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Why Bankruptcy Fraud?Ameer Shafiq Kamalullail

Abstract This paper is initiate to explain on why bankruptcy fraud? A false representation of a matter of factwhether by words or by conduct, by false or misleading allegations, or by concealment of what should have been disclosedthat deceives and is intended to deceive another so that the individual will act upon it to her or his legal injury.KeywordsBankruptcy, Fraud, Bankruptcy FraudIntroductionBankruptcy fraud is a white-collar crime that takes four general forms. First, debtors conceal assets to avoid having to forfeit them. Second, individuals intentionally file false or incomplete forms. Third, individuals sometimes file multiple times using either false information or real information in several states. The fourth kind of bankruptcy fraud involves bribing a court-appointed trustee. Commonly, the criminal will couple one of these forms of fraud with another crime, such as identity theft, mortgage fraud, money laundering, and public corruption.A. Bankruptcy Filing Statistic

According to the United States Bankruptcy Court, there were more than 1.2 million bankruptcy filings in fiscal year 2012. Bankruptcy fraud results in serious consequences that undermine public confidence in the system, taint the reputation of honest citizens seeking protection under the bankruptcy statutes, and have a negative impact on voluntary compliance in our income tax system. With so much at stake, the detection and prosecution of bankruptcy fraud continues to be an area of focus for the IRS, as well as the Department of Justice.Fig.1, shows the statistic data in United States individual or company that filed for bankruptcy." Most incidents of bankruptcy in Malaysia arise from the sale and purchase of vehicles, making up 26.54% of the total cases between 2007 and this year.

Minister in the Prime Minister's Department Nancy Shukri said some 33,570 Malaysians were declared

bankrupt within that period after they faced problems involving vehicle sales transactions.

Fig. 2, on the other hand shows Malaysia statistic data on Malaysia bankruptcy filing since 2014 till early 2015B. Common Fraud Schemes Involving BankruptciesI. Bustouts

A bustout is conducted by a company that is set up to fail from the outset. The operator obtains merchandise from creditors, disposes of the goods (usually for cash) and does not pay suppliers. A bustout can also be conducted by buying an existing company and using that companys good credit to obtain goods, without the intent to pay, and then disposing of the goods immediately for cash.

Examples Of BustoutsDistributors of Consumer Products (including cigarettes, diapers, etc.):

Company operates for a short period and establishes good credit ratings with large consumer goods manufacturers. Orders increase suddenly, and payments are not made. Lulling techniques are used to forestall creditors. Goods are sold to retailers at below cost for cash. Afterwards, a bankruptcy petition is filed. Schedules filed by the debtor after the bankruptcy filing report trade debt owed to consumer products manufacturers with inventory unusually low compared to the date the debt was incurred.

Retail Bustouts:

The merchant rents retail space and does not pay rent or suppliers. He files bankruptcy to stop eviction and to gain additional time to run the illegal operation. Oftentimes, retail stores are part of the distributor bustouts because they provide outlets for the consumable goods. (Examples include retail jewelry stores, oriental rug stores and discount stores.)

Tax Bustouts:

An individual operates a series of businesses in the same industry and never pays taxes. He usually files Chapter 11 bankruptcy for the company just prior to or at the time the IRS files a lien on the debtor's assets. He operates the business for a brief period of time while in Chapter 11 before the case is converted or dismissed. He starts a new business with the debtor's assets. (Examples include restaurants and employee leasing services.)Credit Card BustoutsIndividuals contemplating bankruptcy run up large consumer credit card debt and then file bankruptcy. The purchases and cash advances occur within a short period of time. Frequently, the same individual files bankruptcy several times, using false social security numbers and aliases. Or the fraudulent perpetrator assumes another person's name or social security number. False statements are usually made on credit applications, and the assets acquired from the fraud are concealed when the bankruptcy is filed.II. Bleedouts

A bleedout is similar to a bustout. It usually involves an existing company and a depletion of assets by insiders over a relatively long period of time. There are concealed assets or false statements in this situation. Long-standing owners or corporate raiders can be perpetrators of the crime.

Examples Of Bleedouts

Corporate Raider Bleedouts:

A stable company with very liquid assets, such as a large pension and/or profit sharing fund, is acquired in a leveraged buyout. The company is operated for the sole purpose of allowing the insiders to loot the company. A Chapter 11 is filed to allow the insiders to complete their scheme. Business transactions are complex and purposefully confusing, which makes fraudulent conveyance actions expensive and difficult to prove. This type of scheme is used in all types of industries.

"White Knight" Bleedouts:

A business consultant is hired by a troubled business to assist it in acquiring new financing and streamlining operations. On occasion, the "white knight" is given an ownership interest in the business. The consultant takes control of the financial operations of the business and uses his position to convert company assets. Often this includes failing to pay withholding taxes, failing to make pension fund contributions, diversion of receivables, paying personal expenses with company funds, taking excessive salary and bonuses and, in some situations, paying false invoices to entities or individuals related to the consultant.Red Flags/Common Characteristics Table

Concealment of assets

Serial bankruptcy cases

Failure to keep usual business records

Incomplete or missing books and records

Conduct well outside ordinary business or industry standards and practices

Unusual depletion of assets shortly before the bankruptcy filing

Recent departure of debtor's officers, directors or general partners

Unanswered questions or incomplete information on debtors schedules and statement of financial affairs

Frequent amendments to schedules, statements of financial affairs and monthly operating reports

Inconsistencies among recent financial statements, tax returns and debtor's schedules and statements of financial affairs

Absence of knowledgeable officers to testify at the Section 345 meeting

Inability to contact principals of debtor at debtors stated location

Frequent dealings in cash rather than recorded transactions

Sudden depletion of inventory post-petition without plausible explanation

Inflated salaries, payments of bonuses or cash withdrawals by officers, directors, shareholders or other insiders

Transfer of property to insiders, shareholders and relatives shortly before bankruptcy

Payoff of loans to directors, officers, shareholders, relatives or other insiders shortly before filing.

Transactions with non-debtor subsidiaries, parent companies or affiliated corporations owned by the same or related persons or entity

A history of prior litigation or post-petition litigation involving breech of contracts, fraud misrepresentations, etc.

Complicated corporate structures and relationships.

Creditor confusion concerning corporate structure.

Fire, theft or loss prior to or after filing.

Failure to pay withholding and sales tax.

Startup of a similar business near the time of bankruptcy filing.References

[1] Investigation, F. B. (n.d.). White Collar Crime : Bankruptcy Fraud. Retrieved May 30, 2015, from FBI Web site: http://www.fbi.gov/about-us/investigate/white_collar/bankruptcy-fraud.[2] Joe B. Brown, B. N. (1999). Identifying Bankruptcy Fraud. United States: Credit Research Foundation.[3] MEIKENG, Y. (2014, April 9). Bankruptcy cases on the rise in Malaysia. Retrieved May 30, 2015, from Star Online: http://www.thestar.com.my/News/Nation/2014/04/09/Bankruptcy-on-the-rise-in-Malaysia/[4] Services, I. R. (n.d.). Criminal Investigation : Internal Revenue Services. Retrieved May 30, 2015, from Internal Revenue Web site: http://www.irs.gov/uac/Bankruptcy-Fraud-Criminal-Investigation-(CI) INCLUDEPICTURE "http://www.creditslips.org/.a/6a00d8341cf9b753ef01a511c71549970c-400wi" \* MERGEFORMATINET

Figure 1.

U.S. Daily Bankruptcy Filings 2004 - 2014

INCLUDEPICTURE "http://www.tradingeconomics.com/charts/og.png?url=/malaysia/bankruptcies" \* MERGEFORMATINET

Figure 2.

Figure 2.Malaysia statistic on Bankruptcy Filing