Category Archives: Affinity Fraud

Who Will Watch Over Them?

senior-citizensMichael Bret Hood’s thoughtful contribution to our most recent Fraud in the News post (http://cvacfes.com/a-rude-awakening/) got me to thinking about the linked problems of identity theft and financial exploitation of the elderly.  The U.S. Census Bureau tells us that by the year 2030, it’s estimated that seniors over the age of 65 will comprise 72 million American citizens.  My former Medicaid Program colleagues tell me that by the age of 90, fifty percent of seniors will experience some form of disability and/or mental deterioration that will require outside assistance to perform daily tasks. Who will supervise these individuals to ensure financing decisions remain in the best interest of the senior citizens themselves and not those of fraudsters preying upon them?

Every fraud examiner (and assurance professionals in general), as a part of their routine practice, should be thinking of the design of processes and controls to protect these vulnerable individuals and their assets, to decrease the opportunity for financial fraud and to prevent access and exploitation by ethically challenged parties.

But what is financial abuse of the elderly exactly?  Experts generally say that such financial abuse, or exploitation is limited to the illegal or improper utilization of an elder’s funds, property, or assets.  Such experts usually go on to discuss undue influence or the ability of someone to misuse their power to exploit a weaker person’s trust and influence their decision making as important factors when defining this type of financial crime.  The ACFE defines the typical victims as white, widowed females who are ages 70 to 89 years. Elder financial abuse assumes many forms and occurs across varied demographics. Famous personalities such as Mickey Rooney, Zsa Zsa Gabor, J. Howard Marshall (married to Anna Nichole Smith), and Liliane Bettencourt (heiress to the L’Oreal fortune), were all victims of this sad type of financial fraud.

CFE’s should be aware that a senior whose affairs have become part of one of our investigations has usually become a victim under one or more of four different scenarios:

(1) the senior is a financial prisoner, physically and perhaps psychologically dependent on a caregiver;

(2) the senior is losing the ability to handle financial affairs because of physical or cognitive impairment; a “new best friend” gradually assumes the responsibility for handling the senior’s affairs and then abuses that trust;

(3) a widow or widower does not know how to handle financial affairs that their deceased spouse used to take care of and is taken advantage of by someone offering assistance; and

(4) a senior, perhaps out of fear or paranoia, refuses help or financial advice from reliable, responsible relatives or other individuals and instead turns to strangers.

We are fortunate in Virginia in that most of our state agencies that deal routinely with the elderly have mandatory or voluntary reporting requirements for suspected abuse, but reporting and processing requirements, as the ACFE tells us, often vary within each state. Most states have an elder abuse reporting requirement for the following professionals: police, social workers, public assistance and mental health workers, nursing home employees, and licensed health care providers. They are required to report possible instances to state agencies and, thus, an investigation commences within a prescribed period—normally 48 hours. If the agency processing the initial report is not a law enforcement entity, the agency will turn the case over to a law enforcement agency if it is believed a crime had been perpetrated. There are reporting agencies within each state; however, in most states, there is no one comprehensive, centralized entity with the ability to immediately assess the senior’s situation and put processes in place to protect the senior’s assets and interests.

I believe that we CFE’s should strongly advocate for expansion of the scope of professionals who must report abuse to include: financial planners, accountants, attorneys, bankers, funeral home directors, and church officials. Each would be in the position to assess how the individual is affected by life events. For example, a funeral home director helping a family bury an elderly parent might notice that the spouse is not sure of her financial situation or appears to have diminished mental capacity. If the employee of the funeral home were required to report an at-risk senior, the opportunity for those in a positon to take advantage of that senior may be diminished.

Specific laws have been created during the last decade by federal and state agencies to combat the growing problem of elder financial abuse. The Dodd-Frank Wall Street Reform and Protection Act contains the Senior Investment Protection Act of 2008 which protects older Americans from misleading and fraudulent marketing practices with the goal of increasing retirement security through “grants” enabling states to investigate and prosecute those who sell financial products through “misleading and fraudulent marketing practices, provide educational materials to help seniors avoid becoming a victim, establish reporting requirements, etc.

The Affordable Care Act authorized funds to create a federal elder justice coordination team. The team is charged with combining previously fragmented elder abuse initiatives across the federal government and determines what actions are needed to enhance protection efforts.  The Elder Justice Act directs the Department of Health and Human Services to develop this “coordination team” among other efforts to focus on education, research, leadership and guidance in establishing programs to prevent elder abuse. Although Congress has authorized 125 million dollars for the directives of the Elder Justice Act, only $8 million was appropriated to the 2013 federal budget.

Federal and state agencies in partnership with professional organizations like the ACFE and AICPA, law enforcement, nonprofits, the private sector, and the court system must work together to develop a new model to eradicate elder financial abuse. This new model’s primary concentration should be creating preemptive measures and processes to immediately protect the senior’s financial resources from circling predators.  CFE’s need to be aware that though Federal, state, and local agencies have assumed the responsibility for targeting elder financial abuse, these agencies, as currently constituted, cannot meet demand, generally lack funding, and have limited staffing resources. There are many successful anti-elder abuse leaders within the private and nonprofit sectors, yet accountability of who is responsible and accountable for what is an issue. A balanced partnership between the agencies, nonprofits, and the private sector may be the best long term approach to combating the problem.

Elder financial abuse can only be eradicated if a preemptive approach is adopted. Fraud examiners must understand the history and growth of elder financial abuse, the government’s attempt to enact new laws, the current mostly reactive process, and the cost to society, before brainstorming can commence to develop an effective fraud containment and prevention model. Only through a partnership between agencies, state and local authorities, private sector, law enforcement, and nonprofits can society produce a central authority that could become the shield to protect our aging population from the sad and metastasizing cancer of financial abuse.

Summer’s End

TropicalSunset2As a kid I spent my summers with my mother and sister at our family’s house in Rehoboth Beach, Delaware.  My father, a federal judge, would drive up from Washington to join us on weekends, though, given the pressure of his work, not often.  When my father died, my mother closed the Georgetown house and made Rehoboth her permanent residence, dividing her year between a long summer in Delaware and a short winter in Fort Lucie, Florida (she drove herself back and forth until the end!).  Fiercely independent in everything, she personally managed all her assets including a substantial investment portfolio right up to her sudden death (over a week-end) at the age of 88.  She never manifested any sign of psychological impairment or diminished capacity and was quite active physically until the week before her passing.

Given all this, you can imagine my sister’s and my surprise to find that our mother had been the victim of an elder fraud.  As sharp and capable as she was, she had been talked into a patently fraudulent real estate investment by an ethically challenged relative of one of her best friends.  Although the matter was settled out of court (after several years) and some of the funds were eventually returned, I’ve often reflected that if such a thing could happen to my financially knowledgeable and canny mother, how easily it could happen to any elder.

What happened to my mother was elder financial abuse. Financial abuse, or exploitation is limited to, the illegal or improper utilization of an elder’s funds, property, or assets. Undue influence or the ability of someone to misuse their power to exploit the trust of a weaker person’s decision-making is an important factor when defining this type of abuse.  The ACFE says that a senior can become a victim under four different scenarios:

(1) the senior is a “financial prisoner,” physically and perhaps psychologically dependent on a caregiver;

(2) the senior is losing the ability to handle financial affairs because of physical or cognitive impairment, a “new best friend” gradually assumes the responsibility for handling the senior’s affairs and then abuses that trust;

(3) a widow or widower does not know how to handle financial affairs that their deceased spouse used to take care of and is taken advantage of by someone offering assistance; and

(4) a senior, perhaps out of fear or paranoia, refuses help or financial advice from reliable, responsible relatives or other individuals and instead turns to strangers.

The fraudulent depletion of seniors’ resources places the burden of paying for elder care on the rest of us. This may include the imposition of higher taxes to fund the gap of the social welfare agencies. With the recently enacted Affordable Care Act, new taxes have already been enacted, i.e., the 3.8% investment tax that applies to those citizens that hold investments and generate income of $200,000 or more. Over $5 million dollars within the Affordable Care Act has been set aside to establish a federal elder justice coordination team in an effort to further protect seniors.

Extended family members, like my sister and I, are also affected by the fraudulent depletion of a senior’s financial resources. These family members could very well experience the reduction of their own resources if forced to support the senior. As a result of abuse, the senior’s life might also be cut short due to fear, depression, suicide, or hopelessness. The cost of elder financial abuse may extend even beyond the death of a victim, as it affects beneficiaries who would otherwise inherit his or her assets. The impact to the profitability and reputation of financial institutions that create products to help seniors sustain a better quality of life could also be adversely affected if elder financial abuse is not eliminated.

Fraud examiners need to know that the Affordable Care Act authorized funds to create a federal elder justice coordination team. The team is charged with combining previously fragmented elder abuse initiatives across the federal government and determines what actions are needed to enhance protection efforts. The Elder Justice Act directs the Department of Health and Human Services to develop this coordination team among other efforts to focus on education, research, leadership and guidance in establishing programs to prevent elder abuse. Although Congress has authorized $125 million dollars for the directives of the Elder Justice Act, only $8 million was actually appropriated in the 2013 federal budget.

The good news (that it’s important for fraud examiners investigating such scams to know) is that most states have a reporting requirement for the following professionals: police, social workers, public assistance and mental health workers, nursing home employees, and licensed health care providers. They’re required to report possible incidences of abuse to agencies and, as a result, an investigation commences within a prescribed period of time – normally 48 hours. If the agency processing the initial report is not a law enforcement entity, the agency will turn the case over to a law enforcement agency if it’s believed a crime had been committed. There are reporting agencies within each state; however, in most cases, there is no one cohesive centralized agency with the ability to immediately assess the senior’s situation and put processes in place to protect the senior’s assets.

The ACFE recommends expanding the scope of professionals who must report elder abuse to include: financial planners, accountants, attorneys, bankers, funeral home directors, and church officials. Each would be in the position to assess how the individual is affected by life events. For example, a banker dealing with a grieving spouse might notice that the spouse is not sure of her financial situation or appears to have diminished mental capacity. If the employee of the bank were required to report an at-risk senior, the opportunity for fraudsters to take advantage of that senior may be significantly diminished.

Elder financial abuse can only begin to be eradicated if a preemptive approach is implemented. We fraud examiners and other assurance professionals have a duty to understand the history and growth of elder financial abuse, the government’s attempt to enact new laws, the current reactive process, and the cost to society, before brainstorming can commence to develop a better elder fraud prevention model. Only through a partnership between agencies, state and local authorities, the private sector, law enforcement, and nonprofits can approaches be developed to protect our aging population from this form of shameful and tragic abuse.

Trust Me

GavelDuring a joint training seminar between our Chapter and the Virginia State Police held earlier this year, I took the opportunity to ask the attendees (many of whom are practicing CFE’s) to name the most common fraud type they’d individually investigated in the past year. Turned out that one form or another of affinity fraud won hands down, at least here in Central Virginia.

This most common type of fraud targets specific sectors of society such as religious affiliates, the fraudster’s own relatives or acquaintances, retirees, racial groups, or professional organizations of which the fraudster is a member. Our Chapter members indicate that when a scammer ingratiates himself within a group and gains trust, an affinity fraud of some kind can almost always be expected to be the result.

Regulators and other law enforcement personnel typically attempt to identify instances of affinity fraud in order to prosecute the perpetrator and return the fraudulently obtained goods to the victims. However, affinity fraud tends to be an under reported crime since victims may be embarrassed that they so easily fell prey to the fraudster in the first place or they may remain connected to the offender because of emotional bonding and/or cultivated trust. Reluctance to report the crime also frequently stems from a misplaced belief that the fraudster is fundamentally a good guy or gal and will ultimately do the right thing and return any funds taken. In order to stop affinity fraud, regulators and law enforcement must obviously first be able to detect and identify the crime, caution potential investors, and prevent future frauds by taking appropriate legal actions against the perpetrators.

The poster boy for affinity fraud is, of course, Bernard Madoff.   The Madoff tragedy is considered an affinity fraud because the vast majority of his clientele shared Madoff’s religion, Judaism. Over the years, Madoff’s list of victims grew to include prominent persons in the finance, retail and entertainment industries. This particular affinity fraud was unprecedented because it was perpetrated by Madoff over several decades, and customers were defrauded of approximately twenty billion dollars. It can be debated whether the poor economy, lack of investor education, or ready access to diverse persons over the internet has led to an increase in affinity fraud but there can be no doubt that the internet makes it increasingly easy for fraudsters to pose as members of any community they target. And, it’s clear that affinity frauds have dramatically increased in recent years. In fact, affinity fraud has been identified by the ACFE as one of the top five investment schemes since 1998.

Affinity frauds assume different forms, e.g. information phishing expeditions, investment scams, or charity cons. However, most affinity frauds have a common element and entail a pyramid-type of Ponzi scheme. In these types of frauds, the offender uses new funds from fresh victims as payment to initial investors. This creates the illusion that the scam is profitable and additional victims would be wise to invest. These types of scams inevitably collapse when it either becomes clear to investors or to law enforcement that the fraudster is not legitimate or there are no more financial backers for the fraud. Although most fraud examiners may be familiar with the Madoff scandal, there are other large scale affinity frauds perpetrated across the United States almost on a daily basis that continue to shape how regulators and other law enforcement approach these frauds.

Perpetrators of affinity frauds work hard, sometime over whole years, to make their scams appealing to their targeted victims. Once the offenders have targeted a community or group, they seek out respected community leaders to vouch for them to potential investors. By having an esteemed figurehead who appears to be knowledgeable about the investment and endorses it, the offender creates legitimacy for the con. Additionally, others in the community are less likely to ask questions about a venture or investment if a community leader recommends or endorses the fraudster. In the Madoff case, Madoff himself was an esteemed member of the community. As a former chair of the National Association of Securities Dealers (NASD) and owner of a company ranked sixth largest market maker on the National Association of Securities Dealers Automated Quotations (NASDAQ), Madoff’s reputation in the financial services industry was impeccable and people were eager to invest with him.

The ACFE indicates that projection bias is yet another reason why affinity fraudsters are able to continually perpetrate these types of crimes. Psychological projection is a concept introduced by Sigmund Freud to explain the unconscious transference of a person’s own characteristics onto another person. The victims in affinity fraud cases project their own morals onto the fraudsters, presuming that the criminals are honest and trustworthy. However, the similarities are almost certainly the reason why the fraudster targeted the victims in the first place. In some cases when victims are interviewed after the fact, they indicate to law enforcement that they trusted the fraudster as if they were a family member because they believed that they shared the same value system.

Success of affinity fraud stems from the higher degree of trust and reliance associated with many of the groups targeted for such conduct. Because of the victim’s trust in the offender, the targeted persons are less likely to fully investigate the investment scheme presented to them. The underlying rationale of affinity fraud is that victims tend to be more trusting, and, thus, more likely to invest with individuals they have a connection with – family, religious, ethnic, social, or professional. Affinity frauds are often difficult to detect because of the tight-knit nature common to some groups targeted for these schemes. Victims of these frauds are less likely to inform appropriate law enforcement of the problems and the frauds tend to continue until an investor or outsider to the target group finally starts to ask questions.

Because victims in affinity frauds are less likely to question or go outside of the group for assistance, information or tips regarding the fraud may not ever reach regulators or law enforcement. In religious cases, there is often an unwritten rule that what happens in church stays there, with disputes handled by the church elders or the minister. Once the victims place their trust in the fraudster, they are less likely to believe they have been defrauded and also unlikely to investigate the con. Regulators and other law enforcement personnel can also learn from prior failures in identifying or stopping affinity frauds. Because the Madoff fraud is one of the largest frauds in history, many studies have been conducted to determine how this fraud could have been stopped sooner. In hindsight, there were numerous red flags that indicated Madoff’s activity was fraudulent; however, appropriate actions were not taken to halt the scheme. The United States Securities and Exchange Commission (SEC) received several complaints against Madoff as early as 1992, including several official complaints filed by Harry Markopolos, a former securities industry professional and fraud investigator. Every step of the way, Madoff appeared to use his charm and manipulative ways to explain away his dealings to the SEC inspection teams. The complaints were not properly investigated and subsequent to Madoff’s arrest, the SEC was the target of a great deal of criticism. The regulators obviously did not apply appropriate professional skepticism while doing their jobs and relied on Madoff’s reputation and representations rather than evidence to the contrary. In the wake of this scandal, regulatory reforms were deemed a priority at the SEC and other similar agencies.

Education is needed for the investing public and the regulators and law enforcement personnel alike to ensure that they all have the proper knowledge and tools to be able to understand, detect, stop, and prevent these types of frauds. This is where Fraud Examiners are uniquely qualified to offer their communities much needed assistance. Affinity frauds are not easily anticipated by the victims. Madoff whistleblower Markopolos asserted that “nobody thinks one of their own is going to cheat them”.

Affinity frauds will not be curtailed unless the public, the auditing and fraud examination communities, and regulators and other law enforcement personnel are all involved.