FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT

1. FRAUD EXAMINATIONALBRECHT, ALBRECHT, & ALBRECHT Bankruptcy, Divorce, and Tax Fraud Chapter 16

2. Learning Objectives • Explain why fraud is so prevalent in bankruptcy and divorce cases. • Describe the nature of bankruptcy and gain a familiarity with bankruptcy codes. • Understand civil and criminal bankruptcy fraud statutes. • Identify the participants involved in the bankruptcy process.

3. Learning Objectives • Recognize different bankruptcy and divorce fraud schemes. • Understand how perpetrators fraudulently conceal and transfer assets and income in bankruptcies and divorces. • Define tax fraud.

4. What Roles Do CPAs & Fraud Examiners Play in Bankruptcy Fraud? • Examiner or trustee • Serve on creditors’ committees & prepare investigative reports • Assist government with investigative report • Assist in recovering assets • Act as private investigators

5. Categorization Match Fraud Causing Bankruptcy or Divorce Books or Records Being Destroyed or Inaccurate During “Stay” Assets Are Transferred to Hide from Negotiations Bankruptcy or Divorce Used to Do Fraud Bankruptcy or Divorce Used to Conceal Fraud Too Few Assets to Pay Creditors or Spouse Tries to Salvage Reputation

6. Discuss Bankruptcy. Liquidate, Individuals & Companies Inability to pay debts Legal petition to courts Plans developed to repay or liquidate Chapter 7 Chapter 11 Chapter 13 Reorganize & develop ability to repay debts, Individuals & Companies Applies to Individuals with $1M or less in debts

7. Define and Discuss Tax Fraud. • Willingly and intentionally violating the known legal duty of voluntarily filing income tax returns and paying the correct amount of income, employment or excise taxes. • IRS collected almost $2,000,000,000,000 in revenue and processed more than 222 million tax returns; it costs $0.48 per $100 to be collected or $9,600,000,000.

8. Discuss Tax Fraud and the Criminal Investigation Division. • Mistakes can cost a 20% penalty plus interest. • Fraud costs 75% penalty plus interest. • CI agents are trained to “follow the money.” • They can conduct complex financial investigations.

9. Discuss Divorce Fraud. • More than 1 million divorces are filed yearly – 50% of all marriages fail. • Amicable breakups are not common, rather divorce wars ensue. • The legal system is an adversarial system where attorneys seek to beat one another. • One spouse often feels cheated by another and desires to get even.

10. What Steps are Necessary to Prove Fraud? • That a false representation, usually one of fact, was made by one of the parties • That the defendant’s knowledge or belief that the representation was false or was made with reckless indifference to the truth • That the defendant showed an intent to induce the plaintiff to act or refrain from acting in a certain way

11. What Causes Most Divorce Fraud Litigation? • The plaintiff’s spouse alleges that the defendant hid assets from the divorce court so they would not have to be shared or taken away • The values of the assigned assets were unrealistically low, thus resulting in an unfair divorce settlement

12. Name 2 Most Common Multiple Bankruptcy Fraud Schemes. • Filing for bankruptcy in different states using your true personal identifiers • Using false names and Social Security numbers to file in the same or two or more states listing nearly identical assets and liabilities

13. What Actions Are Criminal in Bankruptcy? Seeking Favor Giving False Oaths or Accounts Hiding Assets Making False Claims Against Estate Receiving a Material Amount from Someone That Has Declared Bankruptcy Hiding or Destroying Information

14. Comment on Other Criminal Frauds in Bankruptcy. Trustee Steals Assets Trustee Purchases Assets from Estate Not Allowing Adequate Inspection By Parties of Interest or By U.S. Trustee

15. What Actions Are Criminal? • Filing for Bankruptcy to Hide a Fraud • Filing a False Claim • Providing False or Fraudulent Representation, Claim or Promise to a Bankruptcy Proceeding Either Before or After Petition is Filed

16. Section 1144 1328 548 Revokes Reorganization Plan if Approval Achieved with Fraud Similar to Section 1144 But for an Individual Filed Under Section 13 Applies to Transfer UP to 1 YR. Before Bankruptcy When Transfer Was Made to Hide Assets and/or Transfers for Less Than Reasonable Equipment, Bargain Transfers Review Civil Bankruptcy Statues.

17. Who Participates in the Bankruptcy Process? Bankruptcy Court Adjusters U.S. Trustee Debtor Court Appointed or Panel Trustee Creditors Fraud Examiner

18. Section 327(a) Allows Them To Be Hired By Trustee Needs Court Approval Section 1103 Allows Creditors To Hire Fraud Examiner How Does a Fraud Examiner Fit into a Bankruptcy Proceeding?

19. List 7 Clues to a Bust Out. • Company’s address & phone are P.O. box & answering service • New company owned & managed by out- of-state people or vague about ownership • Sudden management change, NO “Public Notice” • Can’t verify credit references, or references TOO eager to supply

20. List 7 Clues to a Bust Out. • Size of credit orders & credit balances dramatically increase • Inventory suddenly disappears, without explanation • “Customers” have a history of buying goods At unreasonable discounts

21. List Ways Cash is Concealed During A Divorce. • Receivable Payments Diverted to Another Entity, Usually Related • Inventory Shipped to Another Site, Sold to Related Party At Sharp Discount • Sales Not Reported in Books • Company Pays Personnel Expenses • Undisclosed Business Interests

22. What Are Some Clues to Concealment? • Frequent & Unusual Bank Transfers • Cash Transaction Normally Made “ON ACCOUNT” • Unexplainable, Unusually Large Payments to Vendors • Unusual or Rapid Asset Reduction • Travel to Off Shore Tax Havens • Missing, Inaccurate or Damaged Records

23. Terms Match Title 11 of U.S. Code - federal law governing bankruptcy Bankruptcy Bankruptcy Code Legal process to settle debts in an orderly plan Bankruptcy Court A person or entity owed money by a debtor Creditor The federal court overseeing all bankruptcy proceedings

24. Terms Match A person or entity declaring bankruptcy Debtor Divorce A planned bankruptcy Bustout Legal dissolution of two married partners Trustee Individual or firm that collects debtor’s assets & distributes to creditors