5 most scandalous fraud cases of 2018

According to the ACFE’s 2018 Report to the Nations, the median cost of occupational fraud is $130,000 per instance, and the duration is 16 months. However, some fraud incidents are staggeringly more costly and last many years. The scale and impact of these frauds capture the attention of people around the world — even leading to massive regulatory overhauls or fraudsters becoming ingrained in pop culture.

The ACFE has found that these large, noteworthy fraud cases — like Enron or Bernie Madoff — will live on in infamy and can provide valuable lessons for fraud fighters. That’s why we, along with input from our members, have selected these five stories of 2018 as the most scandalous frauds of 2018. We chose the stories based on money lost, lives impacted and relevance to the anti-fraud profession.

1. March 2018: SEC charges Theranos Inc., and its founder and CEO, Elizabeth Holmes, with fraud

After a meteoric rise in fame, one of Silicon Valley’s darlings fell hard and fast. By the mid-2010s, Elizabeth Holmes was a familiar face on magazine covers and TV screens. She was often hailed as a visionary for founding her blood-testing company Theranos Inc. In October 2015, Inc. magazine called Holmes “the next Steve Jobs” on its cover, and T MAGAZINE — The New York Times style publication — wrote, “It’s hard to overestimate the potential benefit of what Elizabeth Holmes has developed with her tech company Theranos.” (See How Playing the Long Game Made Elizabeth Holmes a Billionaire, by Kimberly Weisul, Inc. magazine, October 2015, and Five Visionary Tech Entrepreneurs Who Are Changing the World, by Laura Arrillaga-Andreessen, Oct. 12, 2015.)

However, around the same time, cracks began to appear in the façade of the seemingly miracle company. Before the adoring profiles began in earnest, Theranos employee Tyler Shultz emailed Holmes in 2014 to allege that Theranos had doctored research and had quality-control issues.

Shultz blew the whistle to a state regulator who quietly started investigating his — and other employees’ — claims. Starting in March 2016, when federal regulators said Theranos was plagued by quality-control problems, the company and Holmes’ reputation went into a freefall. (See Theranos Whistleblower Shook the Company—and His Family, by John Carreyrou, The Wall Street Journal, Nov. 18, 2016, and “Report Shows Theranos Testing Plagued by Problems,” by Andrew Pollack, The New York Times, March 31, 2016.)

After the company failed multiple lab inspections and laid off most of its employees, the fortunes of Holmes and Theranos continued to decline when, in March 2018, the U.S. Securities and Exchange Commission (SEC) charged Theranos, Holmes and former CEO and president Ramesh “Sunny” Balwani with massive civil securities fraud charges. The charges alleged that Holmes and Balwani made numerous false and misleading statements while raising more than $700 million from private investors.

In June 2018, a federal grand jury indicted Holmes and Balwani on charges of wire fraud and conspiracy to commit wire fraud for their roles in separate schemes: one to defraud investors and another to defraud doctors and patients. In September 2018, Theranos shut down for good after reaching an agreement to hand over its patents to its most important creditor, Fortress Investment Group. Investors lost an estimated nearly $1 billion. (See U.S. Files Criminal Charges Against Theranos’s Elizabeth Holmes, Ramesh Balwani, by John Carreyrou, The Wall Street Journal, June 15, 2018, and Theranos is finally shutting down, by Angela Chen, The Verge, Sept. 5, 2018.)

“Unfortunately, health care managers’ demand to control costs and innovate makes it a prime industry for ethically challenged would-be visionaries often seduced by the typical fraudster greed patterns,” says Rebecca Busch, R.N, CFE, CEO and president, Medical Business Associates. “The green-eyed monster has the exceptional ability to operate with blinders while basking in starlit glory,” Busch says.

“What is most painful about health care fraud is that it goes beyond the theft of money; our health is at stake when innovators crush the human experience with their runaway greed.

“It appears that Holmes expressed desire at the age of nine ‘to be a billionaire when she grew up,’ which set the stage of expedient means to achieve her goal at all costs.” [Busch quotes from The rise and fall of Elizabeth Holmes … by Avery Hartmans, Business Insider, Sept. 5, 2018.]

2. September 2018: Danske Bank CEO resigns over $234 billion money-laundering scandal

Founded in 1871 in Denmark, Danske Bank has been a blue-chip name in European banking for more than a century. However, that pristine reputation tarnished in late 2018 after reports that an Estonian branch of the bank participated in money-laundering activities. Danske had acquired that branch when Danske bought Finnish Sampo Bank in 2006. At the time of the purchase, the Financial Times highlighted Sampo Bank’s properties in other countries as a huge boon for Danske, saying, “The deal gives Danske control of Finland’s third largest bank, but crucially includes Sampo’s existing operations in the high growth areas of Lithuania, Latvia, Estonia and Russia.” (See Danske buys Finland’s Sampo Bank, by David Ibson, Financial Times, Nov. 6, 2006.)

Russia and the Baltic countries might have been high-growth areas, but The Wall Street Journal reports that even before the 2006 deal, Russian Central Bank Deputy Chairman Andrei Kozlov warned Estonian officials that the branch “was servicing customers suspected of financial wrongdoing such as tax evasion or corruption.”

The Wall Street Journal also reported that in 2010, Peter Straarup, Danske’s CEO at the time, was worried about how much money was flowing through this small branch — especially when a great deal of that money was from nonresident clients. Thomas Borgen, the head of international banking for Danske from 2009 to 2012, reassured Staarup all was well. Borgen went on to become the CEO of Danske in 2013. (See How One Stubborn Banker Exposed a $200 Billion Russian Money-Laundering Scandal, by Bradley Hope, Drew Hinshaw and Patricia Kowsmann, The Wall Street Journal, Oct. 23, 2018.)

In September 2018, after pressure from authorities in Denmark and Estonia, Danske published a report confirming that, “its headquarters and its Estonian branch failed for years to prevent suspected money laundering involving thousands of customers,” The New York Times reported. (See Danske Bank Says Billions May Have Been Laundered at Single Branch, by Martin Selsoe Sorenson, The New York Times, Sept. 19, 2018.)

Danske Bank said it was unable to estimate the total value of identified suspicious transactions, but the Times author reported that the bank’s “nonresident operation in the Baltic nation improbably had total flows of … $234 billion — nearly equivalent to the size of the Danish economy.” More than 6,200 customers from 2007 through 2015 have been investigated. The bank report indicated serious compliance and control failings.

The Guardian reported on the wide scope of countries involved, stating, “The Danske scandal involves 32 currencies, companies from Cyprus, the British Virgin Islands and the Seychelles. Customers of the Estonian branch have been traced to Russia, Azerbaijan and Ukraine.” (See Is money-laundering scandal at Danske Bank the largest in history? by Juliette Garside, Sept. 21, 2018.)

Borgen resigned because of the scandal. “It is clear that Danske Bank has failed to live up to its responsibility in the case of possible money laundering in Estonia. I deeply regret this,” he said in a company statement. “Even though the investigation conducted by the external law firm concludes that I have lived up to my legal obligations, I believe that it is best for all parties that I resign.”

“When a Russian regulator — not just any regulator — is flagging issues and says something is amiss, Danske’s CEO and board of directors should have listened,” says Regent Emeritus Joseph L. Ford, CFE, principal in Newton and Ford Associates, LLC. Ford was executive vice president and chief security officer of the Bank of the West. Previously, he’d retired from the FBI as its third-ranking official.

“Peter Straarup, Danske’s past CEO, was worried about the massive flow of funds through one branch, and his subordinate who oversees the money-laundering activity tells him everything was okay,” Ford says.

“Maybe if there had been more effective management challenge to his suspicions this would have been avoided. Where was internal audit? Where was the concept of trust but verify? Why didn’t Danske’s anti-money laundering program flag the activity?” Ford asks. “For this to be disclosed in 2018 represents a total breakdown in anti-money laundering controls,” he says.

“According to the law firm that conducted an investigation, Danske’s subsequent CEO, Thomas Borgen, lived up to his legal obligations. But how about his fiduciary and ethical responsibilities as a CEO? I would question how he fared in those two critical areas. Where was the tone at the top at Danske?” Ford asks.

3. June 2018: Largest health care fraud takedown in U.S. history

Health care fraud is incredibly costly and prevalent. However, U.S. Department of Justice (DOJ) officials announced in June 2018 the largest-ever nationwide health care fraud takedown. The enforcement action resulted in charges against 601 defendants with more than $2 billion in fraud losses, including 84 cases involving the illegal prescription or distribution of opioids. The case spanned 58 federal districts. Those charged included 165 medical professionals. (See the DOJ release.)

What is most painful about health care fraud is that it goes beyond the theft of money; our health is at stake when innovators crush the human experience with their runaway greed.

Reuters reported that “those charged included a Florida anesthesiologist accused of running a ‘pill mill;’ a Pennsylvania doctor alleged to have billed an insurer for illegally prescribed opioids; and a Texas pharmacy chain owner and two other people accused of improperly filling orders for opioids that were sold to drug couriers.” The schemes targeted Medicare, Medicaid, TRICARE and private insurance billing schemes. Many involved fraudulent billings for medically unnecessary prescription drugs and compounded medications that were never distributed, plus the payment of kickbacks to patient recruiters, beneficiaries and other co-conspirators for providing beneficiary information to providers for use in such false billings. (See U.S. charges hundreds in healthcare fraud, opioid crackdown, by Nate Raymond, Reuters, June 28, 2018.)

More than 1,000 law enforcement personnel took part in the operation, including more than 350 Office of the Inspector General special agents. “These takedowns send a strong message that theft from federal health care programs will not be tolerated,” the DOJ stated. “The money taxpayers spend fighting fraud is an excellent investment: For every $1 spent on health care related fraud and abuse investigations, more than $4 is recovered.” (See 2018 National Health Care Fraud Takedown, U.S. Department of Health and Humans Services Office of Inspector General.)

“The HEAT [U.S. Health Care Fraud Prevention and Enforcement Action Team] is turned up on fraud!” says Jaqueline Bloink, CFE, consultant with Bates Group on health care. Bloink is also leader of the ACFE’s online Community’s Healthcare Fraud Group.

“The collaborative efforts between the U.S. Department of Health and Human Services [HHS], the U.S. HHS Office of Inspector General, U.S. Department of Justice and local law enforcement has helped HEAT to catch and exclude many health care fraudsters from 2016 through now,” Bloink says.

“In 2018, HEAT uncovered $2 billion in health care fraud that involved more than 601 defendants. Many of the 2018 health care fraud cases involved abuse of opioid prescriptions,” she says.

“Sixty-seven doctors, 402 nurses and 40 pharmacy services were excluded from working with federal and state payers due to their participation in the fraudulent scheme. Return on investment is good when fighting health care fraud.

4. February 2018: $2 billion fraud discovered at Punjab National Bank

Nirav Modi was sometimes referred to as “jeweler to the stars,” with his pieces worn by Priyanka Chopra, Naomi Watts, Kate Winslet and others. Modi’s seemingly charmed life came to a crashing halt early in the year when the second-largest, state-run Indian bank, Punjab National Bank (PNB), filed a police complaint against Modi, another jeweler Mehul Choksi and others, alleging the men had conspired with two of its staff to defraud the bank of nearly $43 million. (See Billionaire Jeweler Accused Of India’s Biggest Ever Banking Scam – Who is Nirav Modi? by Leeza Mangaldas, Forbes, Feb. 22, 2018.)

After India’s Central Bureau of Investigation (CBI) launched an investigation in February of 2018, PNB revealed the total amount involved in the fraud was closer to $2 billion. Modi conspired with bank employees to fraudulently obtain Letters of Undertaking (LoUs) from PNB. Letters of Undertaking act as a guarantee by the issuing bank, similar to Letters of Credit, and are often used in international banking transactions. PNB issued the LoUs in question via the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network without proper authorization. PNB also didn’t record them in PNB’s record-keeping system, which allowed Modi and Choksi to avoid detection while obtaining loans in other countries. (See Developments in the $2 billion Punjab National Bank fraud case, by Krishna V Kurup and Patturaja Murugaboopathy, Reuters, March 8, 2018, and RBI discontinues Letter of Undertaking, Letter of Comfort as instruments of trade credit, The Economic Times, March 14, 2018.)

Modi fled India before the scandal broke. As a result of the fraud, the Reserve Bank of India (RBI) discontinued the acceptance and issuance of LoUs. The RBI also ordered SWIFT network’s integration with Indian financial institutions. As of publication, Modi is still considered a fugitive. (See Nirav Modi Declared ‘Proclaimed Absconder’ By Gujarat Court, The Shillong Times, Nov. 8, 2018.)

“The Nirav Modi scam should serve as an eye-opener for banks and their regulator, the Reserve Bank of India,” says Regent Emeritus Vidya Rajarao, CFE. Rajarao is a partner at Grant Thornton India. She’s a national leader for forensic and investigation services in India and the sub-continent and a member of the firm’s global forensic steering committee.

“The nature, extent and frequency of the LOUs should have raised significant red flags at the bank. Further, these LOU’s mysteriously escaped scrutiny of numerous audits conducted at the bank — internal, concurrent, statutory, regulatory, etc.,” she says.

“Clearly, this is a systemic failure of controls, oversight and governance at multiple levels. Both the bank and the regulator should now focus on bringing the perpetrators — within the bank and Mr. Modi — to account and fix internal control lapses at Punjab National Bank and, more importantly, learn from this incident and prevent another Nirav Modi-like situation that is sure to be lurking at other banks in India,” Rajarao says.

5. July and September 2018: Former Malaysian prime minister at center of 1MDB scandal arrested

After years of reports about the Malaysian government being involved in a multibillion-dollar embezzlement scandal with the 1MDB fund, the incumbent prime minister Najib Razak was ousted in a May election. The defeat was stunning because it marked the first time Najib’s political party, Barisan Nasional, wouldn’t be in power after holding controls since Malaysia won its independence from Britain in 1957. (1MDB — 1Malaysia Development Berhad — is a Malaysian company, owned by the country’s minister of finance, which drives initiatives for long-term economic development.)

In July 2018, authorities arrested and charged Najib with corruption and criminal breach of trust in connection with 1MDB. He pleaded not guilty and was released on bail. Bloomberg reported that he faces “three counts of criminal breach of trust, and one charge under the anti-corruption act. If found guilty, he could be jailed for up to 20 years and fined. The ex-prime minister is seeking a trial for all charges.” (See Najib Pleads Not Guilty to Corruption Charges in 1MDB Case, by Anisah Shukry and Yudith Ho, Bloomberg, July 4, 2018.)

Legal woes continued for Najib when he was charged in August 2018 with three counts of money laundering. He was arrested again in September and charged with more crimes connected to $681 million deposited into his account in 2013. His trials are scheduled to begin in February. (See Najib Razak, Former Malaysian Prime Minister, to Face More Charges, by Austin Ramzy, The New York Times, Sept. 19, 2018.)

“On two occasions my company was offered the opportunity to work for individuals with a prominent role in 1MDB,” says Regent Emeritus David Rule, CFE, managing partner, Xione Group, Ltd., Singapore. “The work on offer in both cases was to protect private conversations, and in both cases I politely declined from an ethical point of view,” he says.

“In the first instance, we were approached in early 2017 by a banker convinced he was being bugged. I did not know at the time who I was meeting. I was struck by the opulence of his residence, which featured an elevator to all floors and flashy sports cars in the garage. A little investigation revealed him to be the head of one of the banks under investigation for laundering billions of 1MDB money,” Rule says.

“The second request came via an external security consultant who wanted us to conduct a sweep on behalf of a very senior Malay politician in Kuala Lumpur. I asked: ‘Given the current changes in Malaysia, will we be working for the incoming or outgoing regime?’ Outgoing, I was told and none other than outgoing ‘Malaysian Official 1.’ ”

“From my experience in Asia, until an ethical approach to banking is cemented into C-suite thinking and until full accountability is assumed, staff will simply follow the dollars with scant regard for provenance,” Rule says.

Dishonorable mentions

It’s impossible to highlight every large fraud case because of the sheer number of frauds that are discovered or prosecuted each year. While they weren’t selected as part of our top 5, here are a few additional stories from 2018 that didn’t make our list but are still notable because of the size of the fraud, callousness of the fraudsters or the political repercussions.

Doctor accused of fraud and misdiagnosing patients to fund ‘opulent lifestyle’

In May 2018, authorities indicted Dr. Jorge Zamora-Quezada, who operated several clinics in Texas, in connection with more than $240 million in health care claims that were based in part on “fraudulent statements” and resulted in $50 million paid to the doctor. According to the U.S. Department of Justice, Zamora-Quezada falsely diagnosed patients — including children, the elderly, and those with disabilities — with serious and even terminal illnesses in order to prescribe expensive treatments and medication, including chemotherapy in some cases. The scheme allegedly allowed the doctor to live a lavish lifestyle, complete with his own personal jet, a fleet of luxury cars and numerous expensive commercial and residential properties in Mexico and the U.S.

(See Feds: About 3,000 ‘suspected victims’ make new allegations against local doctor, by Nicole Perez, KSAT news, May 29, 2018, and the DOJ release.)

Politically tied Michael Cohen and Paul Manafort pleaded guilty to fraud charges

In August 2018, U.S. President Donald Trump’s former personal lawyer, Michael Cohen, pleaded guilty to fraud charges, including tax fraud, bank fraud and making an excessive campaign contribution; his plea also apparently implicated President Trump in directing the campaign contributions for which he was on trial. Manafort was found guilty on eight of 18 fraud charges he faced, including tax fraud and bank fraud, but the jury couldn’t reach a unanimous decision on the other 10 charges. In a separate trial in September, Manafort reached a deal with prosecutors that included pleading guilty to conspiracy against the U.S. and full cooperation with a special counsel investigation into the 2016 presidential election, rather than go to trial on additional fraud charges. (See Michael Cohen pleads guilty to eight counts, by Brett Samuels, The Hill, Aug. 21, 2018, Manafort convicted on 8 counts; mistrial declared on 10 other charges,” by Ken Dilanian, Aug. 21, 2018, NBC News, and Manafort pleads guilty, reaches ‘cooperation agreement,’ by Morgan Chalfant and Lydia Wheeler, The Hill, Sept. 14, 2018.)

Former South African President Jacob Zuma’s corruption and fraud charges

Corruption scandals led South African President Jacob Zuma to choose resignation in February at the insistence of his own political party, who told him to step down or face a no-confidence vote that would have likely removed him from office. Following a tenure filled with corruption allegations, he faces 16 charges, including money laundering, racketeering, fraud and corruption in an ongoing trial. His next court appearance is scheduled for November. (See South Africa ex-President Jacob Zuma charged with corruption, BBC News, April 6, 2018.)

Sarah Hofmann, CFE, is the ACFE public information officer. Contact her at shofmann@ACFE.com.