Malcolm Rivera
Fraud is an act of intentional deceit, designed to financially reward the perpetrator or deny the rights of the victim. It involves falsification, misrepresentation, or concealment of facts, and often targets businesses and individuals alike. Fraud can take many forms, including identity theft, false insurance claims, and securities fraud. To understand which scenario is most likely to constitute fraud, we must consider the elements of intentional deceit, misrepresentation, and concealment of crucial information.
| Characteristics | Values |
|---|---|
| Definition | An act of deception that is intended for personal gain or to damage another individual |
| Entities Involved | A person or institution |
| Targets | Individuals, businesses, insurance companies, banks, investors, organisations, customers, vendors, etc. |
| Types | Identity theft, phishing scams, advance-fee schemes, Ponzi schemes, tax evasion, lying to investors, bribery, theft of intellectual property, false insurance claims, cooking the books, pump-and-dump schemes, securities fraud, mortgage fraud, etc. |
| Federal Fraud and Abuse Laws | False Claims Act (FCA), Anti-Kickback Statute (AKS), Physician Self-Referral Law (Stark law), Exclusion Authorities, Civil Monetary Penalties Law (CMPL) |
| Fraud Risk | A significant risk |
| Fraud Triangle | Unshareable financial need, perceived opportunity, and rationalization |
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What You'll Learn
Concealing toxic waste issues on real property
Fraud occurs when an individual or institution intentionally deceives others for financial or personal gain. It involves deceit, falsification, and withholding information with the intention to illegally or unethically gain at the expense of another.
In the United States, there are several federal fraud and abuse laws that apply to environmental crimes, including the Clean Water Act, the Toxic Substances Control Act, and the Act to Prevent Pollution from Ships (APPS). These laws are enforced by government agencies such as the Department of Justice, the Environmental Protection Agency (EPA), and the Department of Health and Human Services Office of Inspector General (OIG).
Violators of these environmental laws can face criminal penalties, civil fines, and imprisonment. For instance, in a case involving the mishandling of PCB-contaminated used oil, the responsible parties pleaded guilty to various charges, including Toxic Substances Control Act violations and tax-related charges. As a result, they were sentenced to incarceration, tax payments, and restitution for clean-up costs associated with the environmental contamination.
To avoid being a victim of fraud in real estate transactions, it is essential to conduct due diligence and consult with legal professionals. A qualified attorney can guide individuals through the process and ensure that all necessary environmental disclosures are made. By acting promptly when misled by a seller, individuals can increase their chances of proving their case and seeking appropriate remedies.
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Identity theft
There are various ways in which identity theft can occur. For example, criminals may engage in "shoulder surfing" in public places, watching from a nearby location as someone enters their telephone calling card number or credit card number. They may also listen in on conversations if sensitive information is shared over the phone. Additionally, criminals may retrieve discarded "pre-approved" credit card applications from the trash and attempt to activate the cards without the individual's knowledge. Intercepting mail delivered to unsecured locations is another tactic used by identity thieves.
To protect oneself from identity theft, it is important to be vigilant and safeguard personal information. This includes collecting mail regularly, placing a hold on mail during vacations, and ensuring its secure delivery. Individuals should also be cautious when sharing personal information online, such as on social media, quizzes, or surveys. It is recommended not to carry sensitive documents like Social Security cards in wallets and to store them securely instead. Regularly reviewing credit card and bank account statements can help identify any unauthorized or suspicious transactions.
In the event of identity theft, it is crucial to take immediate action. Contact the fraud departments of the affected companies and request to close or freeze the compromised accounts. Change logins, passwords, and PINs for all accounts. Place a fraud alert by contacting one of the three major credit reporting agencies: Equifax, Experian, and TransUnion. Review credit reports for any unrecognized accounts or transactions to facilitate reporting the theft to the relevant authorities, such as the FTC and the police.
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False insurance claims
There are two recognized categories of insurance fraud: hard fraud and soft fraud. Hard fraud occurs when a policyholder deliberately destroys property or stages an accident with the intention of claiming on their insurance policy. Soft fraud, which is more common, occurs when a policyholder exaggerates an otherwise legitimate claim or lies or omits information on an application to obtain a lower premium. Soft fraud is often considered a crime of opportunity.
Some examples of hard insurance fraud include:
- Submitting a claim for an accident that never occurred, such as purposely causing a collision or staging a crash.
- Deliberately destroying property and then claiming on the insurance policy, such as by filing a false claim for a damaged TV during a lightning storm.
- Adding coverage to an insurance policy retroactively and then submitting a claim for damages that occurred before the coverage was in place.
Examples of soft insurance fraud include:
- Exaggerating a legitimate claim, such as including items that were not stolen in a home burglary claim.
- Omitting or lying about information on an insurance application, such as misrepresenting the primary use or location of a vehicle.
- Providing a false or inflated repair estimate from a non-existent business to support an automobile insurance claim.
Insurance fraud can also occur on the part of insurance companies and agents. Illegitimate insurance companies and dishonest agents may defraud consumers by collecting premiums for bogus policies with no intention or ability to pay claims. These companies often offer policies at significantly lower prices to attract consumers looking for a bargain. In some cases, legitimate insurance agents may be misled by these fraudulent companies and unknowingly sell bogus policies.
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Lying to investors
Securities fraud can take many forms, including high-yield investment fraud, Ponzi schemes, pyramid schemes, and late-day trading. In a Ponzi scheme, for example, new investors' money is used to pay returns to earlier investors, rather than through legitimate investment activities. This type of scheme relies on continuously recruiting new victims to sustain the fraud. Another common form of securities fraud is the pump-and-dump scheme, where fraudsters spread false or misleading positive statements about a stock to drive up its price before selling off their holdings and causing the price to plummet.
The impact of securities fraud can be significant, resulting in unfair monetary losses for investors and substantial profits for the deceivers. It is a violation of securities laws and can lead to criminal charges, fines, and jail time for those who are caught. Victims of fraud can pursue civil cases to recover their losses or reestablish their rights if criminal proceedings do not occur.
To prevent falling victim to securities fraud, investors should be cautious when presented with investment opportunities. They should research investments and investment firms, ask for information in writing, and avoid making rushed decisions. It is important to be wary of pushy salespeople and to verify any claims or information provided.
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False financial reporting
Overstating Revenue
This occurs when a company claims money as received before the goods or services have been delivered, or by prematurely recording future expected sales or uncertain sales. This creates a false picture of fiscal health that may inflate the company's share price.
Fictitious Revenue and Sales
This involves claiming the sale of goods or services that did not occur, such as double-counting sales, creating phantom customers, or altering legitimate invoices.
Cookie-Jar Accounting
In this practice, firms understate revenues in one accounting period and maintain them as reserves for future periods with worse performance, to temper the appearance of volatility.
Inflating Asset's Net Worth
A company may overstate its assets by failing to apply an appropriate depreciation schedule or valuation reserve, such as inventory reserves.
Falsifying Expenses
A company may not fully record its expenses, which exaggerates its net income and understates costs, creating a false impression of profitability.
Misappropriations
This involves altering financial statements to mask theft or embezzlement through double-entry bookkeeping or the inclusion of fake expenses.
Timing Differences
This involves understating revenue in one accounting period by creating reserves that can be claimed in future, less robust periods.
Reversing False Sales
False sales are posted at the end of a reporting period, and then reversed at the start of the next period to conceal the deceit.
Internal Controls and Management Override
Fraudulent financial reporting often involves management override of controls, where management directs employees to perpetrate fraud or solicits their help. Management is frequently in a position to manipulate accounting records and present fraudulent financial information.
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