09 Financial Institution Fraud Flashcards
(30 cards)
Zane obtained a loan from Bank A, agreeing to give the bank a security interest in his commercial property. Before Bank A’s lien was filed, Zane managed to get another loan from Bank B using the same commercial property as collateral (unbeknown to Bank B). In which of the following schemes did Zane engage?
A. Linked financing
B. Sham loan
C. Double-pledging collateral
D. Daisy chain
C. Double-pledging collateral
In a double-pledging collateral scheme, borrowers pledge the same collateral with different lenders before liens are recorded and without telling the lenders.
Loan fraud represents a high risk for financial institutions because although the loss amounts are lower than other types of fraud, the number of instances is usually higher.
A. True
B. False
B. False
Loan fraud is a multifaceted activity that includes several types of criminal activities. Larger loan fraud schemes often involve real estate lending and collusion between insiders and outsiders. Loan fraud represents the highest risk area for financial institutions. Although the number of occurrences might be small, the amount per occurrence tends to be large.
In a construction loan, developer overhead is a ripe area for abuse. The purpose of developer overhead is to provide:
A. Labor reimbursements
B. Operating capital
C. Profit margin
D. Budget shortfall
B. Operating capital
It is not uncommon in construction financing to have a budget line item for developer overhead. This is a ripe area for abuse. The purpose of developer overhead is to supply the developer with operating capital while the project is under construction. This overhead allocation should not include a profit percentage, as the developer realizes profit upon completion.
Karl finds a residential property with a non-resident owner. He then forges contractual property documents showing that the owner is transferring ownership of the property completely to Karl, such as would normally happen during a property sale. The property owner is unaware that Karl has created and filed the documents. Later, Karl takes the falsified documents to a lender and borrows money against the property. Which of the following best describes Karl’s scheme?
A. Property flipping
B. Unauthorized draw on home equity line of credit
C. Fraudulent sale
D. Air loan
C. Fraudulent sale
Fraudulent sale scams are particularly harmful because they involve the fraudulent acquisition of real estate by filing a fraudulent deed or respective real estate document that makes it appear that the property legally belongs to the criminal. This scam does not happen at the origination of the loan, but rather might occur without the homeowner’s knowledge decades after the property was originally sold.
The perpetrator identifies a property—typically belonging to an estate or non-resident owner—that is owned free and clear. He then creates fictitious property transfer documents that purport to grant all rights and title on the property to the fraudster. The true owner’s signature is forged on the documents, and the scammer files them in the jurisdiction’s real property records. Once the ownership documents are filed, he applies for and executes a loan on the property (using a straw borrower). Often, the value is inflated. He absconds with 100 percent of the loan proceeds.
If a bank loan is a nonperforming loan, it might be a red flag for fraud. Which of the following is a fraud scheme that is often connected to a nonperforming loan?
A. Land flips
B. Construction over-budget items
C. Bribery
D. All of the above
D. All of the above
A nonperforming loan is a loan that is in default or close to being in default. The interest and principal payments might be overdue, and the creditor has reason to believe the loan will not be collected in full. This is often indicative of a fraud scheme. Fraud schemes resulting in a nonperforming loan include:
* Fraudulent appraisals—The cash flow cannot support an inflated loan and resulting debt amount.
* False statements—The loan was made on false or fraudulently presented assumptions.
* Equity skimming—The borrower never intended to make the underlying loan payments.
* Construction over-budget items—The amount over-budget might be a concealment method for other schemes such as embezzlement, misappropriation, or false statements.
* Bribery—The loan was made because the lender received a bribe or a kickback from the borrower.
* Land flips—The purpose of the loan was to finance the seller out of a property that has an artificially inflated value.
* Disguised transactions—The loans are sham transactions without substance, made to conceal other ills.
A property flipping scheme occurs when someone purchases a piece of real estate and sells it shortly thereafter at an unjustly inflated value.
A. True
B. False
A. True
Property flipping is the process by which an investor purchases a home and then resells it at a higher price shortly thereafter. For example, an investor buys a house in need of work for $250,000 in July, renovates the kitchen and bathrooms, and landscapes the yard at a cost of $50,000. He then resells the house two months later (the time it takes to make the renovations) for a price that is reflective of the market for a house in that condition. This is a legitimate business transaction, and there are numerous individuals and groups in the real estate market who make an honest living flipping properties.
Property flipping is not intrinsically illegal or fraudulent, but it becomes so when a property is purchased and resold within a short period of time at an artificially or unjustly inflated value, often as the result of a fraudulent appraisal. In a flipping scheme, the property is sold twice in rapid succession at a significant increase in value (also known as an ABC transaction, where the property moves from party A to party B to party C very quickly).
Which of the following is a common area for construction loan fraud schemes?
A. Retainage
B. Developer overhead
C. Estimates of costs to complete
D. All of the above
D. All of the above
Construction lending has different vulnerabilities than other permanent or interim lending. More risks are associated with construction projects than with already-built projects. Construction loan fraud schemes are numerous; the more common ones are related to estimates of costs to complete, developer overhead, draw requests, and retainage/holdback schemes.
The Financial Action Task Force’s Recommendation 20 states that countries should require financial institutions to submit which type of report if there is a known or suspected transaction involving the proceeds of criminal activity at the institution?
A. Currency Transaction Report
B. Bank Fraud Report
C. Form 125 Report
D. Suspicious Transaction Report
D. Suspicious Transaction Report
Under the Financial Action Task Force’s (FATF) Recommendation 20, countries should require financial institutions to promptly report to the country’s financial intelligence unit if they have “reasonable grounds to suspect that funds” from a transaction “are the proceeds of a criminal activity, or are related to terrorist financing.” Many countries have implemented laws in compliance with Recommendation 20. The reports are typically called suspicious transaction reports, suspicious activity reports, or something similar. The financial intelligence unit should review the reports and work with law enforcement to investigate likely instances of financial crime.
Which of the following situations would be MOST indicative of a customer committing new account fraud at a bank?
A. A customer deposits a substantial amount of funds in a new personal account and does not spend or withdraw them for several months.
B. An invalid address or phone number is listed in the customer’s account information.
C. A customer opens a business account and soon after has payroll transactions on the account.
D. A customer opens a new personal account and immediately requests two ATM cards.
B. An invalid address or phone number is listed in the customer’s account information.
Fraud is much more likely to occur in new accounts than in established accounts. New account fraud is generally defined as fraud that occurs on an account within the first 90 days that it is open; often, perpetrators open accounts with the sole intent of committing fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts. Some of the more common red flags of potential new account schemes are:
* Customer residence outside the bank’s trade area
* Dress and/or actions inconsistent or inappropriate for the customer’s stated age, occupation, or income level
* New account holder requesting immediate cash withdrawal upon deposit
* Request for large quantity of temporary checks
* Services included with the account that do not match the customer’s purpose
* Missing or inaccurate customer application information
* Invalid phone numbers or addresses in customer account information
* Use of a mail drop address (a service where a non-affiliated party collects and distributes a person or entity’s mail)
* Large check or ATM deposits followed by rapid withdrawal or transfer of funds (a flow-through account)
* Business accounts without standard business transactions, such as payroll or transactions that would be expected in that business
* Transactions without a clear purpose in jurisdictions known for high levels of corruption
* Opening deposit that is a nominal cash amount
* Rare customer ID type
* Applicants over the age of 25 with no credit history
* Customers who cannot remember basic application information (phone number, address, etc.)
Liam, a loan officer, and other real estate insiders colluded to steal a homeowner’s identity, take out a second mortgage on the individual’s property, and split the proceeds. Liam and his co-conspirators’ actions would best be described as a fraudulent second lien scheme.
A. True
B. False
A. True
Fraudulent second liens are a variation of the fraudulent sale scheme. In a second lien scheme, a person assumes a homeowner’s identity and takes out an additional loan or a second mortgage in the homeowner’s name. If there is not enough equity in the home to warrant a second loan, an inflated appraisal is obtained. This scheme often involves a high level of collusion between a loan officer, an appraiser, and a title agent (or other real estate document service provider).
Roxanne works in the accounting department of a bank, but is having difficulty paying her personal expenses. She decides to debit the bank’s general ledger and credit her own account. Which of the following best describes Roxanne’s scheme?
A. False accounting entry
B. Daisy chain
C. Unrecorded cash payment
D. Sham loan
A. False accounting entry
There are various embezzlement schemes that have been used over time against financial institutions. In false accounting entries schemes, employees debit the general ledger to credit their own accounts or to cover up a theft from a customer account.
Generally, if the dollar amount of an embezzlement scheme at a financial institution is small enough such that the targeted entity’s financial statements will not be materially affected, the scheme can be most effectively detected through which of the following methods?
A. Conducting a financial statement analysis
B. Reviewing all disbursements below the approval limit
C. Conducting a review of source documents
D. Educating employees who are responsible for handling currency
C. Conducting a review of source documents
There are several methods by which embezzlement can be detected. Generally, if the dollar amount of an embezzlement scheme is small enough such that the targeted entity’s financial statements will not be materially affected, embezzlement fraud can be most effectively detected through the review of source documents (e.g., receipts, deposit slips). There can be many types of clues in the source documents, and the particular situation will often determine what the fraud examiner needs to look for. The following are common red flags in source documents that might indicate that embezzlement has occurred:
* Missing source documents
* Payees on source documents (e.g., checks) do not match entries in the general ledger
* Receipts or invoices lack professional quality
* Duplicate payment documents for different transactions
* Payee identification information that matches an employee’s information or that of his relatives
* Apparent signs of alteration to source documents
* Lack of original source documents (photocopies only)
If the scheme is so large that the financial statements of the institution are affected, then a review of the source documents will serve to confirm or refute an allegation that an embezzlement scheme has occurred or is occurring. Generally, for large embezzlements, the most efficient method of detection is an analysis of the financial statements.
In a _________, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process.
A. Daisy chain
B. Reciprocal loan arrangement
C. Linked financing arrangement
D. False swap scheme
A. Daisy chain
In a daisy chain, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process. Its purpose is to mask or hide bad loans by making them look like they are recent and good.
Because it is a common occurrence, the fact that documents are missing from a loan file is generally not a red flag for loan fraud.
A. True
B. False
B. False
Missing or altered documentation is a red flag for any type of fraud scheme, and is a particular concern for loan fraud. While it is true that many loan files have missing documents, it is important to determine if the documents have been misplaced or were never received. A waiver of certain documents is one common way for lenders to conceal fraud schemes.
Which of the following is a red flag for new bank account fraud?
A. A customer lists a mail drop as the account’s mailing address
B. A customer requests a large cash withdrawal immediately after opening the account
C. A customer leaves out requested information on the account application
D. All of the above
D. All of the above
Fraud is much more likely to occur in new accounts than in established accounts. New account fraud is generally defined as fraud that occurs on an account within the first 90 days that it is open; often, perpetrators open these accounts with the sole intent of committing fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts. Some of the more common red flags of potential new account schemes are:
* Customer residence outside the bank’s trade area
* Dress and/or actions inconsistent or inappropriate for the customer’s stated age, occupation, or income level
* New account holder requesting immediate cash withdrawal upon deposit
* Request for large quantity of temporary checks
* Services included with the account that do not match the customer’s purpose
* Missing or inaccurate customer application information
* Invalid phone numbers or addresses in customer account information
* Use of a mail drop address (a service where a non-affiliated party collects and distributes a person or entity’s mail)
* Large check or ATM deposits followed by rapid withdrawal or transfer of funds (a flow-through account)
* Business accounts without standard business transactions, such as payroll or transactions that would be expected in that business
* Transactions without a clear purpose in jurisdictions known for high levels of corruption
* Opening deposit that is a nominal cash amount
* Rare customer ID type
* Applicants over the age of 25 with no credit history
* Customers who cannot remember basic application information (phone number, address, etc.)
Excessive write-offs are a form of concealment for which of the following schemes?
A. Embezzlement
B. Conflicts of interest
C. Phantom loans
D. All of the above
D. All of the above
Excessive write-offs are a form of concealment for phantom loans, conflicts of interest, and embezzlement. Therefore, if all write-offs are subject to management review before they are written off, then management reduces the potential environment for fraud.
Which of the following situations is often present in real estate fraud schemes?
A. The services of an arms-length legal representative
B. No expert assistance at closing
C. A false appraisal report
D. All of the above
C. A false appraisal report
Real estate transactions assume a willing buyer and a willing seller. Fraud can occur when the transaction breaks down or the expert assistance is not at arm’s length. Many real estate fraud schemes have a false appraisal report as a condition precedent.
Heather is a fraud examiner who is investigating a fraud case at a bank. Which of the following of Heather’s findings might be a red flag of embezzlement?
A. Payees on source documents do not match entries on the general ledger
B. Only photocopies are available as source documents instead of originals
C. Some source documents are missing or altered
D. All of the above
D. All of the above
There are several methods by which embezzlement can be detected. Generally, if the dollar amount of an embezzlement scheme is small enough such that the targeted entity’s financial statements will not be materially affected, embezzlement fraud can be most effectively detected through the review of source documents (e.g., receipts, deposit slips). There can be many types of clues in the source documents, and the particular situation will often determine what the fraud examiner needs to look for. The following are common red flags in source documents that might indicate that embezzlement has occurred:
* Missing source documents
* Payees on source documents (e.g., checks) do not match entries in the general ledger
* Receipts or invoices lack professional quality
* Duplicate payment documents for different transactions
* Payee identification information that matches an employee’s information or that of his relatives
* Apparent signs of alteration to source documents
* Lack of original source documents (photocopies only)
A draw request on a construction loan should be accompanied by all of the following EXCEPT:
A. Expenses from similar contracts
B. Lien releases from subcontractors
C. Change orders, if applicable
D. Inspection reports
A. Expenses from similar contracts
A draw request is the documentation substantiating that a developer has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. Generally, draw requests on construction loans are made on a periodic schedule (e.g., once a month) and are verified by a quantity surveyor (QS) or other authorized entity as agreed to by the financial institution. The request should be accompanied by the following documents:
* Paid invoices for raw materials
* Lien releases from each subcontractor
* Inspection reports
* Canceled checks from previous draw requests
* Bank reconciliation for construction draw account for previous month
* Loan balancing form demonstrating that the loan remains in balance
* Change orders, if applicable
* Wiring instructions, if applicable
* Proof of developer contribution, if applicable
Which of the following methods might be used to conceal a sham loan transaction in which the loan officer receives part of the proceeds (kickback)?
A. “Digging” the loan on the books
B. Charging off the loan as a bad loan
C. Turning the loan over to a collections agency
D. Letting the loan go into arrears
B. Charging off the loan as a bad loan
Loan officers will sometimes make loans to accomplices who then share all or part of the proceeds with the lending officer. This is called a sham loan scheme. In some instances, the loans are charged off as bad debts; in other instances, the bogus loans are paid off with the proceeds of new fraudulent loans.
Common fraud schemes involving ATMs include all of the following EXCEPT:
A. Counterfeit ATM cards
B. Employee manipulation
C. Unauthorized access to PINs and account codes
D. Credit data blocking
D. Credit data blocking
There are a number of fraud schemes that are being perpetrated with regard to ATMs. These schemes include: (1) theft of card and/or unauthorized access to PINs and account codes for ATM transactions by unauthorized persons; (2) employee manipulation; (3) counterfeit ATM cards; (4) counterfeit ATMs; (5) magnetic strip skimming devices; and (6) ATM deposit fraud.
When a construction developer submits a draw request to a lender, all of the following would be red flags for loan fraud EXCEPT:
A. Invoice documentation that appears altered
B. Failure to include lien releases from each subcontractor
C. Missing inspection reports
D. Omission of developer’s personal account statements
D. Omission of developer’s personal account statements
Construction loan advances are generally supported by draw requests. A draw request is the documentation substantiating that a developer has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. Generally, a draw request is made once a month and is verified by a quantity surveyor (QS) or other authorized entity as agreed to by the financial institution. The request should be accompanied by the following documents:
* Paid invoices for raw materials
* Lien releases from each subcontractor
* Inspection reports
* Canceled checks from previous draw requests
* Bank reconciliation for construction draw account for previous month
* Loan balancing form demonstrating that the loan remains in balance
* Change orders, if applicable
* Wiring instructions, if applicable
* Proof of developer contribution, if applicable
Any missing or altered documentation is a red flag that something is amiss with the draw request. All advances on the loan should be adequately documented.
The developer’s personal account statements would never be included with a draw request.
In most construction contracts, a certain amount will be withheld from each draw request by the contractor. This amount is not paid until the contract has been finished and approved by the owner. The withheld amount is referred to as which of the following?
A. Withholding
B. Good faith deposit
C. Retainage
D. None of the above
C. Retainage
Retainage (sometimes called the holdback) is the amount withheld from each draw request until such time as the construction is complete and the lien period has expired.
Which of the following best describes the difference between a flipping scheme and a flopping scheme in the context of mortgage fraud?
A. In a flopping scheme, the lender is not one of the potential victims of the scheme.
B. In a flopping scheme, the second transaction in the scheme usually occurs several years after the first.
C. In a flopping scheme, the value of the first transaction is deflated instead of inflating the second transaction.
D. In a flopping scheme, the original seller always ends up as the final owner of the property.
C. In a flopping scheme, the value of the first transaction is deflated instead of inflating the second transaction.
Property flipping is the process by which an investor purchases a home and then resells it at a higher price shortly thereafter. For example, an investor buys a house in need of work for $250,000 in July, renovates the kitchen and bathrooms, and landscapes the yard at a cost of $50,000. He then resells the house two months later (the time it takes to make the renovations) for a price that is reflective of the market for a house in that condition. This is a legitimate business transaction, and there are numerous individuals and groups in the real estate market who make an honest living flipping properties.
Property flipping is not intrinsically illegal or fraudulent, but it becomes so when a property is purchased and resold within a short period of time at an artificially or unjustly inflated value, often as the result of a fraudulent appraisal. In a flipping scheme, the property is sold twice in rapid succession at a significant increase in value (also known as an ABC transaction, where the property moves from party A to party B to party C very quickly).
Property flopping is a variation on property flipping, but it generally involves a property subject to a short sale (meaning the owner sells the property at a lower value than the unpaid mortgage amount on the property). This variation typically is conducted by industry insiders or unscrupulous entrepreneurs rather than the homeowner. Property flopping involves a rapid transfer of property with an unjustified, significant change in value (like the ABC transaction in flipping schemes), but instead of inflating the value on the second transaction, the value on the first transaction is deflated.
To prevent problematic short sale flopping, some lenders are starting to require all interested parties to sign an affidavit requiring disclosure of an immediate subsequent sale.
