Swindlers 'Party On' During Tough Economy

September 25, 2009

By Lora Kloth

The recession may be waning, but it has invited scammers to throw what some call a “fraud party.” Fraud increases during recessions, and this downturn is no different.

According to a recent report from The Network Inc., a Norcross, Ga., firm that runs compliance and corporate-governance hotlines for about half of Fortune 500 companies, fraud-related calls amounted to 21% of all reports in first-quarter 2009, up from 14% in first-quarter 2007.

Criminologist Donald Cressey proposed that three elements exist in a “fraud triangle,” and all three must be present for fraud to occur:
1. Opportunity: Con artists identify a method to commit fraud.
2. Pressure: Criminals face financial and other pressures.
3. Rationalization: Fraudsters convince themselves that their illegal actions are justified.

Credit unions can help crash the fraud party by being aware of the following trends.

Mortgage fraud

The New York Times cites one type of mortgage fraud involving “deed thieves” who promise struggling homeowners assistance with mortgage payments by “temporarily” managing their deeds.

The thieves convince the owners to transfer the titles to their homes. Then the swindlers refinance and make off with the homeowners’ equity—sticking them with the remaining payments or leaving them stranded after stealing their homes outright.

In another scheme, foreclosure rescue scammers may charge exorbitant fees for useless services.

Sometimes mortgage applicants are the fraudsters as they falsify tax returns or financial statements to obtain loans. [Freddie Mac] (http://www.cuna.org/initiatives/freddie_mac/freddie_mac.html) has detected an increase in borrowers who don’t admit all debts so they can qualify for mortgages.

Some potential buyers claim properties as primary residences, but actually use them as investments or vacation homes to avoid providing lease agreements or to obtain lower interest rates. Home builders, too, may be in on the act as they falsify liens to cash in at closings or flip properties to third persons at exaggerated prices based on fake comparables.

Be aware of signs that members may be victims or perpetrators of mortgage fraud. Listen carefully as they ask about mortgages, and be on the alert for nervousness or conflicting comments about their finances.

Vehicle fraud

Desperate vehicle owners burdened by car payments also may resort to fraud. A recent Los Angeles Times report says motorists may commit insurance fraud by setting cars on fire or conniving with professional con artists who charge vehicle owners a fee to “steal” the auto for resale or strip it for parts.

According to the article, insurance cheats often miss loan payments prior to filing fake insurance claims.

When you discuss missed auto loan payments with members, listen for signs of insurance fraud. For example, after a loan is closed, check for previous missed payments.

Check scams

A recent Consumer Federation of America (CFA) survey states about one-third of adults have encountered check scams and 1.3 million have been victimized. CFA says the average loss per consumer is $3,000 to $4,000.

Sometimes these swindles take shape as work-from-home jobs in which scammers ask victims to cash checks from fake overseas businesses. After the “employee” subtracts his or her compensation and wires remaining funds to the “employer,” the bad checks become the victim’s responsibility.

A similar tactic is a supposed sweepstakes or lottery win in which the fraudster asks the consumer to wire fees or taxes on “winnings.”

Fraudsters also trick with offers to purchase an item posted for sale by a victim, who then receives an overpayment by fake check. The scammers request that the extra amount be wired elsewhere for shipping costs.

Be aware of these scams and discuss the likelihood of fraud with members who request help wiring funds or cashing suspicious checks from overseas businesses.

Next: Ponzi schemes, elder abuse

Ponzi schemes

The Federal Bureau of Investigation (FBI) reports investment fraud has run rampant. FBI Special Agent David G. Nanz says in The Washington Post, “We have more open Ponzi scheme cases than at any time in FBI history.”

During a down economy, Ponzi schemes unravel as nervous investors attempt to withdraw funds or refuse to invest in the first place.

In a Ponzi, con artists promise big returns on securities, real estate, and other investments. Unwitting consumers provide funds that are never invested, but instead pay off earlier “buyers.”

Eventually, new investments cease and the pyramid collapses. This type of fraud proliferates in good economic times and falls apart with economic uncertainty.

If members seem excited to discuss new investment opportunities, listen carefully. If you suspect these “too-good-to-be-true” opportunities could lead them astray, mention what you know about Ponzi schemes.

Elder abuse

While anyone can be a victim of financial fraud, the elderly are particularly vulnerable as they tend to be more trusting and more likely to suffer from ailments that impair judgment and reasoning. Older members may also have significant assets.

Sadly, it’s often a relative who takes advantage of an elder. For example, the elder may sign documents he or she doesn’t understand—tricked into cashing out home equity, changing names on deeds, and so on.

One MetLife study indicates family members or care providers bilk seniors in 55% of cases of elder fraud. But investment cons reflect greater financial loss.

Forms of elder financial abuse include fraud, abuse of powers of attorney, identity theft, phishing, contractor or repair cons, and medical fraud.

Be aware of changes in elderly members’ financial habits: asset transfers, large withdrawals, potential signature forgeries, and lost checks, credit cards, and retirement income payments. These could be signs of elder abuse.

Occupational fraud

A 2009 survey on occupational fraud by the Association of Certified Fraud Examiners shows corporate fraud has increased due to economic pressures.

Forty-eight percent of survey respondents claimed employee embezzlement is on the rise, and more than one-third stated that frauds by unrelated third parties—such as identity theft, con schemes, and securities fraud—have increased in the past year.

“These types of fraud can be devastating to individual and organizational victims as well as the economy as a whole,” cites the survey report. Respondents believe this higher level of fraud risk will exist at least until 2010.

Occupational fraud also presents itself through vendor trickery, corruption, alteration of financial statements, and theft of assets. According to a Krall Global Fraud Report, 85% of surveyed companies experienced corporate fraud within the last three years.

Pay attention to paperwork that crosses your workstation and report oddities or discrepancies.

Online fraud

Phishing also has gained momentum during the recession. One example is when an e-mail solicitation appears to come from a respectable source, such as a credit union, but actually is a scammer’s attempt to obtain personal information, such as credit card numbers.

An April 2009 Gartner study indicates more than five million American consumers lost money due to phishing in the year ending September 2008. This reflects a 39.8% increase over the previous year.

Phishing fraudsters become savvier as they expand to adopt brands like lotteries, fake mortgage companies, and others. Gartner claims the 2008 average loss per victim was $351.

Tell members your credit union will never e-mail or call to verify account numbers, passwords, and other personal information. Explain that some crooks may disguise themselves as credit union representatives to swindle members.

The despondent economy is challenging enough for consumers and businesses without the added burden of recession fraud attacks. Crash the scammers’ fraud party with alertness, vigilance, concern for members, and awareness of the schemes.