Objectives:
- Understand what activities constitute “white collar crime”
- Compare and contrast the various schemes that are perpetrated by white collar criminals
- Acknowledge and evaluate the typical target victims for various fraudulent schemes
Introduction
There are numerous forms of white collar crime, and innumerable variations of each of these forms. Some general descriptions of these crimes are frequently used. This glossary lists such terms, defines them generally, and provides some comments on them which hopefully will be of assistance to investigators who must cope with them. The review avoids legal definitions, stressing instead the most frequent situations in which particular white collar crimes occur, the most frequent victims of particular abuses, the modi operandi, and the relationships between offenses and enforcement avenues. Where appropriate, references are made to a list of sources which follow this review and from which additional information on specific crimes may be obtained.
ABUSE OF TRUST
The misuse of one’s position and/or of privileged information gained by virtue of that position in order to acquire for oneself (or for another in whom has an interest) money, property, or some privilege to which one is not entitled. Abuse of trust often involves as well a violation of fiduciary duty.
The victims of such abuses are those who rely to their detriment, for example, an individual or group which misuses a trusted position. The abuse of trust can occur in many areas but is a situation which arises most frequently in the following four white collar crime areas:
- Banking – where abuse of trust can involve self-dealing in connection with loans or credit to oneself, one’s friends or business associates.
- Securities – where insider information may be used for personal benefit at the expense of clients, stockholders and others.
- Commercial bribery — where the procurement and competitive bidding processes may be manipulated
- Embezzlement &fiduciary violations — where trustees, attorneys, etc., may misuse property or funds in their custody.
Remedies for abuses of trust include criminal, civil, and regulatory remedies, enforceable under federal and state law.
ADVANCE FEE SCHEMES
Advance fee schemes are schemes in which assurances of some future benefit are made, with full compensation to the promisor/perpetrator to be deferred until final performance, but where the perpetrator has no intention of performing or in obtaining full compensation for performance but rather is interested only in obtaining the partial payment requested as a service fee or an advance good faith deposit (often called a “returnable” deposit).
Typical victims of advance fee schemes are businessmen who cannot obtain customary banking or credit sources to continue their business operations or to expand them. They thus pay deposits or fees to others to arrange loans or credit for them.
These frauds are customarily prosecuted under the federal mail fraud statute and state larceny and fraud statutes. Check with the US Postal Inspector for further information.
ANTI-TRUST OFFENSES
Anti-trust offenses are combinations of restraint of trade, price fixing or other schemes to unlawfully drive competitors out of business; and/or agreements among competitors to share business according to some agreed formula (such as bid-rigging conspiracies and discriminatory pricing agreements); and/or domination of a business area by one or a few enterprises.
Victims of anti-trust offenses are businessmen who are hurt as competitors and purchasers of goods or services who pay higher prices and/or deprived of the choice of where and how they will buy.
Anti-trust offenses constitute violations of both federal and state criminal and civil laws. Check with local prosecutors, state attorneys-general, US Department of Justice and regional offices of the US Federal Trade Commission.
AUTO REPAIR FRAUD
Auto repair fraud is a form of consumer fraud involving maintenance services to automobiles. Auto repair frauds fall into several categories:
- Overcharging for service or parts, or use of shoddy or substandard parts
- Failure to perform promised services or repairs
- Charging for services not performed or parts not used
- Performing services or repairs that are unnecessary or unwanted
Remedies usually involve state fraud or larceny laws, state and local licensing laws, etc. Many law enforcement agencies have adoptee pro-active detection techniques, such as the use of decoy vehicles.
BAIT & SWITCH
Bait and switch is a form of consumer fraud involving misleading advertising. The substance of the bait and switch is the situation in which a store’s advertised bargain is little more (and often nothing more) than an inducement (for example, bait) to lure a customer to the store where he is presented with similar but higher priced items (for example, the switch). Thus the advertisement does not constitute a bona fide offer for sale of the merchandise in question.
This may be because 1) the advertised item is not available on the premises or is available in unreasonably short supply; or 2) acts are undertaken to prevent the customer from purchasing the advertised item in favor of higher priced merchandise (for example, by downgrading the advertised goods).
Such sales tactics only sometimes are sufficiently blatant to support criminal fraud prosecutions. More frequently they are dealt with through civil remedies invoked by local consumer protection offices and district attorneys (where they have civil jurisdiction), consumer divisions of state attorneys general offices, and the US Federal Trade Commission.
BANKING VIOLATIONS
Banking violations are usually executed by insiders or by customers of banks, savings and loan association, or credit unions. Insider violations generally involve embezzlements or self-dealing (where insiders lend money to themselves or to businesses in which they have an interest, or take bribes or special favors to make loans or to refrain from collecting loans). Violations by outsiders would include false financial statements to induce a bank to make a loan, the use of fraudulent collateral, check kiting, etc.
Victims are depositors and shareholders, bank stockholders, creditors, the federal government as the insurer of deposits, and surety companies who bond bank employees and officials.
These violations are prosecuted under federal and state statutes proscribing embezzlement, false entries in books and records of banks (including digital records), and misapplications. Violations in state-chartered institutions are often federally prosecuted because deposits are federally insured. The F.B. I. should first be contacted with respect to any banking violations.
BANKRUPTCY FRAUD
Bankruptcy frauds involving financial insolvency. Victims of bankruptcy frauds are usually creditors and suppliers of the failed or failing business, although “silent partners” and stockholders can also be victimized by managers of the business who operate fraudulently. There are two major types of bankruptcy fraud:
- The scam or planned bankruptcy, in which the assets, credit and viability of a business are purposely and systematically milked to obtain cash which is hidden by scam operators.
- Fraudulent concealments or diversions of assets in anticipation of insolvency so they cannot be sold for the benefit of creditors (for example, squirreling away assets when bankruptcy appears imminent).
Planned thefts and fencing activities may be associated with either type of bankruptcy fraud as a means by which assets can be diverted and converted to cash.
Bankruptcy fraud is primarily a federal violation; the FBI should be notified if there are indications of such fraud. Some forms of bankruptcy fraud, such as “scams” should also be violations of state fraud and larceny laws.
BOILER ROOM
A boiler room scam is a technique used to promote fraudulent sales of securities, charitable solicitations, etc.
The boiler room technique involves the use of telephone solicitors, who might operate locally or by use of long distance lines, who call lists of victims, soliciting them to buy stock, contribute to charities, etc. The telephone salespersons work on high commissions using pre-planned sales pitches. Their services, particularly in charitable solicitations, are sometimes sold to otherwise legitimate enterprises, which rarely see much of the collections. The technique depends upon glib misrepresentations.
The use of this technique exposes the perpetrators to criminal prosecution under federal wire fraud and mail fraud laws and under fraud and non-registration provisions of the Securities Acts administered by the US Securities and Exchange Commission. It also exposes the users to criminal or civil action in state and local levels under state fraud statutes, state “blue-sky laws” regulating securities sales, and local and state laws requiring licensing and filing of information in connection with charitable solicitations
BUSINESS OPPORTUNITY SCHEMES
One of the most prevalent and multi varied forms of fraud in which victims are offered the opportunity to make a living, or to supplement their income by going into business for themselves (full or part-time), by purchasing franchises or equipment to manufacture some item, sell merchandise, or perform some service.
Victims are generally individuals with some small pool of money they have saved and to whom the prospect of the promised independence and/or income is attractive.
Such schemes range from being total shams to being opportunities whose promised returns are highly illusory.
The operators of these schemes have essentially one goal, which is to acquire the money of subscriber or investor victims. Work-at-home merchandising schemes (knitting machines, raising minks, etc.) or the sale of distributorships (cosmetics, special rug cleaning processes, etc.) are common examples of the kinds of situations involved in the business opportunity fraud. The opportunity presented by the fraud operator often includes the promise of guaranteed markets for the goods or services to be produced. Often the schemes induce the victim to enlist other victims, creating a pyramid scheme.
These schemes are generally prosecuted under federal mail fraud laws, and state laws which proscribe larceny, false pretenses, etc. Check with US Postal Inspector, US Federal Trade Commission, state attorneys general offices, and local prosecutors.
CHAIN REFERRAL SCHEMES
Any scheme in which the victim is induced to part with money or property on the representation that he will make money through inducing others to buy into the same deal.
First-tier victims usually believe that those whom they involve in the scheme (second-tier victims) will themselves make money, but since second-tier victims can only make money by involving third-tier victims, and so on, the scheme must eventually collapse. Generally only the fraud operators who manage the scheme make money on it; few first or second tier victims (especially if they are honest) have a sufficient number of friends and acquaintances subject to victimization to come out whole.
One common type of chain-referral scheme is the chain-letter; more sophisticated is the “pyramid scheme,” in which (for example) the victim is sold a franchise to sell both merchandise and other franchises, with the promise of profits on merchandise sold and commissions, or “overrides,” on merchandise sold by any second-or-later tier victim who buys a franchise from him. The profits appear, therefore, to be in selling franchises rather than in selling merchandise. These schemes ultimately collapse of their own weight.
Chain-referral schemes are criminally prosecuted under federal mail fraud statutes, and state fraud laws. Civil actions have been undertaken by the US Federal Trade Commission, state attorneys general offices, and local prosecutors.
CHARITY AND RELIGIOUS FRAUDS
Frauds arising out of the fund-raising activities of charitable and/or religious groups.
Almost anyone can be the victim of such frauds often without even knowing it, but even where the victim may later suspect the fraud, his or her individual loss may be so small that there is little desire to pursue the matter. Three types of fraud situations are observed in this area:
The bogus charity or religious group, where money is solicited for a non-existent organization or cause, or for a charitable front created for the sole purpose of soliciting funds which will end up in the collectors’ pockets.
False of association with a charity or religious group
Where money is solicited on behalf of a legitimate organization or cause by those with no ties to such organization or cause, and who have no intention of giving money to the group
Misrepresentation of the benefits or uses of contributions
Situation in which people solicited for donations to a legitimate charity or religious organization are not aware that most of the money collected reverts not to the charitable cause but rather is used to cover the cost of professional fund raisers and/or administrative overhead expenses. (This is a grey area since professional fund raisers perform a legitimate service for which they may properly and legitimately be compensated)
In some instances charitable organizations themselves are the victims of con men who use them as a front, keeping the lion1s share of the collections, as in the case of boiler room operations (see Boiler Rooms, above). In other instances the solicitation falls into a grey area where otherwise legitimate charities and causes will cover up the fact that most of the monies collected go to salaries, fund raisers, etc.
Depending on the blatant nature of the operation, or where in the “grey area” a con falls, there may be federal criminal violations (for example, mail fraud, wire fraud, etc.), violations of state fraud statutes, violations of local licensing laws dealing with charitable solicitations, or of state laws requiring filing of information with state agencies and full disclosure as to funds collected, costs of solicitation, monies provided charitable beneficiaries, etc.
CHECK KITING
Any of a variety of frauds against banks which depend for success upon the time it takes to clear checks.
The most common form of check-kiting involves the opening of two or more accounts. Balances are built up in each by deposits from the others. Checks are circulated between accounts, with no money taken out of any account, until at least one of the banks develops confidence in the depositor. Then the depositor takes money out of that bank, depending on the circulation of checks between the two or more banks, and the several days it takes to clear checks (especially between different cities), to prevent detection.
Banks are the victims of check kites. When first discovered check-kites appear far more costly than when all transactions are analyzed, since hundreds of thousands of dollars in checks may be circulated to steal only a few thousand dollars, though in some instances massive amounts have been stolen. In many instances, however, business men employ check kites when they cannot get loans from banks to tide themselves over a temporary business situation, and intend to (and often do) put the money back into the accounts before the check-kite is discovered, in such instances the bank has been fraudulently induced to unwittingly grant what amounts to an interest-free loan.
Check-kites are generally prosecuted under federal laws dealing with mail fraud and banking fraud. Local law enforcement investigations should carefully consider signs of check-kites in cases investigated, since they may play a part in other, broader fraud schemes.
COLLATERAL FRAUDS
Frauds involving the holding, taking or offering of collateral pursuant to a financial transaction.
In many instances these will be banking transactions. Beyond this, however, such frauds may be encountered in connection with any transaction in which security is provided, such as security for private loans, non-existent accounts receivable sold or pledged to factors, etc. In some cases collateral used as security may not belong to the person offering it. It could be stolen, such as stolen securities, or borrowed, or already subject to an undisclosed lien or other encumbrance, or there can be some gross misrepresentation as to its value.
Collateral frauds may be violations of federal banking laws, the mail fraud statute, or state fraud laws. They may be elements in bank or corporate violations involving self-dealing, as where a bank officer makes a loan knowing the collateral is bad. Collateral frauds may also be involved in organized crime activities, for example, obtaining proceeds of stolen securities not by an attempted sale which would precipitate discovery when title was transferred, but by their use as collateral for loans.
COMMERCIAL BRIBERY
A form of insider fraud or abuse of trust in which an employee or officer of a private enterprise in some government entity is given a bribe or some other valuable consideration, to induce the employee or official to make a purchase, or grant a contract or some special privilege (such as a zoning variance, license, etc.)
Commercial bribery is a violation of specific statutes in a large number of states, and falls within the proscriptions of more general criminal statutes in other jurisdictions. It may violate numerous federal statutes, depending on the manner in which it is executed.
This crime is one of the most pervasive crimes committed in the US, but relatively little prosecuted. Its impact, in undercutting the integrity of our private and governmental processes is vast, and it adds immeasurably to our taxes and to the cost of goods and services we buy.
COMPETITIVE PROCUREMENT FRAUD
Unlawful manipulation of the public or private contracting process. Victims are competitors not participating in the fraud; the public or private entity soliciting bids (which are believed to be competitive); and customers or constituents of those entities who do not realize benefits that would be derived from a truly competitive procurement process.
Three main forms of competitive procurement frauds are:
Bid rigging
Form of illegal anti-competitive conduct in which bidders in a competitive procurement collusively set their bids so as to deprive the bid solicitor of a competitive process. The effect is an administered bidding process in which the winner and the terms and prices of the goods and services involved in the procurement are set by the conspirators rather than by the “competitive” process. Parties to the conspiracy are thus able to divide among themselves a relevant set of procurement contracts and to fix prices for goods and services at the same time.
Bid fixing
A form of illegal manipulation of the procurement process whereby one bidding party is provided with inside information (by the bid solicitor or an agent thereof) which enables said bidder to gain an unfair advantage over other bidders.
Bribery/kickbacks
Situation in which procurement contracts are let on the basis of the payment of bribes and kickbacks to procurement officials rather than on the basis of competitive procurement guidelines.
Competitive procurement frauds are prosecuted under federal and state criminal laws proscribing mail fraud, criminal conspiracy, bribery, kick-backs, etc. Proof in these cases involves 1) the most painstaking analysis of bidding patterns, 2) examination of relationships between bids to the entity whose defrauding is being investigated and bids by the same bidders to other entities for possible broader patterns of trade-offs, and 3) close scrutiny of performance on the jobs done pursuant to contracts.
COMPUTER FRAUD
Frauds arising out of the use of technology to maintain business and governmental records, such as those relating to inventories, accounts payable and receivable, customer and payroll records.
Computer frauds are rarely uncovered by internal audits. Often the thief or fraud artist is the computer system operator or one having accesS to the computer’s memory system.
CONSUMER FRAUD
Fraud of the marketplace involving seller misrepresentations to buyers.
Victims are consumers of all kinds, individual and institutional, public and private. Common forms of consumer fraud include:
- Selling of useless goods or services, represented as beneficial;
- Miracle face creams
- Misrepresentation of product performance, benefits or safety
- False and misleading advertising
- Failure to service items after sale, including reneging on warranties
- Repair fraud
- Hidden charges with respect to financing, necessary follow-up services, etc
- Weights and measures violations
COUPON REDEMPTION FRAUDS
Frauds which involve cheating manufacturers or merchandisers who promote sales of their products by offering coupons which return part of the purchase price when the products are purchased.
Many manufacturers, primarily in the food business, place coupons in newspaper and magazine ads offering, for example, 15% off if the product is purchased. The grocery store is supposed to redeem the coupon, and will customarily receive a service charge of about 5¢ for handling the transaction. Frauds are committed against the manufacturers by amassing large numbers of coupons and submitting them to manufacturers without any bona fide purchases of the products. These frauds probably amount to many tens of millions of dollars annually.
The modus operandi of this type of fraud involves two basic steps: 1) collecting coupons, and 2) processing for redemption. Collecting coupons may be done by going through large numbers of old newspapers and magazines; sometimes this is done by trash collection or waste disposal companies as a side venture. Processing for collection requires the collaboration of retail merchants, and is most efficiently done with the cooperation of officials of food retail chains, frequently without the knowledge of their companies.
These frauds have involved organized criminal syndicates. They have usually been federally prosecuted under the mail fraud statute, although they could be prosecuted under numerous state fraud statutes.
CREDIT CARD FRAUDS
Frauds arising out of the application for, extension and use of credit-cards. Victims are the issuers of the credit cards. Common credit card abuses include:
- Use of stolen credit cards or card data (physically or digitally)
- False statements in application for credit card, including application under a false name
- Buying with no intention to ever pay, by use of a credit card which was originally legitimately obtained.
Credit card cases are usually referred to prosecutorial agencies by credit card company investigators, who have completed major portions of the investigation. Prosecution can be undertaken under the federal mail fraud statute, and under state fraud, larceny, and forgery laws. Investigators and prosecutors should be careful to avoid becoming collection agencies in such cases by carefully analyzing referrals to be sure that the requisite criminal intent is present, for example to avoid cases in which a credit card holder badly overextended himself and fell hopelessly into debt, as opposed to cases where he never intended to pay.
CREDIT RATING
Credit card rating fraud arises out of the application for, extension and use of credit. Victims are generally the providers of credit. Common credit-related schemes include:
- Sale of good credit ratings to high risk applicants
- False statements in application for credit
- Creation of false credit accounts for purpose of theft
The modus operandi of such schemes vary widely. In recent periods employees of credit rating organizations have altered credit ratings for payment, sometimes using computer techniques; false financial statements are a most common method. On a smaller scale is a fraud which operates like shoplifting, opening a charge account with false information in order to purchase and take away goods simultaneously with opening of the accounts.
Cases involving sales of credit ratings and alteration of computerized ratings are prosecuted under the federal mail fraud statute, since they are world wide in scope. They would also be prosecutable under state laws proscribing fraud, false pretenses, and larceny.
DEBT CONSOLIDATION OR ADJUSTMENT SWINDLES
These are swindles perpetrated against people who are heavily in debt, and against those peoples’ creditors, by purporting to provide a service which will systematically organize the marshaling of the debtor’s assets and income to repay all creditors over a period of time, with creditors refraining from pressing for immediate payment of all sums due. Some such services are provided by legitimate private agencies, and provision is made for such processes in non-bankruptcy proceedings in federal bankruptcy courts.
The modus operandi of this fraud is to use heavy TV and newspaper advertising to lure debtors into signing up. The fraud operators then take their fee, usually a heavy percentage of the total debt, in advance. Sometimes they talk creditors into waiting for their money; in other instances they falsely tell the debtors they have done so. They then take debtors’ assets, and a portion of their weekly or monthly earnings, paying themselves first, and (usually only after they have their entire “fee”) doling out the remainder to creditors. Frequently creditors receive little or nothing, and the debtors are left minus their fees and still in debt.
These schemes have been prosecuted under the federal mail fraud law, state general fraud, larceny, and false pretenses statutes.
DIRECTORY ADVERTISING SCHEMES
These are frauds arising from the selling of printed mass advertising services. These schemes are of two basic kinds: 1) impersonation schemes, in which con men send bills to business enterprises which look like those customarily received; for example from the phone company for yellow page advertising, with directions to make checks payable to entities which look like legitimate payees of such bills; and 2) schemes in which it is promised that advertising will appear in a publication distributed to potential customers but where, in truth and in fact, distribution will be limited to the advertisers themselves, if the directory is printed at all.
These cases have been federally prosecuted under the mail fraud statute and can be prosecuted under state general fraud laws, larceny and false pretenses statutes.
EMBEZZLEMENT AND FIDUCIARY FRAUDS
The conversion to one’s own use or benefit the money or property of another over which one has custody, to which one is entrusted, or over which one exerts a fiduciary’s control.
These crimes are prosecuted under specific statutes, such as those dealing with embezzlement, banking misapplications, etc., the federal mail fraud statute, federal and state laws regulating brokers and investment services, and state general fraud or larceny statutes.
Victims would be financial institutions, businesses in general, pension funds, beneficiaries of estates being managed by fiduciaries, etc.
EMPLOYMENT AGENCY FRAUDS
These area fraudulent solicitations of money or fees in order to find employment for, to guarantee the employment of, or to improve the employability of another. Victims are generally individuals seeking jobs or hoping to improve skills in order to obtain better paying employment opportunities.
Variations of employment related frauds include:
Phony job agencies where agency solicits advance fees in order to find employment for the victim when in fact the service is neither performed nor intended to be provided.
Job training frauds where money is received from victims to train them for specific jobs and 1) the training is not supplied; 2) guaranteed job opportunities on completion of training are not supplied; or 3) the training is misrepresented as being “certified” or “recognized” by employers when it is not and does not qualify the victim for anticipated employment.
These frauds are prosecutable under the federal mail fraud statute and state general fraud statutes. Substantial recoveries have been made for victims of such frauds by the U.S, Federal Trade Commission.
ENERGY CRISIS FRAUDS
These are frauds arising out of the sale of goods or services related to energy or fuel use, saving, and production. Victims are generally individual consumers interested in stretching their dollars spent on energy sources and/or saving energy.
Energy schemes include the following types of frauds:
- Merchandising schemes where sale of worthless or bogus items which do not deliver the specific benefits promised or the degree of benefit promised, such as carburetor gadgets to save gasoline or phony solar heating systems. Often these frauds occur because of the novelty of the items involved combined with the naiveté of the victims.
- Weights &measures violations, Short weighing or measuring of fuels to customers, for example manipulation of gas pump measuring devices or misrepresentation of fuel, or changing of octane ratings on fuel pumps
- Discriminatory allocation of fuel by distributors to sub-distributors and retailers, in consideration of commercial bribes to distributors’ executives or special payments to companies with the power to make distribution in the form of under-the-table payments or required purchases of other items, useful or not needed, in violation of anti-trust or other laws.
These cases can be prosecuted under special state statutes, e.g., those dealing with weights and measures, or violations of specific administrative regulations promulgated to deal with energy crises, and (in appropriate situations) as commercial bribery or anti-trust violations.
FALSE AND MISLEADING ADVERTISING
This is the use of untrue or deceptive promotional techniques resulting in consumer fraud. Victims are consumers relying to their detriment on the false or misrepresented advertising or promotion. The following kinds of practices are prominent among those which fall under the heading of false and misleading advertising:
- Advertising as a “sale” item, an item at the regular or higher price.
- Misrepresentations concerning the size, weight, volume or utility of an item.
- Falsely claiming an attribute which a good or service does not in fact possess.
- Misstatement of the true costs of a good or service through the use of confusing payment provisions or otherwise.
These violations are prosecutable under the federal mail fraud statute, state general fraud statutes, and specific statutes dealing with false advertising.
Administrative and other civil remedies are frequently invoked these offenses, and local consumer protection offices provide mediation remedies since these offenses frequently fall into “grey” areas with respect to wrongful intent.
FALSE CLAIMS
False claims are fraudulent written claims for payment for goods or services not provided as claimed, to public or private entities. False claims may involve activities such as:
- Presentation of a bogus claim or claimant; such as a ghost payroll situation.
- Misrepresentation of the qualifications of an otherwise ineligible claim or claimant; for example welfare fraud.
- False representation of the extent of payment or benefits to which claimant is entitled, such as overtime pay frauds.
- Claims for reimbursement for goods and services allegedly provided to non-existent recipients, such as Medicaid fraud, by service providers.
The false claim will carryall the trappings of a legitimate claim and is most successfully undertaken by an individual(s) with a thorough knowledge of the system being defrauded. The false claim is one of the basic implementing tools of the white collar thief and can run the gamut from the elaborate computerized creation of fictitious claimants to the simple manipulation of numbers on a time card. False claims will sometimes involve the cooperation of executives or officials of the private or governmental entity to which such claims are submitted.
Violations are prosecuted under both general and specific fraud statutes, e.g., that dealing with false claims submitted to the federal government, larceny, and false pretenses statutes. Such violations are also generally a basis for civil action, whether or not the proof is sufficient to meet the criminal standard of proof.
FALSE STATEMENTS
False stateless are the concealment or misrepresentation of a fact material to the decision-making process of a government entity, with the result that the government entity accepting the false statement is deprived of the opportunity to decide whether or not to follow up on the situation which a truthful presentation of the situation would have allowed.
The false statement is often the means by which a fraudulent scheme to obtain money or benefit is effected either because (among other things); The false statement constitutes the underlying documentation for a false claim; or the false statement impedes discovery of the fraudulent scheme; for example, covers up the fraud. These statements often provide the opportunity for conditioning the victim to unquestioningly accept and approve a false claim.
On the federal level, false statement prosecutions have been a major weapon against white collar crime directed at the federal government. Even where such statutes are not present as part of the arsenal of state statutes, their use for the purposes outlined above will be valuable in showing the manner and means by which frauds were perpetrated in prosecutions under state general fraud, larceny, and false pretenses statutes.
FRANCHISING FRAUDS
Franchising frauds arising out of business opportunity situations in which individuals invest time, talents and money to obtain a business enterprise, relying on others (for example, the franchiser) to supply at prearranged rates specified goods and services such as necessary business structures, the goods to be sold or materials with which goods can be made, advertising, and an exclusive territorial market or market area for the franchisee’s output. Victims generally invest their major assets in what are fraudulent franchise opportunities. Frauds in franchises generally arise because one or more of the following occurs:
- Franchisor has no intention of performing on any of his obligations; for example, the franchise is a complete ruse to acquire victim-franchisee’s initial investment monies.
- Franchisor fails to provide promised goods or services essential to success of franchise.
- Franchisor makes success for franchisee either difficult or impossible by extending too many franchises in a given locale or market area.
- Franchisor has misrepresented the market or demand for goods/services central to the franchise, or has misrepresented the level of skills needed to realize franchise-profitability.
#1 is outright fraud, while #2 – 4 represent variations ranging from fraud to shady dealing, to failure to fulfill contractual obligations.
Franchise frauds are federally prosecuted under the federal mail fraud statute, and under state statutes proscribing frauds, larceny, or fa1se pretenses. In some instances, where success depends not on the victim’s own labor, the franchise agreement may be considered a security, and enforcement may be possible under securities acts in the jurisdiction of the US Securities and Exchange Commission or state securities regulatory agencies.
FRAUDS AGAINST GOVERNMENT BENEFIT PROGRAMS
These are unlawful application for and receipt of money, property or benefit from public programs designed to confer money, property or benefit under specific guidelines. Victims are federal, state and local governments, their taxpayers, and qualified, intended beneficiaries of such programs.
Typical kinds of frauds suffered by government programs include:
- Misrepresentations of applicants’ qualifications concerning program eligibility; such as food stamps received by ineligible persons.
- False billing/vouchering in which public programs make good on false claims for services not rendered or for non-existent beneficiaries; for example physician’s claims under Medicaid programs for patients not treated, or for specific treatments not provided.
- Inflated billing/vouchering/claiming, by which public programs are charged more than allowable costs; e.g., housing fraud where cost of construction is inflated so that builder/owner construction is inflated so that builder/owner receives more than total cost of land and buildings and avoids making investment required by law and administrative guidelines.
- Embezzlement, by which employees or officials of public programs convert funds, property or benefits to their own use (often via their custodial, fiduciary or programmatic relationship to the program), such as licensed dispensers of food stamps converting funds to their own use.
- Misuse of properly obtained funds, etc., in which money, property or benefit conferred under very specific guidelines concerning end use, are received and utilized for unauthorized ends; e.g., receipt of federal loan funds (such as student educational loans) with failure to use such for specified purposes.
These frauds are prosecutable under specific enforcement sections of statutes setting up government programs, as well as statutes proscribing false claims, false statements, and conspiracy. They will also be violations of general fraud and larceny statutes, on the state level.
FUNERAL FRAUDS
These are a class of guilt inducement frauds relying for success on the emotional stress of victims who have lost, or are about to lose loved ones through death. Victims are the relatives or friends of deceased or terminally ill persons.
Funeral related frauds often take the form of consumer and merchandising frauds and generally involve one or more of the following practices:
- Relying on the guilt or anxiety of bereaved relatives, victims are persuaded to contract for unnecessary or unduly elaborate funeral services or merchandise.
- Billing for funeral expenses to include charges for services not performed (here fraud artist relies on victim anxiety or guilt to preclude memory of whether service was performed or not and/or to preclude victim’s challenge of the bill for payment).
- Services or goods in connection with burial are represented as legally required, when in fact they are not.
- Contracts are made for future provision of goods or services in connection with funeral and burial arrangements which fraud operator has no intention or no capacity to provide; such as sale of non-existent cemetery plots.
Since many such abuses fall into grey areas of consumer fraud and misrepresentation, state attorneys-general and consumer protection agencies often undertake to provide civil mediation remedies. In addition, the US Federal Trade Commission has expressed considerable interest in fraudulent activities in this area.
GHOST PAYROLLS
Ghost payrolls are a form of false claim in which fictitious employees are added to a payroll and payments to these employees revert to the payroll manipulator. Fictitious employees are commonly referred to as “ghosts.” Victims are generally public and private entities responsible for honoring payroll claims. Often the ghost payroll is a device used to defraud government programs designed to provide employment for the unemployed or disadvantaged. This is closely related to welfare and unemployment insurance frauds. This device can also be used in cost-plus contracts to cheat governmental entities, or by managers of sub-units in private enterprises to steal from their parent organizations.
A variation on the ghost payroll is the overtime pay fraud in which false claims are made with respect to overtime work by bonafide employees.
Prosecution on the federal level would be under mail fraud, conspiracy, false claim and false statement statutes. On the state level, such prosecution would be under general fraud, false pretenses, and larceny statutes.
GUILT INDUCEMENT FRAUDS
Frauds perpetrated via the tactic of inducing guilt or anxiety in the victim concerning his or her relationship or obligations to another person who is significant to victim (for example, a child, parent, spouse).
Victims are individuals who, susceptible to the guilt or anxiety induced by the fraud operator, are persuaded to part with money or property in the belief that the questioned transaction will atone for any shortcomings or fulfill obligations they have toward another.
Because guilt inducement is a major tactic used to secure voluntary victim action, it cuts across many fraud areas. A few examples of the dynamics of such frauds are noted below:
Encyclopedia salesmen induce victims to enter into purchase contracts for books suggested to victim that imminent scholastic failure of children can be expected if such purchase is not made. Here a merchandising fraud is consummated by the offender’s capacity to induce parental anxiety in victims.
Children of deceased are persuaded to purchase elaborate and unnecessary funeral arrangements construed by the fraud operator to constitute a decent burial. The implication in such funeral frauds is that failure to buy the most expensive items, or close checking of the details of bills are tantamount to lack of affection or respect for the deceased.
Unnecessary and imprudent expenditures for life insurance are made by many wage earners to whom it is suggested that failure to subscribe to such policies constituted a failure to one’s spouse and family.
Self-improvement merchandise and facilities are marketed to victims on the basis of such guilt inducements as “you owe it to your spouse to be as (lovely, manly, successful, etc.) as you can be” or “you can only be a failure if you fail to take advantage of opportunities to improve your (looks, job, speaking ability, etc.)”.
Depending on the level and quantity of misrepresentations involved in such frauds, remedies will range from criminal prosecutions (mail fraud, state general fraud statutes, etc.) to regulatory or administrative measures in federal, state and local levels to enjoin deceptive practices, compel reimbursement of victims, etc.
HOME REPAIR OR IMPROVEMENT FRAUDS
These are frauds committed out of the provision of goods and services in connection with the repair, maintenance or general improvement of housing units. Victims are generally homeowners but may also include public agencies or programs which subsidize and/or underwrite home purchase and ownership. Home repair or improvement frauds include the following practices:
- Shoddy or incompetent workmanship
- Sale of over-priced or unfit materials or services for home repair projects
- Failure to provide services or goods paid for by customer
- Submission of false claims for materials or work not provided
- Misrepresentation of the need for particular materials or services to be performed
- Misrepresentations or concealment of the costs of credit, or of the nature of liens securing the payment obligations
- The victim may be told that the home is in violation of building codes or in a condition substandard to the neighborhood, endangering the value of the home or the safety to the victim’s family.
These violations are prosecutable under a broad range of statutes including mail fraud, statutes aimed at fraud against the federal government, state general fraud statutes, local licensing laws, including those regulating door-to-door solicitations. This is a major area for administrative and meditational activities on the part of attorneys general offices, municipal consumer protection offices, etc.
INSIDER SELF-DEALING
Insider self-dealing is a fraud benefiting oneself or others in whom one has an interest by trading on privileged information or position. Insider self-dealing is reputed to have been the cause of approximately half the bank failures in the United States since 1960.
Typical violative situations include those where a corporate officer or director trades in the stock of his company on the basis of inside information as to prospective profits or losses; bank officers lending money to themselves or businesses in which they have an interest; corporate executives or purchasing officials setting up suppliers of goods and services to contract with their companies, etc.
INSURANCE FRAUD
Insurance fraud is perpetrated by or against insurance companies. Victims may be the clients or stockholders of insurance companies or the insurer itself. Insurance fraud breaks down into the following categories and subclasses:
Frauds perpetrated by insurers against clients/stockholders include the following deliberate and intentional practices:
- Failure to provide coverage promised and paid for when claim is made
- Failure to compensate or reimburse properly on claims
- Manipulation of risk classes and high-risk policy holder categories
- Embezzlement or abuse of trust in management of premium funds and other assets of insurance companies
- Twisting or illegal sales practices in which insurer persuades customers to cancel current policies and purchase new ones from it.
- Types of frauds perpetrated by insureds against insurance providers:
- Filing of bogus claims for compensation or reimbursement, multiple claims for same loss from different insurers
- Inflating reimbursable costs on claim statements
- Payment of bribes or kickbacks to local agents to retain coverage or coverage in improper risk category
- Failure to disclose information or false statements made in application for insurance
Cases are often developed by insurance company investigators or state insurance departments and referred to investigative agencies and prosecutors. Federal prosecutions are generally under the mail fraud statute; state and local prosecutions under general fraud laws, larceny statutes, etc. Where the frauds are committed against insurers, assistance may be obtained from the Insurance Crime Prevention Institute (ICPI), an industry investigative group supported by nationwide insurers. http://www.propertycasualty360.com/term/insurance-crime-prevention-institute
INVESTMENT FRAUDS
These are frauds in which victims, induced by the prospect of capital growth and high rates of return, invest money in imprudent, illusory or totally bogus projects or businesses. Investment frauds generally victimize those with a pool of liquid or convertible assets, ranging from retirees or near-retirement age people; widows or widowers, to high-income professionals and businessmen. Hallmarks of many such frauds are:
- Higher than average promised rates of return
- Developmental nature of investment object, for example, project or business is not a mature entity
- Sales made by strangers, for example, through boiler rooms
- Generalized definition of nature and scope of project, lack of detailed plans by which progress might be observed
- Object or site of investment geographically remote or distant from investors
- Failure to fully disclose facts material to investor prior to his commitment of money
- Non-registration with US Securities and Exchange Commission and comparable state regulatory agencies
- Promise of special advantages, like tax shelters
Examples of such frauds are numerous. They are generally violations of special statutes such as the federal Securities Acts enforced by the US Securities and Exchange Commission, state securities regulatory laws enforced by state agencies, the mail fraud statute, and state general fraud, larceny, and false pretenses statutes. Where land frauds are involved, the US Department of Housing and Urban Development and state agencies which require full disclosure filings will have enforcement jurisdiction. In this area of enforcement, state and local investigatory agencies and prosecutors can anticipate major support and assistance from federal agencies which have overlapping or parallel enforcement interests.
LAND FRAUD
Land fraud is a type of investment fraud which involves sale of land, based on extensive misrepresentations as to value, quality, facilities, state of development. Victims are usually individuals buying land for retirement, investment, or both simultaneously. Land frauds usually consist of one or more of the following practices. The sale of land or of interest in land:
To which seller has no present title or claim of right; for example, seller cannot properly transfer title or interest to buyer as represented at the time of sale and about which a misrepresentation or failure to disclose a material fact has occurred;
At inflated or unjustified prices based on misrepresentations to purchaser on the promise of future performance or development which the seller neither intends to provide nor can reasonably expect to occur. Misrepresentations usually involve presence of utilities, water, roads, recreational facilities, credit terms, etc.
Such frauds have been perpetrated for decades, and resulted in numerous successful prosecutions on both federal and local level as well as in extensive civil actions by regulatory agencies which have resulted in both extensive restitution to victims and options to cancel improvident purchases. Federal prosecutions are undertaken under the mail fraud statute, and it may be anticipated that there will be increasing prosecutions for failure to comply with recently enacted registration and disclosure laws wider the jurisdiction of the U.S, Department of Housing and Urban Development; there are parallel state registration and disclosure laws. Local prosecutions have been undertaken under general fraud laws, false advertising, and larceny statutes. There is substantial federal-state-local cooperation in this enforcement area.
LANDLORD-TENANT FRAUDS
Landlord tenant frauds are unlawful practices involving the leasing or renting of property. Common fraud practices by landlords include:
- Keeping two sets of books, for example, tax violations
- Schemes to avoid return of security deposits
- Rental of property to which one has no title claim of right
- Deliberate and persistent violations of safety and health regulations, and failure to provide heat, services, etc
These white collar crimes are usually misdemeanors, and violations of local ordinances. Frauds such as schemes to cheat tenants out of their security deposits should be prosecutable under state’s general fraud laws.
LOAN OR LENDING FRAUD
These are unlawful practices committed by the lending of borrowing of money. Victims may be financial institutions, the stockholders of financial institutions, or borrowers. Loan frauds generally involve either the failure to disclose relevant information which would bear on the extension or granting of a loan, or the provision of false information, or both.
When perpetrated by the lender, loan frauds may take the form of lending to oneself through ghost accounts, or lending to friends or entities in which one has an interest. Other examples include:
- Commercial bribery, approving loans to those who would not qualify as borrowers, for example, exchange for kickbacks or other considerations
- Advance fee schemes, by which borrowers remit money to secure a loan which is not forthcoming or for which no payment was necessary
- When perpetrated by borrowers, loan frauds may take the form of:
- False statements by which loan to which one is not entitled is fraudulently obtained
- Improper use of legitimately obtained loans, where improper use was intended at the time the loan application was made
- Larceny by false pretenses, by which loan is obtained with no intention of repayment.
A separate and important dimension of loan fraud involves the misuse or misrepresentation of items of collateral and collateral accounts. These frauds are prosecutable under federal statutes proscribing mail fraud, banking frauds, securities frauds, program frauds (such as those involving construction or repair loans which are federally guaranteed), etc. They are also prosecutable under general state fraud laws, false pretenses statutes, and larceny statutes.
MEDICAID/MEDICARE FRAUD
These constitute fraudulent practices arising in connection with the receipt or provision of health care services under government financed programs. Such frauds are nearly always perpetrated by health care providers (both medical professionals and facility operators) against the government(s) financing the programs and/or the intended beneficiaries of such programs.
Specific examples of this kind of fraud practices include:
- Ping-Ponging, a scam in which patients to other doctors in a clinic in order to claim reimbursements for their consultation rather than for bonafide patient treatment or observation.
- Upgrading, where patients are billed for services not provided
- Steering, or sending patients to a particular pharmacy, medical lab, etc., for required prescriptions or services, and receiving kickbacks therefrom.
- Shorting, which is delivering less medication, like pills, than prescribed while charging for the full amount
- Procurement abuses in which violators establish a supply/purchase arrangements with firms which pay kickbacks to health care facilities or which are owned by those controlling the facility itself.
- False claims in which the facility submits claims for which payment from government for patients that do not exist, or were never seen or treated.
These violations are prosecutable under federal fraud statutes, including mail fraud, false claim, and false statement statutes, as well as specific statutes in legislation authorizing such programs. Since many such programs are administered through state agencies and involve use of state funds, state general fraud, false pretenses, and larceny statutes will also be applicable.
MEDICAL FRAUDS
Medical frauds are unlawful activities arising out of the provision and sale of bogus, highly questionable or dangerous medical services, cures, or medications. Victims are often individuals who have been given little hope of recovery or improvement by traditional medical establishments and desperately seek any promise of ameliorating their conditions. Also victimized are persons who are poorly informed and thus vulnerable to claims made by medical fraud artists, often in such areas as beauty treatments, cosmetics, etc. Medical frauds generally include one or more of the following abuses:
- Quackery which is the false representation of oneself as a legally trained and licensed health care provider
- Fake cures, offering sale of bogus or highly questionable cures for specific illnesses or diseases
- Misrepresentations of medication which are misrepresentations as to the therapeutic value of medications, and/or omissions made regarding known side effects of medications
- Misrepresentations of treatment which are false statements made with regard to the therapeutic value of a particular treatment protocol, with regard to its degree of acceptance as a bonafide medical practice; and/or omissions of material information concerning known side effects of treatment, that would affect patient1s choice of treatment program
Such frauds may operate through misrepresentations made to victims themselves, as well as to regulatory agencies such as the US Food and Drug Administration. In the latter case the may involve the nature of test results or the methodology or procedures involved in conducting such tests.
Federal enforcement has been dominant in this field, through the mail fraud prosecutions, Food &Drug Administration efforts, and US Federal Trade Commission proceedings, Local quacks should, however, be open to prosecution or control under general fraud statutes, larceny and false pretenses statutes, and vigorous exercise of licensing powers with respect to health and beauty services.
MERCHANDISING FRAUDS
Merchandising frauds are an umbrella term for a broad variety of consumer frauds involving misrepresentations inducing the victims to purchase merchandise, which either is not as represented or which in fact will never be delivered to them.
The frauds usually involve one or more of the following aspects:
- Representation that the item is sold at lower than usual price, whereas it is in fact sold at the usual retail price or higher
- Misrepresentation as to the quality or utility of the merchandise
- Misrepresentation as to the ultimate price, or credit terms
- Misleading information as to warranties, cancellation of transaction, return of merchandise, and validity of money back guarantees
- Solicitation of money with no intention to deliver the merchandise promised
- Bait & Switch frauds
Victims customarily buy from salesmen or are entrapped when they respond to newspaper, magazine, radio or TV advertisements. Examples of such frauds include magazine subscriptions sales, hearing-aid frauds, bulk sales of items falsely represented to be at wholesale prices (for example, freezer food sales), and false sales (where items sold are falsely represented to be priced at less than regular prices, or sold pursuant to closeout of a business or replacement of inventory).
Enforcement with respect to these frauds has been successfully undertaken at federal, state, and local levels. Laws invoked have included federal mail and wire fraud statues , the US Federal Trade Commission Act, general state fraud and false advertising statutes, and local licensing laws governing direct sales and solicitations.
NURSING HOME ABUSES
These are a variety of frauds perpetrated by individuals who provide institutional nursing and convalescent care to patients, particularly the aged. Victims of such frauds are the patients of such facilities, their families, and/or governmental entities who subsidize the cost of care provided to eligible patients.
Forms of nursing home fraud abuses include:
- Unlawful conversion or attachment of patients’ assets
- False claims to patient, family or government entity regarding services delivered
- False statements in license application or renewal
- Maintenance of fraudulent records as to general or overhead costs of operation of facilities, as a basis for false claims to governmental entities
- Receipt of kickbacks from facility suppliers
- Employment of inadequate or unqualified staff in violation of licensing guidelines
These frauds are prosecutable under federal false claim and false statement statutes, and state fraud laws. They generally require careful and painstaking audits to separate out extensive self-dealing, kickback arrangements, and concealments through sophisticated accounting techniques, etc.
PATENT FRAUD
Patent fraud is a form of self-improvement scheme which most closely resembles vanity publishing frauds. In patent frauds, individuals are solicited through newspaper advertisements, etc., to send “patentable” ideas or gadgets to fraud operator for “evaluation by experts.” The “evaluation” of course usually involves a fee, or at least “further processing” of the submission may involve a fee, thus an advance fee situation evolves. The fraud operator generally has neither the intention nor the capacity to develop or process a patentable item.
PENSION FRAUDS AND ABUSES
These are thefts and fraudulent conversions of pension fund assets either by trustees, employers or employees. Pension frauds are typically perpetuated by trustees or employees of pension organizations: Frauds by trustees typically include poor investments tied to self-dealing or commercial bribery, or embezzlement. Such frauds victimize those who have contributed to the fund as well as those intending to benefit from it.
Frauds by employees include accrual of abnormal overtime, etc., to form an inflated base period on which pension payment levels are to be established (very often in local public sector employment situations). Victims are there employees whose potential benefits are reduced by fraud of their peers or bankruptcy of the fund, as well as employer contributors to the pension plan. The victims are employees who have relied on promised future benefits.
Prosecutions in this white collar crime area have shown patterns of questionable union-employer agreements to permit widespread trustee fraud. Major violations have been prosecuted under the federal mail fraud statute, and this area is considered one in which there are major white collar crime/organized crime interrelationships.
PIGEON DROP OR POCKETBOOK DROP
The pigeon drop is one of a large variety of street con games regularly perpetrated on gullible victims. It is a scheme in which the victim is persuaded to withdraw a large sum of cash from a bank account in order to show good faith or financial responsibility regarding the sharing of a “discovered” cache of money with two other persons (who are con artists). In the course of the con, both the “discovered” money and the victim’s good faith money disappear as do the con artists. Victims may be anyone, since perpetrators of this fraud have a remarkable ability to disarm their victims. Keys to the pigeon drop con are:
- The con artists to do not appear to be associated or know each other on any way
- A pocketbook, envelope, etc., is “found” by one of the confederates, and it contains a sizable amount of money, no owner ID, and the suggestion that the money is illicitly generated, for example, a gambler’s proceeds, etc.
- An agreement to share the money is made with the victim showing “good faith” (for example, putting up money) by those involved. (Alternatively, a deal is made for all to put up money in a pool to be held by victim.) A switch is made while the victim is distracted, and his or her money is stolen by one of the confederates.
Street cons of this type are generally prosecuted under state fraud, false pretenses, and larceny statutes. Police in most jurisdictions have had experience with one or more such street con games.
POLLUTION AND ENVIRONMENTAL PROTECTION VIOLATIONS
Many abuses in the environmental area involve more than violation of specific environmental/pollution control statutes and orders. White collar crime type abuses in this area consist primarily of the making or submitting of false statements concerning the degree of compliance with statutes and regulations for pollution control; and in order to cover up violations or lack of compliance with environmental standards. Falsification of test or sample data designed to measure compliance with standards represents another form of white collar violation in this area.
PONZI SCHEMES
These are a general class of frauds in which the fraud operator uses money invested by later investor/victims to pay a high rate of return on the investments of earlier victims whose money he has already appropriated instead of making investments represented to them. Such schemes must inevitably collapse because it is mathematically impossible to continue them indefinitely. The length of time they can continue will depend upon the promised rate of return to investors, the amount of money the fraud operator takes out for himself, and the costs of inducing victims to part with their money (sales commissions). Many such frauds have cheated victims of millions of dollars; some have operated over a period of years.
Ponzi elements are to be found in many varieties of investment frauds, under different guises and in different variations; e.g., long-term investments, short-term business financing, etc.
These schemes have been federally prosecuted under the mail fraud statute, and as securities violations investigated by the US Securities and Exchange Commission. On the state level they would be violations of general fraud, false pretenses, and larceny statutes.
PRICE FIXING
Illegal combinations by sellers to administer the price of a good or service depriving customers of a competitive marketplace, restraining competition and maintaining an artificial price structure. Victims are customers of such combinations who are deprived of freely determined prices for the goods and services they purchase. Secondary victims may be competitors of the firms participating in the price fixing agreement.
Often when one thinks of price fixing, one thinks of a large nationwide conspiracy between industrial giants. While this is part of the problem, it is equally probable that many price fixing arrangements occur at the local level. For example, in Virginia the practice of a local bar association that set the price far title searches was held to be unlawful. In other locally prosecuted cases, druggists have been adjudicated for fixing prices on prescription drugs.
Price-fixing violations are most often the subject of federal enforcement efforts, but are also proscribed by many state anti-trust statutes.
PUBLIC/OFFICIAL CORRUPTION
A crime which generally falls into the category of abuse of trust-type violations involving commercial bribery, collusion with bid-rigging, avoidance of the competitive process in connection with the purchase of goods and services by governmental entities, self-dealing in connection with governmental purchases or grants of franchise to use public property, real estate variances , etc.
Most public corruption has its parallel in private sector. Thus conflict of interest is the public equivalent of Insider Self-Dealing; and there’s little distinction between public and commercial bribery situations particularly where they overlap, such as in the government procurement area.
These violations are federally prosecuted under federal mail fraud and organized crime statutes. On the local level there are numerous violations prosecuted such as bribery, taking of kickbacks, and perjury.
PYRAMID SCHEME
A pyramid scheme is the commercial version of the chain letter scheme, used by fraud operators in the selling of phony distributorships, franchises, and business opportunity plans.
REPAIR FRAUD
Repair fraud is a form of consumer fraud involving repairs or maintenance services performed on consumer goods. Such white collar crime schemes generally involve:
- Overcharging for services performed
- Charging for services and parts not used
- Performing services or repairs not wanted or needed
- Failing to perform services or repairs promised
This is an appropriate target for proactive investigations, particularly decoy techniques. Where a sufficient pattern of deliberate violations have been developed, or the decoy technique successfully implemented, there have been convictions under state general fraud laws.
RESTRAINT OF TRADE
These are actions, combinations or schemes which interfere with unfettered marketplace transactions. Examples are: price fixing, bribery and kickbacks for commercial advantage, interference with competitive bidding processes, dictation of price structure to customers or dealers; exclusive buying arrangements.
While the best known statutes in this area are federal in scope, many abuses occur in local jurisdictions and are subject to state or local remedies, especially when interstate commerce is not involved.
Many organized crime activities, aimed at monopolizing local markets to provide certain services or merchandise, may also involve restraints of trade and state anti-trust statutes should be reviewed to determine their applicability in such situations.
SECURITIES FRAUD
Securities Frauds are fraudulent activities involving the sale, transfer, or purchase of securities or of money interests in the business activities of others. Victims are generally securities investors who are not aware of the full facts regarding transactions they enter into. Abuses cover a broad range, and can include, for example, situations where:
- Businesses or promoters seek to raise capital unlawfully or without proper registration and oversight
- Securities of no value are sold, or are misrepresented to be worth far more than their actual value
- Purchasers are not advised of all facts regarding securities, and/or failure to file appropriate disclosures with federal and state regulatory agencies.
- Insiders use special knowledge to trade in securities to the disadvantage of the general public which lacks such knowledge
- Broker-dealers and investment advisers act for their own benefit rather than for the benefit of their clients
- False information is provided to security holders and the investing public in financial statements published or filed with securities regulatory agencies, or by payments to financial writers or publication
- Manipulation of the price of securities by purchases and sales occurs in stock exchange or over-the-counter market
- There has been a failure to file registration or other reports with federal and state regulatory agencies.
Law enforcement agencies should be alert to the fact that securities violations potentially exist wherever investors rely on others to manage and conduct the business in which an investment is made. It is not necessary that there be any formal certificates such as stocks and bonds. Any form of investment agreement is potentially a security.
This field is one where there is vigorous federal enforcement by the US Securities Exchange Commission, and many outstanding examples of expert and zealous enforcement by state regulatory agencies. It is also an area where much support to local investigations is supplied by regional offices of the US Securities and Exchange Commission.
SELF-IMPROVEMENT SCHEMES
These are frauds which appeal to victims’ desires to improve themselves personally or financially, by the acquisition of social or employment skills. Schemes in this category tend to run on a continuum from improving purely personal/social skills and attributes to those tied to an individual’s employment opportunities. On the personal end of the scale are the dance studio or charm school schemes; on the employment end of the scale are fraudulent job training schemes and advance fee employment agencies.
Somewhere in the middle are modeling agencies which purport both to improve the person and his or her other employment prospects; also courses on improving one’s image or ability to communicate with others. Some business opportunity schemes which hold out the prospect of financial improvement plus being a respected community business person also fall into this category by appealing to victim’s desire to improve his or her finances and life style.
These abuses have been prosecuted under mail fraud and state fraud statutes, curbed by the US Federal Trade Commission, and have also been the subject of enforcement efforts based on state and local legislation, licensing codes, and other codes governing the operation of schools or educational settings.
SEWER SERVICE
A sewer service is a term of art used to describe the kinds of activity noted below.
Many merchandising, home repair, and other frauds rely on the use of litigation for ultimate collections of proceeds of the fraud. Likewise, many enterprises which are not strictly speaking fraudulent, such as those which sell much overpriced merchandise on credit, similarly depend upon litigation or the threat of litigation to squeeze money from victims.
In both these situations devices are often adopted to fraudulently deprive victims of the opportunity to defend against such litigation, usually by not informing them that litigation has been initiated against them (for example, dropping the summons or subpoena down the sewer). This is accomplished, usually, by false affidavits, filed in court, that a summons and complaint were served on the victim. Sometimes the litigation plaintiff is aware of the practice, sometimes he closes his eyes to what the process server is doing; in other instances the process server is making false affidavits to collect the fee for non-existent service, without the knowledge of the plaintiff or his attorney.
Such violations have been federally prosecuted for violation of the 1866 Civil Rights Act, but state violations are clearly present where false affidavits are filed in court.
SHORT WEIGHTING OR LOADING
This is the purposeful shorting of the volume or quantity of a cargo, accompanied by a false claim (invoice) demanding payment for the full amount.
Such frauds are easiest to perpetrate where the cargo is of such nature or bulk that it is difficult for the receiver to detect shortages. The reverse of the short weighting/loading fraud is often used as a modus operandi for diversions (thefts) of cargo. In this situation a transport vehicle is purposefully overloaded; the overage is not recorded (false statement by omission); and the overloaded amount forms the basis of kickbacks to scheme operators by the recipients of the shipments (often fences of stolen goods). Manipulation of the size or volume of loads must always be accompanied by false claims or false statements, since accompanying documentation or invoices do not reflect the fraudulent changes in the load size.
This violation involves either a false claim to a customer, or a plain and simple theft from the shipper. Since insiders are frequently involved, it will often involve commercial bribery, kickbacks, etc., as well as federal violations involving interstate shipment of stolen property.
TAX AND REVENUE VIOLATIONS
These are perpetrated with the intent to deprive a taxing authority of revenues to which it is entitled or of information it needs in order to make a judgment regarding revenues to which it is entitled, or to avoid admission of involvement in illicit, though profitable, business activities.
Tax frauds may be perpetrated through the filing of false returns–as in personal income tax frauds; through the bribery of public officials, as may occur in property tax assessment frauds; or in the failure to file appropriately, as with an organized crime-figure who may not be concerned with avoiding tax liability but rather with revealing the sources of his taxable income. Many white collar crimes obligate the offender to commit tax fraud because of illicitly obtained monies he does not wish to report, for example, assets due to bribes, larcenies, kickbacks, or embezzlement proceeds.
Common crimes, especially of a business nature, also result in tax violations: bookmaking, fencing of stolen goods (both income and sales tax abuses) •
Tax avoidance through false statements may be a component of otherwise legitimate business enterprises, especially in areas of business and occupation taxes, inventory taxes, and sales taxes. Individuals and businesses will also seek to avoid or evade excise taxes; such as on cigarettes, substitution of low-taxed home heating oil for higher-taxed diesel fuel for trucks, etc.
Tax violations are usually prosecuted under special federal, state and local tax statutes.
VANITY PUBLISHING SCHEMES
Schemes which involve eliciting fees from individuals on the promise of promoting their creative talents (real or imaginary), or assisting them in the development of said talent.
Such frauds rely upon the vanity of the victim (for example, his or her belief that s/he has a creative talent that has not as yet been discovered). Generally these schemes relate to creative endeavors in which clear performance standards regarding the talent are not available and are often a matter of taste, such as literary publishing, song writing, etc.
The scheme operator will imply a promise of national advertising, book reviews, distribution, special marketing services, but not so concretely that he will be held to any implied promise. The victims usually invest heavily, and lose both their money and their hopes, what they are left with are a few copies of a printed and scored song arrangement, or a number of copies of books Which established book review publications have not troubled to look at because of their publishing source.
It should be kept in mind that there is a legitimate private publishing market. General principles of fraud analysis should be applied to determine whether or not the line has been crossed in ways which make misrepresentations fraudulent.
WEIGHTS AND MEASURES VIOLATIONS
These are abusive practices involving the cheating of customers by failure to deliver prescribed quantities or amounts of desired goods. These violations usually involve false statements or claims in which the victim has relied on seller’s representation of the delivered quantity in remitting higher payment. Examples of such crimes are:
- Gas pump meter manipulation to show more gas pumped than received by customer
- Butcher’s thumb on the meat scale
- Odometer roll backs in auto sales
These frauds are most successful where one victim cannot easily verify weights or measuring devices himself, or where victim has no reason to question the seller’s claim or statement; for example, when products sold are bottled or packaged.
These abuses are usually detected on inspection by local agencies’ personnel and prosecuted or enforced as violations of local ordinances. Purposeful, intentional, and continued activity of this kind should be considered as possibilities for violations of general fraud, false pretenses, and larceny statutes.
WELFARE FRAUD
These are abuses associated with government income and family subsidy programs. Government welfare programs are always exploited by a small number of applicants who apply for benefits to which they are not entitled, or continue to claim eligibility when they no longer meet the established criteria for such aid.
Receipt of monies from claimants by officials processing welfare claims represents dimension of this fraud area. Such monies may be solicited as kickbacks in exchange for inflated claims filed; as bribes to certify claimants who are ineligible or to avoid reporting claimants’ ineligibility, or as extortion for processing claims to which recipient is fully eligible.
In some cases non-existent recipients (“ghosts”) may be created to fraudulently siphon money out of such programs.
These violations are enforced under both specific provisions of welfare legislation, and under general fraud statutes. Where federal funds are involved, there may be overlapping federal/state enforcement jurisdiction.
Summary
White collar crime schemes are variations of schemes and activities that have been carried out for hundreds of years, if not longer. What changes is the economy, technology, culture, populations, and locations. As time moves forward, new versions and styles of crimes will evolve.
The group of crimes described in this chapter is by no means totally inclusive of all white collar crimes.
Student case study EIGHT – Egg Company’s Fraudulent Practices Put Public at Risk 05/08/15
Assignment
- Research your state for any similar food safety, distribution, or restaurant fraud. Create a case summary of your findings.
- What special skills would an investigator need to investigate this type of crime?
Overview
The 81-year-old owner of an Iowa egg production company and his son, a top executive in the business, are going to prison for bribing a federal food inspector and distributing eggs that contained Salmonella bacteria, which caused hundreds of consumers to become sick.
A federal judge in Iowa last month ordered the Quality Egg company to pay a $6.79 million fine and sentenced company owner Austin “Jack” DeCoster, and his son, Peter DeCoster, who was Quality Egg’s chief operating officer, to serve time in prison.
During the spring and summer of 2010, adulterated eggs produced and distributed by Quality Egg were linked to nearly 2,000 consumer illnesses in a nationwide outbreak of salmonellosis that led to the recall of millions of eggs produced by the defendants.
“This was a classic case of putting profits over public safety,” said Special Agent Grant Permenter, who helped investigate the case from the FBI’s Omaha Division.
Quality Egg pled guilty to bribing an inspector of the US Department of Agriculture (USDA) to release eggs that had been retained for quality issues. The eggs had been “red tagged” for failing to meet minimum USDA quality grade standards. The company also pled guilty to introducing misbranded eggs into interstate commerce with the intent to defraud. From approximately 2006 until 2010, Quality Egg employees affixed labels to egg shipments that indicated false expiration dates with the intent to mislead state regulators and retail egg customers regarding the true age of the eggs.
In the government’s sentencing memorandum prepared for the court, it was noted that Quality Egg personnel had for years disregarded food safety standards and misled customers about the company’s food safety practices.
“As with a lot of fraud cases,” Permenter said, “Quality Egg’s crimes were committed over and over for years, and, eventually, these illegal practices caught up with them.” But this case was not just about deception, he said. “People got sick. There was a serious public safety issue here. Quality Egg’s business practices put the public at risk—at times, substantial risk.”
Permenter explained that the FBI assisted in the investigation led by the USDA’s Office of Inspector General and the Food and Drug Administration’s Office of Criminal Investigations. He added that the USDA inspector who received bribes from Quality Egg was in ill health and died before he could be charged. “The inspector was a federal employee. Had he lived,” Permenter said, “he would have been charged and, in all likelihood, would have gone to jail as well.”
In June 2014, Quality Egg and Jack and Peter DeCoster pled guilty to bribery and other charges related to adulterated egg distribution.
In the end, Permenter said, “It seems obvious that company profits outweighed other concerns.” By being able to circumvent the inspection process through bribes and not having to remove the tainted eggs from its inventory, the company saved a significant amount of money. “When you start bending your ethical and moral fibers because there are dollar signs in front of you,” he said, “a lot of bad things are likely to happen.”