1-Answer the initial question (About 180 words)
Initial Question:
-Read theShell Gamesarticle from Fraud Magazine. Find a unique example of a fraud using a shell company. Discuss how the fraud could have been prevented or discovered based on the information included in the article.
2-Reply to 4 student posts
No minimum amount of words. Just quality response. (About 80 words each) Please refer to the rubrics.
APA reference.
Module 2 Discussion 1-Answer the initial question (About 180 words) Initial Question: -Read the Shell Games article from Fraud Magazine. Find a unique example of a fraud using a shell company. Discuss how the fraud could have been prevented or discovered based on the information included in the article. 2-Reply to 4 student posts No minimum amount of words. Just quality response. (About 80 words each) Please refer to the rubrics. APA reference. Student posts: See page 2 (one per page so you can answer following) 1- Mod 2 DP Dayana Alvarez posted Mar 11, 2019 11:38 PM Shell companies are “fictitious entities created for the sole purpose of committing fraud” (Wells, 2013). These companies are used by criminals to “launder money, evade taxes and perpetuate all manner of fraud” (Hubbs, 2014). In the Chuy Construction case, Leon “Chuy” Jimenez owner of Chuy Construction Inc. was arrested after a fraud investigation revealed that the construction company was a shell company with no direct or significant business operations. The company as used “as a vehicle to conduct fraudulent financial scams such as worker’s compensation fraud” (Insurance Journal, 2017). The investigation for Jimenez’ construction company began after the Department of Financial Services’ Bureau of Insurance Fraud received a tip from the Florida Carpenter’s Union claiming that Jimenez may be involved in illegal activity with his company. The investigation revealed that Jimenez provided false information of the worker’s compensation application which said that the company “employed 50 people who performed drywall and other basic construction services across Central Florida” (Insurance Journal, 2017). The investigation further revealed that between August 2014 and May 2015, Chuy Construction’s insurance company was defrauded of more than $160,000 and more than $2 million in payroll was cashed by at least 140 employees (Insurance Journal, 2017). Insurance fraud is somewhat difficult to prevent, and in many cases, the perpetrators won’t get caught until they’ve done enough damaged. In order to try to minimize the insurance-related frauds, I believe insurance companies such as worker’s compensation insurance companies should investigate every incident before issuing payment. Insurance agencies should ensure that the employee involved in the incident is, in fact, a real person and not a ghost employee and verify all the information before approving treatment of payment. Another way this type of fraud could be prevented is with the use of worker’s compensation approved doctors and clinics. By doing this, it creates another layer of support and indirect investigation to the related incident which could have prevented or detected the fraud faster. References: Florida Man Arrested for Running Shell Company Workers’ Comp Scam. (2017). Insurance Journal. Retrieved from https://www.insurancejournal.com/news/southeast/2017/06/05/453409.htm Wells, J. T. (2014). Principles of Fraud Examination (4th ed.), Hoboken, NJ: John Wiley & Sons, Inc. 2- The Panama Papers Maurice Naylon posted Mar 11, 2019 8:27 PM According to the text, a shell company is “A fictitious entity created for the sole purpose of committing fraud” (Wells, 2013, p. 117). As a novice in the world of fraud examination, I have always viewed shell companies in terms of Grisham-esque legal dramas and Caribbean tax havens. However, as the assigned article from Fraud Magazine illustrates, “Shell companies aren't just for big tax evaders anymore,” rather, “they're the financial and deception vehicle of choice for some of the most corrupt, dangerous and ruthless individuals and entities in the world” (Hubbs, 2014, p. 1). Specifically, in a fraud involving a shell company, “the primary purpose is like any other basic fraud scheme: to conceal. This may include the nature, origin, or destination of misappropriated funds and/or concealment of the true owners and decision-makers of a criminal act or conspiracy” (Hubbs, 2014, p. 2). This begs the question: if the purpose of this type of fraud is to conceal some nefarious activity, what is the best way to combat this concealment and bring light to shady activities? The Panama Papers case, involving the leaked documents from Panamanian law firm Mossack Fonseca, provides interesting insight to the above question. Specifically, this law firm spent decades helping to form shell companies for an international clientele of the world’s wealthy and powerful, a fact that came to light following the release of millions of documents to a consortium of journalists, documents that would come to be called the Panama Papers. In the United States, two of the first four individuals to actually face charges for the events surrounding the Mossack Fonseca shell companies were Ramses Owens and Dirk Brauer. According to Bloomberg, these two individuals spent nearly two decades helping “U.S. taxpayer clients of Mossack Fonseca conceal assets, investments and the income generated from them, through offshore trusts and undeclared bank accounts, using “sham” foundations to own the shell companies and conceal the identities of the wealthy clients” (Berthelsen et al, 2018). It’s counterfactual now, but it’s unlikely that these crimes would have been uncovered without the release of the Panama Papers. However, as the assigned case study suggests, one technique that likely could have uncovered at least some of the shell companies fraudulently established by Owens and Brauer via Mossack Fonseca would be evaluating the online presence of these shells, as “shell incorporators have a hard time faking an active and robust online presence because these companies technically don't exist” (Hubbs, 2014, p. 4). The lesson: scrutiny and due diligence require both regulators and other stakeholders to go beyond simply reviewing documents of incorporation – even a cursory review of some of the Mossack Fonseca-related shells’ websites (or lack thereof) should have raised red flags well before the release of the Panama Papers. References Berthelsen, C. and Voreacos, D. (2018). US accuses four of fraud in first Panama papers charges. Bloomberg. Accessed 11 March 2019 at https://www.bloomberg.com/news/articles/2018-12-04/u-s-charges-four-with-fraud-in-relation-to-panama-papers-probe. Hubbs, R. (2014). Shell games. Fraud magazine. Accessed 11 March 2019 at https://saintleo.brightspace.com/content/enforced/60960-co_ACC-505-MBOL1-2019SP2/ACC505_CaseStudy_Mod2.pdf?_&d2lSessionVal=kDbnO5zueLEuTE6FPTrHmHXwU. Wells, Joseph T. Principles of Fraud Examination, 4th Edition. Wiley, 2013-10-14. VitalBook file. 3- CityTime When it comes to fraud, the types of cases I am most interested in are the ones that involve collusion committed against a large organization, because I am always left with the question of how something could occur for any length of time and usually with a large economic loss. An example of such occurrence happened between 2003 to 2010 in New York City. New York’s CityTime project for payroll utilized the contractor company, Scientific Applications International Corporation (SAIC). What led to a tip of the contractor slowing down a project turned into an investigation that uncovered shell companies, collusion, and theft of over $500 million. There were eight convictions handed down in this case. One individual who was involved in the conspiracy was Mark Mazer. He used his authority in managing the project to keep amending the CityTime project and additional consultants would be hired where he would receive kickbacks in return. He also reported fraudulent hours worked by contractors. “In order to conceal the kickbacks, Mazer used a group of “shell” companies controlled by his family and friends to engage in hundreds of financial transactions to distribute the proceeds of the fraud,” (Peters, M., 2014, p. 3). Mazer and his accomplices laundered the kickbacks through companies ran in India and then funds would be transferred to a shell company in the United States. Money was also laundered through shell company accounts that would wire funds abroad and into other entities. “Several of the shell companies that were third-tier subcontractors on the project were directly associated with Mazer’s relatives, including his mother, wife and uncle, but because no vetting of subcontractors occurred there was no mechanism for detecting this,” (Peters, M., 2014, p. 6). This fraud could have been detected quickly if the account was controlled early on by a project manager with the skillset to handle a project of this magnitude. CityTime’s original budget was approximately $63 million and through inflated rates, falsified records, and coconspirators, costs soared. With better management of the costs of the project, steps could have been taken early on to research and discover why the project was over budget. Better screening of contractors into their background and parties involved could ensure quality contractors will be completing the work. A set contract and budget should never be amended without more than one party involved in the approval process. Internal controls to monitor the charges could catch things such as falsified time or over billing. The investigation into this case revealed many operational weaknesses within the city’s projects with a serious lesson to be learned with regard to adequate governance of large-scale projects. References: Department of Justice. (28 April 2014). Three Leaders Of Citytime Fraud Scheme Each Sentenced In Manhattan Federal Court To 20 Years In Prison: Defendants Must Also Forfeit More Than $40 Million In Crime Proceeds. Retrieved 11 March 2019 from https://www.justice.gov/usao-sdny/pr/three-leaders-citytime-fraud-scheme-each-sentenced-manhattan-federal-court-20-years. Peters, M. (25 July 2014). DOI ISSUES REPORT FROM ITS CITYTIME INVESTIGATION ON LESSONS LEARNED AND RECOMMENDATIONS TO IMPROVE MANAGEMENT OF LARGE INFORMATION TECHNOLOGY CONTRACTS. Retrieved 11 March 2019 from https://www1.nyc.gov/assets/doi/press-releases/2014/jul/pr13citytime_72514.pdf. 4- SRJ Enterprises Felicia Smith posted Mar 12, 2019 11:01 AM Subscribe The example of fraud regarding a shell company that I found was located in the Journal of Accountancy’s database, called “Billing Schemes, Part 1: Shell Companies that Don’t Deliver”. This article was written by Joseph T. Wells, who also wrote our textbook. This article highlights the case of a man named Stanley who worked at an advertising firm. Stanley and his girlfriend (who worked in the accounting department) came up with a plan to deceive the advertising company that they worked for by setting up a shell company, SRJ Enterprises. They set up this fake business so that “if he submitted phony invoices to the company they worked for, she could get them approved and paid” (Wells, 2002, para.6). They would then take the money that they received from the advertising firm and put it into a local bank. The couple successfully managed to embezzle $700,000 from this company before Stanley’s wife tipped off the internal auditor for the advertising company. Part of the reason that their scheme worked so well is that the girlfriend knew that the company did not investigate invoices that were under $5,000 so they would bill the invoice for just under this amount; then she would stick the invoice for SRJ Enterprises in a batch with other invoices that needed to be paid. After reviewing the books, the auditor was able to determine that the couple was indeed stealing from the business, however, because they were first-time offenders, they only received probation for their crime. There are some ways that this fraud could have been discovered beforehand. For instances, if the invoices lacked enough evidence to support the billing it should have been a red flag. Additional red flags include if more than one invoice came in