Category Archives: Elder Fraud

#We Too

The #Me Too phenomenon is just one of the latest instances of a type of fraud featuring a betrayal of trust by a fellow community member which is as old as humanity itself. The ACFE calls it affinity fraud, and it is one of the most common instances of fraud with which any CFE or forensic account is ever called upon to deal. The poster boy for affinity frauds in our time is, of course, Bernard L. Madoff, whose affinity fraud and Ponzi scheme ended with his arrest in 2008. The Madoff scandal is considered an affinity fraud because the vast majority of his clientele shared Madoff’s religion, Judaism. Over the years, Madoff’s clientele grew to include prominent persons in the entertainment industry, including Steven Spielberg and Larry King. This particular affinity fraud was unprecedented because it was perpetrated by Madoff over several decades, and his investment customers were defrauded of approximately twenty billion dollars.

But not all targets of affinity fraud are wealthy investors; such scams touch all genders, religions, age groups, races, statuses, and educational levels. One of the saddest are affinity frauds targeting children and the elderly.

Con artists prey on vulnerable underage targets by luring them to especially designed websites and phone Aps and then collecting their personal information. TRUSTe, an Internet privacy seal program, is a safe harbor program under the terms of the Children’s Online Privacy Protection Act (COPPA) administered by the U.S. Federal Trade Commission. This was the third safe harbor application approved by the Commission. Safe harbor Aps and programs are submitted by the Children’s Advertising Review Unit (CARL) of the Council of Better Business Bureaus, an arm of the advertising industry’s self-regulatory program, and the Entertainment Software Rating Board (ESRB), which were both previously approved as COPPA safe harbors. Sadly, in spite of all this effort, data collection abuses by websites and Aps targeting children continue to increase apace to this day.

Then there’s the elderly. It’s an unfortunate fact that elderly individuals are the most frequent targets of con artists implementing all types of affinity frauds. Con artists target the elderly, since they may be lonely, are usually willing to listen, and are thought to be more trusting that younger individuals. Many of these schemes are performed over the telephone, door-to-door, or through advertisements. The elderly are especially vulnerable targets for schemes related to credit cards, sweepstakes or contests, charities, health products, magazines, home improvements, equity skimming, investments, banking or wire transfers, and insurance.

Fraudsters will use different tactics to get the elderly to cooperate in their schemes. They can be friendly, sympathetic, and willing to help in some cases, and use fear tactics in others. The precise tactics used are generally tailored to the type of individual situation the con artist finds herself in in relation to the mark.

Ethically challenged fraud practitioners frequently focus on home ownership related schemes to take advantage of the vulnerable elderly. The scammer will recommend a “friend” that can perform necessary home repairs at a reasonable price. This friend may require the mark to sign a document upon completion confirming that the repairs have been completed. In some cases, the elderly victim later learns that s/he signed the title of his house over to the repairman. In other cases, not only is the person overcharged for the work, but the work is not performed properly or at all.

Another frequent scheme targeting the elderly involves sweepstakes or prizes. The fraudster continues to influence the elderly victim over a period of time with the hope that the victim will eventually win the “grand prize” if they will just send in another fee or buy a few more magazines.

Fraudsters also frequently solicit the elderly with “great” investment opportunities in precious metals, artwork, securities, prime bank guarantees, futures, exotics, micro-cap stocks, penny stocks, promissory notes, pyramid and Ponzi schemes, insurance, and real estate. Other common scams involve equity skimming programs, debt consolidation offers, or other debt relief services which only result in the loss of the home used as collateral if the victimized debtor misses a payment.

The societal effects of affinity fraud are not limited solely to the amount of funds lost by investors, churches, the elderly or by other types of victims. Once these frauds are uncovered, investor confidence can diminish the financial and other legitimate markets, and a general level of distrust can decrease the government’s ability to provide protection. Loss of confidence manifested itself after the Madoff fiasco with such negative effects evident throughout the economy. Unfortunately, affinity fraud erodes the trust needed for legitimate investments to occur and grow our economy. Essentially, affinity fraud victims of all types become less likely to trust any future monetary request and honest charitable organizations suffer from a loss of endowments. Subsequent to a large affinity fraud being discovered, time is spent by regulators and law enforcement not only prosecuting these cases but also in the expenditure of endless taxpayer dollars assessing what went wrong. Time consuming, expensive investigations generally also include implementation of regulatory changes in an attempt to assist in detection of these frauds in the future, another costly burden on taxpayers.

Once affinity fraud offenders have targeted a community or group, they seek out respected community leaders to vouch for them to potential victims. By having an esteemed figurehead who appears to be knowledgeable about the investment or other opportunity 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 a highly esteemed member of the community he victimized.

Experts tells us that projection bias is one reason why affinity fraudsters are able to continually perpetrate these types of crimes. Psychological projection is a concept introduced by 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 both shared the same value system.

Because victims in affinity frauds are less likely to question or go outside of their group for assistance, information or tips regarding the fraud may not ever reach regulators or law enforcement. In religion related 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 even believe they have been defrauded and also unlikely to investigate the con.

The ACFE tells us that in order to stop affinity frauds from occurring in the first place, one of the best fraud prevention tools is the implementation of increased educational efforts. Education is especially important in geographical areas where tight-knit cultural communities reside who are particularly vulnerable to these frauds. By reaching out to the same cultural or religious leaders that fraudsters often target in their schemes, law enforcement could launch collaborative relationships with these groups in their educational efforts.

In summary, frauds like Madoff’s occur daily on a much smaller scale in communities across the United States. The effects of these affinity frauds are widespread, and the emotional consequences experienced by the victims of these scams cannot be overstated. CFEs, assurance professionals, regulators and law enforcement and investigative personnel need to assess the harm caused by affinity fraud and continue to determine what steps need to be taken to effectively confront these types of scams. State and Federal laws should be reviewed and amended where necessary to ensure appropriate enhanced sentencing is enforced for all egregious crimes involving affinity fraud. Regulators and law enforcement should approach fraud cases from different angles in an attempt to determine if new methods may be more effective in their prosecution.

Additionally, anti-fraud education as provided by the ACFE is needed for both the general and investing publics and for regulators and law enforcement personnel to ensure that they all have the proper knowledge and tools to be able to understand, detect, stop, and prevent these types of scenarios. Affinity frauds are not easily anticipated by the victims because people are not naturally inclined to think that one of their own is going to cheat them. Affinity frauds can, therefore, only be most effectively curtailed by the very communities who are their victims.

The Equity Strip Tease and Flip

home-equityThe recent troubles at Deutsche Bank and Wells Fargo and the many come-ons on television targeting senior citizens attest to the fact that the traditional scams and schemes among conventional and shadow lenders are as alive and well as ever.   If you thought sub-prime loans and equity stripping were financial ghosts of the past, think again.

It generally takes years for any borrower to build equity in a home. Fraud examiners should help consumers be aware that fraudsters employ several common ways to take that equity away. The most common technique used by fraudsters to steal consumers’ equity is known as equity stripping.  In equity stripping schemes, lenders promote ways consumers, especially the elderly and recent immigrants, can obtain cash by borrowing against the equity established in their home. The fraudulent lender is not concerned about whether the payments can be made once the loan is granted, and may even encourage consumers to fudge on their loan application to obtain the loan. If monthly payments cannot be met on the loan, consumers are subject to foreclosure on, and the subsequent loss of, their home, including all their equity.

Subprime loans have recently become a significant and growing part of the auto financing market and have never completely dried up in the home equity market. Subprime lending refers to the extension of credit to higher risk borrowers or to those with non-existent credit histories at interest rates and fees higher than conventional loans. Some companies make auto and home equity loans to minorities, the elderly, and low-income borrowers at interest rates as high as 20 to 24 percent in states without usury statutes.  As the ACFE tells us, as a rule, loans made to individuals who do not have the income to repay them are intentionally designed to fail; they typically result in the lender acquiring the borrower’s financed property. In the case of a home, the borrower is likely to default on the loan and ultimately lose his home through foreclosure or by the signing over of the house deed to the lender in lieu of such foreclosure.

Another frequent lender scam to separate home owners from their equity is credit churning. Churning, or loan flipping, is directed toward consumers who own a home and have been making mortgage payments for years. A lender calls to talk about refinancing a loan, and using the availability of extra cash as bait, claims it’s time the equity in the consumer’s home started working for him or her. When the consumer agrees to refinance his loan, the borrower’s troubles begin.  After the consumer has made a few payments on the loan, the lender calls to offer a bigger loan for, say, a family vacation to Disney World. If the consumer accepts the offer, the lender refinances the original loan and then lends the consumer additional money. In this practice, often called flipping, the lender charges the homeowner high points and fees each time s/he refinances, and may increase the interest rate as well. If the loan has a prepayment penalty, which is often the case, the consumer must pay that penalty as well each time a new loan is taken out.  The bottom line is that now the consumer has some extra money and a lot more debt, stretched out over a longer payment period. With each refinancing, the consumer has increased her debt and should she get in over her head and not be able to make the mortgage payments, she risks losing her home and all the equity in it.

Who hasn’t seen the kindly-looking, aging celebrity shilling on TV for his employer- lender’s reverse mortgage product?  Reverse mortgages are aggressively pitched to older individuals who are seeking money to finance a home improvement, pay off a current mortgage, supplement their retirement income, or pay for health care expenses. A typical reverse mortgage allows older homeowners to convert part of the equity in their homes into cash without having to sell their homes or take on additional monthly bills. In a regular mortgage, the homeowner makes payments to the lender. But in a reverse mortgage, the homeowner receives money from the lender and generally does not have to pay it back for as long as he lives in his home. Instead, the loan must be repaid when the homeowner dies, sells the home, or no longer lives there as his principal residence.

The amount of such a loan depends upon the consumer’s age (s/he must be at least 62), the equity in the home, and the interest rate the lender is charging. Among the facts for your clients to consider before applying for a reverse mortgage are:

  • Reverse mortgages are rising-debt loans. This means that interest is added to the loan’s principal balance each month because interest is not paid on a current basis. Therefore, as the interest compounds over time, the amount owed increases.
  • Reverse mortgages and their associated expenses use up some or all the equity in the home, leaving fewer assets for the homeowner and his heirs.
  • Lenders are providing the loan as an investment, which they aim to collect on at a profit, not out of goodwill or charity.

Another lender initiated scam against borrowers is credit insurance packing which occurs during the process of obtaining a mortgage or other loan, whereby the lender includes charges for credit insurance or other “benefits” that the borrower did not request or does not desire, and requests that the borrower sign the documents to close the deal. The fraudulent lender hopes that the borrower will not notice the additional charges that are listed or that s/he will believe that they are part of the loan terms that were originally agreed upon. Thus, the lender can imply that this “benefit” is provided at no extra charge. The lender does not explain in detail the additional cost or obligations. If the borrower agrees to the charge, s/he will be paying for additional fees that may not be required or desired. If the borrower questions the charge and does not want the credit insurance, the lender may attempt to intimidate the borrower; the lender may indicate that to obtain the loan, the loan documents must be rewritten, which may take several days, and that the possibility even exists that the loan may not be approved without the insurance.

Consumers who have financial difficulties and are unable to maintain their monthly mortgage or other loan payments may be faced with lenders who begin threatening foreclosure or repossession. Fraudulent lenders may then approach the consumer with offers to assist in refinancing. The new financing, however, never comes to fruition. To “help,” the fraudulent lender may offer the consumer a temporary solution to prevent foreclosure. In an act of desperation, consumers are lured into deeding their property over to the fraudulent lender with claims that it is only temporary. However, the consumer should be aware that, in the case of a mortgage or automobile, once the lender has the deed or title, the lender owns the property, may borrow against it, and may even sell it. The consumer’s monthly payments become rent payments that come with the possibility of eviction by the lender, as the consumer becomes the fraudulent lender’s tenant.

Finally, a word about balloon payments and title loans.  Lenders offer consumers balloon payment loans, which require low, interest-only payments during the life of the loan, and payment of the entire principal in one lump sum at the end of the loan term.  Consumers are enticed by fraudulent lenders to refinance their loans with a balloon payment loan so that their monthly payments will be low, allowing extra funds for other debts. A fraudulent lender may not explain the loan in its entirety or the hidden terms in the agreement. Without a thorough understanding of this type of agreement, consumers face the possibility of foreclosure at the end of the loan term if the lump-sum repayment of the principle proves to be more than they can afford.

A title loan enables a consumer to borrow against the equity in her motor vehicle. A lender determines the amount eligible to be borrowed based on the market value of the motor vehicle. The lender retains tide to the motor vehicle, as well as a set of keys. If monthly loan payments are not made, the motor vehicle can be repossessed. Consumers must understand the contract terms of the loan to avoid any misunderstanding regarding delinquency and repossession.

As practicing CFE’s we have a responsibility to educate our clients and the general public about fraud schemes in general and about emerging threats in particular.  As the ACFE tells us, an educated public is the best defense we have against all lender frauds both old and new.

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.