The Bernard Madoff story which unravelled in early 2009 has become one of the most cited white collar crimes in American history, where one man’s criminal behaviour ruined the lives of hundreds of thousands not only in America but globally. Like all white collar crimes committed in America, there was no bloodshed or physical trauma left on the victims but rather endless emotional distress and devastating financial losses that can have even greater effect on those victimised by such crimes.

While Madoff has become the poster boy of all white collar criminals because of the sheer enormity of the reach of his effect, there are countless other individuals operating in this field of endeavour in America today. In this article, the author cites some examples of such crimes in three areas:

• Money laundering
• Cash diversion
• Document falsification

Money Laundering

In the case of Calma (name modified for this article), it was discovered that senior management engaged in two types of white collar crimes, namely, loan kiting and money laundering. Money laundering is when criminals use legitimate businesses to disguise the proceeds of criminal enterprise operations. For example, a group of individuals involved in the illicit drugs/narcotic trade will find a way to funnel the funds through a legitimate business so that they can then recover the funds without attracting the attention of the authorities. The following are excerpts from the Calma report presented to the authorities.

Bank Activity

Calma has disclosed fourteen checking accounts. These accounts are with the members of the Bank Group that retained consultants to perform this forensic accounting exercise. Calma provided the consultants with bank statements on these accounts for the eighteen-month period ended March 31, 2003.

In reviewing the bank activity the Consultants noted unusual activity that required further scrutiny. There appeared to be an established pattern of using loan advances from one bank to pay off a loan at another. The following is a summary of Calma’s cash activity over the latest 15 months.

Cash Summary

($000’s)

Period	Deposits	Disbursed
Oct 01 – Sep 02	$161,079	$160,488
Nov 02 – Mar 03	$23,805	$24,161
Total	$184,884	$184,649
Sales FYE 2002	$ 24,038

In the foregoing real example, the individuals involved here did what is called loan kiting, which is borrowing from another lender using the same collateral to pay off a loan due another lender. The proceeds of this cash “churn” was then used as “seed” money to then buy illegal substances which were then sold at a profit and the run through the legitimate company.

The telltale evidence is that the total deposits and disbursements for the period October 2001 through September 2002 totalled $161 million when the sales from the legitimate business for that period was only $24 million. How could the company possibly deposit and withdraw more funds (in this case a 6.8 multiple) than sales for the period?

In this case, the perpetrators were all convicted and given relatively stiff prison sentences and the banks lost in excess of $30 million when the loan kiting ceased and the company was closed down.

Cash Diversion

In the Kenyon Furniture case, the white collar crime involved a diversion of cash from the secured lender Bankers Trust to the owners of the borrowing company for personal criminal enterprise. Below are excerpts from the report submitted to a potential lender, Bank of New York Commercial Lending.

“Consultants reviewed cash deposits and paid checks for the most recent 6 months, the results of which were troubling are summarized as follows:
1. Firstly, the company sold inventories as cash on the following dates:

• $972.7K in late February 1989
• $529.3K on 03/08/89
• $402.0K on 02/02/89

The cash proceeds totaling $1,904.0K were deposited into Kenyon’s operating account at American Bank & Trust, High Point, North Carolina account #1000611 and used for “operating purposes”. These proceeds should have been remitted to Bankers Trust who had a lien on these assets and used to reduce the loan.

Mr. Pearce explained that these were done erroneously but displayed no remorse that this occurred. Mr. Pearce also advised Consultants that he made the people at Schroder Bank aware of this situation prior to Consultants being retained to do this review.

2. Secondly, Consultants, in reviewing paid checks, found the following hand written, hand endorsed and cashed at Wachovia Bank in Thomasville, North Carolina:

• Nine (9) checks totaling $278.6K payable to MODA-Italy which were hand endorsed and signed by “ROGER CATES.”
• Eleven (11) checks totaling $518.3K payable to Induscuer in Argentina which were hand endorsed and signed by “KURT FREEMAN.” Consultants’ office contacted Induscuer in Argentina at telephone #011-54-1-207-9336 and several people had no knowledge of “KURT FREEMAN” and said he did not work for Induscuer.
• Nine (9) checks totaling $405.8K payable to Pinheiros-Brazil which were hand endorsed and signed by “BRYAN JEROME.”
• These transactions totaled $1,202.7K all between the dates of March 01st and March 03rd, 1989. It is a remarkable coincidence that these transactions happened shortly after the aforementioned inventory cash sales”.

It was revealed in court that the aforementioned checks were actually cashed by the endorsers with the help of an insider in Wachovia Bank and the proceeds were then used for criminal enterprise by the individuals involved. This crime was cleverly disguised by writing the swindled checks to actual vendors and then enlisting a cohort inside the bank to procure the funds in return for a cut of the proceeds. The main players were sentenced to prison terms of 10 and 8 years and Bankers Trust suffered a $33 million loss as a result of this crime.

Document Falsification

Document falsification or creating fraudulent documents with the intent of using such documents to borrow money from lenders is a common white collar crime.

In the specific case of First Factors in the late 1990s, a disingenuous client firstly created phony invoices from phantom customers which it would then submit to the factor. The factor would then purchase those invoices at as much as 95% of face value from this client. Because the factor required delivery evidence and shipping documentation to support the invoices before they were purchased, the client got a hold of delivery tickets of their major shipping companies and then fabricated these documents and presented them to the factor. The scheme became unglued when on a field visit it was discovered that the same person was signing for several shipping companies at the same time.

This white collar crime caused the factor an unspecified amount of loss and the factor subsequently went out of business.

In the case of the infamous Barry Minkow and The ZZZ Best case, Minkow’s accomplices utilised a copy machine to manufacture phony invoices for jobs that did not exist. These invoices were then booked as accounts receivable and then submitted to the banks of record as actual receivables. When Minkow’s scheme was ultimately unravelled, he had swindled in excess of $150 million from banks and investors and made the cover of Time Magazine under the heading “Faking It in America”.

Figures can’t lie but liars can figure.