The Fraud Examiner

Investigating Sham Loans: A Guide for CFEs
 

Prof. Colin May, CFE      
Adjunct Professor of Forensic Studies and Criminal Justice
Stevenson University, Forensic Studies Program


The Oxford English Dictionary defines “sham” as an adjective meaning “false or bogus.” A sham loan is a fake loan — one that never existed or was not legitimate. Fraudsters often use the “loan defense” as a way of saying their ill-gotten gains were lawful. It may also be a way for a fraudster to siphon funds from a business by characterizing a payment as a loan, when in fact it was really a dividend or reportable income paid to the person. So what does a CFE need to do to look beyond the loan? Let’s start with some of the most common investigative areas fraud examiners can use to identify these situations.

Three case examples:

  • Timothy Fisher was 39 years old when he pleaded guilty in November 2016 to federal money laundering charges for his role in selling nonexistent loans to another investment company for $179 million. As the president and COO of First Farmers Financial LLC, he caused the company to sell 26 nonexistent loans to a Milwaukee investment firm. The company submitted false documents that detailed that the loans had been issued to borrowers in Florida and Georgia, and were guaranteed in part by the federal government. However, they were fake and didn’t exist at all. The loss was staggering.
  • In 2009, Jeffrey P. Chernick pleaded guilty to federal tax charges for maintaining an undisclosed foreign bank account. Chernick, who was a sales representative for toy manufacturers, concealed more than $8 million in income from tax authorities by using a nominee corporation called Simba International Ltd., incorporated in Hong Kong. He had been using offshore accounts to hide his income since the mid-1970s. Chernick also used a fake $700,000 loan between Simba and a second Hong Kong shell company to repatriate his own money, which he then used to purchase property adjacent to his New York home. The sham loan was used as a way to leverage his offshore funds to purchase an asset in a way that looked legitimate.

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