Financial Institution Fraud Flashcards

If a bank loan is a nonperforming loan, it might be a red flag for fraud. Which of the following is a fraud scheme that is often connected to a nonperforming loan?

B. Construction over-budget items

D. All of the above

A nonperforming loan is a loan that is in default or close to being in default. The interest and principal payments might be overdue, and the creditor has reason to believe the loan will not be collected in full. This is often indicative of a fraud scheme. Fraud schemes resulting in a nonperforming loan include:
• Fraudulent appraisals—The cash flow cannot support an inflated loan and resulting debt amount.
• False statements—The loan was made on false or fraudulently presented assumptions.
• Equity skimming—There was never any intention to make the underlying loan payments.
• Construction over-budget items—The amount over budget might be a concealment method for other schemes such as embezzlement, misappropriation, or false statements.
• Bribery—The loan was made because the lender received a bribe or a kickback from the borrower.
• Land flips—The purpose of the loan was to finance the seller out of a property that has an artificially inflated value.
• Disguised transactions—The loans are sham transactions without substance, made to conceal other ills.

ABC Bank recently acquired a new portfolio of consumer loans. Because this particular loan portfolio is experiencing a higher than normal default rate, management has asked B.J., a Certified Fraud Examiner, to evaluate the portfolio. B.J. notices that the loan package was sold without recourse to the broker, the brokerage fee was high relative to other purchases, and the broker is no longer in business. Which of the following types of schemes has B.J. most likely uncovered?
A. Money transfer fraud

B. Daisy chain fraud

C. Letter of credit fraud

D. Brokered loan fraud

D. Brokered loan fraud

Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans. A variation of a brokered loan is the loan participation, where the purchaser participates in the loan but does not purchase the entire loan. The fraud schemes associated with brokered or participated loans generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Generally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money, and disappears. Brokered loans are generally not sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting. However, this does not relieve the participating bank from its obligation to perform its own due diligence.

In a _________, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process.

A. Reciprocal loan arrangement

B. False swap scheme

D. Linked financing arrangement

In a daisy chain, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process. Its purpose is to mask or hide bad loans by making them look like they are recent and good.

Which of the following is most indicative that the winning bid on an original construction project was not feasible?

A. Missing documentation

B. High turnover in developer’s personnel

C. Draw requests

D. Increasing trend in the number of change orders

D. Increasing trend in the number of change orders

An increasing trend in the number of change orders or amounts on change orders might be an indication that construction changes have taken place that would alter the originally planned project to such an extent as to render the underwriting inappropriate. On the other hand, some projects—especially large projects—tend to have many change orders. It might be more abnormal in situations like these to have few change orders or none at all than to have many. For instance, a lack of change orders for a large project might suggest that progress is not actually being made. Ultimately, the key characteristic that the fraud examiner should look for in change orders is abnormality, which can come in many forms. Fraud examiners should discover what the normal trend for change orders is in terms of both quantity and content with the particular type of industry and project, and then they can look for deviations from those trends.

A draw request on a construction loan should be accompanied by all of the following EXCEPT:

A. Lien releases from subcontractors

B. Inspection reports

C. Change orders, if applicable

D. Expenses from similar contracts

D. Expenses from similar contracts

A draw request is the documentation substantiating that a developer has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. Generally, draw requests on construction loans are made on a periodic schedule (e.g., once a month) and are verified by a quantity surveyor or other authorized entity as agreed to by the financial institution. The request should be accompanied by the following documents:
• Paid invoices for raw materials
• Lien releases from each subcontractor
• Inspection reports
• Canceled checks from previous draw requests
• Bank reconciliation for construction draw account for previous month
• Loan balancing form demonstrating that the loan remains in balance
• Change orders, if applicable
• Wiring instructions, if applicable
• Proof of developer contribution, if applicable

Common fraud schemes involving ATMs include all of the following EXCEPT:

A. Unauthorized access to PINs and account codes

B. Employee manipulation

C. Duplicating ATM deposits

D. Counterfeit ATM cards

C. Duplicating ATM deposits

There are a number of fraud schemes that are being perpetrated with regard to ATMs. These schemes include: (1) theft of card and/or unauthorized access to PINs and account codes for ATM transactions by unauthorized persons; (2) employee manipulation; (3) counterfeit ATM cards; (4) counterfeit ATMs; (5) magnetic strip skimming devices; and (6) ATM deposit fraud .

In most construction contracts, a certain amount will be withheld from each draw request by the contractor. This amount is not paid until the contract has been finished and approved by the owner. The withheld amount is referred to as which of the following?

C. Good faith deposit

D. None of the above

Retainage is the amount withheld from each draw request until such time as the construction is complete and the lien period has expired.

Which of the following best describes the difference between a flipping scheme and a flopping scheme in the context of mortgage fraud?

A. In a flopping scheme, the second transaction in the scheme usually occurs several years after the first.

B. In a flopping scheme, the original seller always ends up as the final owner of the property.

C. In a flopping scheme, the value of the first transaction is deflated instead of inflating the second transaction.

D. In a flopping scheme, the lender is not one of the potential victims of the scheme.

C. In a flopping scheme, the value of the first transaction is deflated instead of inflating the second transaction.

Property flipping is the process by which an investor purchases a home and then resells it at a higher price shortly thereafter. For example, an investor buys a house in need of work for $250,000 in July, renovates the kitchen and bathrooms, and landscapes the yard at a cost of $50,000. He then resells the house two months later (the time it takes to make the renovations) for a price that is reflective of the market for a house in that condition. This is a legitimate business transaction, and there are numerous individuals and groups in the real estate market who make an honest living flipping properties. Property flipping becomes illegal and fraudulent, however, when a home is purchased and resold within a short period of time at an artificially or unjustly inflated value. In a flipping scheme, the property is sold twice in rapid succession at a significant increase in value (also known as an ABC transaction, where the property moves from party A to party B to party C very quickly).

Property flopping is a variation on property flipping, but it generally involves a property subject to a short sale (meaning the owner sells the property at a lower value than the unpaid mortgage amount on the property). This variation typically is conducted by industry insiders or unscrupulous entrepreneurs rather than the homeowner. Property flopping involves a rapid transfer of property with an unjustified, significant change in value (like the ABC transaction in flipping schemes), but instead of inflating the value on the second transaction, the value on the first transaction is deflated. To prevent problematic short sale flopping, some lenders are starting to require all interested parties to sign an affidavit requiring disclosure of an immediate subsequent sale.