Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except

Albrecht, Albrecht, Albrecht, Zimbelman

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

Fraud Examination, 4E

Chapter 16: Bankruptcy,

Divorce and Tax Fraud



Learning Objectives

Understand how perpetrators fraudulently conceal and transfer assets and income in bankruptcies and divorces.

Define tax fraud and be familiar with common tax fraud schemes.

Understand how money laundering is used to commit fraud.



Overview of Tax, Divorce and Bankruptcy FraudsBankruptcy fraud is a growing problem in the

United States. Bankruptcy is the legal process that allows a debtor to work out an orderly plan to either settle debts or liquidate assets and distribute them to creditors.

The reason that fraud is so common in bankruptcies, divorces, and tax payments is because, in all three situations, assets are being taken away from someone or some organization and given to someone else.



Bankruptcy and Divorce Fraud

Several different types of bankruptcy and divorce frauds are noteworthy:

Bankruptcy or Divorce Resulting from FraudToo few assets remaining to pay creditor and investor claims, an entity will

generally file bankruptcy. Similarly, when one marriage partner discovers that

his or her spouse has committed fraud, he or she often seeks divorce to

salvage a reputation or because of a lack of trust in the partner.

Bankruptcy and Divorce used to perpetuate Fraud Some debtors use the “automatic stay” period to perpetuate fraud

Bankruptcy and Divorce used to conceal FraudGenerally results in the books and records of the debtor or marital partner being

destroyed, inaccurate, or hard to locate.



Tax Fraud

Tax fraud can be committed against any governmental or other organization that collects taxes, including the federal government, state governments, local governments or other taxing authorities.

Common Tax Fraud Schemes

Deliberately underreporting or omitting income

Overstating tax deductions

Keeping two sets of books

Making false entries in books and records



Tax Fraud

Claiming personal expenses as business expenses

Claiming false deductions

Hiding or transferring assets or income

Illegal money laundering schemes



Tax Laws for Fraud Perpetrators



IRS CRIMINAL INVESTIGATIONS ACTIVITY, 2004-2006



Divorce Fraud

Most divorce fraud litigation results from two allegations:

The plaintiff spouse claims that the defendant hid assets so they would not have to be shared or taken away

or

(2) The values assigned to assets were unrealistically low, thus resulting in an unfair divorce settlement.



Bankruptcy Fraud

The bankruptcy system, an arm of the U.S. District Court, is a critical component of the U.S. government because of the impact bankruptcy filings have on the national and local economies.

Monies defrauded from a bankruptcy never reach the pockets of deserving creditors and investors.

The loss of faith in the legal process (bankruptcy) by creditors and investors can have a ripple effect in the economy through the tightening of credit, the raising of interest rates and subsequent economic reactions.



The Bankruptcy Code

Title 11 of the U.S. Code is referred to as the Bankruptcy Code.

The code provides for several types of bankruptcy.

Chapters 1,3, and 5 contain general provisions that apply to all bankruptcies.

Chapters 7,11, and 13 apply to specific types of bankruptcy.



Criminal Bankruptcy Statutes

Concealment of Assets, False Oaths and Claims, and Bribery (18 USC 152)

It is a crime to… Conceal property of a debtor’s estate from creditors Make a false oath or account in a bankruptcy case Give, offer, receive, or attempt to obtain money or

property, remuneration, compensation, reward, advantage or promise thereof for acting or forbearing to act in a bankruptcy case.




Embezzlement Against the Debtor’s Estate (18 USC 153)

The statute makes it a crime for such persons to “knowingly and fraudulently appropriate to [their] own use, embezzle, spend, or transfer” any property, or to hide or destroy any document, belonging to the debtor’s estate.




Adverse Interest and Conduct of Officers(18 USC 154); it is a crime to knowingly: Purchase, directly or indirectly, any property of the debtor’s estate

of which the person is an officer in a bankruptcy case

Refuse to permit a reasonable opportunity for the inspection by parties in interest of the documents and accounts relating to the affairs of the estate in the person’s charge when directed by the court to do so.

Refuse to permit a reasonable opportunity for inspection by the U.S. Trustee of the documents and accounts relating to the affairs of the estate in the person’s charge.




Bankruptcy Fraud

It is a crime to do any of the following to execute or conceal a fraud scheme:

File a bankruptcy petition.

File a document in a bankruptcy proceeding.

Make a false or fraudulent representation, claim, or promise with respect to a bankruptcy proceeding, either before or after the bankruptcy petition is filed



Civil Bankruptcy Statutes

Offenses Leading to Revocation of Debt Discharge (Section 1144 of the Bankruptcy Code)

For example, if a debtor lied about (usually by understating) the amount of his or her assets in order to get debts forgiven, the forgiveness or discharge of the debts could be revoked.



Civil Bankruptcy Statutes

Fraudulent Transfers (Section 548 of the Bankruptcy Code)

A transfer made, or obligation incurred, within one year before the bankruptcy petition’s filing date that was: Made with the actual intent to hinder, delay, or defraud

creditors Made for less than reasonably equivalent value



Participants in the Bankruptcy Process The parties involved in

the bankruptcy process: Bankruptcy court U.S. Trustee Court-appointed or panel

trustee Examiners Debtors Creditors Adjusters (operations

or field agents)



Bankruptcy & Divorce Schemes

Two most common bankruptcy fraud schemes are: bust-out and the fraudulent concealment of assets during, or in contemplation of, a bankruptcy.

Bust-out may take several forms, but essentially involves intentionally obtaining loans or purchasing inventory on a credit basis and concealing, or absconding with, the proceeds from the loan or sale of the inventory or with the inventory itself before creditors are paid.




Indicators of a bust-out: A company’s only listed address and phone number are

a post office box and an answering service

A new company is owned and managed by persons from another state

A sudden change is made in a company’s management

Credit references either cannot be verified or seem too eager to provide favorable references




The size of orders placed on credit and the credit balances with suppliers suddenly and dramatically increase.

The inventory is suddenly deleted, without explanation.

“Customers” have a history of buying goods at unreasonable discounts.



Concealing and Transferring AssetsWays in which assets or income may be

fraudulently concealed:

Cash may be diverted to another entity

Inventory may be shipped to an off-site location

Assets or income may be shifted to another entity controlled by the debtor

Sales may not be reported properly

Payment may be made to fictitious persons



Concealing and Transferring Assets Some indicators of concealment include:

Transfers of property or large payments to related parties or individuals, such as insiders, shareholders, or relatives.

Frequent and unusual transfers between bank accounts, particularly between business and personal accounts.

Numerous transactions made in cash that normally are made on account (sales, purchases, etc.)

Unusually large and unexplainable payments to vendors.



Concealing and Transferring Assets

Unusual or rapid reductions in assets.

Increases in operating losses that are not explained by economic factors.

Inconsistencies between financial statements or tax returns and the official forms filed for the bankruptcy or records filed in divorce cases.

Travel to offshore tax havens or locations that allow secret bank accounts.

Missing, inaccurate, or damaged records.



Money Laundering Process

Documents

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except