The final three chapters in our book discuss various fraud schemes that, unfortunately, we are all too likely to experience personally, if we have not already. Far too many of these fraud schemes permeate our society and daily experiences. Most of you, your families, or loved ones will be touched in some way by one or more of the fraud schemes covered in these chapters. We certainly can’t stop this fraud, but we can educate ourselves and those around us on these schemes, their signs and symptoms, and means of prevention and protection.
In this light, our final discussion of the semester will create an open discussion of many of these schemes, helping to educate all of us and raise our level of awareness. In this way, we are better prepared to avoid these situations, educate others, and help to protect ourselves and those we care about.
For this discussion, choose a fraud scheme from Chapters 15, 16, or 17. Educate yourself on your particular selected scheme, including some outside research to broaden your understanding. Post a 2 to 4 paragraph summary of the following:
Summary description of the fraud scheme
Educate us regarding the symptoms and warning signs of the particular scheme

Summarize a case study example of the fraud scheme, either from research or from personal experience, of the fraud in your life or that of someone close to you
Discuss methods of prevention for your selected fraud scheme, including how you can educate others in your life to help protect them
Please be sure to cite any outside resources that you may use.
CHAPTER
Consumer Fraud
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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.
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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
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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)
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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.
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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.
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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.
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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
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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
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CHAPTER 15
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? 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
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CHAPTER 15
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? Gathering information from businesses
? Stealing wallets or purses
? Breaking into victims’ homes
? Stealing mail
? Completing “change of address” forms
? Shoulder surfing
? Phishing
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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
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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.
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CHAPTER 15
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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
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CHAPTER 15
15
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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
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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
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CHAPTER 15
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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
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CHAPTER 15
20
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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.
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CHAPTER 15
22
2
? Figure 15.4 provides an
example of three mystery
shopping letters.
1
3
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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
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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.
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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.
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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.
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CHAPTER 15
27
CHAPTER
Bankruptcy, Divorce,
and Tax Fraud
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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.
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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.
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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).
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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
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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
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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.
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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
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CHAPTER 16
8
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CHAPTER 16
9
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CHAPTER 16
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CHAPTER 16
11
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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.
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CHAPTER 16
13
? The usual parties involved in a divorce include:
? The marital partners
? Attorneys for both sides
? A divorce court
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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.
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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
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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
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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
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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.
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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.
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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
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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
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CHAPTER 16
22
? Bankruptcy court
? U.S. Trustee
? Court-appointed or panel trustee
? Examiners
? Debtors
? Creditors
? Adjusters (operations or field agents)
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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CHAPTER 16
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? 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