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Financial Institution Fraud

Financial Institution Fraud

Statement of Charles L. Owens, Chief , Financial Crimes Section, Federal Bureau of Investigation, Before the U.S. Senate Committee on Banking Housing, and Urban Affairs Subcommittee on Financial Services, Washington, D.C., September 16, 1997.

I am pleased to appear today on behalf of the FBI, and provide you with information concerning the status of financial institution fraud in the United States.

The nature and complexity of financial institution fraud has changed significantly since the 1980's. Prior to the Savings and Loan crisis, frauds against the banking industry involved a limited number of uncomplicated fraudulent transactions, typically committed by a single individual, or small group of unsophisticated criminals. Losses associated with this criminal activity averaged less than $100,000 and had little impact on the safeness and soundness of institutions.

During the 1980s, the unprecedented proportion of the failure debacle focused the FBI's efforts on extremely complex, large-scale frauds perpetrated by corrupt insiders who violated their fiduciary duties by engaging in self-dealing and other egregious abuses. FBI investigations involving insolvent institutions peaked at 758 in July 1992. By the close of fiscal year 1996, only 247 failure cases remained pending, primarily in the New England and southern California regions. In fact, only six financial institutions failed during 1996, the lowest number of failures since 1972.

By the 1990s, the banking industry as a whole began to stabilize as evidenced by the decreasing number of institutions on the Federal Deposit Insurance Corporation's (FDIC) problem list, from 1,492 in 1990, to 112 in early 1997. The industry is generally healthier now than at any time in the recent past. It is therefore unlikely that any large scale failure will occur in the near future.

But there is no room for complacency. Although insolvencies are no longer a critical problem, law enforcement is still confronting an increasing number of serious criminal referrals involving complex crime problems, many the outcome of emerging technologies. Failure investigations have been replaced by other major investigations where institutions sustained losses, or a loss exposures, in excess of $100,000. For example, at the end of 1991, the FBI was pursuing 7,613 financial institution fraud cases, almost half of which involved losses exceeding $100,000. Today, the FBI's financial institution fraud caseload exceeds 8,300, but the percentage of major investigations remains relatively the same.

Financial institution fraud remains one of the FBI's highest white collar crime priorities, accounting for more than 41 percent of all white collar crime cases. Last year, FBI investigations led to 2,630 federal indictments and 2,510 convictions addressing this crime problem, in addition to the $67 million in recoveries. The FBI's efforts also led to criminals being ordered to repay $359 million in restitutions and $443 million in fines, a figure substantially higher than prior years due largely to substantial fines levied in the Daiwa Bank case.

The dwindling number of failure investigations has permitted the FBI to redirect its investigative efforts on emerging priority financial institution crimes. Nonetheless, large scale fraud, particularly insider abuse, remains a top priority because of its potential for threatening the stability of a financial institution. The FBI's Daiwa Bank investigation is but one recent example of this type of destabilizing crime.

Daiwa investigation, Daiwa executive Toshi Iguchi, a Japanese citizen, caused Daiwa's New York banking operations approximately $1 billion in losses from unauthorized trading of U.S. Treasury securities. The enormous losses were concealed with false entries in the records which was able to occur due to inadequate internal controls. When discovered, the losses were initially hidden and unreported by Daiwa Bank. As a result of the investigation and subsequent prosecution, Iguchi was convicted, sentenced to four years in prison, and fined $2.6 million. Daiwa Bank was closed and prohibited from conducting further operations in the U.S. Daiwa Bank also paid a $340 million fine for its negligence and complicity.

In another large scale fraud, in March 1996, the FBI was alerted to a $323 million fraud victimizing Signet Bank, NationsBank and Nelco Limited, a computer leasing firm. The subject, Edward Reiners, leased computers from Nelco on behalf of Philip Morris. Over a period of time, Reiners deceived Nelco to fraudulently secure over $323 million in computer leases financed by several financial institutions, including the Long Term Credit Bank of Japan. In addition to assisting in obtaining an approximately $227 million recovery, the FBI charged and arrested Reiners and a co-conspirator, Jody Rose Bachiman. Reiners pled guilty to various bank fraud and money laundering charges and is currently awaiting sentencing. A third co-conspirator, charged with 159 counts of bank fraud and other charges, is awaiting trial.

While internal fraud will always receive priority attention, external fraud now accounts for more than 60 percent of fraud affecting financial institutions. Criminal schemes are primarily related to negotiable instrument fraud involving checks, money orders, currency, and debit and credit cards. This is in direct contrast to the labor-intensive loan fraud schemes perpetrated by insiders in the last decade. The increase in external fraud has been exacerbated by technological advances in laser color printers and scanners, desktop publishing software, and the availability of low cost, but highly efficient computers, particularly mobile laptop units.

The dramatic rise in fraud committed by outsiders is in large part due to the popularity of checks in our society, as a form of tendering payments, unlike European nations which have more rapidly evolved to electronic payment systems. Annual check volume is at an all time high of about 63 billion, according to the Tower Group, Newton, Massachusetts, and is expected to grow about three percent per year for the foreseeable future. With this tremendous volume of checks, the opportunity to commit check fraud is substantial. It is estimated that more than 1.2 million worthless checks are accepted for payment every day. The FBI's own analysis of approximately 45,000 criminal referrals and Suspicious Activity Reports received by the FBI, in fiscal year 1996, revealed that 44.5 percent of the referrals pertained to check fraud and counterfeit negotiable instruments. A 1996 Federal Reserve survey estimated banks and other financial institutions lost $615 million in 1995 due to check fraud. Crime assessments conducted by the FBI indicate that a significant portion of negotiable instrument fraud is being perpetrated by organized, transnational, ethnic criminal groups located in populous regions of the U.S. Regardless of ethnic origin, these groups are distrustful of anyone outside their own ethnic heritage, making it difficult for law enforcement to pro-actively investigate their criminal activities.

Some of the ethnic groups involved in nationwide criminal check fraud schemes include Asian, especially Vietnamese; Russian; Armenian; Nigerian and Mexican groups. The majority of the Vietnamese, Armenian and Mexican organizations are based in the Los Angeles, San Francisco and Sacramento, California areas. However, investigations have uncovered their expansion throughout the country, favoring the East Coast and Southwest. Networks are already established in Chicago, Houston and Washington, D.C. The Nigerian and Russian groups, based in the northern and eastern regions of the U.S., on the other hand, are more dispersed.

"Operation Checkmaster" is a major FBI initiative in combating check fraud and counterfeit negotiable instruments. This operation, which began in 1995, focuses on groups engaged in these crimes on a national scale. In October 1996, over 120 subjects were charged in two undercover operations codenamed Papercaper and Paperson. Since its inception, Checkmaster has been credited with over 66 complaints, 201 indictments and informations, 174 arrests, and 111 felony convictions, and has included 45 search warrants and two Title IIIs.

The FBI's New York Field Office has been using a similar strategy in an operation known as Prime Note. Prime Note purchases stolen and counterfeit securities from known subjects minimizing losses to financial institutions and citizens. Prime Note has produced 209 complaints, 198 arrests, 180 indictments, $10,985,900 in recoveries, and $67 million in seizures.

Criminals can easily assume identities by creating counterfeit documents or using forged identifications to perpetrate check fraud. In a FBI Seattle investigation, involving the fraudulent acquisition of state identification cards, almost 700 seized checks are undergoing FBI forensic analysis, along with documents from over 20 private mail drops and check ordering businesses.

One area of financial institution fraud receiving renewed interest is loan fraud, particularly mortgage loan fraud. In March 1997, two of the nation's top financial regulators, the Federal Reserve and the Office of the Comptroller of the Currency, cautioned banks to review their lending practices in light of growing evidence that loan-underwriting standards were weakening. The OCC disclosed that recent examinations found that credit risk from shaky loans was rising at almost one in five of 2,300 small federally chartered banks, though high levels of risk existed at just 3%.

The mortgage industry estimates that up to ten percent of the $600 billion in mortgage loans processed annually involve some degree of fraud. Analysis of all financial institution fraud criminal referrals received by the FBI in fiscal year 1996 revealed that 35 percent of the $3.3 billion reported losses involved some type of loan fraud or false statement.

FBI investigations have exposed the participation of collusive groups of professionals conspiring in the fraudulent loan application process, such as realtors, loan brokers, appraisers, accountants, and attorneys. Other cases have demonstrated mere greed on the part of the loan applicant. The FBI's Phoenix Office recently concluded a lengthy investigation involving loans obtained by recently resigned Arizona Governor John F. Symington, prior to becoming Governor, as part of a commercial real estate venture in Phoenix. Although acquitted on some counts, following a jury trial, Symington was convicted in September 1997, of one count of wire fraud and six counts of making false statements

to federal lending institutions in connection with loans totaling $19 million. This lengthy, high profile case highlights a growing problem being addressed by the FBI through new initiatives.

Rapid technological advances and customer demand for quick and easy access to financial information are revolutionizing the banking industry. As banks begin to focus on these interactive Internet delivery systems, the threat of high-tech fraud becomes more real. Recent surveys on electronic commerce indicate that online banking will increase 600% in the next two years. The FDIC recently identified over 700 banking web sites. As early as 1994, a RAND Corporation study indicated that from a simple statistical viewpoint the danger of cyber attacks against any institution, financial or not, was steadily increasing with the spread of computers and the growth of the Internet.

Technological advances have also facilitated "identity theft," the availability and misuse of electronic account and personal information. Identity theft poses significant risks to financial institutions and individuals alike. The Internet is also engendering other bank-related frauds. One Internet site, calling itself Netware International Bank, purported to offer full banking services (though not insured by FDIC) and pay 25 percent return on "deposits" in soliciting funds from new and existing members. As a result of searches conducted by the Charlotte Division, with the participation of other law enforcement agencies, nearly $1 million has been seized.

In view of the growing concern regarding the increased risk to financial institutions in this cyber era, the FBI led the effort to establish a subgroup with the Interagency Bank Fraud Working Group (BFWG) to study the potential effect of computer-related fraud on financial institutions. A goal of the group is to ensure that adequate fraud prevention measures are implemented to assist in the detection, investigation and prosecution of individuals attempting to defraud the cyberbanking system.

Although serious cyber attacks on banks are still not common, we believe existing guidelines for reporting these new types of crime are in need of revision. The subgroup on cyberbanking is drafting interim guidelines for reporting cyber crimes against banks, and evaluating the need to amend the Suspicious Activity Report (SAR) to include computer related crimes. The SAR form serves not only as a means to report crimes perpetrated against banks, but also as an investigative tool to assess current and anticipated crime trends. The addition of computer fraud to the SAR will enhance law enforcement's response and crime assessment capability. Law enforcement is an essential resource in helping society prevent losses and protect its economic and financial assets. One of the FBI's responsibilities is to enhance awareness regarding the universal warning signs of fraudulent activity thus playing an integral role in its deterrence. In fulfilling this responsibility, the FBI strongly supports the inkless fingerprint system for non-bank customers, a demonstrated effective tool in preventing check fraud. As recently as August 5, 1997, Special Agent in Charge John Hancock, who then headed the FBI's Memphis Division, forwarded a letter to the Tennessee Bankers Association in support of implementing the inkless fingerprint system in the state of Tennessee. Preliminary studies indicate that the fingerprinting program, promoted by over 20 state bankers associations, has led to a 70% reduction in check fraud in states where it has been applied. The program provides law enforcement with evidence and background information never before attainable at the onset of an investigation.

The FBI participates in the Check Fraud Working Group, another subgroup of the BFWG, that includes representatives of the Office of the Comptroller of the Currency, FDIC, Federal Reserve Board, Internal Revenue Service, Department of Justice, Office of Thrift Supervision, Postal Inspection Service, and the U.S. Secret Service. Under the auspices of this group, the FBI assisted in developing a fraud awareness and crime prevention guide entitled, "Check Fraud: A Guide to Avoiding Losses."

Crime prevention also requires the cooperation of law enforcement worldwide. The FBI is presently working on an international fraud prevention video, targeting mid-level managers and executives in banking and other financial services industries, in partnership with the City of London Police and the international accounting firm Ernst and Young.

The FBI will continue to aggressively address the financial institution fraud problems and will work closely with regulators and industry professionals to effectively respond to emerging crime problems affecting the industry. These efforts will not only include investigations but detection and prevention efforts.


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Directeur de la publication : Joël-François Dumont
Comité de rédaction : Jacques de Lestapis, Hugues Dumont, François de Vries (Bruxelles), Hans-Ulrich Helfer (Suisse), Michael Hellerforth (Allemagne).
Comité militaire : VAE Guy Labouérie (†), GAA François Mermet (2S), CF Patrice Théry (Asie).