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Bankruptcy, Divorce, Identity Bankruptcy, Divorce, Identity TheftTheft

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

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Bankruptcy Fraud OverviewThe DOJ Bankruptcy Trustee Manual lists various frauds:

Conceals property from the bankruptcy proceedings.  Makes a false oath or account in relation to a bankruptcy case. Makes a false declaration, certification, verification, or statement in

relation to a bankruptcy case. Makes a false proof of claim. Receives a material amount of property from the debtor with intent to

defeat the Bankruptcy Code. Gives, offers, receives, or attempts to obtain money, property, reward,

or advantage for acting or forbearing to act in a bankruptcy case. Transfers or conceals property with the intent to defeat the Bankruptcy

Code. Conceals, destroys, mutilates, or falsifies documents relating to the

debtor's property or affairs. Withholds documents related to the debtor's property or financial

affairs from the standing trustee or other officer of the court.

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Bankruptcy Fraud Penalties

Typical penalty: a maximum of five years in prison or a maximum fine of $250,000, or both, per bankruptcy offense.

Many cases include more various offenses. A typical bankruptcy case could involve false declarations, property concealment, conspiracy, mail fraud and money laundering.

Section 802 of the Sarbanes-Oxley Act (SOX) of 2002: A possible 20 years in prison for one who knowingly alters, destroys, mutilates, conceals … with the intent to impede, obstruct, or influence the investigation or proper administration of any matter within the jurisdiction of any department or agency of the United States or any case filed under title 11, or in relation to or contemplation of any such matter or case.

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Frequent Bankruptcy Frauds

Concealment of assets: the most common type of B fraudFraudulent conveyances involve assist concealment

Petition mills and multiple filing schemes are the second and third most common bankruptcy frauds.

A petition mill typically involves unqualified persons who offer fee-based financial advice, credit counseling, and bankruptcy filing services.

In multiple filing schemes, fraudsters typically file bankruptcy petitions in a number of states using different identities.

Additional forms of bankruptcy fraud include trustee fraud, attorney fraud, forged filings, embezzlement, credit card fraud, and bust-outs.

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Types of Bankruptcy Proceedings

Chapter 7 Applies to both individuals and businesses; designed to completely liquidate the debtor’s assets and discharge the debtor’s liabilities as permitted by the bankruptcy code.

Chapter 9 Applies to municipalities. Chapter 11 Applies to businesses (and sometimes

wealthy individuals) and focuses on working out a creditor payment plan without liquidating the businesses.

Chapter 12 Applies to those in farming and fishingChapter 13 Applies to individuals whose means-tested

income is too large to permit them to file under Chapter 7. Chapter 15 Applies to cross-border cases and certain other ancillary cases.

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Bankruptcy Proceedings

Bankruptcy petitions are filed in federal bankruptcy courts, and the proceedings are administered by DOJ trustees.

Bankruptcy trustees are responsible for maintaining fair and orderly proceedings as well as ensuring compliance with all bankruptcy laws. Trustees have an affirmative obligation to collect and review the required documentation and refer any cases of suspected fraud to the U.S. Attorney’s Office and sometimes to the FBI. They are also responsible for recommending to the U.S. Trustee the filing of a motion with the court for dismissal of the debtor’s petition if the debtor does not cooperate as required or commits fraud, or if the petition is abusive.

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Filing of Documents, Discovery, and the Meeting of the Creditors

The bankruptcy normally includes filing of many schedules, and federal tax returns, and detailed accounting and financial records, as well as financial statements for business debtors.

Additional information can be obtained through discovery. Bankruptcy discovery rules incorporate the federal

discovery rules and give any party in interest the right to obtain a court order to examine any entity involved with the case.

In addition to the discovery process, all bankruptcy proceedings, with few exceptions, require debtors to appear in person at the first meeting of the creditors.

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Sources of Discovery for Concealed Assets

Tax ReturnsBank, Brokerage, and Other StatementsLoan ApplicationsCash Flow AnalysesCredit ReportsPublic RecordsUnusual AssetsConveyances

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Investigations of Businesses

Review all sales records for sources of incomeVerify all vendors Review communicationsScrutinize paymentsVerify the existence of inventories, fixed assets, and all

other assetsStudy previous income tax returns and income statements

for evidence of expenses for patents, R&D, and other intangible assets

Review work in progress and unbilled work

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Bankruptcy Fraud Cases

Taco Bell Franchise Owner Jaweed SiddiquiTwo Texas Business OwnersJoseph James Russo

Cases such as these are normally in the IRS case files because they involve charges of income tax fraud. As mentioned, it is common for bankruptcy fraud to be connected to other related crimes. Many individuals who commit bankruptcy have no idea how many federal laws they are breaking.

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DIVORCE FRAUD

Divorce fraud is similar to bankruptcy fraud. In both, a court may divide the assets of some estate.

As is in the case of bankruptcy, the most common area of fraud connected with divorce is asset concealment.

Finding concealed assets in divorces cases involves the same basic techniques used in bankruptcy cases.

In most states, people involved in divorce cases are required to supply each other and the court complete financial statements. The level of scrutiny could be considerably less than that in bankruptcy cases for the following reasons:

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Divorce Versus Bankruptcy

Divorce attorneys do not always have the financial expertise that many bankruptcy attorneys have.

Bankruptcy cases tend to involve creditors who could be engaged in asset concealment and who possess information-rich credit applications from debtors.

Bankruptcy cases tend to involve fraudulent conveyances and hidden assets immediately prior to the filing. In divorce, however, one spouse could hide assets from the other for many years prior to the filing.

While many bankruptcies genuinely have no assets to hide, divorcing couples are more likely to be solvent and have assets to hide.

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Identity Theft

The fastest growing crime in the United States, identity theft occurs when one person uses another’s personal identifying information, such as driver’s license or SSN, to obtain goods and/or services in the other person’s name.

The problem of identity theft has existed throughout history, but it has become much more prevalent with the advent of the Internet and our electronic society.

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Federal Laws Relating to Identity Theft

The Identity Theft and Assumption Deterrence Act of 1998This was the first major act passed to combat identify theft.

It punishes anyone who…knowingly transfers or uses, without lawful authority, a

means of identification of another person with the intent to commit, or to aid or abet, any unlawful activity that constitutes a violation of federal law, or that constitutes a felony under any applicable state or local law.

Under this act, means of identification is broadly interpreted to include any type of information that can identify a particular individual such as numbers for social security, credit cards, and drivers’ licenses.

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Fair and Accurate Credit Transaction Act of 2003 (FACTA)

Free consumer credit reports 

Fraud and active duty alerts 

Truncation of identifying numbers 

Documents to victims Collection agencies Business compliance Disposal of consumer

reports Notice of consumer rights Credit scores

Disputes of inaccurate information 

Negative information in reports by financial institutions 

Medical information and consumer reports

Nationwide specialty consumer reporting agencies Workplace investigations 

Marketing opt-out requirements

Risk-based pricing 

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Identity Theft Penalty Enhancement Act

Congress created the crime of aggravated identity theft-- identity theft, or intended identity theft, committed in connection with certain other listed crimes. The penalty for most crimes listed in it is a mandatory extra two years in prison. Examples of listed crimes include the following:Thefts relating to employee benefit plans.False impersonation of citizenship.False statements in the acquisition of a firearm.Crimes relating to mail, bank, and wire fraud.Crimes relating to nationality and citizenship, passports, and

visas.

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The Internet False Identification Prevention Act of 2000

This act makes selling counterfeit versions of certain official identification cards illegal.

The law also makes it illegal to sell electronic templates for making counterfeit identification cards. There is a potential one-year prison sentence if one fake identification card is made from a given template, but the potential prison sentence increases to 20 years if the template is used to make five or more cards.

Plenty of Web sites and message boards contain instructions on how to make false identification cards. The process is not terribly difficult with a computer.

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Identity Theft and Other Federal Statutes

Many identity theft schemes involve violations of related federal statutes, some of which carry penalties up to 30 years in prison. These statutes include crimes in the areas of computer fraud, credit card fraud, wire fraud, mail fraud, social security fraud, and financial institution fraud. In some cases, laws relating to conspiracy, racketeering, and obstruction of justice may also apply.

Individual state laws also play an important role in the war against identity theft. The FBI cannot possibly prosecute many of the small cases that occur, especially those relating to single crimes committed by individuals not associated with organized crime groups.

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Identify Theft Prevention

People should be aware of possible fraudsters:Dumpster divers and garbage pickers. Shoulder surfers Hackers Company insidersImpersonatorsMail thievesPublic records diggersScammers (includes phishers and phone scammers)Fake ATMPurse snatchers and pickpockets

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Warning Signs of Identity TheftUnauthorized address changes A serious warning sign

is evidence of any type of unauthorized change in a mailing address.

Unauthorized account transactions All monthly statements should be carefully inspected for unauthorized activity. Improper transactions should be immediately reported.

Incorrect information on credit reports Any significant incorrect information on a credit report could indicate identity fraud.

Bill collectors Unfortunately, one of the first symptoms of identity fraud victimization could be phone calls or letters from bill collectors for unknown credit transactions.

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Identity Theft Investigation

Identity thieves can be caught various ways.Tracing The true identities of fraudsters can sometimes be

obtained by using video surveillance records, telephone records, and the Internet methods discussed in the earlier chapter on forensic science to trace them.

Catching thieves in the act In theory, identity thieves can be caught in the act of obtaining or using others’ identity information. This approach is not generally helpful because immediate arrests do not normally take place unless a law enforcement officer happens to be at the scene of the crime.

Controlled delivery This is the strongest and most reliable way to catch identity thieves.

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Identity Theft and Related Crimes

Identity theft is frequently related to a wide array of other financial crimes. For example, one check fraud ring in South Florida operated as follows:Thieves from the group broke into cars and stole purses or

wallets to obtain identity information.Counterfeiters from the group manufactured fake driver’s

licenses and other identification documents and created fake checks made payable to the names of the identity theft victims.

Check passers from the group used fake identification cards and physical disguises to hide their faces from cameras and used bank drive-through tellers to cash the counterfeit checks.

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Damage Control

Details on how to report identity theft and notify creditors and credit bureaus is available on consumer.gov (http://www.consumer.gov/idtheft).

The primary steps that victims of identify theft should take are to report the problem to the major credit-reporting bureaus (using fraud affidavits), place fraud alerts in their credit bureau files, close affected accounts including ones that have been set up fraudulently (again, using fraud affidavits), and file reports with local police and the Federal Trade Commission through its Web site.