Fraud Spotlight: Analyses of lesser-known frauds
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As the economy struggled on and on, the credit and collection manager at a large hospital system watched as the cash collected from written-off bad debt accounts nearly dried up. Just four years before, the health care system could rely on almost 10 percent recovery from delinquent accounts placed with an outside collection agency. Now, they were lucky to get 2 percent — that was a drop of more than $6 million a year! Had to be the economy, the hospital system managers decided. Patients just can’t pay during these difficult economic times. Trying to keep the home, utilities, car, kids and food just leaves nothing left for medical bills. The contracted collection service provider is a well-known and reputable company, and the hospital system bid out the contract to select the best service provider.
One day, the hospital business office receptionist paged the credit and collection manager to let him know that an officer from the FBI was in the office to see him. Agent Carlson explained that a two-year investigation of the contracted collection service provider revealed that more than $10 million was stolen from the company’s bank accounts. The owner and his son, the company’s president, had been moving money from a line of credit — propped up by false accounting statements — to the business and not remitting collections to their clients, including the hospital system. The courts have slapped them with charges of money laundering, bank fraud, wire fraud and conspiracy to commit wire fraud in a massive scheme to steal millions of dollars from their investors, lenders and clients.
Now it made sense. The owners were greedily siphoning money recovered from collection accounts and keeping it for themselves.
OXFORD COLLECTION AGENCY STOLE FROM CLIENTS
Although this opening case is fictional, it isn’t unlike the actual story of the executives at Oxford Collection Agency who bilked their clients for at least $10 million. The FBI and the U.S. Attorney for the District of Connecticut said that Richard Pinto and his son, Peter Pinto, pleaded guilty on May 11, 2012, to one count of conspiracy to commit wire fraud, bank fraud and money laundering and one count of wire fraud while operating the agency, also known as Oxford Management Services. Richard was Oxford’s board chairman, and Peter, the president and CEO, managed the company’s daily activities. The company is headquartered in Fort Pierce, Fla., with additional offices in Melville, N.Y., and Scranton, Penn.
On Jan. 30, District Judge Stefan R. Underhill sentenced Richard Pinto to 60 months of imprisonment, which will be followed by five years of supervised release.
The government indicted other executives. In December of 2012, the U.S. Department of Justice and FBI officials said that Randall Silver, Oxford’s vice president of finance, pleaded guilty to one count of conspiracy to commit wire fraud, bank fraud and money laundering, and one count of wire fraud. Charles Harris, executive vice president, and Chief Operating Officer Carlos Novelli each pleaded guilty to one count of conspiracy to commit wire fraud and bank bribery.
“These defendants carried out a significant fraud scheme through which they stole millions of dollars from their company’s clients, lenders, and investors,” said U.S. Attorney David B. Fein.
Beginning in April 2007, the Pintos secured a line of credit from Connecticut-based Webster Bank without disclosing to the lender about Oxford’s significant client backlogs or outstanding payroll taxes. The Pintos and others sent falsified financial statements to Webster Bank, eventually increased the credit line to $6 million and subsequently laundered funds from the credit line to promote the ongoing fraud scheme against their clients.
During that same period, the Pintos also solicited millions of dollars in investment capital from various investors without disclosing the existence of their backlog of unremitted client funds. Oxford collected debts on behalf of various clients in the bank card/credit card, telecom and consumer credit industries. The Pintos and others then diverted various funds from their client remittances and used them for their personal greedy gain.
The FBI; the Internal Revenue Service – Criminal Investigation; and the Connecticut Securities, Commodities, and Investor Fraud Task Force are investigating the case. Also, because Webster Bank received funds through the Troubled Asset Relief Program (TARP), the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) was involved in the investigation.
NATION AWASH IN CONSUMER DEBT
This case exemplifies the critical need for strict controls over outside vendors entrusted with cash handling for the business enterprise. But what could the credit manager have done to detect malfeasance, and even better, deter and prevent it all together? As Certified Fraud Examiners, we’ll learn much from studying this case.
Eliminating the use of collection service providers isn’t the answer. According to ACA International, the credit and collection industry’s professional association, accounts receivable management (ARM) companies provide a very valuable and necessary service to the creditors they serve. “Recovering rightfully owned consumer debt is essential to our nation’s economy,” according to the ACA’s website. “Businesses from Main Street to Wall Street rely on the repayment of credit to pay employees, utilities, taxes, insurance and other business expenses. Federal, state and local governments also rely on the repayment of billions of dollars in uncollected court fees, taxes and other delinquencies. Failure to recover this debt results in business closures, layoffs, higher prices, less available consumer credit and tax increases to close government budget gaps.”
The ACA reports that on the heels of the recent global financial meltdown, the U.S. is a nation awash in consumer debt. According to the U.S. Federal Reserve, in 2010 the total amount of consumer debt in the U.S. exceeded $2.45 trillion (with an average credit card debt per household of more than $16,007). In addition, at press time, the federal government deficit now tops a record $14 trillion just as most states and local governments struggle with budget crises. Based on a net of $44.6 billion recovered, third-party debt collection efforts represents $396 in savings on average per household by keeping the costs of goods and services lower, according to a February 2012 ACA-Ernst & Young study, “The Impact of Third-Party Debt Collection on the National and State Economies.”
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