Financial Institution Fraud Flashcards
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
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—There was never any intention 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.
ABC Bank recently acquired a new portfolio of consumer loans. Because this particular loan portfolio is experiencing a higher than normal default rate, management has asked B.J., a Certified Fraud Examiner, to evaluate the portfolio. B.J. notices that the loan package was sold without recourse to the broker, the brokerage fee was high relative to other purchases, and the broker is no longer in business. Which of the following types of schemes has B.J. most likely uncovered?
A. Money transfer fraud
B. Daisy chain fraud
C. Letter of credit fraud
D. Brokered loan fraud
D. Brokered loan fraud
Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans. A variation of a brokered loan is the loan participation, where the purchaser participates in the loan but does not purchase the entire loan. The fraud schemes associated with brokered or participated loans generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Generally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money, and disappears. Brokered loans are generally not sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting. However, this does not relieve the participating bank from its obligation to perform its own due diligence.
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. Reciprocal loan arrangement
B. False swap scheme
C. Daisy chain
D. Linked financing arrangement
C. 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.
Which of the following is most indicative that the winning bid on an original construction project was not feasible?
A. Missing documentation
B. High turnover in developer’s personnel
C. Draw requests
D. Increasing trend in the number of change orders
D. Increasing trend in the number of change orders
An increasing trend in the number of change orders or amounts on change orders might be an indication that construction changes have taken place that would alter the originally planned project to such an extent as to render the underwriting inappropriate. On the other hand, some projects—especially large projects—tend to have many change orders. It might be more abnormal in situations like these to have few change orders or none at all than to have many. For instance, a lack of change orders for a large project might suggest that progress is not actually being made. Ultimately, the key characteristic that the fraud examiner should look for in change orders is abnormality, which can come in many forms. Fraud examiners should discover what the normal trend for change orders is in terms of both quantity and content with the particular type of industry and project, and then they can look for deviations from those trends.
A draw request on a construction loan should be accompanied by all of the following EXCEPT:
A. Lien releases from subcontractors
B. Inspection reports
C. Change orders, if applicable
D. Expenses from similar contracts
D. 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 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
Common fraud schemes involving ATMs include all of the following EXCEPT:
A. Unauthorized access to PINs and account codes
B. Employee manipulation
C. Duplicating ATM deposits
D. Counterfeit ATM cards
C. Duplicating ATM deposits
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 .
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. Retainage
C. Good faith deposit
D. None of the above
B. Retainage
Retainage 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 second transaction in the scheme usually occurs several years after the first.
B. 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.
D. In a flopping scheme, the lender is not one of the potential victims of the scheme.
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 becomes illegal and fraudulent, however, when a home is purchased and resold within a short period of time at an artificially or unjustly inflated value. 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.
Under certain conditions, the Bank Secrecy Act and its amendments require national banks to submit which type of report if there is a known or suspected criminal violation committed against the bank?
A. IRS Form 1090
B. Suspicious Activity Report
C. Bank Fraud Act Report
D. Currency Transaction Report
B. Suspicious Activity Report
The Bank Secrecy Act (BSA) and its amendments require national banks to file Suspicious Activity Reports (SARs) under certain circumstances. The Financial Crimes Enforcement Network (FinCEN) is the administrator of SARs and may bring an enforcement action for violations of the reporting, recordkeeping, or other requirements of the BSA. SARs are required in each of the following instances:
• There is a known or suspected criminal violation involving the bank, and the bank has a substantial basis for identifying responsible bank personnel.
• There is a known or suspected criminal violation involving the bank, the amount involved is $5,000 or more, and the bank has a substantial basis for identifying a possible suspect.
• There is a known or suspected criminal violation involving the bank and an amount of $25,000 or more, regardless of whether there is an identified suspect.
• Any transaction aggregating $5,000 or more that was conducted or attempted to be conducted through the bank when the bank knows or has reason to suspect that the transaction: (1) involves potential money laundering or terrorist financing; (2) is designed to evade any regulations under the Bank Secrecy Act; (3) involves intrusion into a financial institution’s computer systems to steal or affect funds, information, or critical systems; (4) has no apparent business or lawful purpose in which the particular customer would likely engage, and the institution has no reasonable explanation after examining the available facts; and (5) the bank knows that the customer is operating as an unlicensed money services business.
The Red Flag Rules issued by the Federal Trade Commission apply exclusively to financial institutions. T/F
False
Although the Red Flag Rules apply primarily to financial institutions, they also apply to any creditor with covered accounts. The definition of creditor includes any entity that “regularly extends, renews, or continues credit” or that “regularly arranges for the extension, renewal, or continuation of credit,” including banking institutions, mortgage lenders, retailers, utility companies, car dealers, and debt collectors. A covered account is an account primarily used for personal, family, or household purposes and that involves multiple payments or transactions, including credit card accounts, mortgage loans, car loans, cell phone accounts, utility accounts, and savings accounts. Therefore, even if a business is not a financial services entity, management should determine whether the entity is a creditor under the Red Flag Rules.
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. Conducting a review of source documents
C. Educating employees who are responsible for handling currency
D. Reviewing all disbursements below the approval limit
B. 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 (i.e., receipts, canceled checks, deposit slips, etc.). 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
• Unusual amount of out-of-sequence check numbers
• Payees on 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.
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. Turning the loan over to a collections agency
B. Charging off the loan as a bad loan
C. “Digging” the loan on the books
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
Which of the following real estate loan schemes would be best described as an air loan?
A. A fraudster files a fraudulent deed with the property owner’s forged signature, and then takes out a loan using the property as collateral.
B. A loan applicant falsifies his income sources to qualify for a mortgage.
C. A builder, in collusion with an appraiser and a title company, fraudulently applies for a loan to construct a building on a nonexistent property and keeps the proceeds.
D. A property developer applying for a loan submits instances of previous development experience that are fictitious or that he had no part in.
An air loan is a loan for a nonexistent property. There is nothing to collateralize the loan on but air. Most or all of the documentation is fabricated, including the borrower, the title commitment, and the appraisal. This type of scheme involves a high level of collusion, and perpetrators might have even set up a dummy office with people pretending to be participants in the transaction, such as the borrower’s employer, the appraiser, and the credit agency. Usually, air loans go into early payment default. Since there are no actual properties on which to foreclose, the losses on these loans can be enormous.
Jeff works as a teller at a bank. One of Jeff’s friends came in as a customer and presented a check. Jeff could tell that the check was counterfeit, but the friend convinced him to cash it for a share of the proceeds. Which of the following best describes the scheme in which Jeff engaged?
A. Unauthorized disbursement of funds to outsiders
B. Theft of physical property
C. Unauthorized use of collateral
D. False accounting entry
A. Unauthorized disbursement of funds to outsiders
There are various embezzlement schemes that have been used over time against financial institutions. The scheme in this scenario involves an employee abusing his authority to approve a fraudulent (counterfeit, forged, stolen, etc.) instrument to make an unauthorized disbursement of funds to an outsider.
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
True
Property flipping in and of itself is not 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. 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).
