting in a certain way.  Most divorce fraud litigation results from one of two allegations:  The plaintiff spouse claims that the defendant hid assets so they would not have to be shared or taken away.  The values assigned to assets were unrealistically low, thus resulting in an unfair divorce settlement. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 13  The usual parties involved in a divorce include:  The marital partners  Attorneys for both sides  A divorce court Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 14  When allegations of fraud, such as hiding or illegally transferring assets arise, the attorney for the party alleging fraud usually hires investigators to try to locate such hidden assets.  Investigative techniques such as surveillance, public records searches, and even subpoenas of private records are often used.  Any evidence that is discovered by the investigators will be presented by the attorney to the divorce court in order to obtain the most favorable divorce settlement possible.  Most divorce fraud cases are civil cases, but where evidence of egregious fraudulent acts by one marital partner has been shown, law enforcement officials are often involved and criminal charges can be filed. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 15  The most common fraud scheme utilized in fraudulent bankruptcy filings, like divorce, involves the concealment of a debtor’s assets.  Concealment prevents these assets from being liquidated and transferred to creditors to extinguish debts.  Examples  Individual not listing assets  Business owner transferring assets to family members or outside business interest controlled by owner Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 16  Bankruptcy fraud also involves schemes including:  Petition mills  Multiple filings  Filing for bankruptcy in different states by utilizing true personal identifiers  Using false names or SSNs to file in the same or different states  False statements  Trustee fraud  Attorney fraud  Forged filings  Embezzlement  Credit card fraud  Bust-outs Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 17  Title 11 of the U.S. Code is a federal statute that governs the bankruptcy process.  The code provides for several types of bankruptcy.  Chapters 1, 3, and 5 of Title 11  Contain general provisions that apply to all bankruptcies.  Chapters 7, 11, and 13 bankruptcies  Apply to specific types of bankruptcy Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 18  Chapters 7 and 11 bankruptcies may be used by corporations or individuals.  Under Chapter 7 bankruptcy, the bankruptcy involves a complete sale or liquidation of all assets and the proceeds are used to pay creditors, usually at some percentage of the debts owed.  Under Chapter 11 bankruptcy, the creditors are told to give the bankrupt entity some time until it can reorganize its operations and finances so as to settle its debts and continue to operate in a reorganized fashion.  If reorganization does not work in Chapter 11 bankruptcy, judges often order a Chapter 7 bankruptcy. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 19  Chapter 13 bankruptcies are reorganizations (similar to Chapter 11) that can be used by individuals with regular income and debts of $1 million or less.  Debtors make regular payments to creditors over a specified number of years under Chapter 13.  If reorganization does not work in 13 bankruptcies, judges often order a Chapter 7 bankruptcy. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 20  Some of the more relevant sections of the Bankruptcy Code relating to criminal fraud include:  Concealment of Assets, False Oaths and Claims, and Bribery (18 USC § 152)  Embezzlement against the Debtor’s Estate (18 USC § 153)  Adverse Interest and Conduct of Officers (18 USC § 154)  Bankruptcy Fraud Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 21  Some of the most pertinent sections of the Bankruptcy Code that provide civil remedies for bankruptcy fraud:  Offenses Leading to Revocation of Debt Discharge in Chapters 11 and 13 Cases  Fraudulent Transfers Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 22  Bankruptcy court  U.S. Trustee  Court-appointed or panel trustee  Examiners  Debtors  Creditors  Adjusters (operations or field agents) Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 23  Section 327(a) of the Bankruptcy Code allows trustees to employ, with the court’s approval, attorneys, accountants, or other professionals to represent or assist the trustee.  Also, Code Section 1103 allows a creditors’ committee to employ, with the court’s approval, attorneys, accountants, or their agents to perform services for the committee.  Although the code does not specifically authorize it, bankruptcy courts have typically allowed examiners to employ CFEs, CPAs, and other professionals.  Fraud examiners may be used to conduct fraud investigations as well as provide consulting and other financial services. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 24  The two most common bankruptcy fraud schemes are:  The planned bankruptcy, or bust-out  The fraudulent concealment of assets during, or in contemplation of, a bankruptcy  This latter scheme is also the most common type of fraud in divorce cases. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 25  A bust-out may take several forms, but essentially involves intentionally obtaining loans or purchasing inventory on a credit basis and concealing, or absconding with, the proceeds from the loan or sale of the inventory or with the inventory itself before creditors are paid.  Insolvency is declared and bankruptcy is filed, but the creditors find no assets left from which they can be paid.  If the scam works, the perpetrators retain the cash proceeds (from the loan or sales or the inventory) but escape liability for the unpaid debt. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 26  A bust-out may involve setting up a new company or using an established company.  In the first type of bust-out, the fraud perpetrators set up a new company and operate it legitimately for a while in order to establish credibility (a reputation for honesty) and credit with banks (that provide loans) or suppliers (who sell goods on credit).  In the second type of bust-out, the perpetrators quietly buy an established company that already has a good reputation and credit rating and take over its management. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 27  A company’s only listed address and phone number are a post office box and an answering service.  A new company is owned and managed by persons from another state or is vague about its ownership or type of business.  A sudden change is made in a company’s management, especially if the change is made without public notice.  Credit references either cannot be verified or seem too eager to provide favorable references.  The size of orders placed on credit and the credit balances with suppliers suddenly and dramatically increase.  The inventory is suddenly deleted, without explanation.  “Customers” have a history of buying goods at unreasonable discounts. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 28  Although bust-outs are unique to bankruptcy, fraudulent concealment of assets or income is a common type of fraud in both bankruptcy and divorce. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 29  When a company or an individual (including an individual who owns an unincorporated business) files for bankruptcy or an individual files or is involved in a divorce, an estate is created.  This estate consists of the property (or income, in some cases) of the debtor or divorcee, which will be divided among claimants and over which the bankruptcy or divorce court has control.  Handling of estate assets  In a Chapter 7 bankruptcy  All estate assets are liquidated and the proceeds are used to settle debts.  In Chapter 11 bankruptcies or Chapter 13 bankruptcies  These bankruptcy types allow the individual or organization to retain assets and to settle debts from future income.  Some estate assets may be liquidated or turned over to creditors in settlement of debt, but most are not.  In a divorce case  Estate assets of the married couple are usually divided between the two marital partners after the debts of the couple are paid. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 30  Title 18, Section 152, of the U.S. Code makes it a crime to knowingly and fraudulently conceal property of a debtor’s estate or falsify any documents, records, or statements during, or in contemplation of, a bankruptcy.  The Bankruptcy Code provides for revocation of debt forgiveness or discharge obtained through fraud, including concealment of assets or intentional misstatement of records or statements filed in the case.  Even if the debtor is not convicted of criminal or civil fraud, any concealed assets or income that are located can be brought back into the estate to be used to settle debts. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 31  Cash received in payment of receivables may be diverted to another entity, usually a related party.  Inventory may be shipped to an off-site location or sold to a related party or co-conspirator at a steeply discounted price.  Assets or income may be shifted to another entity controlled by the debtor or the divorced party.  Sales may not be reported in the debtor company’s books.  Payments may be made to fictitious individuals or vendors and the amounts diverted to the debtor or to a divorced party.  Income from controlled organizations may be intentionally understated by overstating expenses.  The debtor’s personal expenses may be paid by the company and mischaracterized as business expenses.  The debtor’s or divorced partner’s books and records or other financial information may be damaged or hidden.  Interests in partnerships, corporations, lawsuit proceeds, or other assets may not be disclosed. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 32  Some indicators of possible asset or income concealment:  Transfers of property or large payments to related parties or individuals, such as insiders, shareholders, or relatives  Frequent and unusual transfers between bank accounts, particularly between business and personal accounts  Numerous transactions made in cash that normally are made on account (sales, purchases, etc.)  Unusually large and unexplainable payments to vendors  Unusual or rapid reductions in assets  Increases in operating losses that are not explained by economic factors  Inconsistencies between financial statements or tax returns and the official forms filed for the bankruptcy or records filed in divorce cases  Travel to offshore tax havens or locations that allow secret bank accounts  Missing, inaccurate, or damaged records Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 33 Section 548 of the Bankruptcy Code defines a fraudulent transfer as a transfer made, or obligation incurred, within one year before the bankruptcy petition’s filing date that was 1. made with the actual intent to hinder, delay, or defraud creditors, for example, by giving debtor property to relatives with the intent of placing it beyond the reach of creditors, or 2. made for less than the reasonably equivalent value if a. the debtor was insolvent or became insolvent as a result of the transfer (insolvency for this purpose is defined beginning in Paragraph 906.5), or b. the debtor’s capital remaining after the transfer was unreasonably small (for instance, the debtor was constantly behind in paying bills after the transfer), or c. the debtor intended to, or believed it would, incur debts it would be unable to repay when they matured. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 34  Fraud investigators should always have evidence supporting claims of alleged fraud.  Without supporting evidence, charges of false accusations could result in civil liability against a fraud investigator.  This is especially true in cases involving bankruptcy and divorce fraud. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 35  Money laundering involves engaging in financial transactions so as to conceal the source, identity, or destination of funds.  The U.S. Department of Justice defines money laundering as “the process by which one conceals the existence, illegal source, or illegal application of income and then disguises that income to make it appear legitimate.”  The phrase “money laundering” implies that money that is “dirty” because it was generated illegally is “laundered,” or made to appear that it came from legitimate sources. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 36  Financial institutions and other organizations are required to use CRTs and SARs to report large cash transactions that could be money laundering.  Currency Transaction Reports (CTRs) are used for amounts over $10,000.  With CTRs it is the amount that triggers the filing.  Suspicious Activity Reports (SARs) are used for amounts that are suspicious but are under $10,000.  With SARs it is the suspicious activity or the pattern of deposits or the expenditures that trigger the filing. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 37  Banks  Automobile dealers  Real estate agents  Other organizations that are in positions to collect large amounts of cash Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 38  Three steps in the money laundering process  Placement  Layering  Integration Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 39  In the placement stage, the launderer inserts “dirty money” into a legitimate financial institution.  Usually, this involves making cash deposits to a bank.  This is often the riskiest stage of the laundering process because large cash deposits raise red flags and banks are required to report details regarding large cash transactions to the government.  The layering stage is the most complex step in a laundering scheme.  The purpose of this stage is to make the dirty money difficult to trace. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 40  Layering involves conducting various financial transactions to make it difficult to follow the flow of funds.  Layering may consist of such activities as making wire transfers between accounts located in different countries attached to different names.  It may also include making multiple bank-to-bank transfers, making deposits and withdrawals to continually vary the amount of money in the accounts, exchanging the money to a new currency, and purchasing high-value items (e.g., houses, cars, jewelry) to change the form of the assets. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 41  In the integration stage, the money reenters the economy in a form that appears to come from a legal transaction.  This transaction may involve the sale of other assets bought during the layering stage or giving funds to a business in which the launderer is supposedly “investing.”  Once the money is reintroduced as “clean” into the economy, the launderer can use the funds for personal consumption. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 42 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 43  Cooperative international efforts are necessary to combat money laundering because money laundering often takes place across many national borders.  The Financial Action Task Force (FATF) is an intergovernmental body that strives to combat money laundering globally.  FATF recommendations have been recognized by the International Monetary Fund (IMF) and the World Bank as the international standards for combating money laundering and the financing of terrorism. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 44  FATF recommendations deal with the following categories:  Customer due diligence and record keeping  Reporting of suspicious transactions and compliance  Other measures to deter money laundering and terrorist financing  Measures to be taken with respect to countries that insufficiently comply with the FATF rules  Regulation and supervision Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 45  Federal statutes deal with:  Money laundering instruments  Transportation or transferring of funds into or out of the United States  Transactions deriving from specified unlawful activity  Examples  Title 18, USC §§ 1956 and 1957  Focuses primarily on laundering and racketeering  Title 31, USC §§ 5316 and 5324  Focuses on records and reporting  In addition to federal statutes, individual states, as well as local governments, have developed statutes prohibiting money laundering. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 46  Investigations of money laundering often uncover other fraud or illegal activities.  Many different money laundering schemes  No exact method of detection exists for uncovering every money laundering scheme.  Red flags exist that indicate the existence of money laundering.  One single indicator does not prove that a suspicious transaction is money laundering.  Multiple red flags often exist, and a money launderer is typically identified from a combination of facts and events. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 47  Purchasing large assets or paying periodic expenses with cash  Purchasing property in the name of a nominee using different names on offers, closing documents, and deposit receipts  Purchasing personal use property under a corporate veil, whose ordinary business is inconsistent with this type of transaction  Using a post office box or general delivery address instead of a home address when dealing with contracts  Owning expensive assets without legitimate means of being able to afford them  Conducting suspicious banking activities such as excessive use of cashier’s checks or money orders  A business that does not appear to produce a sustainable amount of legitimate income  A person who is secretive about his or her occupation yet seems to be living an extravagant lifestyle Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 16 48 CHAPTER Fraud in E-Commerce Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After studying this chapter, you should be able to:  Understand e-commerce fraud risk.  Take measures to prevent fraud in e-commerce.  Detect e-business fraud. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 2  Although fraud can occur in any environment, several aspects of e-business environments present unique risks.  These characteristics of the Internet-driven economy create pressures and opportunities specific to ecommerce fraud.  Just like other frauds, these new frauds are perpetrated when pressures, opportunities, and rationalizations interact.  E-commerce elements that create increased or unique risks are listed in Table 17.1. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 3 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 4  Data theft  Passwords  Social engineering  Sniffing  Wartrapping  Portable devices with large-capacity memory  Vandalism Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 5 Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 6  Computer viruses  True virus  Worm  Trojan horse  Spyware  Phishing  Spoofing  Falsified identity  Database query (SQL) injections  Bust-out  False Web sites  E-mail and Web site hijacking Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 7  Preventing fraud in each business setting involves reducing or eliminating the elements that motivate fraud: pressure, opportunity, and rationalization.  In e-business settings  Reducing pressures and eliminating rationalizations has thus far proved difficult.  The lack of personal contact makes it hard to know what pressures exist or what rationalizations perpetrators are using. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 8  Security through obscurity is the tactic of keeping security strategies, encryption algorithms, and processes secret in an effort to confuse attackers.  In contrast, true security is found when algorithms and processes are subjected to intense review and stand the test of time. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 9  One of the best ways to prevent fraud in e-business settings is to focus on reducing opportunities, usually through the implementation of appropriate internal controls.  In traditional businesses, internal controls involve five different elements:      The control environment Risk assessment Control activities or procedures Information and communication Monitoring  In e-businesses, the first three elements are often the most important. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 10  Risk assessment identifies the risks of doing business with ebusiness partners.  A key part of the assessment focuses on the control environment of those organizations.  Another part identifies key risks in the electronic exchange of information and money  Control procedures can be tailored to the special challenges that these exchanges present  Control procedures can be installed to counter the risk of data theft, sniffing, unauthorized access to passwords, falsified identity, spoofing customer impersonation, false Web sites, and e-mail or Web site hijacking.  A specialized branch of risk assessment is intrusion detection.  Firms specializing in intrusion detection try to gain access to networks and secure information and report their findings to management.  Normally, a security audit includes an investigation into technology, processes, controls, and other factors at a client. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 11  Adequate separation of duties  Proper authorization of transactions and activities  Adequate documents and records  Physical control over assets and records  Independent checks on performance Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 12  In e-business, this control is useful for making sure that individuals who authorize transactions are different from those who execute them.  Segregation of duties can help prevent bribery because employees don’t have complete control of transactions. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 13  Every transaction must be properly authorized.  The most common authorization controls:  Passwords  Firewalls  Digital signatures and certificates  Biometrics Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 14  Documents and records are the physical objects by which transactions are entered and summarized.  Examples include sales invoices, purchase orders, subsidiary records, sales journals, employee timecards, and checks  In e-business, documents are present in electronic form.  This lack of hard-copy documentation creates opportunities for fraud.  Because many of the traditional document controls aren’t available in e-commerce, additional controls are needed.  The primary electronic transaction and document control is encryption.  Encryption protects confidential and sensitive information (such as checks, purchase or sales transactions) from being “sniffed” or stolen. Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 15  Companies need to go to special lengths to protect computer equipment, programs, and data files.  Onsite access control needed for  Physical facilities  Equipment such as computers and servers  Software  Applications  Data  Offsite location of services  Cloud-based architectures Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 16  A key component in e-business controls is the careful and continuous review of the other four components—the independent checks and internal verification.  Independent checks are particularly important in preventing fraud in e-business.  Organizations should always conduct checks on their ebusiness partners.  To prevent fraud, gaining an understanding of the management or the organization’s business partners and what motivates them is important.  In particular, three items must be examined:  Backgrounds  Motivations  Decision-making influence Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 17  Data-driven fraud detection  Endeavor to understand the business or operations of the organization  Identify what frauds can occur in the operation  Determine the symptoms that the most likely frauds would generate  Use databases and information systems to search for those symptoms  Analyze the results  Investigate the symptoms to determine if they are being caused by fraud Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 18  Many hackers use tools that were originally written to troubleshoot networks and catch perpetrators rather than to hack into systems.  Fraud investigators who specialize in e-commerce need to understand the tools and methods that perpetrators use.  Examples of knowledge and expertise needed for catching perpetrators and securing systems:  Knowledge of web servers, e-mail clients and servers, and intrusion programs such as Nmap, and Wireshark  Knowledge of Unix/Linux  Knowledge of the security strengths and weaknesses in Windows  Knowledge of computer scripts (written in languages such as Python, Ruby, and Bash) that monitor logs and systems for potential break-ins  Knowledge of intrusion detection systems (IDS) is on the market today Albrecht, Fraud Examination, 6th Edition. ©2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 17 19 
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