When the music stopped ...
A case study in a bank president’s mortgage loan fraud
Starting Out: For new and budding fraud examiners
Caitlin Glass, CFE, CPA, is a 2010 graduate of Birmingham Southern College where she founded the ACFE Student Chapter. She’s a forensic analyst at Forensic Strategic Solutions Inc., a national financial investigation firm specializing in fraud examination and investigative financial consulting services. The firm’s president is ACFE Regent Emeritus Ralph Q. Summerford, CFE, CPA, ABV, CIRA. In this column, Glass recounts the case of the president of a small bank who stole funds through a complex loan fraud scheme. Glass examines the scheme and discusses the motivation of using stolen funds for unconventional purposes. She’s changed all names because this is an ongoing case. — ed.
Richard Jones, a successful president of a local bank in a small Mississippi town, was a devoted businessman and community leader. His colleagues liked him, valued his reputation and appreciated his professional and personal relationship-building skills. Jones never missed a company social or neighborhood block party and could often be found on the golf course or tailgating at his son’s high school football games. Jones’ story is one of a Southern family man, motivated by a growing disinterest in his career, who found himself in the midst of a multimillion-dollar loan fraud.
LURED BY A MORE EXCITING LIFE
Jones created fictitious loans to divert funds that he intended to invest in a local recording company he believed was on the verge of success. Terrell Smith, the owner of the recording company, partnered with Jones and enlisted friends and family members to contribute as illegitimate borrowers in this scheme. Jones and Smith became friends when Smith became a regular customer of the bank.
Jones’ fraud began in August 2007. When Smith knew he couldn’t qualify for a loan, he convinced Jones that they could both benefit from a few fictitious loans. However, over the course of three years, the fraud snowballed, and Jones created more than 50 fraudulent mortgage loans, which totaled more than $2 million. These loans were significantly deficient because they didn’t conform to the bank’s approval and documentation requirements. They included failure-to-file liens on collateral, forged signatures, false income and other false information on loan documents, nonexistent collateral, phony appraisals and construction loans fully disbursed with no work on the project.
Onsite visits to verify collateral named in the mortgage loans turned up vacant lots or foreclosed homes. Other loans were protected by “quitclaim deeds,” which released the bank’s interest in the subject properties. Unlike most other property deeds, a quitclaim deed offers the buyer no warranty on the status of the property title. The seller doesn’t guarantee that he or she actually owns the property. A quitclaim deed relieves the grantor of any future liabilities or rights to the property.
Jones made sure that none of these loans ever exceeded the bank’s threshold amount so the bank’s loan committee wouldn’t have to review them. He approved the fraudulent mortgage loans to borrowers with poor credit history, high-debt-to-income ratio and little or no down payments on the properties. Jones knew that any of these factors would have been enough for the loan review committee’s rejection.
ENTER THE FRAUD EXAMINERS
The bank hired our firm in July 2010. The bank’s manager and business development officer were concerned that several loans weren’t performing; they wanted us to determine if the loans were simply a matter of bad judgment or fraud. A bank employee had noticed the same piece of property was listed as collateral for multiple mortgage loans. As she began to look further, she uncovered countless loans supported by questionable documentation. The employee notified the bank manager and business development officer, who both began to review the innumerable non-conforming loan files. That’s when they contacted us.
Our primary objectives were to determine the extent of the alleged fraud, identify borrowers who may be involved and determine if Jones received any personal benefit from these loans. Jones’ responsibilities as president and senior lending officer included reviewing loan applications and compiling necessary supporting documentation.
At the start of each business day, a “tickler report” was generated and distributed to branch management, listing any exceptions or missing information for loans currently in processing. Jones’ loans would frequently appear on the tickler report as missing income and employment verification, and credit reports and/or appropriate signatures on the loan or credit applications, which were required for compliance. His loans, however, never raised any suspicions, and bank employees attributed the missing information to Jones’ lack of attention to detail and his “easygoing” approach to banking.
Jones’ assistant, Jennifer Brown, stated in her investigative interview with us that Jones believed in an “open-door policy” and would routinely meet with customers in his office. However, when the issues with his loans began to pile up he held some of these meetings behind closed doors. When Jones was asked about missing loan information, his typical response was, “Don’t worry about it; I will handle it.” Jones didn’t allow Brown to make follow-up calls to certain customers; he told her that he would “take care” of the missing items.
We built detailed profiles of our suspects by gathering information from the loan files provided by the bank, inspection of collateral and/or property associated with the questionable loans, Internet public records, social media and business websites, and other means. We could gather a good deal of information because many of the borrowers had provided correct Social Security numbers on their loan applications. (However, others provided false numbers or none at all.)
After we gathered valuable insights into each borrower’s background, personal life and business activities, we established the business connection between Jones and his business partner, Smith, and identified other key individuals and relationships. Our research uncovered countless other borrowers involved in the scheme, which bank management didn’t initially detect.
We established or directed connections using software specifically designed for visual analytics. Visual analytics, which leverages traditional data mining and integrates images to identify patterns and anomalies in data, gave us the big picture quickly so we could establish networks, transactions and relationships. It allowed us to search multiple data sources rapidly and consolidate the results into two charts: one for any key players we identified in the scheme and another to trace the flow of loan proceeds approved by Jones to the borrowers, most of whom had personal accounts at the bank. The discovery of these bank accounts allowed us to trace the funds directly to the suspects and prove the borrowers benefited from the fictitious loans.
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