An Introduction to Corporate Fraud as a Federal Crime

While certain federal offenses fall squarely under one statute or federal charge – this isn’t the case with corporate fraud. Corporate fraud refers to any frauds committed by corporations or their senior executives. This terminology covers a lot of ground and can reference a very wide variety of fraudulent activity, including:

  • Misrepresenting assets or revenues in accounting and reporting;
  • “Cooking the books” for accounting or federal filing;
  • Fraudulent transfers, particularly of business assets;
  • Illegal or fake business loans to the company and siphoned by a business leader;
  • False purchases and other fraudulent transactions;
  • Intentionally inaccurate financial reports or doctored documents; and
  • Falsification of tax returns.

Actions ranging from embezzlement to identity theft or fraudulent tax filings can qualify as corporate fraud. What ties these various frauds together isn’t how they are committed, constructed, or carried out, but that the fraud is done under the guise of a large corporate entity or committed by the corporation’s top executives. In certain instances, the corporation can also be a victim of the fraud.

Role of Business Practices in Corporate Fraud

Frequently, corporate fraud is effectuated under the cover of legitimate business practices. This may entail actions taken by several members of a corporate entity or the actions of a lone executive going rogue. The outcome of all corporate frauds is an unlawful financial windfall to those involved in the fraud or to the corporation.

A recent example of corporate fraud involves a payroll service provider in North Carolina. An executive at the entity was charged with fraud after the company intentionally misrepresented to payroll clients that the company would accurately and fully pay their federal taxes.

instead, the funds intended for federal taxes were diverted to pay executive salaries and cover corporate liabilities. This example clearly shows how the misrepresentation of a legitimate business purpose was used to effectuate a corporate fraud.

Federal Law on Corporate Fraud

Under federal law, fraud is a serious offense. It is also a prolific federal offense that is frequently used by federal prosecutors to tackle various accusations of white-collar crime. The broad use of fraud charges is possible because Chapter 47 of the U.S. Code covers several different types of fraud. There are several other sections of the U.S. Code that cover other types of fraud, such as wire and mail fraud, securities fraud, and failure to certify financial reports.

Corporate fraud doesn’t fit squarely within one provision of Chapter 47 on fraud and false statements or Chapter 63 on mail and other frauds. Rather, depending on the facts and specific accusations, corporate fraud could fall under one of several different sections of the U.S. Code.

For example, a former director of Samsung America was charged and convicted of wire fraud based on allegations of a scheme of embezzling over $1 million from Samsung through documentation of ghost services and transactions that ultimately resulted in the money transferred to the former director’s bank account. Charges for fraudulent income tax statements were also filed.

Statutory Examples of Corporate Fraud

Some of the most common federal fraud statutes applicable to charges of corporate fraud include:

  • Section 1001 – statements or entries generally – Section 1001 makes it an offense to intentionally file a fraudulent document with or make a false statement to a government official. This Section allows a federal prosecutor to bring corporate fraud charges for filing fraudulent income tax statements or other financial reports with the U.S. government.
  • Section 1343 – fraud by wire, radio or television: charges for wire fraud are common in corporate fraud cases because there is frequently evidence that funds were moved through electronic means.
  • Section 1031 – major fraud against the United States: as a broad fraud provision that makes it illegal to attempt or execute a scheme with the intent to defraud the United States. This can cover a wide variety of corporate fraud that is effectuated through an ongoing scheme or entity.
  • Section 1341 – frauds and swindles: another robust fraud charge, Section 1341 makes it a federal offense to devise or intend to devise a scheme to obtain money or property under false pretenses.

Investigations Into Corporate Fraud By the Federal Government

Very few corporate frauds are detected or discovered on a whim. More commonly, a combination of technology and mandated reporting requirements allow the federal government to use audits, investigation, and suspicious transactions to uncover a series of odd behavior or unusual documentation. This leads to further investigation, which can be carried out by several different federal agencies.

How Are Corporate Frauds Detected

Most corporate frauds are found through audits, both external and internal audits are a leading form of detection for all types of corporate fraud, and rigorous IT tripwires put in place by government agencies. External audits, red flags in transaction or stock reporting, and oddities on financial reports are all inspected carefully by federal agencies, and today, run through extensive fraud detection and monitoring software and systems.

In contrast, few corporate frauds are reported by leadership or board of directors of a company. There is a very low level of reporting corporate fraud from inside a corporation or limited liability company. Rather, when a corporate fraud by a mid-level employee or high-level board of director, the business is very likely to handle the investigation and punishment internally. Someone will be fired, documentation added to file, and new processes put into place. Rarely are federal agencies involved.

The one exception to internal reporting is reports and findings from internal auditors. Internal audits have uncovered some of the biggest corporate frauds in the United States, including the very famous Worldcom fraud. However, there are serious concerns over the value and appropriateness of treating an internal audit team as a fraud detection unit.

Most people agree it isn’t a strong strategy for the well-being and long-term goals of a company. In short, these studies say that it is ineffective as putting in place other measures to halt fraud at the source.

What Federal Agencies Handle Corporate Fraud?

Often, defendants are surprised to find that a number of federal agencies and departments are involved in the detection and investigation of accusations or charges involving corporate fraud.

  • Federal Bureau of Investigations (FBI): When it comes to all types of white-collar crime, including corporate fraud, the FBI is the first, and often most, capable agency to handle an investigation. The FBI specifies several types of corporate fraud that fall under its purview, including charity fraud, internet auction fraud, non-delivery of merchandise, overpayment schemes, and re-shipping schemes. Unlike the extensive corporate frauds committed against an entity, these are frauds against consumers or individuals.

The FBI can also be involved in an investigation into corporate fraud against entities, but these activities are more likely to be detected and investigated by the SEC, as described below.

 

  • Securities and Exchange Commission (SEC): The SEC is able to uncover many instances or schemes involving corporate fraud through false financial statements, odd transactions, or sloppy reporting – and these forms of detection have led to major investigations into corporate fraud. Another source of detection and the initial investigation by the SEC comes from whistleblowers.

 

The SEC’s Office of the Whistleblower collects tips and information from individuals knowledgeable about a particular fraud or potential fraud. The whistleblower must bring evidence of the fraud to the attention of the SEC, and often entire cases are built around the initial findings and documentation of a whistleblower. Whistleblowers usually come from within the organization.

As an incentive for whistleblowers to come forward, the SEC is able to offer monetary rewards. When information leads to enforcement action by the SEC for more than $100,000 in fraud, then the whistleblower is entitled to some of the money collected. The whistleblower can receive between 10% and 30% of the total money recovered through fines.

 

  • Internal Revenue Service (IRS): False or fraudulent tax filings are another way the federal government can detect possible corporate fraud. The IRS is responsible for the performance of random and strategic audits, involving both individuals and entities. A strategic audit could be triggered by odd or abnormal financial reports or tax filings that don’t align with other financial records. On the other hand, random audits of individual tax returns and corporate filings are another source of detecting schemes and scams.

 

Punishment for Conviction of Corporate Fraud

The criminal penalties for corporate fraud can vary. The criminal punishments range extensively from five to 25 years in prison, with the type of fraud and total losses to the government or other victim being instructive in sentencing.

It is possible that an extensive fraud scheme, such as that committed by Bernie Madoff, will result in federal charges related to corporate fraud and a much longer prison term. It is very common for charges of corporate fraud to include charges for conspiracy, other types of fraud, and other types of theft.

In addition to a prison sentence for conviction of corporate fraud, federal criminal statutes allow for the imposition of criminal fines and restitution. Criminal fines can be extensive and often equal twice the amount of total fraud committed. Likewise, the imposition of restitution can require the full repayment of losses to victims of corporate fraud, including remitting payment to the federal government or entity itself.

Other Repercussions of Corporate Fraud Charges

It is tough to conduct legitimate business from behind bars, but equally difficult to continue a high-level or executive career with federal corporate charges to your name. Very few CEOs, CFOs, or board members could survive conviction of corporate fraud, and in many instances, these individuals are barred from acting in a fiduciary position for a certain amount of time.

These ramifications on a defendant’s professional life a just as extensive and long-lasting as formal criminal penalties and result in further financial implications. Therefore, a federal defense lawyer is just as adept and aware of the reputational and professional harms, as those handed down in the courtroom.

Your Defense to Corporate Fraud Charges

Each type of fraud carries a separate maximum sentence and criminal punishment. These punishments, if convicted, are specified in the federal statute for that type of corporate fraud. What do all of these fraud charges have in common? They are all serious offenses that can lead to years in federal prison.

Accusations of corporate or business fraud can impact your entire life and derail a career. As discussed above, a prison sentence and restitution are just two of the major ramifications that accompany a conviction for corporate fraud. This information alone makes it important to address and confront accusations of corporate fraud. However, you deserve better than a shot in the dark to overcome corporate fraud charges, which is why you need legal representation.

Why You Need Knowledgeable Advice

Your defense to corporate fraud charges is crucial, and it should be strategic. To ensure you receive the quality of defense you need and deserve, you should turn to a lawyer experienced in complex financial crimes. More specifically, you need a federal defense lawyer that has successfully handled these cases in the past.

Knowledgable legal advice comes from a lawyer who is familiar with the factual and legal issues of a business or corporate fraud matter. This experienced lawyer will know what defense and defense strategies work for a particular fact pattern and understand the legal issues of your case without extensive research or consulting an outside expert. These qualities save you time and money – and could ultimately save you from a prison sentence.

Remember, when facing accusations or charges for corporate fraud, such as accounting fraud, you are up against a federal prosecutor also familiar with these charges. You need a lawyer that is nimble and knowledgeable enough to keep pace with anyone in the U.S. Attorney’s office.

Different Defense Strategies to Corporate Fraud Charges

Your defense to federal corporate fraud charges is entirely dependant on the facts of your case. There is no one-size-fits-all approach that a defense attorney can provide online or over the phone. Rather, the strategy for your defense should be built on in-depth conversations and review of extensive documentation and facts by a qualified lawyer.

Some common defense strategies to corporate fraud charges include:

  1. Lack of criminal intent: A key component to the federal prosecutor’s corporate fraud case is showing an intent to defraud. This can also be called intent or mens rea by a legal professional. What it means is the defendant had the intent to commit a crime at the time of the fraud. There are several ways to prove criminal intent, but there are also avenues for a criminal defense lawyer to refute this critical requirement of the federal prosecutor.
  2. Legitimate purpose: Similar to lacking criminal intent, a federal defense lawyer can also bring evidence that the defendant was merely acting in good faith for a legitimate purpose. A federal defense lawyer needs evidence that the defendant honestly and truly believed that his or her actions weren’t fraudulent and for a legitimate business purpose.
  3. Acted under duress: In a small number of cases, a federal defense lawyer can show that the defendant acted under duress when committing corporate fraud. This argument is both easier to prove because the defendant can admit to carrying out the corporate fraud, but requires evidentiary support that there were threats or violence upon the defendant if the fraud wasn’t committed.

 

 

Focus on Corporate Accounting Scandals

Some of the biggest corporate frauds were committed through accounting and financial reporting. From siphoning money to underreporting line costs, there are substantial and ever-increasing ways to commit corporate fraud through accounting. Some of the most well-known and worst accounting frauds include:

  • At Swiss security systems company, Tyco, the CEO and CFO conspired to steal over $150 million from the business and inflate the overall company revenue by $500 million.

The duo carried out the massive accounting fraud by meticulously mining funds from unapproved loans and phony stock sales. The extra cash was divvied up into executive bonuses and other compensation, but a joint SEC and Manhattan District Attorney investigation uncovered the fraud in 2002. Both perpetrators were sentenced to federal prison for eight to 25 years.

  • Former telecommunications company, Worldcom, was the victim of long-term accounting fraud by the company’s CEO. Bernie Ebbers was able to inflate the company’s assets by more than $11 billion by capitalizing certain line costs, rather than appropriately recording them as expenses and inflating revenue through fake loans.

The internal audit team at Worldcom uncovered the massive fraud and the DEA brought federal criminal charges. Ebbers sentence was 25 years in federal prison, and the Sarbanes-Oxley Act was subsequently passed as a result of the massive scandal.

  • One of the most famous frauds in U.S. history involved another Bernie, Bernie Madoff. The Bernard L. Madoff Investment Securities LLC was able to commit $64.8 billion in fraud thanks to a scheme hacked by the company’s CEO and its accountants. Madoff would receive 150 years in prison and payment of $170 billion in restitution.

How was the corporate fraud uncovered? Madoff’s sons reported him to the SEC.

While these massive corporate frauds represent years of fraudulent activity and some of the biggest losses in history, the results are instructive for smaller schemes. The SEC does not take fraud lightly and will ensure it is prosecuted by the DEA to the fullest extent possible.

Individuals accused of corporate fraud, of any size or substantiality, should be prepared to fight the allegations or face serious repercussions. To start, any accusations of accounting or other corporate fraud require the expertise of a federal defense lawyer.

What to Do First If Accused of Corporate Fraud?

You need to address accusations of corporate fraud early and with vigor. If possible you want to speak with a federal defense lawyer before your businesses practices – irrespective of legitimacy or legality – come under investigation by the FBI, SEC or other federal agency. Therefore, if you receive notice of a federal investigation or audit into corporate fraud, the time to call a lawyer is now.