When the music stopped ...

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.

ESTABLISHING CONNECTIONS 

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.

INTERVIEWING BANK PERSONNEL, BORROWERS 

After collecting all of this data, we needed to conduct interviews with bank personnel to complete a thorough investigation. These interviews provided additional details about Jones’ management style and personality and corroborated information we had gathered. (We hadn’t found anything that indicated that other current or former bank employees were involved in the alleged scheme. We realized that Jones had the authority to pull off the scheme with no fellow employees.)  

We began interviewing borrowers who had the weakest connections to Jones or Smith. We then interviewed individuals who were more involved in the scheme, such as close friends and business partners, as we worked our way towards Jones and Smith. These borrowers were less forthcoming about other individuals and their potential involvement with the fictitious loans. 

We interviewed more than 20 subjects listed as borrowers on these loans; more than half admitted to participating in the fraud. All the borrowers had some sort of connection with Smith and did it as a favor to him. Smith promised them a lucrative portion of the loan proceeds for participating. Our continued inspection of collateral, tracing funds to borrowers’ accounts and corroborating statements of other borrowers confirmed the information we gathered from these interviews.

A MUSIC MOGUL IN THE MAKING 

Armed with a mountain of evidence and countless confessions, we were ready to confront our main suspect — the bank president, Richard Jones. We decided not to call Jones into the bank but rather conduct a more personal interview with him at his house. Jones had resigned from the bank a few days earlier. We arrived — unannounced — and Jones surprisingly welcomed us in quickly. Our main objective was to obtain a confession, so we assured Jones we “just wanted to talk” and approached him in a warm and sincere manner. It appeared that Jones was upset over the fraud, and he wanted to confess. We didn’t start the interview with any specific questions; we just let Jones tell us his side of the story.  

“You’ve seen the loan files; you know they’re bad, I know they’re bad,” Jones admitted in the interview. He rationalized his fraud by blaming his growing disinterest in his job and the monotony of his “ordinary” life. He talked about his close friendship and business relationship with Smith and his intentions to provide Smith with enough funds to help jump-start his music business. Jones said he never intended to approve as many loans as he did and always planned to pay back the bank once Smith’s business began to see a return. It was now apparent to us that Smith had manipulated Jones into using his position of power and trust to approve numerous questionable loans — most of which were non-performing or close to default. 

He admitted in his interview he was drawn to the excitement of the music business, Smith’s lifestyle and his new friends and business associates. He also believed he was going to make a large return on his investment in Smith’s business. Jones believed if he kept his friendship and business relationship with Smith a secret, the fictitious loan proceeds wouldn’t be tied back to him.

LESSONS LEARNED 

Jones wasn’t interested in buying a fancy home or a luxury car; the pursuit of material wealth doesn’t motivate every fraudster. He didn’t deny Smith’s involvement in the scheme, but he didn’t offer any additional information about him. We couldn’t contact Smith; we later learned from the FBI that Smith had fled to Florida to live with his girlfriend.  

As of press time, the FBI and the U.S. Attorney’s Office are pursuing the case against Jones and the straw borrowers involved with the loan fraud. Shortly after our interview with Jones, we learned that he finally told his family the truth behind his recent resignation. 

The victim bank has instituted new policies and procedures for loan processing and approval, including stricter documentation for the loan review committee. Bank management has learned the difference between establishing policies and ensuring that all personnel, including management, follow them.  

The bank also has implemented quarterly employee performance reviews, which will allow the board of directors to:  

1. Exercise a “checks and balances” corporate culture.  
2. Stay actively aware of daily operations. 
3. Prevent employees — specifically bank management — from making decisions that may negatively impact the bank.  

This fraud also opened the door to stronger lines of communication among top management and lower-level employees. If bank employees who worked with Jones had felt more comfortable with management, they would have notified the board sooner about Jones’ loans red flags. The bank also filed an insurance claim to cover the fraud with hopes to recoup some of the damages caused by Jones and his cohorts. 

The visual analytics used in this case were vital to the success of our investigation. This tool helped us collect enough evidence to obtain a confession and prove the involvement of many other individuals.  

This case illustrates the importance of a methodically planned strategic fraud examination to uncover a complex loan fraud scheme, determine motivations and trace the use of illicit funds.  

I’ve learned that fraud examinations require a keen eye for the unexpected. Every examination can lead you down countless paths, but building connections and establishing relationships are not only key to uncovering how the scheme was perpetuated but understanding a fraud perpetrator’s motives.

Caitlin Glass, CFE, CPA, is a forensic analyst with Forensic Strategic Solutions, of Birmingham, Ala.  

Colin May, M.S., CFE, is a forensic financial investigator with a government agency (the views in “Starting Out” are his own) in Baltimore, Md. 

Mark F. Zimbelman, Ph.D., CPA, Educator Associate Member, is a professor of accounting at Brigham Young University in Provo, Utah.