2011 Was Worst Year for Suspected Financial Crimes on Record

2011 Was Worst Year for Suspected Financial Crimes on Record
March 27, 2012

A tidal wave of fraud reports fed by an ingenious array of scams borne out of the mortgage crisis have swamped federal offices, which are investigating and prosecuting only a small percentage of the allegations.

In 2011, suspected instances of money laundering, consumer loan fraud, debit card fraud, mortgage loan fraud, casino fraud and other scams hit all-time highs, according to suspicious activity reports known as SARs submitted to the Treasury Department's Financial Crime Enforcement Network (FinCEN).

The SAR numbers have been fluctuating between 1.2 million and 1.3 million totals since 2007, but in 2011 they jumped up to more than 1.5 million.

"The financial meltdown that took place from 2007 to 2009 uncovered all the skeletons, what was taking place in the marketplace, from mortgage financing to Ponzi schemes," said Curt Novy, a mortgage and real estate analyst based in San Diego, Calif.

"Massive fraud isn't discovered in good times. It's when the market changes, and financial institutions start looking closer, when the checks stop coming in, they take a closer look at what's going on," Novy said.

While providing a fertile ground for criminals, the financial crisis also lured those who might not have ever thought to commit a crime, according to Harry Cendrowski, a fraud and forensics consultant based in Chicago.

He said having a respected person with a financial portfolio suddenly faced with financial ruin creates a "perfect storm."

"You have well-educated person in a position of trust and influence and high up in an organization and all of a sudden has this motivation because they are caught between a rock and hard place, and you can imagine what they do," Cendrowski said.

Between 2007 and 2011 there was a 74 percent increase in fraud cases where people working within a financial institution exploited internal controls for their own gain, according to a study by KPMG.

"I don't hesitate to tie this into the economy," said Tim Gallagher, chief of the financial crimes section of the FBI. "There has been a lag time from the meltdown to now."

Gallagher attributed the steep increase in money laundering and mortgage loan fraud specifically to hucksters who scammed distressed homeowners. Mortgage loan fraud has had the most dramatic surge over the past decade, going from 9,539 in 2001 to 93,564 in 2011, according to FinCEN figures.

As the fraud peaked in 2011, however, the FBI scaled back its fraud investigations, with just 2,691 cases, or 3 percent, of the more than 90,000 suspected mortgage loan fraud cases "under investigation," according to the FBI.

"About 70 percent of our cases are more than a million dollars. We are going after big fish as far as putting cases together, and we're going after people on the inside because of fiduciary responsibility and the element of trust that they're violating and doing the most damage," Gallagher said.

The small number of federal investigations is somewhat bolstered by state and local authorities, who can also investigate and prosecute the crimes.

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Novy said the number of suspected mortgage fraud crimes may have spiked in 2011 because of crimes that are just now being unravelled from when they were committed during the depths of the recession.

"The cases are so complex, sometimes involving hundreds of properties, that it can take three to four years to put all the pieces together to prepare for trial. A typical fraud case may have a 100,000 to 200,000 pages of case discovery and FBI recordings are often used," Novy said.

Gallagher said that for the next five to ten years fraud committed from 2007 to 2011 will be brought to trial.

In many cases, criminals targeted homeowners as they began filing foreclosure paperwork in local courts, combing through the filings to spot potential victims and then pretending to save them from having to foreclose, Gallagher said.

The fake companies marketed their scams through spam emails, often demanding upfront payments of $1,500 to $2,500 for help saving their homes, according to FBI data.

"A lot of these cases involve fraudulent use of the bankruptcy process to stall foreclosures," Gallagher said.

In addition to conning people in the middle of foreclosure filings, criminals made money by "flipping" houses they purchased improperly from banks, he said.

"This was more along the lines of individuals identifying houses they think they can get a short sale on, and then not disclosing to the bank the fact that there are higher offers out there. They get the bank to agree to a short sale and then flip the property for a higher price to the other bidders," Gallagher said.

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Gallagher said investigators are also seeing an uptick in money laundering as criminals who obtain money through illegal scams figure out how to funnel the money into various bank accounts.

"This is what banks are telling us: They've seen a rise in suspicious activity that appears to be money laundering," he said.

The number of financial crimes will likely start to trend back down, Novy said, as the fraud and other crimes uncovered during the recession begin to taper off.

"The prosecutions and investigations have really peaked at this point. I don't think they're going to get much larger than what they were in 2011, and a lot of this is beginning to wind down from what I can see," Novy said.