ITS 4450 - Fraud Risk Assessment Tools and Investigation


Chapter 16, Bankruptcy, Divorce, and Tax Fraud

This lesson presents material from chapter 16. Objectives important to this lesson:

  1. Reasons fraud appears in these cases
  2. Civil and criminal bankruptcy fraud
  3. Examples of schemes
  4. Tax fraud and examples
  5. Money laundering
Concepts:
Chapter 16

The story at the beginning of this chapter is not very enlightening, so let's start with the overview section on page 576. The analysis one that page is reasonable. When one is going through bankruptcy, being divorced, or being taxed, there may be resentment about assets that will be transferred to someone else. In each case, the entity taking your assets is probably someone you have no affection for. It makes sense that many people would try to hide assets to avoid their being lost as part of the penalty/settlement/bill. However, an untruthful accounting of assets in each case is an act of fraud.

The text goes on to explain that fraud in the three categories many be a civil or criminal offense.

  • bankruptcy fraud
    • criminal - investigated by law enforcement, possibly by the FBI
    • civil - investigated by trustees, examiners, creditors, or committees appointed by a court
  • divorce fraud
    • criminal - investigated by law enforcement, possibly by the FBI
    • civil - investigated by trustees, examiners, creditors, or committees appointed by a court
  • tax fraud - usually criminal cases, investigated by law enforcement at the appropriate level; in the case of the IRS, it is their Criminal Investigation division; typically, civil cases have a lower threshold of proof, but they will not have prison terms as penalties

The text also observes that bankruptcy and divorce can relate to fraud in different ways:

  • they can take place because a partner has committed a fraud, and the other partner wants out of the relationship
  • the fraud can take place during the bankruptcy or divorce, as you probably imagined when you read the first paragraph
  • the bankruptcy or divorce can occur to establish fraudulent accounts and records as accepted versions of the truth; the information goes in the court records, and the fraud is assumed to be fact

The text moves on to tax fraud, and discusses it mainly from the perspective of the US Internal Revenue Service. The text informs us that a significant mistake on a tax return might result in a 20% penalty, but a fraudulent return would probably result in a 75% penalty. (The penalties are in addition to the tax already owed.)

As the lawyer in the video above describes, the IRS can choose to prosecute under civil laws, criminal laws, or both.

Tax fraud comes in many varieties, but there is a common theme. Table 16.1 presents seven laws that specify particular offenses. Those laws also specify the fines and prison time associated with each type of offense. We do not need to memorize them to avoid breaking those laws. The basic advice would be to pay your taxes honestly and there should be no trouble. The text presents a series of cases in which this did not happen. The text presents a list of common tax fraud schemes on page 580. They really come down to someone lying about income, deductions, or expenses.

The text moves on to discuss the adversarial nature of a divorce, using the colorful phrase "divorce wars". (Sounds like a reality TV show.) There are no additional facts about fraud in divorce cases, just the description of the process and a reference to the second scenario in the bullet list above.

The author suggests, reasonably, that most readers are unlikely to be familiar with bankruptcy. The chapter offers some insights into the bankruptcy process:

  • a bankruptcy is meant to provide some protection to the debtor, and some settlement to the creditors (entities that are owed money)
  • common bankruptcy frauds hide assets, which provides less relief to the creditors
  • bankruptcy can call for liquidation of all assets (chapter 7), or may require the creditors to give the debtor time to reorganize and make payments (chapter 11 or 13)
  • on pages 586 through 588, the text provides definitions and duties for the entities typically involved in a bankruptcy case, whether there is fraud or not

The text provides excerpts from bankruptcy law and divorce law on pages 584 through 586. Examples of several schemes, including the bust-out, follow. Most feel very familiar since they include the same elements we have seen in numerous frauds.

The chapter ends with some remarks about money laundering, which typically consists of making large amounts of money appear as though they came from legitimate sources of income. This is obviously another form of fraud. The text describes it in three stages:

  1. placement - Money is placed in a bank. The cover is often that it is cash from a cash based business, like a laundromat or a vending machine business.
  2. layering - Money is moved to many places (e.g. other banks, other countries, investments) in various sizes of transactions to make it harder to follow.
  3. integration - Money is moved back to the accounts of the perpetrator by appearing to be payment for goods or services.

Assignments

  1. Continue the reading assignments for the course.
  2. Complete the assignments and class discussion made in this module.