Question

Find a recent case on mortgage fraud (published within the last three years) and answer the following questions:

The case I have chosen is the most recent in the news for Paul Manafort. I have the background of his fraud and what he did but need some help with the rest. Thanks in advance.

• What is the background of the case, and how has the history of the mortgage industry led up to the current situation of the organization(s) you are researching?
• How did the mortgage fraud essentially operate? What were the actions of the participants that made it fraud?
• What inherent weaknesses were present in the process to allow the fraud to take place? What internal controls would have prevented the fraud?
• What were some of the red flags that allowed for the detection of the fraud?

Answer 1

Essex County Loan Officer Charged With Mortgage Fraud(Case Law)

February 5, 2018 – USAO, District of New Jersey

NEWARK N.J. – A Nutley, New Jersey, man was charged today with using fraudulent documents to deceive his employer into approving a loan, U.S. Attorney Craig Carpenito announced.

Richard Patino, 42, is charged by complaint with one count of wire fraud. He made his initial appearance before U.S. Magistrate Judge Cathy L. Waldor in Newark federal court and was released on bail.

Background of the Case

On Aug. 15, 2013, a person identified in the complaint as “Individual A” signed a loan application in connection with Individual A’s purchase of a property in Elizabeth, New Jersey. Patino signed the loan application indicating that he had reviewed and approved it.

However, the bank statements that were included in the application were allegedly Patino’s own bank statements that.

he altered to make them appear as though they belonged to Individual A. Afterwards, the mortgage company approved the application and issued the loan to Individual A

s of January 2018, Individual A has ceased paying the loan and the financial institution has begun foreclosure proceedings on the property.

Overall, law enforcement is aware of approximately 23 loans that Patino approved that are suspected of fraudulent activity

Performing Risk Assessment Procedures

a. Obtaining an understanding of the company and its environment

b. Obtaining an understanding of internal control over financial reporting

c. Considering information from the client acceptance and retention evaluation, audit planning activities, past audits, and other engagements performed for the company

d. Performing analytical procedures

e. Conducting a discussion among engagement team members regarding the risks of material misstatement

Internal Controls that Prevent the Fraud

1. Use a system of checks and balances to ensure no one person has control over all parts of a financial transaction.

2. Reconcile agency bank accounts every month.

3. Restrict use of agency credit cards and verify all charges made to credit cards or accounts to ensure they were business-related.

4. Provide Board of Directors oversight of agency operations and management.

5. Prepare all fiscal policies and procedures in writing and obtain Board of Directors approval. Include policies and/or procedures for the following:

6. Ensure that agency assets such as vehicles, cell phones, equipment, and other agency resources are used only for official business.

7. Protect petty cash funds and other cash funds.

8. Protect checks against fraudulent use.

9. Protect cash and check collections.

10. Avoid or discourage related party transactions.

Red flags that allowed for the Detection of Fraud:

1. Missing Documents -- It isn’t uncommon for documents to go missing in the workplace. After all, accidents do happen. However, if this becomes a frequent occurrence, fraudulent acts could be the culprit, especially for checks. Missing checks numbers or gaps in reconciled check numbers can also be an indicator of fraud.

2. Complaints -- It’s easy to write off complaints as nonsense venting, but complaints are one of the best ways to identify fraud. If employees are complaining about something, don’t take it lightly. Dig further into the situation to identify the cause of the complaint and what else could be behind it.

3. Excess Purchases -- Fake payees can be used to convert funds. Be aware of excessive purchases as they could be covering a possible payoff of a purchasing agent.

4. Inventory Shortages -- Internal shrinkage and product loss happens. However, excessive shrinkage could be an indicator of a plethora of fraudulent activities.

5. Excessive Voids/Returned Checks -- Voided sales slips mean that the sale has been rung up, but the payment was diverted, potentially into the wrong hands. This is similar to cancelled checks. While they are usually legitimate transactions, a cancelled check can be returned to the wrong hands and be re-written to the fraudster. Excessive voids and cancelled or returned checks are common indications of theft and should be watched carefully.

6. Duplicate Payments -- Duplicate payments in many cases are not fraud-related. However, if a duplicate payment is accidentally made by a company, it is possible for an employee to forge an endorsement of the check. Watch this closely as well.

7. Rounded-Amount Invoices -- Fraudsters will often create invoices with rounded amounts. If you don’t see any pennies, it may be a sign that you need to look into that invoice further.

8. Abnormal Invoice Volume -- Rapid invoice volume increases may be due to a legitimate increase in business, but is also may point to fraudulent behavior. Monitoring vendor invoice volume and being aware of spikes is a good way to spot abnormal behavior.

9. Invoices Just Under Approval Amounts -- Some employees may be aware of the dollar threshold for management approval and create an invoice just below that approval level. For example, if the approval level is $5,000 and you get an invoice for $4,998, you may want to do a bit more research on that invoice.

10. Mail Drop Address -- A mail drop, or ghost address, is an entity that can receive mail in your name. Companies using a mail drop as their address rather than a P.O. Box may be doing so to hide their fraudulent activity.