Bankruptcy Fraud as White-Collar Crime - Case Study Example

Bankruptcy Fraud Introduction The bankruptcy system is intended to offer a company or an individual an opportunity toreorganize/change their affairs, or if change is not likely, then to equitably dispense the non-exempt resources of the debtor amongst the creditors (Cohen and Clough 1). This is normally called “a fresh start” (United States Trustee 4). The sum of money a creditor will get in a case will vary from nothing in numerous cases to 100% in only a few scenarios. In each case, there will be considerable hindrances from the period a bankruptcy plead is filed till the matter is closed plus all creditors get their final payment (US Attorneys 1). Bankruptcy fraud refers to a white-collar crime (Cohen and Clough 1). While it is hard to simplify across jurisdictions, common criminal statutes under bankruptcy acts normally involve destruction or concealment of documents, concealment of assets, conflicts of interest, false declarations or statements, fraudulent claims, as well as the fee redistribution or fixing arrangements (Cohen and Clough 1). Falsifications on bankruptcy documents frequently constitute lying under oath (United States Trustee 6). Numerous filings are not of and in themselves criminal, but they might defy provisions of bankruptcy statutes. In the United States, bankruptcy fraud laws are mainly centered on the mental state of specific actions. In the United States, the endeavor is considered as a federal crime. Researchers argue that bankruptcy fraud must be set apart from strategic bankruptcy, which works against the filer and not a criminal act (Cohen and Clough 1). This paper will discuss this endeavor (bankruptcy fraud) by presenting the rules and regulations that are against it, and also some few real life cases of the act. Literature Review There are basically three methods of perpetrating a bankruptcy fraud as discussed in the introduction bit: concealment of assets, petition mills and multiple filings. The amount of cases increases in line with the amount of bankruptcy filings every year. Court convictions for this offense result roughly to a fine of up to 250,000 USD or even up to 6 years in prison (United States Trustee 23). At times, a culprit is given both the fine and the prison term. Concealment (covering up) of assets is the most widespread form of bankruptcy fraud (Cohen and Clough 1). This form takes place when the debtor conceals his or her assets through the declaration period of the bankruptcy procedure, all in an effort to stop them from being cleared up (United States Trustee 23). Multiple filing happens when debtors only file for bankruptcy in over one state and finally a petition mill is a spiteful form of bankruptcy fraud (Cohen and Clough 1). Unlike the first two, the fraud is not done by a third party (US Attorneys 1). The U.S. bankruptcy system is rooted in the notion that a debtor will allow full disclosure of all liabilities and assets so that a disposition is in line with what the law necessitates. Unfortunately enough, sometimes, both creditors and debtors attempt to acquire more than they are permitted to by the Bankruptcy Code (US Attorneys 1). There are numerous criminal statutes, which prohibit this form of conduct (United States Trustee 23). Even though, making false statements or concealing assets in a bankruptcy proceeding from the majority of bankruptcy frauds, there are many fraud schemes, which are more complex or are mainly planned for reasons other than exploiting the maintenance of assets/funds in bankruptcy (Cohen and Clough 1). Such schemes frequently apply the automatic stay granted by the Bankruptcy Code to cover up a previous crime, capitalize on profit from a current fraud scheme or buy time as the perpetrator looks from a way to leave town avoid or victims (US Attorneys 1). The future implications of leaving out some assets from schedules can be rather severe for the criminal debtor (Cohen and Clough 1). In the U.S., a closed bankruptcy might be revived by the U.S. trustee or motion of a creditor only if a debtor tries, in the future, to claim possession of such an "impromptu asset" in the bankruptcy just after being set free of all debt. The U.S. trustee might then seize them, as well as liquidate them, for the profit of the (previously discharged) creditors (US Attorneys 1). Whether a cover up of such an asset should or should not also be deemed for prosecution as perjury and/or fraud would then be at the choice of the U.S. Trustee and/or a judge (United States Trustee 26). The provisions regarding bankruptcy fraud were passed to protect sincere administration in bankruptcy proceedings and to guarantee the allocation to creditors of as huge a bit of the bankrupts party as feasible (Cohen and Clough 1). These criminal provisions can be found in United States Code, §§ 152 to 157, Title 18. These provisions can be applied to any proceeding, plan or arrangement under the Title 11Bankruptcy Code, of the United States Code (United States Trustee 23). Even though, a majority of the criminal law principles are the same, since the national bankruptcy laws were considerably amended in 1978, some previous bankruptcy fraud parts or cases of cases might no longer be excellent law when read in line with the present Bankruptcy Code. On 22nd October, 1994 the Bankruptcy Reform Law made changes to 18 U.S.C. §§ from 152 to 155 and brought in section 156, as well as section 157. Now, the references to Section 152 specify the paragraph numbering, but prior to that amend, the paragraphs were not numbered (Cohen and Clough 1). The previous sections go on to apply to crimes conducted prior to 22nd October, 1994 -- the date that the Bankruptcy Reform Law started to be used. The fresh provisions pertain to all crimes that were committed after the commencing date (United States Trustee 23). Amends to the bankruptcy act have lead to a considerable rise in the volume of bankruptcy fraud proceedings for cover up of assets (US Attorneys 1). In today’s new law, the debtor is not allowed to file for bankruptcy in Chapter 7 if their disposable monthly revenue is higher than 183.50 USD (Cohen and Clough 1). However, the debtor is allowed to file for bankruptcy in Chapter 13. Furthermore, in Chapter 7 bankruptcy, all debts are pardoned, whereas in Chapter 13 bankruptcy, the debtor is forced to make monthly imbursement toward a part of his or her debt for roughly three to six years. Once that phase is done, the debtor is freed from bankruptcy (United States Trustee 24). The bankruptcy, however, remains on the credit file for a decade from the time of discharge. Thus, so as to avoid Chapter 13, debtors try to under report their revenue for the past six months (Cohen and Clough 1). They raise their operating costs to lessen the sum of disposable revenue reported. These attempts both fall under cover up of assets and are deemed as bankruptcy fraud. Rules and Regulations Trustees of bankruptcy consider fraud very critically. If the trustee suspects any case of fraud, what his or she will do relies on the particular facts of matter, the form of fraud being done and who is assumed to have done the fraud (Cohen and Clough 1). If someone suspects fraud in line with Chapter 11 bankruptcy proceedings, then they consider looking for the immediate selection of a trustee (United States Trustee 45). This trustee dislodges the management, which forced the debtor to his or her financial mess and is vested with broad powers and rights to supervise the debtor’s financial dealings (US Attorneys 1). It is suitable to look for appointment of a trustee if an individual suspects that any group that controls the debtor was deceitful in handling the debtor or preparing the financial reporting of the debtor (Cohen and Clough 1). The appointment of a trustee is regarded as an extraordinary remedy, necessitating a revealing of fraud, incompetence, dishonesty or gross misconduct either ahead of or after filing the bankruptcy. If the case is dire, and the individual believes a debtor is trying to quickly transfer or conceal assets, then it is legal to seek the direct appointment of a temporary “gap” trustee (United States Trustee 45). Any group in interest can ask for the appointment of an examiner or trustee at any time before verification in a Chapter 11 situation (US Attorneys 1). On action by a concerned group or the trustee, as well as after notice and a court hearing, the court will then order the incorporation of a case trustee (Cohen and Clough 1). If a debtor does not succeed in filing the necessary financial documents with the bankruptcy court, as is normally the case when entities or individuals inappropriately use the bankruptcy procedure as a guard, then it might become vital for a group, counting any creditor, to force the debtor to obey the Bankruptcy Code’s filing principles by filling a court motion. More motions planned to speed up the debtor’s fulfillment with Section 704 of the U.S. Bankruptcy Code, which underlines the debtor’s obligations and duties to provide information, might be required, as well (Cohen and Clough 1). For instance, Bankruptcy Rule 2004 permits any concerned group to take a legal analysis—such as a deposition—of any entity or individual on condition that the analysis pertains to the property, liabilities or conduct of the respective debtor (US Attorneys 1). The rule also permits concerned groups force production of significant documents (US Attorneys 1). If the debtor owns any kind of business, then the analysis might pertain to the proceedings and the appeal of maintaining the business (Cohen and Clough 1). The rule is wide and can be a helpful tool for groups looking to examine the debtor’s financial state before the 341(a) convention of creditors—a convention run by the U.S. Trustee Office, at which concerned groups, as well as the creditors, are allowed to ask the debtor queries about the debtor’s debts together with the assets (Cohen and Clough 1). Even though, the Bankruptcy Code necessitates that the 341(a) convention of creditors should occur within two months following the filing of the matter, a court order to conduct a Rule 2004 exam might be required much sooner if the debtor is revealing signals of fraudulent actions (US Attorneys 1). Examples Case One On 17th July, 2013, Larry Lake from Fort Worth, Texas, was sentenced to 14 years in jail and ordered to reimburse $550,000 worth of fines and roughly $25 million in penalties, interest and taxes (IRS 1). The man was found guilty at trial in February 2013 of suppression of assets (bankruptcy fraud), as well as years of tax evasion. According to proof brought forward at Lake’s court hearing, in November, 2004, one day before the filing for bankruptcy took place, he knowingly and fraudulently concealed and transferred over $3 million held in a bank account and an online trading account (IRS 1). He moved the money through a chain of constant bank deposits, cashier’s checks and wire transfers, as well as utilized a shell corporation to assist in hiding the assets (IRS 1). From August 2006 to November 2009, he and his spouse decided to structure over 1,100 money deposits, into over 13 bank accounts, all with different names (IRS 1). These accounts stretched among many financial institutions, plus the overall sum structured throughout this phase was over $9.3 million. Lake, with the assistance of his wife, established at least two shell firms, which they utilized to unlock some of the bank accounts utilized in the organizing scheme (IRS 1). Lake gave false income reports on his, as well, and his wife’s combined tax proceedings for tax from 2006 to 2008 (IRS 1). Case Two On 9th July, 2013, Michael Recker, in Cedar Rapids, Iowa, was sentenced to three and a half years in jail, three years of home custody and required to reimburse $26,267 in compensation (IRS 1). Recker was charged with conspiring to make false granule elevator scale tickets, obstructing Internal Revenue laws and bankruptcy fraud. At the plea hearing, Recker confessed that he bribed a worker of a northern Iowa grain elevator to produce false and fabricated granule elevator scale tickets (IRS 1). The worker created eight fake granule elevator tickets, and in exchange being offer thousands of dollars from Recker. Recker, on the other hand, was paid over $20,000 by the grain elevator derived from the false tickets. Recker sold two at auction for just about $50,000 before filing for bankruptcy security in the U.S. Bankruptcy Court (IRS 1). In bankruptcy paper, Recker did not unveil the income that was owed to him by the auction firm and when asked concerning the proceeds, Recker did not tell reveal the matter to the court. Conclusion Bankruptcy fraud refers to a white-collar crime and while it is hard to simplify across jurisdictions, common criminal statutes under bankruptcy acts normally involve destruction or concealment of documents, concealment of assets, conflicts of interest, false declarations or statements, fraudulent claims, as well as the fee redistribution or fixing arrangements. This paper has discussed bankruptcy fraud by presenting the rules and regulations that are against it, and also some few real life cases of the act. It is vital that authorities ensure that the laws in place are effectively working because nations lose a lot of money due to such an endeavor. Works Cited Cohen, Marc and Clough, Alicia. Bankruptcy Fraud. N.p, 2010. Web. IRS. Examples of Bankruptcy Fraud Investigations - Fiscal Year 2013. N.p, 2013. Web. United States Trustee. Bankruptcy Fraud and Abuse Enforcement Program. New York: Office of the US Trustee, 2013. Print. US Attorneys. Bankruptcy Fraud. N.p, 2014. Web. Read More