Guest Author - Consuelo Herrera, CAMS, CFE
Bankruptcy fraud is one of the areas where forensic accountants find opportunities because many perpetrators incur in violations of the Bankruptcy Code. Some perpetrators frequently buy businesses, liquidate their assets and divert the proceeds to their personal use, and then, leave the businesses to sort out their dealings in a bankruptcy court.
A common bankruptcy scheme is called "bustout" which involves setting up a wholesale business at a temporary location, placing orders by telephone to legitimate businesses, taking delivery of merchandise shipped on credit, disposing of the goods received at below fair market value, and making no or only minimal payments for the goods received on credit. After operating at a given location for a short period, the "business" would abruptly close without notice, usually with a balance due on the defendants' rental or lease agreement. A new wholesale "business" under a different name, but operated by one or more of the perpetrators involved in the prior scheme, would then open at a different location. In order to facilitate their "bustout" scheme, credit references were necessary to induce suppliers to ship merchandise to the bogus businesses on credit. Usually the conspirators give false credit references for the businesses and make fraudulent assurances to creditors for the purpose of preventing collection efforts. Creating the illusion of reliable credit references is essential to the success of the sham operation.
Usually proceedings against those who have defeated the Code by fraudulent means include the following charges:
1) Making a false or fraudulent representation concerning a proceeding under title 11, after the filing of the petition, and after having devised, or intended to devise, a scheme or artifice to defraud, and for the purpose of executing or concealing such a scheme or artifice, in violation of 18 U.S.C. 157;
(2) Knowingly and fraudulently concealing and making false entries in recorded information, including books, documents, records, and papers, relating to the property or financial affairs of the Debtor, in violation of 18 U.S.C. 152.
The Section 152 of the Bankruptcy Code sets forth the most common violations that may be committed by anyone who attempts to defeat the purposes of the Bankruptcy Code by fraudulent means. Nine paragraphs prohibit the following activities:
1. The concealment of property belonging to the estate of a debtor;
2. The making of false oaths or accounts in relation to any case under Title 11;
3. The making of a false declaration, certificate, verification or statement under penalty of perjury as permitted under Section 1746 of Title 28 or in relation to any case under Title 11;
4. The making of false claims against the estate of a debtor;
5. The fraudulent receipt of property from a debtor;
6. Bribery and extortion in connection with a case under Title 11;
7. Transfer or concealment of property in contemplation of a case under Title 11;
8. The concealment or destruction of documents relating to the property or affairs of a debtor; and
9. The withholding of documents from the administrators of a case under Title 11.
Title 11, Bankruptcy, provides a list of definitions related to bankruptcy.Some of these definitions are:
The term ,“accountant” means accountant authorized under applicable law to practice public accounting, and includes professional accounting association, corporation, or partnership, if so authorized.
The term “assisted person” means any person whose debts consist primarily of consumer debts and the value of whose nonexempt property is less than $150,000.
The term “bankruptcy assistance” means any goods or services sold or otherwise provided to an assisted person with the express or implied purpose of providing information, advice, counsel, document preparation, or filing, or attendance at a creditors’ meeting or appearing in a case or proceeding on behalf of another or providing legal representation with respect to a case or proceeding under the Title 11.
The term “claim” means:
(A) Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured;
(B) Right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
Accountants and attorneys assisting with bankruptcy proceedings use software packages that help them streamline processes and ensure reasonableness of calculations. For example, when calculating the Current Monthly Income and Means Test for a Chapter 7, the information provided determines median income and the Internal Revenue Services allowances to a given debtor. To provide an accurate result fields such a s marital and filing statuses are required, the size of the household.
Being aware of fraud schemes related to bankruptcy and how they are perpetrated is crucial for the success of an investigation where a forensic accountant is involved.