BANKRUPTCY FRAUD
OBJECTIVE
To reduce the amount of
economic loss caused by fraudulent bankruptcy filings throughout
the United States.
The bankruptcy
system, an arm of the United States District Court, is a critical
component of the United States government because of the impact
bankruptcy filings have on the national and local economies. Abuse
of the system by an individual debtor or a professional within the
system itself undermines the integrity of the system as a whole.
Through abuse and corruption of the system, the effectiveness of the
rehabilitation process, the system's primary function for
the debtor, is reduced.
Monies defrauded from a bankruptcy never
reach the pockets of those deserving creditors and investors. As
these frauds occur more frequently, these creditors and investors
lose faith that their interests will be protected. This can have a
ripple effect in the economy through the tightening of credit, the
raising of interest rates, etc.
Bankruptcy fraud is a
growing national problem. The number of bankruptcies
and associated bankruptcy frauds has increased every year over
the last five years. During 1997 alone, bankruptcy filings
registered with the U.S. Bankruptcy Court totaled 1,367,364, an all-time high for any 12-month period in its history. The
increase in the number of petitions filed with the bankruptcy court
has resulted in a corresponding increase in administrative activity
and a lessening of the available time and resources to enforce
policy, procedures, and to detect fraud by the bankruptcy court
infrastructure.
Over the past decade,
professionals involved in the bankruptcy system have seen a decrease
in the stigma that had been attached to an individual filing for
bankruptcy. Bankruptcy relief is now more widely accepted than ever
before. Along with this perceived elimination of the shame attached
to filing for bankruptcy, the changing economic climate in the
United States has led to a significant rise in bankruptcy filings
over the past decade.
The vast majority of
bankruptcies filed in the United States come in the form of Chapter
7 — "Liquidation." An analysis of current FBI bankruptcy
fraud investigations revealed that the most common scheme utilized
in fraudulent bankruptcy filings involved the concealment of a
debtor's assets. The concealment of assets encompasses approximately
70 percent of bankruptcy fraud. Concealment prevents
these assets from being liquidated and transferred to his/her
creditors to extinguish the debt.
While concealing
assets from the bankruptcy court is a fairly self-explanatory fraud
scheme, it can be accomplished in a variety of ways. A business or
an individual can conceal assets. For example, an individual in
Chapter 7 bankruptcy listed his/her assets as being well below
his/her liabilities. While this should be the typical situation in most
bankruptcy filings, the eventual outcome is not. After the debtor's
bankruptcy is dismissed, he/she seems to continue living a very
extravagant lifestyle. The debtors are reported by their neighbors,
who claimed that the debtors concealed several assets from the
bankruptcy court, to include boats, Rolex watches, and country club
memberships. An investigation determined the debtors did not list
these assets on their bankruptcy schedules in hopes of avoiding
total liquidation of their assets.
In the case of a business filing
for bankruptcy protection, concealment of assets typically occurs on
a larger scale. For example, a business owner places his company in
Chapter 11 bankruptcy because the company is facing a severe cash
shortage. However, just prior to filing for bankruptcy, the business
owner transfers large sums of cash and other company assets to
family members as well as outside business interests which the owner
controls. The debtor's objective was to protect these assets from
sale or liquidation. Despite some notable law enforcement successes,
including Operation Total Disclosure, the concealment of a debtor's
assets remains the most significant problem area within bankruptcy
fraud.
Bankruptcy fraud also
involves schemes to include petition mills, multiple filing, false
statements, trustee fraud, attorney fraud, forged filings,
embezzlement, credit card fraud, and "bust-outs." After
the concealment-of-assets fraud schemes, petition mills and multiple
filings are the most prominent bankruptcy fraud schemes.
Petition mill fraud
schemes are becoming increasingly popular in large cities with poor
or immigrant populations. The scheme revolves around keeping an individual
from being evicted from his dwelling, usually a person who is
renting versus owning. Typically, when an individual is experiencing
financial troubles, the first "creditor" to contact the
distressed individual is his or her landlord. In order to avoid
eviction as well as the high cost of a lawyer, the individual
answers an advertisement in the newspaper or responds to a billboard
or poster intentionally posted in targeted neighborhoods. The
advertisement explains how a "typing service" will help
them keep their homes or apartments if faced with eviction.
Unbeknownst to the individual, the
service files a bankruptcy on the individual's behalf. The service
charges an exorbitant fee for this service and drags the process out
for several months, leading the individual to believe that the
company is providing them a great service. In reality, the service
is stripping the individual of any savings they might have and prolonging the inevitable eviction.
The two most popular
ways to perpetrate the multiple filing fraud schemes are:
CAPABILITIES
Enforcement of
bankruptcy fraud falls within the exclusive investigative
jurisdiction of the FBI. Investigations are typically the result
of referrals from a number of sources, but primarily originate
with the United States Bankruptcy Trustees. Many of these
investigations are complex and interrelated with other forms of
fraud. Due to the seriousness of this crime problem, the
investigation of bankruptcy fraud remains an investigative
priority within the FBI.
STRATEGY
The FBI's strategy for
reducing the number of fraudulent filings concentrates on three
tasks: targeting individuals and businesses who conceal assets;
dismantling petition mills that prey upon poor and/or immigrant
victims; and targeting individuals who make fraudulent multiple
interstate bankruptcy filings.