Badges Of Fraud In Debt Collection, Divorce & Bankruptcy

Posted on August 27, 2007 by Fred Abrams
When financial transactions hide assets the subject of a debt collection, divorce, or bankruptcy case, the Court looks for badges of fraud.  As explained in Wall Street Associates v. Brodsky, 257 A.D.2d 526, 529 (1st Dept 1999), the badges of  fraud for fraudulent asset transfers are: 
  • A Close Relationship Between The Parties
  • A Transfer Outside The Ordinary Scope Of Business
  • Inadequate Consideration
  • Knowledge Of A Creditor’s Claim
  • Retention Of Control Of The Property
For example, in AMP Servs. Ltd. v. Walanpatrias Found. a.k.a. Doraw, 2006 slip op. 7985 ; 34 A.D.3d 231; 824 N.Y.S.2d 37 (1st Dept,  2006), the Appellate Division upheld an injunction against a debtor dodging a debt collection proceeding.  In applying New York Debtor and Creditor Law, the Appellate Division ruled that the debtor could not transfer a stock portfolio offshore to Europe because there were badges of fraud as mentioned by Wall Street Associates, 257 A.D.2d 526.


In another Appellate Division case, Dempster v. Overview Equities, Inc., 2004 slip op. 01149 ; 4 A.D.3d 495; 773 N.Y.S.2d 71 (2d Dept 2004), a divorcing husband transferred his residence to a Delaware corporation just before his valuation/equitable distribution hearing.  Since the Delaware corporation had filed for bankruptcy, the residence was eventually sold by the bankruptcy court as a corporate asset.  The husband in Dempster had also diminished his net worth by alleging he had a $1,473,362.74 debt because of two confessions of judgments from construction loans.


Since the the above transfer happened just two weeks before the valuation hearing, the Appellate Division found it "replete with badges of fraud".  The Appellate Division further stated that the Delaware corporation had been created only two days before the residence was transferred to it and that the corporation had operated from the very same address as the husband's other businesses.  According to the Appellate Division, the husband's residential transfer and construction loans also violated New York Debtor and Creditor Law because they had occurred without any monies ever being paid, (i.e. without "fair consideration").


In Allan J. Bentkofsky, Trustee v. Ralph J. Malandra, et. al., United States Bankruptcy Court, N.D.N.Y.,  Adv. Pro. No. 00-80221, the Court also found there were badges of fraud when a husband and wife transferred their residence to their children.  Despite the transfer, the husband and wife continued to live at the residence because they had retained a life estate interest.  Since the couple had filed a Chapter 7 bankruptcy petition, the Bankruptcy Court analyzed the residential transfer only to discover that it had occurred without any payment of money/was without "fair consideration".  The couple had also made the transfer at a time they had been insolvent.  Given these facts, the Court found there were badges of fraud and set aside the transfer as it violated New York Debtor and Creditor Law.


Finally, badges of fraud can sometimes be used in debt collection, divorce, or bankruptcy cases to demonstrate that an opposing party has hidden assets or removed property with "actual intent" to defraud.  Robert M. Morgenthau v. A.J. Travis Ltd., 708 N.Y.S.2d 827, 842 (N.Y. Sup. Ct. 2000); Wall Street Associates, 257 A.D.2d at 529.  The badges can also become important in court because a concurrence of several badges always makes a strong case for fraud. Gafco Inc. v. H.D.S. Mercantile, 47 Misc. 2d 661, 665 (N.Y. Civ. Ct. 1965).


Copyright 2007 Fred L. Abrams
Tags: , , ,

Trusts, Tax Fraud & Hidden Assets

Posted on August 19, 2007 by Fred Abrams
In its "Abusive Trust Tax Evasion Schemes - Facts", the Internal Revenue Service estimates that trusts will account for much of the $4.8 trillion to be inherited or transferred between the generations by 2015.  According to that same publication's Talking Points, trusts are now sometimes fraudulently used: 

  • To depreciate personal assets (such as a home);
  • To deduct personal expenses;
  • To split income over multiple entities, often filed in multiple locations;
  • To underreport income;
  • To avoid filing returns;
  • To wire income overseas and fail to report it; and
  • To attempt to protect transactions through bank secrecy laws in tax haven countries.


Insurance salesman Denny Patridge's June 30, 2005 conviction for tax evasion, wire fraud, and money laundering, is one example of how trusts can be used to hide assets and commit tax fraud.  At page four of its Enforcement Results, the Department of Justice's Tax Division mentions that Patridge was fined $100,000 and sentenced to sixty months because he had used: a trust to conceal assets; a false lien on his home; nominee bank accounts; and offshore accounts in Belize and Antigua.


Unlike Mr. Patridge's scheme, some abusive trusts are entirely based on domestic financial transactions.  Such was the case of Marvin Swanson, sued in February 2004, by  the U.S. Justice Department for offering asset protection/tax evasion services.  According to the November 15, 2006 permanent injunction issued pursuant to 26 U.S.C. § 7402 against him, Mr. Swanson had sold phony trusts called "unincorporated business trust organizations" through his manual and website.  As the November 15, 2006 injunction explains, Mr. Swanson had established corporations in Nevada in order to provide his clients with anonymity and hide their assets from the Internal Revenue Service.
  

The January 11, 2007, Complaint for an injunction against Victor Carlysle Sullivan alleges that Mr. Sullivan as a CPA had an asset protection service that hid monies first through a domestic trust known as the Tuxedo Trust and then in two offshore trusts called Blackshear and Bulldog.  Also according to the Complaint, Mr. Sullivan had cost the U.S. Government an estimated $5 - $10 million by underreporting the taxes of at least 53 of his clients in his sham-trust scheme started in 1998.  On March 22, 2007, Mr. Sullivan did however agree to his Stipulated Permanent Injunction, which bars further illegal conduct and essentially obligated him to provide the Government with his client list for the past ten years.   


Given all of the above, the Internal Revenue Service has ranked trust misuse as eighth in its 2007 Top Dirty Dozen Tax Scams.  To educate the public about abusive trusts, It also published "Should Your Financial Portfolio Include Too Good To Be True Trusts?".  Furthermore, when the medical community was  targeted by asset protection service providers, the Internal Revenue Service published a February 2002 bulletin to especially address the issue.  Fraudulent trusts however, are not just limited to tax evasion as they can also play a role in schemes to hide assets during a divorce, bankruptcy, debt collection proceeding, etc.


Copyright 2007 Fred L. Abrams
Tags: ,

Army Major Arrested For Money Laundering

Posted on August 12, 2007 by Fred Abrams
 
According to the Washington Post, U.S. Army Major John Cockerham, his sister, and wife were all recently arrested for hiding the proceeds of the largest bribery case in Iraq by money laundering.  As the Washington Post further mentioned, Major Cockerham allegedly received $9.6 million in bribe money, (and was awaiting another 5.4 million), for giving favorable contracts to military contractors.  The Washington Post also reported the following allegations: (1) that  Major Cockerham's wife had admitted that she had deposited $800,000 of the bribe money into a Kuwaiti bank; (2) that a company known as TransOrient had, (through the persons of Mr. Ajmal and Mr. Ismail of Detroit), deposited $300,000 into a Jordanian bank as bribe money;  (3) and that investigators had in December 2006 found ledgers relevant to the bribery scheme which implicated Major Cockerham, his sister, and wife.

Based on information in the complaint and Special Agent's affidavit from the criminal prosecution, Major Cockerham and his wife each face up to twenty years and a $500,000 fine if convicted of money laundering pursuant to 18 U.S.C. §1956 (h).  The conspiracy and fraud charge, (pursuant to 18 U.S.C. § 371), is additionally punishable by  a maximum of up to five years and a fine of $250,000.  The 18 U.S.C. § 201 bribery charge against Major Cockerham also carries a penalty of up to fifteen years and a fine of $250,000.


The Special Agent's affidavit also claims that in December 2006, both Major Cockerham and his wife admitted that Mrs. Cockerham had deposited over $1 million of the bribe money in safe deposit boxes in Kuwait and Dubai.  Furthermore, the scheme to hide assets allegedly included the following shell companies: Worldwide Trading Co.; D & J Trading; Abdullah American Trading; and Triad United.  Offshore bank accounts were also allegedly established at: Abu Dhabi Commercial Bank, the Commercial Bank of Kuwait, Union National Bank in Dubai, the Sharjah Islamic Bank, and the now defunct First Curacao International Bank, N.V.  According to that same special agent, seized documents demonstrated that Major Cockerham had even opened offshore bank accounts in the Cayman Islands at Butterfield Bank (Cayman) Ltd. and the First Caribbean International Bank (Cayman) Ltd.


Assuming for the limited purposes of this blog post that all of the above is true, we can understand how the government reached its conclusion that Major Cockerham was hiding assets in a money laundering circuit.  For example, although the Cayman Islands amended anti-money laundering laws on June 1, 2007, it remains committed to a tradition of bank secrecy laws.  Major Cockerham's bank accounts in the Cayman Islands, (along with the offshore bank accounts or safe deposit boxes in Jordan, Kuwait, Dubai, Abu Dhabi, and the Dutch Antilles), suggest he was hiding assets.  His use of: offshore bank accounts; safe deposit boxes; shell corporations; and nominees like his wife would further suggest the existence of laundering links part of a money laundering circuit.  By using laundering links to make financial transfers, Major Cockerham could have easily concealed his true beneficial ownership of any bribe money.  The above criminal complaint however is not evidence of Major Cockerham's guilt; so we must therefore still presume that Major Cockerham, his wife, and any others arrested are innocent.


Copyright 2007 Fred L. Abrams
Tags: , ,

Hidden Assets & Insurance Fraud

Posted on August 2, 2007 by Fred Abrams
To avoid detection, those who commit insurance fraud typically hide assets.  In August 2001 for instance, a father and son in Florida were charged with money laundering after fraudulently billing over forty health and insurance auto companies more than $1million dollars.  As part of their scheme, monies paid by insurance companies for blood tests were converted to cash via a Florida Bank of America account. This account had been opened in the name of a phony Miami medical laboratory (Biolab Clinical Inc.), which was actually just a rented mailbox.

More recently, a Westchester New York dentist and his wife were arrested for money laundering in connection with a $2.8 million Medicaid fraud.  The N.Y.S. Attorney General's July 30, 2007 press release claimed that the two had submitted fraudulent Medicaid bills for dental cleanings, x-rays, and oral surgeries, and then made ".... financial transactions and fil[ed] false financial disclosure statements in an effort to hide assets from the courts."  According to the Attorney General, there was also an attempt to use the name of  the couple's 18 year old son on an account at a foreign based bank with $828,817 deposited in it.


Because assets can be hidden in a wide variety of ways during an insurance fraud, I asked Stan Tice for a briefing.  Stan consults with the insurance industry about detecting and investigating insurance fraud through his New York  based  private investigation  firm.  Furthermore, he had: lectured annually about insurance fraud at New York's College of Insurance, served as a deputy director of the Insurance Frauds Bureau for New York's Insurance Department, and had even worked for New Jersey's Insurance Department where he was the founding director of its former Insurance Frauds Prevention Division.


During my briefing, Stan mentioned how one policyholder had hidden his collection of Hummel & Lladr? figurines and then filed a property/casualty insurance claim for them, alleging a loss in the  hundreds of thousands.  According to the policyholder, debris from the figurines demonstrated that they had been accidentally destroyed.  Stan however submitted these remains to a forensic lab for testing-- only to discover that they could not have originated from the policyholder's figurine collection.  Because of Stan's efforts, the policyholder was eventually criminally prosecuted for fraud and attempted grand larceny.


Given the fact that the insurance industry's National Insurance Crime Bureau advises that 10% or more of all property/casualty claims are fraudulent, I wanted Stan's opinion.  Stan then advised that since the above statistic was limited to just property/casualty claims, that the actual number of all fraudulent claims was likely astronomical.  This of course means that our insurance premiums are not going to be reduced any time soon.


Copyright 2007 Fred L. Abrams
Tags: , ,