We love a good case history. We read cases to note the fascinating machinations of devious fraudsters. But we study cases to discover the ways the fraud examiner caught the crook and learned lessons. This new column dissects case histories for the benefits of our readers. Send your case for possible publication to: fraudmagazine@ACFE.com.
Ajax Motors was having cash-flow problems. The vehicle dealership had lost money after three damaging hurricanes. And fewer potential customers were walking through the doors because a two-year road construction project had limited access. However, Ajax's owner, Milt, wanted to continue his lavish lifestyle that included an offshore racing boat. The dealership needed cash fast.
Milt told the dealership's general manager and controller to try to deceive the local bank into lending them cash to buy used cars they had already sold. And the scheme worked for awhile. But finally a bank employee found some problems with a vehicle title, and the dealerships execs were caught. Eventually, the owner, the general manager, and the comptroller were either sent to prison or given home detention for defrauding the bank of $2.4 million. (All names in this column have been changed.)
I'm a special agent for the Florida Department of Law Enforcement. FBI Special Agent Dan Kelly, CPA, and I were called in to investigate this case. We found that the fraudsters had stolen from the bank through a scheme that exploited a weakness in a traditional "floor-plan" deal with the bank.
Such a deal enables a dealership to purchase new and used vehicles through a short-term, revolving-credit loan agreement with a bank. The dealership and the bank agree on a dollar amount based on the dealership's credit worthiness, history, longevity, and size of inventory, among other factors.
This high-dollar deal only endures because the dealership and the bank trust each other. However, as we know, fraud possibilities grow in equal proportion to the amount of necessary trust.