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So Much Fraud (Gwen Moritz Commentary)

4 min read

I’m in a position to see more reports than the average person — I get a stream of news releases from the Department of Justice, the Federal Deposit Insurance Corp. and other federal agencies — and, friends, there’s a whole lot of fraud going on out there.

There’s always a lot of fraud. But there really has been more of it lately. When the Association of Certified Fraud Examiners issued its biennial Report to the Nations on occupational fraud and abuse last month, it noted that “half of [2,110] fraud cases in the study were affected by the pandemic in some way.”

Another 8% of the cases examined for the new report involved cryptocurrency. “The most common ways cryptocurrency was used included making cryptocurrency bribery and kickback payments or converting misappropriated assets to cryptocurrency,” according to the ACFE.

The Certified Fraud Examiners continues to estimate that the typical organization loses 5% of revenue to fraud each year, a figure that has been consistent over the years. The 2022 report is otherwise a mix of good and bad news:

► Over the past decade, fraud cases have generally been caught faster, which results in smaller losses. Specifically, the median length of a fraud declined from 18 to 12 months between 2012 and 2022, and the median loss declined from $140,000 to $117,000.

► But “more of the fraudsters were higher up on the organizational ladder.” Now more than 60% of frauds were perpetrated by people in management or executive positions.

► Men are even more likely than women to steal from employers compared with a decade ago, but women who do embezzle are catching up with men in how much they steal. The median loss to a male fraudster has declined from $200,000 to $125,000, while the median loss to a woman has increased from $91,000 to $100,000.

The kind of fraud in the ACFE report is not the kind that is keeping federal prosecutors busiest these days: fraud related to federal pandemic relief programs. Even before Paycheck Protection Program payouts ended two years ago, federal prosecutors had opened fraud investigations across the country and had brought the first indictments.

I made a presentation to the Arkansas Society of CPAs in the fall of 2020 about the first wave of PPP fraud cases. There were fewer than 100 indictments at that point, but banks reported more than 1,500 cases of suspected fraud to the U.S. Treasury Department’s Financial Crimes Enforcement Network in June and July 2020. That’s about five times the historic average and a sign of things to come.

In March, when Attorney General Merrick Garland appointed the DOJ’s first director for COVID-19 fraud enforcement, the number of criminal defendants had grown to more than 1,000, “with alleged losses exceeding $1.1 billion.”

The feds were also conducting “over 240 civil investigations into more than 1,800 individuals and entities for alleged misconduct in connection with pandemic relief loans totaling more than $6 billion.” I’m not sure how they draw the line between civil and criminal misconduct, but it’s notable that the Fraud Examiners also found that victim organizations are increasingly likely to pursue civil cases rather than criminal prosecution.

As I pointed out to the ARCPA, the PPP frauds were not particularly creative. Since the program was designed to keep employees on the payroll for a couple of months, there were only a couple of ways to defraud the system: phantom employees at legitimate businesses or phantom employees at fictitious businesses.

The DOJ issued a release earlier this month on a far more ingenious fraud, one that seems tailor-made for the frantic house-buying that accompanied the pandemic, but it actually dates back almost a decade.

California siblings Adolfo Schoneke, 44, and Bianca Gonzalez, 39, ran real estate companies and would list properties for sale “even though they did not intend to sell them to anyone,” according to prosecutors. Schoneke and Gonzalez would accept multiple offers on each property, and they would set up bank accounts to receive down payments and even the full purchase amounts in cash while the buyers were strung along — some of them for years — with excuses about why their sale had not closed.

Here’s the part of the DOJ release that blew my mind: “In some cases, the homes were marketed through open houses arranged by tricking homeowners into allowing their homes to be used.”

Investigators said several hundred victims collectively lost more than $6 million between 2013 and 2016.

Gwen Moritz is a contributing editor at Arkansas Business Publishing Group. Email her at gmoritz@abpg.com or call (501) 455-9246.
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