Planned Bankruptcy Fraud

… This is the second part of the previous post on this blog “Situational Bankruptcy Fraud”, which is an interview with my good old friend Mike B., who works as a bankruptcy investigator at IRS.

Me: Good morning Mike! Thanks for joining me again today. I know you are going to be late for work if this takes more than two hours, but I’m going to be fast and it won’t!
Mike: G’morning! No problem at all. I’m all eyes and ears!

Me: Today I would like us (but mainly you) to talk a little bit more about the second type of bankruptcy fraud which is planned bankruptcy fraud.
Mike: I remember I even wrote a thesis work on planned bankruptcy when I was in college, he-he. When dealing with the planned type of bankruptcy fraud, it’s usually all about a well analyzed scheme or strategy of doing things. Those who do it are aware of the circumstances, but when it comes to big sums of money, the effort is really worthy. Let’s start by mentioning that an individual, often representing a company or even operating a series of companies, starts a certain business transaction with the well thought intent of declaring bankruptcy the very moment this happens. By doing something like this, they manage to stay away from the payment for the goods they got or any other type of property they acquired. While others say this is not only fraud, but also theft (because it is using the bankruptcy court to aid the whole scheme when necessary), I personally consider it to be a large scale planned bankruptcy fraud and nothing else.

Me: Alright, thanks Mike, nice introduction! Please let us know more about the types of planned bankruptcy fraud. I’ve heard there are a lot of interesting things to be mentioned about it!
Mike: Sure thing. We are going to pay a closer look at two great examples which represent the criminal mind of planned bankruptcy fraud (also called premeditated). The first one is represented by the actual planned business bankruptcy and the schemes used to accomplish it and the second part is the investment bankruptcy, but more about this later, when you’ll ask, he-he.

Me: Please enlighten us about planned business bankruptcies.
Mike: While technologies used by investigators at IRS constantly evolve, so do the ideas brainstormed by those criminal minds that are taking advantage of the weak spots of the financial system here in US. What I can say is that lately there have been initiated some really complicated bankruptcy schemes that are made up of starting various types of retail business. The way it works is quite simple. These people (if they can be called so) will legally run these businesses for a certain amount of time (usually quite short, a few months, not more) and soon declare total bankruptcy. So we are dealing with the usual scheme, right? Well, not really so, because in this particular case, these people are going to try to hide their funds and profits accumulated during the last months of their activity. In order to accomplish their goal, what they do is actually order huge amounts of goods from people that offered them credit. Selling these goods quite fast at an unrealistic discount is a common trait of their activity, because they search for opportunities to skip paying their creditors (first of all), their employees, secondly and finally the rent. All they do is smoke their cigars and claim bankruptcy.

Me: Are there any variations of planned business bankruptcies that you are aware of?
Mike: Yes, sure; one of the most well known is the one with travel company businesses. However, in this case, instead of selling goods, the criminals who are behind the schemes are trying to do everything possible to sell as many vacation packages or airline tickets without paying the airline at all. In order to make it look real, than claim about the plates used to print those tickets were stolen by their competitors (because sometimes something like this happens). In the long run, the money (profits) are being hidden using money laundering techniques and the sum that they own to the airline company is being forgiven in the bankruptcy court. I have personally investigated several hundreds of such schemes.

Me: Aren’t there any solid punishments for these bankruptcy crimes?
Mikes: Yes there are, but quite unfair, in my opinion, in comparison with the prejudice they bring to certain honest companies. Bankruptcy fraud is considered felony and is prosecuted, but due to new provision that was adopted in 1994, it is done not as hard as it used to be in the past; that’s the main reason why this wave of criminal minds cannot be stopped at the moment. They are swirling companies for millions of dollars and all they get is $250k of fees to pay in a certain amount of time. Even though the law says that some of them might get up to five years in prison, only a few go to prison, and usually get out in a year or two usually for good behavior (good money I guess). Anyways, using the bankruptcy court for concealing a fraud is considered a crime and is punished each time all the necessary evidence is gathered.

Me: How about the investment frauds? What can you tell us about them?
Mike: Even if this is a question I will dare to respond with another question. Did you ever hear of the so called Ponzi schemes? So basically the operators of such schemes and other type of investments use bankruptcy as a way to prevent other investors or creditors from taking over what belongs to them by filling in for recovery of the assets. During this timeframe, the smart criminals (if they are smart and aren’t cough) usually consolidate their profits and powers and make their escape, by hiding any possible footprints. There is a lot more to be mentioned about this but we are going to talk about this later on. I hope you understand. Such real estate investment partnerships and all the similar types of businesses that use bankruptcy court to help get away with the fraud are being considered crimes and punished by the law with up to five years of prison.

Me: That’s really interesting. I hope my readers are going to discover some of the aspects that they never had the clue to find out elsewhere, especially from a professional IRS investigator. Thanks Mike! Please come by my blog in the near future and answer the comments in case some of them will appear! Have a great day and you have to hurry because you are going to be late for work!
Mike: No problem Hellen, thanks for offering me this chance to share my thoughts with the World Wide Web. The work will wait; after all, I’m the boss of my department! He-he! Have a nice day too!