White Collar Crimes

300 words per db, ARTICLES ATTACHED

DB1: Check Fraud Article

Respond to the article on check fraud by stating your reaction to the problem. 

  

DB2: Diamonds Article

After reading the Diamond and Jewelry Industry article, discuss what specific preventive measures can be taken by both U.S. and international law enforcement agencies to combat this issue.

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Top of Form Diamond and Jewelry Industry Crime By KELLY ROSS The criminal world is changing. Technology, international commerce, and globalization have allowed lawless individuals to broaden the scope of their activities and the sophistication of their operations. Unfettered by internal policy or bureaucracy, they can morph from one criminal enterprise into another faster than law enforcement can keep pace. The activities normally associated with criminals have expanded beyond national borders and—adding to the usual drugs, weapons, contraband, and sex trade—have become modalities to serve the criminal finances generated. In this respect, diamonds and similar commodities, such as gemstones, jewelry, and gold, regularly appear as facilities to gather, store, and move proceeds of crime undetected by authorities. Street-level illegal activity in diamonds and jewelry has increased, and the criminal and terrorist use of diamonds and gemstones has become the subject of many books and intelligence reports. This growing problem presents new challenges to all law enforcement agencies. Understanding the criminal use of diamonds and jewelry, recognizing the issues facing law enforcement, and seeking proactive countermeasures represent the first steps to finding a solution. Constable Ross coordinates the Diamond Program, Customs and Excise Unit, Royal Canadian Mounted Police. Understanding the Criminal Use of Diamonds and Jewelry No doubt, the relative high values, ease of concealment, and untraceable attributes of diamonds, gemstones, and jewelry prove quite appealing to criminals. Street-level perpetrators involved in residential and retail jewelry store burglaries and robberies favor these items. Moreover, increasing evidence points to the gravitation of the more sophisticated offender, organized crime member, and terrorist toward the use of diamonds, gemstones, and jewelry for criminal financing or as a facility for money laundering, international movement, or storage of crime proceeds.1 The tracking of currency nationally and internationally through government agencies corrals criminals into the use of alternate currencies, such as diamonds, gemstones, and gold. Law enforcement authorities have identified gemstone and jewelry smuggling operations run by organized crime, and jewelry store thefts linked to organized crime are not uncommon.2 Further evidence has shown a strong link between street-level criminal activity regarding diamonds and jewelry and organized crime. Statistics reflect this criminal use of jewelry and precious metals. From 1999 to 2003, jewelry was among the fastest growing categories of stolen property in the United States and now ranks second only to automobiles by value.3 This is not surprising as the United States, with approximately 5 percent of the world’s population, consumes 48 percent of the annual world production of diamond jewelry, totaling approximately 30 billion U.S. dollars.4 Similar per capita spending on diamond jewelry could be expected in Canada. Within this North American “diamond culture,” an enormous number of jewelry outlets, manufacturers, and suppliers exist to quench the thirst for diamond jewelry. This results in a greater opportunity for criminals to acquire such items and corresponding occasions to insert them back into the legitimate jewelry market. In terms of criminal exploitation of diamonds and jewelry, no other continent has such favorable conditions for product acquisition and for converting the proceeds of crime. Recognizing the Issues Facing Law Enforcement Identifying the stolen products, something the police and the public both have difficulties with, contributes to the problem. Another limiting factor involves the lack of knowledge and awareness of diamonds, gemstones, and the jewelry industry at all levels. This translates into a poor understanding of the criminal activity that surrounds these products, specifically the “what, why, and how” of the criminal use of diamonds and jewelry. Many officers who have purchased diamond jewelry would have difficulty describing it in any detail more than its approximate carat weight. They probably could not relate the characteristics that determine a diamond’s value: the four C’s of carat, color, clarity, and cut. This would be similar to investigating the theft of a $7,000 motorcycle without a description of its make, color, engine size, or accessories. Lacking accurate identifiable characteristics of the vehicle, officers would have little chance of recovering it. Diamonds and jewelry, even under the best circumstances, are extremely difficult to track and rank among the lowest of police recovery rates.5 Additionally, the dearth of diamond-specific laws does not help matters. In Canada, diamonds, gemstones, and jewelry are indirectly controlled by several acts of parliament. The most common of these include the Criminal Code, the Customs Act, the Competition Act, the Export and Import of Rough Diamonds Act, and the Cultural Property Export and Import Act. The only one of these laws specific to diamonds is the Export and Import of Rough Diamonds Act (EIRDA). The remainder control diamonds and gemstones indirectly in the same way they do other material items. For instance, the Criminal Code contains several sections, such as theft, robbery, and fraud, that could be used relative to criminal activity that surrounds diamonds and gemstones. EIRDA controls the export and import of rough diamonds from and to Canada in compliance with the international Kimberley Process protocols.6 Several other countries, including the United States, have joined this endeavor and also have enacted their own similar legislation. The spirit of EIRDA is genuine in its efforts to control international sales of conflict diamonds; however, at present, the basic training and awareness of law enforcement may not be sufficient, nationally or globally, to meet the demands of this worldwide initiative. Further, those criminals who have operated in an unscrupulous manner prior to the 2001 launch of the Kimberley Process would have no reason to change their modus operandi. If they have successfully moved rough diamonds surreptitiously without detection prior to the Kimberley Process initiative, they probably will continue. Finally, the emergence of the diamond production industry in Canada and the corresponding new opportunities for criminals have become the harbinger of new policing challenges. At present, the annual production of rough diamonds from Canada is valued at 1.24 billion U.S. dollars.7 Yet, even a small percentage of mine-site loss due to criminal activity could translate into large dollar values. If Canadian mines experienced the estimated 12 percent losses per year that occur in South African diamond mining operations, the results would amount to a 180-million Canadian dollar loss to the industry and a 25-million Canadian dollar loss of government royalties.8 Canadian diamond production, estimated as the world’s third largest by value, is expected to expand at the production level and at several of the intervening steps from the mine to market.9 Slowly but surely, the Canadian diamond industry will become more stratified, with new cutting and sorting facilities and distribution networks that will afford both new and, perhaps, the greatest opportunities for organized criminal exploitation.10

A recent investigation un-covered a novel avenue of fraud whereby criminals recruit municipalities as unwitting coconspirators to their own loss. Initially brought to the attention of the U.S. Attorney’s Office for the District of Maryland by a local municipality, the investigation, conducted jointly with the FBI, concerned a vendor who contacted the city’s department of finance to request the reinsurance of a check. The retailer explained that the original check, received 1 year earlier, had been misfiled and only discovered during a routine review. Because the date was well be-yond the 180-day life allowed by the municipality, as indicated on the check, the merchant sought a replacement. Upon reviewing its records, the city discovered that a third party claiming to represent the vendor already had requested and been issued a replacement check. The third party, in fact, had provided a signed limited power of attorney showing that the retailer had entered into an agreement with this company to collect the payment. Because of the significant monetary amount, the municipality began an audit to determine what had occurred. It quickly discovered that this third party, located out of state, had paid a nominal charge and received a stale-dated check listing.1 The city’s initial review disclosed four other requests made by and checks issued to this same firm for stale-dated check replacements.

The investigation subsequently identified a total of nine replacement checks, totaling in excess of $157,000, as having been requested and received by this third party from the complainant municipality during a 9-month period. It also deter-mined that this firm received numerous checks from multiple jurisdictions under similar circumstances. Further analysis of those records identified additional companies acting in concert with the original subject business or having the same ownership ancestry. A review of disbursements made from various bank accounts operated by these companies disclosed that no payments were made to any of the original vendors that the third parties claimed to represent.

In total, the main subject of this investigation received more than $.5 million in municipal government payments through fraudulent requests and representations. However, and more important, this investigation illuminated a heretofore under-estimated vehicle for commit-ting fraud.

DEFINING THE TERM

Typically, a government check carries a life limitation printed on the front warning that it will become void after a specified number of days. Banks should not honor or negotiate a check beyond the indicated period.

The issuing municipality has a department or bureau that accounts for issued checks. A subset to this accounting involves the maintenance of a stale-dated check registry of those checks not negotiated within their allowable life limitation. The issuance of a check in payment for provided goods or services does not eliminate a city’s liability. Jurisdictions recognize this and will reissue a payment upon the request of a vendor after deter-mining that the original check has not been negotiated and is included on the stale-dated check list. Many also honor requests for repayment to third-party collection agents acting on a vendor’s behalf.

 

This investigation
highlighted several
areas that can help
officials recognize
stale-dated
check fraud.

Mr. Sheehy, a retired FBI special agent and former investigator for the U.S. Attorney’s Office in Baltimore, Maryland, currently works as a consultant.

 

 
 
 
 
 
 
 

The investigation presented at the beginning of this article determined that many municipalities broadly interpret public information or open-government requests to include providing stale-dated check data. For a nominal fee, $25 to $60 encountered during this case, the city will provide detailed information or the entire stale-dated check list to any requester. Numerous jurisdictions even post their entire stale-dated check list on their municipal or department Web site. Usually, the provided information includes exactly what the municipality requires for reissued payments.

UNDERSTANDING THE PROBLEM

Although a number of lawful individuals and firms locate a vendor included on a stale-dated registry, negotiate a recovery fee with them, and make a collection on their behalf, less scrupulous people have found this situation ripe for fraud. After all, the stale-dated check list contains all of the required data needed to request a re-placement check. Therefore, it should come as no surprise that some have decided to forego locating and negotiating with the original vendor. Rather, they simply request a reissued payment check and provide a forged power of attorney form, which should satisfy most questions that might arise.

To date, victimized municipalities represent both city and county jurisdictions in states located on both coasts, as well as in the central plains. Because of its simplicity, this fraud could easily migrate to state and federal government entities.

Research has disclosed that every jurisdiction in the United States, regardless of size, has amassed countless stale-dated checks amounting, conservatively, to hundreds of millions of dollars. These checks are an accrued liability for a municipality until paid to the rightful vendor or until applicable law allows the jurisdiction to claim the funds through escheatage.

Another area of weakness in municipal accounting targeted for exploitation by these same individuals is that of foreclosure, specifically tax sales. Properties seized and sold by government auction at times will produce a surplus owed to the original debtor. As in the case of stale-dated checks, municipalities have been routinely providing listings of these accounts, and the third-party requesters have been submitting fraudulent powers of attorney seeking to recover these funds supposedly for the intended recipient.

Tips for Avoiding Stale-Dated Check Fraud · Request additional information from the third-party agent. · Limit the information provided on the stale-dated check lists. · Verify the recovery authorization. · Conduct independent research. · Impose additional requirements.

RECOGNIZING DISCREPANCIES

This investigation highlighted several areas that can help officials recognize stale-dated check fraud. Some prove easy to detect, whereas others require further examination.

Lack of Information

The letters and powers of attorney encountered in this investigation simply regurgitated the information supplied by the municipalities on their stale-dated check lists. The initial victim jurisdiction did not include the original vendor’s address on the registry; therefore, the letter and power of attorney form, drafted by the third party, likewise did not contain an address or any other contact information regarding the vendor it supposedly represented. The power of attorney contained only an authorizing signature, allegedly made by a responsible person within the business. The name and position were not included, and no contact address or telephone number appeared for the vendor or a representative on any of the documents.

Crude Appearance of Forms

The letters and power of attorney forms contained non-professional variations in the letterheads, such as commas and ampersands appearing in one document but not repeated on another. One of the subject firms encountered in this investigation did not have a business telephone or facsimile number in its letterhead. Instead, it listed a business contact telephone number in the body of the letter, and a quick check via the Internet disclosed it as a cellular phone.

Questionable Notary Public Certifications

Only half of the power of attorney forms contained notary public stamps. Some of these stamps were issued in states unlikely to house the headquarters of the original vendor; others carried expired commission dates.

Duplicate Forms

The letters and power of attorney forms from the supposedly separate and independent third-party collection agents en-countered in this investigation were identical. They all contained exactly the same wording and other characteristics.

Dubious Third-Party Agents

In this investigation, verification with the secretary of state’s office in the state from which one of the third-party companies operated determined that the firm was incorporated as a barber shop. Most of the other third-party agents were not legally incorporated in the state.

FINDING REMEDIES

Although this scheme may have netted the defendant in this case a small fortune, stale-dated check fraud is not a particularly troublesome area if encountered. Limitation, verification, and research should eliminate the possibility of it occurring. The author suggests five basic steps for municipalities to take to avoid falling prey to this problem.

1) Request additional information from the third-party agent: This can include the identity of and contact information for the corporations and individuals represented by the asset-recovery firm seeking to obtain stale-dated or other monetary listings.

It is far easier to be future fraud than it is to recover past losses.

2) Limit the information provided on the stale-dated check lists: By blocking the dollar amount of previously issued stale-dated checks, third-party agents could not determine the “choice” amounts to request for replacement. Too many “blanket” replacement requests from one third-party agent would readily raise suspicion. Jurisdictions should consider yearly publication of stale-dated vendor identities—by name only—in local newspapers. This should satisfy legal notice as to funds being held for others and open-government obligations as well.

3) Verify the recovery authorization: Because the municipality has the original vendor’s invoice, it should be easy to contact the business to determine the propriety of third-party representations.

4) Conduct independent research: At a minimum, municipalities should con-duct an annual audit review of the stale-dated check lists to identify those vendors with listed checks of significant value. Employing well-known search services can help locate most of the significant vendors. Jurisdictions then can send a verification letter to them regarding the non negotiated instrument.

5) Impose additional requirements: If the original, now stale-dated, check was made payable to an individual, the municipality could require the third-party agent to provide a copy of that person’s driver’s license prior to release of a reissued check. Jurisdictions also could consider mandating that reissued checks be mailed to the original company, rather than directly to the third-party requester. Finally, demanding that the third-party agent provide a copy of the original invoice should evidence that the vendor agrees with the third party’s actions.

 

Recommendations for Reducing the Potential for Fraud · Restrict access to stale-dated check and similar registries, including internal departmental employees. · Contact the state comptroller’s office or similar agency regarding state rules or codes governing release of financial information pertaining to unclaimed assets. · Correspond only with third-party collection agents who provide verifiable identifying documentation regarding a specific client. · Set up or add to an existing municipal Web site the ability to query by name (individual or company) only for unclaimed assets/funds. · On a yearly basis, have the names of individuals and businesses whose funds are held published in a newspaper with statewide circulation. · Consider conducting independent research to locate the legitimate owner of the funds. An A-B-C analysis conducted periodically will identify the limited number of owners of held property of significant value, and public search services can help locate their addresses for sending verification letters. · Establish a policy of mailing payment only to the original owner of the funds, thereby leaving third parties to make their own collections.

CONCLUSION

The window of opportunity existing to the felon, from when the payment is first rendered void until the funds either are paid to the rightful vendor or can lawfully revert to the jurisdiction, must be closed. It is far easier to bar future fraud than it is to recover past losses. Although this investigation resulted in the indictment and conviction of only one subject, it indicated that others apparently have engaged in similar fraudulent activity. Municipal accountants may well be able to locate additional, similarly maintained accounts that need greater protection.

This investigation could locate only one suspicious activity report involving $2,000 as having been previously filed, even after two municipalities and three different banks had become aware of the attempted fraud being conducted by the subject. Such lack of notice is exactly what these individuals count on. They also believe that should their illegal activity be discovered, it will be viewed as an isolated occurrence, and the full impact of their fraud will not be realized or appreciated.

Municipal accountants and auditors should review their financial systems and procedures with their legal departments, particularly as they pertain to public access to financial records and the re issuance of payments. Stale-dated check fraud can be stopped through vigilance and cooperative efforts.

Endnotes

1 A stale-dated check is a check officially issued by a municipality during the routine conduct of business that was not negotiated within the allowable life of the check.