Home > Articles

  • Print
  • + Share This
This chapter is from the book

1.2. Characteristics and Types of Fraud

Fraud is not only a theft of assets but also an attempt to conceal it. Misappropriation of assets without an attempt to conceal is merely a theft, which is usually uncovered quickly through normal checks and balances procedures. Concealment distinguishes fraud from theft. As perpetrators attempt to conceal fraud, they might continue to engage in similar misappropriations over an extended period of time. A theft often occurs only once because the victim becomes armed with the knowledge of that theft and takes necessary precautions to deter future occurrences; the victim of a fraud, on the other hand, is usually unaware of the loss, and hence the perpetrator can repeatedly commit the crime. In that sense, fraud is nothing but recurring theft on the similar type of victim by the same perpetrator. In the instance of corporate fraud, there is a sole victim, the organization, and usually there are multiple occurrences of theft that impact that organization.

The FBI characterizes fraud as comprising of deceit, concealment, and or violation of trust. Fraud is not usually dependent on the application or threat of physical force or violence. The FBI has recently investigated and prosecuted many financial crimes, including corporate fraud, securities and commodities fraud, health care fraud, financial institution fraud, mortgage fraud, and others. This section provides an overview of these schemes, and subsequent sections discuss in more detail corporate fraud committed by insiders (employees and management) of an organization.

Figure 1.1 plots the number of cases in each category investigated by the FBI over the seven-year period from 2005 to 2011. The “other” category is comprised of money laundering, insurance fraud, and mass marketing schemes. The plot represents the total number of ongoing investigations at the end of each reporting period. It is important to note that this does not reflect the number of new cases for each year. An upward sloping line indicates that the number of new cases in that category exceeded the number of cases that were settled or resolved. Similarly, a downward sloping line indicates that the number of cases settled for that category was greater than the number of new cases. Thus, a decline in the number of open cases does not necessarily indicate a decrease in that category of crime but could be due to speedier resolution of the pending cases from previous years.

Figure 1.1

Figure 1.1 Number of fraud cases by category investigated by the FBI between 2005 and 2011

Data for the graphs obtained from the FBI’s Financial Crimes Report to the Public from the years 2009 and 2011. The 2009 report covers the years 2005–2009, and the 2011 report covers the years 2010–2011.

Over the seven-year period, health care fraud cases have been steadily high at about 2,500 cases annually. In contrast, investigations related to mortgage fraud spiked in 2008 and 2009, exceeding the 2,500 mark. This spike was primarily related to investigations following the collapse of the sub-prime lending market in the United States. Investigations related to securities fraud also increased in the 2008–2009 timeframe, but the increase was not as drastic as the increase in mortgage investigations. Open investigations on corporate fraud were relatively steady over the seven-year period. In contrast, investigations of financial institution fraud and others have been declining in recent years. The percentage of growth or decline in the number of cases over the previous year for each category is plotted in Figure 1.2.

01fig02.jpg

Figure 1.2 Percentage change in cases by category investigated by the FBI 2005–2011

Investigations related to corporate fraud are usually conducted by the FBI in collaboration with the Securities and Exchange Commission (SEC). Often the investigation is initiated at the SEC following a tip from a whistleblower. Upon follow up if the SEC suspects criminal wrongdoing, the FBI is alerted, and a criminal investigation ensues. Corporate fraud cases usually involve accounting schemes designed to deceive investors, auditors, analysts, and others regarding the true financial condition of the corporation. The usual objective for such crimes is to artificially lower the cost of borrowing by inflating the share price based on fictitious corporate performance indicators. As can be seen in Figure 1.2, the number of such cases has been relatively stable over the seven-year period. In 2011, the pursuit of these cases led to 241 convictions, and the FBI secured $2.4 billion in restitution orders.

Corporate fraud investigations focus not only on the misrepresentation of a firm’s financial conditions, but also on the investigation of allegations involving insider trading. A multitude of parties can potentially engage in trading based on insider and nonpublic information. These parties include corporate insiders, corporate attorneys, traders, and other financial intermediaries such as accountants and investment bankers who are privy to confidential and nonpublic information.

The volatility of the financial market in recent years has caused investors to seek alternative investment opportunities. This investor need has created a demand for new and innovative investment products and opportunities. Concurrent with investors’ growing need for alternate investment vehicles and their eagerness to invest in new and untested products, the FBI saw a steady rise in securities and commodities fraud in 2009 and 2010. These new schemes and trends included

  • Securities market manipulation through cyber-intrusion
  • Increased commodities fraud
  • A continuing rise in Ponzi schemes
  • Onslaught of foreign-based reverse merger schemes

Figure 1.2 showed the plot corresponding to securities fraud spikes in 2009, signifying that such fraud schemes are increasing at a faster rate following the recent financial crisis. The victims of securities fraud include individual investors, pension and retirement funds, government entities, financial institutions, and private and public companies. The creation of complex investment vehicles makes prevention and early detection of such schemes difficult, resulting in higher losses for the victims of such schemes.

As seen from Figure 1.1, health care fraud, an important area of investigation for the FBI, has traditionally been their most prolific type of case; however, the number of cases has been relatively stable over the seven-year period if you compare the data to that shown in Figure 1.2: the graph is close to the x-axis, or zero, denoting little change. Data mining techniques, which are covered in a later chapter, are used to detect health care-related fraud schemes. In 2011, the FBI recovered $1.2 billion in restitution, $1 billion in civil settlements, and an additional $1 billion in fines. The prevalent schemes for health care fraud identified by he FBI include

  • Billing for services not rendered, either wholly or partially.
  • Duplicate billing.
  • Upcoding of services to generate higher payments.
  • Upcoding of items.
  • Kickback schemes.
  • Unbundling, which involves billing separately for individual items to maximize reimbursement when they are required to be billed together at a reduced cost. For example, a laboratory test can be ordered individually or as a panel. A panel test usually costs less than the sum of the individual tests.

Another area of fraud that is rapidly increasing is mortgage fraud, the victims of which include financial institutions and investors. Mortgage frauds primarily occur at entry or exit points. In other words, they occur at the time of loan origination or at the time of foreclosure or delinquency. After underwriting rules were tightened in response to the financial crisis that began in 2007, the year 2011 was the first time that distressed homeowner frauds outnumbered loan origination fraud. As seen in Figures 1.1 and 1.2, the investigations of mortgage fraud spiked considerably in 2009 following the financial crisis and the near-abolition of the sub-prime market.

Following the global financial crisis, many incidents of financial institution fraud came to light. Having started at the highest level in 2007, the cases corresponding to this category have been declining over the years. This includes investigation of financial institution failures. The number of bank failures during 2009 and 2010 had significantly increased to about 150 per year but then in 2011 decreased to under 100 per year. Over the five years following the global financial crisis, there have been about 400 bank failures. Although still a large number, this cumulative total compares favorably to more than 1,000 banks closing over the five-year period from 1987 to 1992 and more than 9,000 bank failures during the Great Depression (1930 to 1933).

Other types of financial fraud investigated by the FBI include insurance scams, money laundering, and mass marketing frauds. One of the most prevalent mass marketing frauds in recent times is the Nigerian email/letter that you might have personally encountered. In this scheme victims are asked to act as U.S. agents to facilitate transfers of huge sums of money held in foreign accounts into the U.S. The victims are promised a generous portion of the total proceeds for their efforts. The victims are then required to open accounts at fraudulent websites and transfer their holdings from legitimate banks to fictitious ones; once completed, the funds are stolen by the perpetrator.

  • + Share This
  • 🔖 Save To Your Account

InformIT Promotional Mailings & Special Offers

I would like to receive exclusive offers and hear about products from InformIT and its family of brands. I can unsubscribe at any time.

Overview


Pearson Education, Inc., 221 River Street, Hoboken, New Jersey 07030, (Pearson) presents this site to provide information about products and services that can be purchased through this site.

This privacy notice provides an overview of our commitment to privacy and describes how we collect, protect, use and share personal information collected through this site. Please note that other Pearson websites and online products and services have their own separate privacy policies.

Collection and Use of Information


To conduct business and deliver products and services, Pearson collects and uses personal information in several ways in connection with this site, including:

Questions and Inquiries

For inquiries and questions, we collect the inquiry or question, together with name, contact details (email address, phone number and mailing address) and any other additional information voluntarily submitted to us through a Contact Us form or an email. We use this information to address the inquiry and respond to the question.

Online Store

For orders and purchases placed through our online store on this site, we collect order details, name, institution name and address (if applicable), email address, phone number, shipping and billing addresses, credit/debit card information, shipping options and any instructions. We use this information to complete transactions, fulfill orders, communicate with individuals placing orders or visiting the online store, and for related purposes.

Surveys

Pearson may offer opportunities to provide feedback or participate in surveys, including surveys evaluating Pearson products, services or sites. Participation is voluntary. Pearson collects information requested in the survey questions and uses the information to evaluate, support, maintain and improve products, services or sites, develop new products and services, conduct educational research and for other purposes specified in the survey.

Contests and Drawings

Occasionally, we may sponsor a contest or drawing. Participation is optional. Pearson collects name, contact information and other information specified on the entry form for the contest or drawing to conduct the contest or drawing. Pearson may collect additional personal information from the winners of a contest or drawing in order to award the prize and for tax reporting purposes, as required by law.

Newsletters

If you have elected to receive email newsletters or promotional mailings and special offers but want to unsubscribe, simply email information@informit.com.

Service Announcements

On rare occasions it is necessary to send out a strictly service related announcement. For instance, if our service is temporarily suspended for maintenance we might send users an email. Generally, users may not opt-out of these communications, though they can deactivate their account information. However, these communications are not promotional in nature.

Customer Service

We communicate with users on a regular basis to provide requested services and in regard to issues relating to their account we reply via email or phone in accordance with the users' wishes when a user submits their information through our Contact Us form.

Other Collection and Use of Information


Application and System Logs

Pearson automatically collects log data to help ensure the delivery, availability and security of this site. Log data may include technical information about how a user or visitor connected to this site, such as browser type, type of computer/device, operating system, internet service provider and IP address. We use this information for support purposes and to monitor the health of the site, identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents and appropriately scale computing resources.

Web Analytics

Pearson may use third party web trend analytical services, including Google Analytics, to collect visitor information, such as IP addresses, browser types, referring pages, pages visited and time spent on a particular site. While these analytical services collect and report information on an anonymous basis, they may use cookies to gather web trend information. The information gathered may enable Pearson (but not the third party web trend services) to link information with application and system log data. Pearson uses this information for system administration and to identify problems, improve service, detect unauthorized access and fraudulent activity, prevent and respond to security incidents, appropriately scale computing resources and otherwise support and deliver this site and its services.

Cookies and Related Technologies

This site uses cookies and similar technologies to personalize content, measure traffic patterns, control security, track use and access of information on this site, and provide interest-based messages and advertising. Users can manage and block the use of cookies through their browser. Disabling or blocking certain cookies may limit the functionality of this site.

Do Not Track

This site currently does not respond to Do Not Track signals.

Security


Pearson uses appropriate physical, administrative and technical security measures to protect personal information from unauthorized access, use and disclosure.

Children


This site is not directed to children under the age of 13.

Marketing


Pearson may send or direct marketing communications to users, provided that

  • Pearson will not use personal information collected or processed as a K-12 school service provider for the purpose of directed or targeted advertising.
  • Such marketing is consistent with applicable law and Pearson's legal obligations.
  • Pearson will not knowingly direct or send marketing communications to an individual who has expressed a preference not to receive marketing.
  • Where required by applicable law, express or implied consent to marketing exists and has not been withdrawn.

Pearson may provide personal information to a third party service provider on a restricted basis to provide marketing solely on behalf of Pearson or an affiliate or customer for whom Pearson is a service provider. Marketing preferences may be changed at any time.

Correcting/Updating Personal Information


If a user's personally identifiable information changes (such as your postal address or email address), we provide a way to correct or update that user's personal data provided to us. This can be done on the Account page. If a user no longer desires our service and desires to delete his or her account, please contact us at customer-service@informit.com and we will process the deletion of a user's account.

Choice/Opt-out


Users can always make an informed choice as to whether they should proceed with certain services offered by InformIT. If you choose to remove yourself from our mailing list(s) simply visit the following page and uncheck any communication you no longer want to receive: www.informit.com/u.aspx.

Sale of Personal Information


Pearson does not rent or sell personal information in exchange for any payment of money.

While Pearson does not sell personal information, as defined in Nevada law, Nevada residents may email a request for no sale of their personal information to NevadaDesignatedRequest@pearson.com.

Supplemental Privacy Statement for California Residents


California residents should read our Supplemental privacy statement for California residents in conjunction with this Privacy Notice. The Supplemental privacy statement for California residents explains Pearson's commitment to comply with California law and applies to personal information of California residents collected in connection with this site and the Services.

Sharing and Disclosure


Pearson may disclose personal information, as follows:

  • As required by law.
  • With the consent of the individual (or their parent, if the individual is a minor)
  • In response to a subpoena, court order or legal process, to the extent permitted or required by law
  • To protect the security and safety of individuals, data, assets and systems, consistent with applicable law
  • In connection the sale, joint venture or other transfer of some or all of its company or assets, subject to the provisions of this Privacy Notice
  • To investigate or address actual or suspected fraud or other illegal activities
  • To exercise its legal rights, including enforcement of the Terms of Use for this site or another contract
  • To affiliated Pearson companies and other companies and organizations who perform work for Pearson and are obligated to protect the privacy of personal information consistent with this Privacy Notice
  • To a school, organization, company or government agency, where Pearson collects or processes the personal information in a school setting or on behalf of such organization, company or government agency.

Links


This web site contains links to other sites. Please be aware that we are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of each and every web site that collects Personal Information. This privacy statement applies solely to information collected by this web site.

Requests and Contact


Please contact us about this Privacy Notice or if you have any requests or questions relating to the privacy of your personal information.

Changes to this Privacy Notice


We may revise this Privacy Notice through an updated posting. We will identify the effective date of the revision in the posting. Often, updates are made to provide greater clarity or to comply with changes in regulatory requirements. If the updates involve material changes to the collection, protection, use or disclosure of Personal Information, Pearson will provide notice of the change through a conspicuous notice on this site or other appropriate way. Continued use of the site after the effective date of a posted revision evidences acceptance. Please contact us if you have questions or concerns about the Privacy Notice or any objection to any revisions.

Last Update: November 17, 2020