AML Mortgage and Health-Care Frauds

Most of the houses were dilapidated. Places in which no one would actually want to live. But that didn’t stop the six culprits from actively recruiting unsuspecting people to buy 210 properties at artificially inflated prices. The Dayton, Ohio, houses, according to the federal indictment, were financed with $15 million in mortgage loans fraudulently obtained through 33 lending institutions.

The fraudsters, who operated real estate mortgage and title-insurance businesses, also paid kickbacks to the buyers they recruited, promised to pay for all repair costs to the properties and, out of the goodness of their hearts, made mortgage payments until they located suitable renters, the indictment said. Oh, yes – the six also pocketed $7 million from the loans for their “personal benefit.” The schemes lasted from March 2002 to June 2008.

Charges against the crooks, all of whom eventually pleaded guilty, included mail and wire fraud, tax crimes, and money laundering. Hang on to that last charge; we’re going to switch to a different – but equally popular – venue for fraud.

In July of 2009, New York Attorney General Andrew M. Cuomo announced the indictment of six individuals and seven corporations – all charged with defrauding Medicaid out of $47 million for 10 years. The indictment said that Alexander Levy, with the assistance of several cohorts, allegedly controlled many health-care entities to illegally obtain payment for the treatment of Medicaid recipients and then laundered the profits. There’s the common denominator in these two cases – money laundering.

Anti-money laundering (AML) is a living and breathing interplay among fraudsters and fraud fighters that changes daily from external influences. Here we explore some of the latest AML issues, pending legislation, and the effects on the anti-fraud community within two perennial targets: the mortgage and health-care industries. 

MONEY LAUNDERING PRIMER

According to the ACFE’s Fraud Examiners Manual, money laundering is the disguising of the existence, nature, source, ownership, location, and disposition of property derived from criminal activity.

The “washing” of money includes all forms of illegal activities. In most instances, the goal is to conduct cash transactions in such a way as to conceal the true nature of transactions. Problems occur with manipulating large volumes of cash – transporting it, converting small denomination bills to larger denomination bills, and then converting that cash into assets that can be invested or spent.

Money laundering is generally accomplished in three stages: placement, layering, and integration. Placement involves putting illicit funds into the financial system, layering entails the moving and cleaning of these funds in an attempt to obscure the money trail, and integration is the process of reintroducing this laundered money into legitimate areas of the economy. 

LAWS AND FINCEN FIGHTING MONEY LAUNDERING

U.S. AML regulation has evolved greatly in the past four decades through the Bank Secrecy Act (BSA) of 1970, Money Laundering Control Act (MLCA) of 1986, and the more recent relevant parts of the USA PATRIOT Act enacted in 2001.

The touchstone to effective anti-fraud measures is to have oversight and regulatory bodies that can execute the legislative intent. For example, the U.S. Financial Crimes Enforcement Network (FinCEN), established in 1990, is the main federal body responsible for safeguarding financial institutions against money laundering and related activities.

FinCEN Director James H. Freis said that the fraud committed in the mortgage sector can be an isolated event, or it can also be an enumerated crime that triggers the application of AML laws.

“Money laundering itself is a crime that can be separately prosecuted from any unlawful activity,” said Freis, the 2009 ACFE Cressey Award recipient, in a recent interview. Often FinCEN isn’t the lead investigator or prosecutor in mortgage fraud cases but it plays a supporting role, he said.

Freis discussed the two prevalent mortgage frauds – cases that involve prospective homeowners who misrepresent their incomes and asset information on mortgage applications and cases in which criminals work with others in a network and assume false identities with no intention to pay the mortgages.

FinCEN issued a July 16, 2009, guidance that addressed information sharing among employees in the financial mortgage sector. Freis said that “the thinking behind the provision of section 314(b) of the PATRIOT Act and, therefore, implementing regulation, is that as a general matter, financial institutions would not be sharing sensitive commercial information about their customers with a competitor, but this [July 16, 2009 guidance] creates an exception and a provision that allows them to share when the purpose is to prevent fraud and other illegal money laundering activities.”

In this guidance, FinCEN clarified some ambiguities that might have limited financial institutions sharing information about mortgage fraud and other potential illegal activities, Freis said. “We do understand that anecdotally, multiple individual cases of the sharing have grown as a result of the clarification, and I can only underline that when we talk about fighting fraud, that industry and government incentives could hardly be more closely aligned,” he said.

The intent of the 2008 U.S. Secure and Fair Enforcement (SAFE) Mortgage Licensing Act is to increase consumer and borrower protection and reduce mortgage-related fraud by requiring that each state enact minimum registration and licensing requirements for mortgage loan originators.

Freis said that these minimum requirements in the SAFE Act aim to form a national uniform registry that FinCEN could use to fight mortgage fraud and money laundering.

“Although the registry is not primarily designed for AML purposes, it is certainly something that can help FinCEN build upon as evidenced by released information put out this past summer in an Advanced Notice of Proposed Rulemaking (ANPRM),” he said. (An ANPRM is a preliminary notice, published in the Federal Register, which announces that an agency is considering a regulatory action.)

This FinCEN ANPRM sought comment on the establishment of an AML program and Suspicious Activity Report (SAR) regulations for non-bank residential mortgage lenders and originators. For years, financial institutions have sent FinCEN SARs reporting on possible money laundering, tax evasion, terrorism, or other criminal activities. Freis said FinCEN is reviewing those comments. He said that those fraudsters in the mortgage industry would find it harder to abuse the system if the sector was more regulated, and FinCEN might be the agency to do that as it works with state and federal authorities. 

MORTGAGE FRAUD VIEWS FROM THE PRIVATE SECTOR

Connie Wilson, CFE, CMB, executive vice president of Interthinx, a provider of fraud prevention, compliance, and decision-support tools for the mortgage industry, said, “it is important to note that the average borrower has no idea how to defraud the mortgage industry, and there has to be someone behind the borrower who coaches them.”

She said those crooked coaches lead unwitting borrowers into eventual fraud-for-profit arrangements. “Enterprise fraud consists of organized criminal rings that recruit straw buyers and appraisers to act in concert in committing large-scale mortgage fraud,” Wilson said.

She said the biggest problems the industry faces are falsified income, fictitious employment, and undisclosed liabilities (when the buyer has obtained additional mortgages or other types of loans that aren’t reflected on the credit report), but there’s an even longer list of red flags. Some of those red flags include:

• Income and credit-usage patterns that don’t make sense
• Variance between two or more of the same document types in the loan file
• Variances or similarities in signatures within the loan file
• Date sequence of documents in a loan file
• White-outs, squeezed-in numbers, and document alignment
• Different type, print, or handwriting styles on the same document 

Fraud examiners can use automated off-the-shelf tools plus search engines, databases, and Web sites to find loan information. They can also use some proprietary tools to search through key data on more than 62 million loans currently registered on the Mortgage Electronic Registration System (MERS), she said. (MERS, created by the real estate finance industry, simplifies the way mortgage ownership and servicing rights are originated, sold, and tracked.)

“Presently, the automated tool-type work is mostly proactive, whereas the end-up file investigation aspect is primarily reactive, but the industry as a whole is moving to an overall due diligence proactive approach to fighting mortgage fraud,” Wilson said. 

She said the end-up file investigations are time-consuming. An experienced auditor/investigator spends at least three hours on each file. “However, the automated fraud detection tools take seconds to use and provide the lender red flags noting variances between data in the loan application and data retrieved from external sources,” Wilson said. 

HEALTH-CARE FRAUD AND MONEY LAUNDERING

In July of 2009, H.R. 3369, the Improving Medicare and Medicaid Policy for Reimbursements through Oversight and Efficiency Act (IMPROVE Act) was proposed in the U.S. House of Representatives to combat health-care fraud and close loopholes available to money launderers. (A similar bill, S. 1521, is proposed in the Senate.) The IMPROVE Act proposes to “amend titles XVIII and XIX of the Social Security Act to require provider and supplier payments under Medicare and Medicaid to be made through direct deposit or electronic funds transfer [EFT] at insured depository institutions.”

U.S. Rep. Michael Arcuri, D-Utica, one of the co-sponsors of the House act, told us that “the focus of the bill is to make it more difficult to perpetrate money laundering and fraudulent check schemes in our health-care system.” As a former prosecutor, Arcuri said that he has seen “a great deal of check forgery and duplication whereby one check could be used to fraudulently create millions of dollars, and such a law can attack this head on. In addition, it will make it easier for law enforcement to track down the criminals who try to open accounts in fictitious names in an attempt to launder money.”

This concept lies at the heart of Customer Identification Program (CIP) requirements and Know Your Customer (KYC) protocol in AML, which emphasizes that doing due diligence up front helps detect and prevent fraud. (The USA PATRIOT Act requires banks, savings associations, credit unions, and certain non-federally regulated banks to have CIPs. Countries around the world have incorporated KYC rules and protocols.)

With the Obama administration’s emphasis on health-care reform, it makes sense that fraud in this area also should be addressed. “An ancillary effect of the [IMPROVE] act is to save money and increase efficiency, all of which are part of the proposed health-care reform,” Arcuri said.

INDUSTRY AND REGULATORY VIEWS ON HEALTH-CARE FRAUD LEGISLATION

Former FBI agent John Hanson, CFE, CPA, an active anti-fraud professional, believes that an EFT payment system under the IMPROVE Act would “negate a lot of vulnerability that exists with the current check system as many red flags could pop up and be more evident when all payments were sent to one account.”

Hanson said it still would be possible to set up fictitious accounts, but EFT payments would make it harder because money is still going directly into accounts – fictitious or not. “Also, it would force criminals to alter their fraud protocols, which usually causes them to make mistakes in the beginning stages and will put them on the fraud radar,” he said.

“The down side is that direct deposit proceeds allow the scam to move much faster, it may reduce the number of conspirators necessary to affect a scam, and the process of layering funds and covering the money trail begins instantaneously,” Hansen said. “Also, from a purely traditional investigative perspective, an EFT system leaves less physical trace evidence.”

He said an EFT system initially makes it easier for fraudsters to move money within the laundering placement stage because the networks and systems of accounts previously used might not yet be extensive enough or have transitioned to the new requirements.

“Also, in many of the common health-care type scams where checks are used, the influx of checks are typically numerous and scattered, allowing checks to be pooled in such a manner as to make the placement less likely to draw attention,” Hanson said. “Under an EFT system, this is limited by the fact that the funds previously paid by check cannot be endorsed and pooled so easily; rather, the money launderer must set up accounts on a mass scale, which can be very difficult to quickly accomplish.”

Sharon Maddock, M.D., of New York Presbyterian Hospital in Manhattan, said “The Hippocratic Oath taken [by physicians] swears to practice medicine ethically, and it is unfortunate that doctors involved in fraudulent practices are indirectly affecting patients and giving a bad name to other medical professionals who have the patients’ best interests in mind.” 

She said that legislation such as the IMPROVE Act will decrease vulnerability in the payment process and leave medical professionals with fewer opportunities to commit fraud and diminish the reputation of the medical profession. Maddock said that patients incur costs that they can’t afford. “With less fraud occurring between the professionals and Medicaid or Medicare, it is my hope that more funding is available to patients who truly need assistance,” she said.

“When talking about the health-care sector,” Freis said,  “… it is not so much of a question of new AML legislation per se, but rather understanding the way that health-care services and products are used by criminals involved in fraud or other illegal activity and how the proceeds might be laundered through the financial system.”

Such a mindset is important not only in the health-care sector but all industries. “AML regulations are known globally as the ‘market integrity regulations,’ so anything that can be done to keep illicit funds or proceeds of crime out of the financial system is also a good effort in promoting the legitimate use of commerce,” he said.

IMPACT ON THE ANTI-FRAUD COMMUNITY

CFEs investigating mortgage and health-care fraud must stay current on AML issues and impending legislation because AML often is interwoven into many crimes or is a byproduct of other types of fraud.

“The skills learned as a CFE,” Wilson said, “are very important in detecting mortgage fraud. Knowing how to identify documents that have been altered can be very useful in following the money trail in and out of accounts to identify suspicious activity and red flags.”

An inherent part of the CFE mindset is systematically gathering facts. CFEs can laterally apply this regimen to AML mortgage fraud. For example, CIP and KYC protocols require a full understanding of the customer as a baseline approach to regulatory compliance.

“Much of the work performed by a CFE in the mortgage fraud sector,” said Wilson, “is similar because the first thing performed is verifying borrower identity to ensure that the borrower actually has a loan or the borrower is who they say they are."

Wilson further credits CFE training as “an excellent background enabling the mortgage investigator to properly phrase suspect questioning that fosters a non-threatening environment.”

The IMPROVE Act could change health-care field work, Hanson said, “because the act would allow payments to be tracked electronically, and there would be a quicker turnaround on available information that would enable and require the CFE to respond faster.” This would enable CFEs to strike when cases are still hot. Hanson said the IMPROVE Act could be used as a measuring stick to monitor variances that could serve as red flags for Medicare fraud schemes.

“The government could track any significant changes from the old check payment to the new wire payment system,” he said. “And any major differences could be indicative of a Medicare fraud scheme because in many of the scams the only major factors that should change may be the existence of a bank account.” 

If major discrepancies were found in payment data under each system, CFEs or other anti-fraud professionals could commence field work and develop fraud leads that would not have existed under a check payment program.

NO BLANKET CURE

As money laundering and related criminal enterprises continue to grow in the mortgage and health-care sectors, regulatory bodies, the legislative process, and industry professionals are reacting accordingly. Of course, no blanket cure exists because money launderers are constantly looking for new ways to perpetrate their crimes. But anti-fraud professionals are anticipating the newest insidious money laundering twists, and with the help of new legislation like the IMPROVE Act, we’ll be ready.

Christopher Ernst, J.D., CFE, CAMS, is managing director of Kahler Forensic Solutions in New York, N.Y. 

Aaron Kahler, CFE, CAMS, is managing director of Kahler Forensic Solutions in New York, N.Y. 

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