On-Demand: Fraud Risks & Enforcement Trends
Our panelists discussed how to invest in the internal controls necessary to prevent and recognize fraud.
Lisa Knee: Good afternoon everyone, my name is Lisa Knee and I'm a co-chair or EisnerAmper's Real Estate Service group. We happy to welcome you to this special and timely series Real Estate in the pandemic focusing specifically on fraud risks and enforcement trends. We'll also like to thank our friends at Blank Rome for co-sponsoring today's event.
We at EisnerAmper are focused on helping clients respond to the pandemic and its impact on the real estate market, through a wide array of advisory and accounting services, including property accounting and construction financial oversight. We have published a compendium of articles which is available on the resource section. Today is the second in a series of webcast to keep clients and advisors up to date on what's happening in the market and what they should be thinking about when they refine and redefine business strategies. Today our expert team will help those in management and legal team successfully identify and navigate fraud risks within their own organization during the pandemic. Our team will cover assessing the areas most vulnerable to fraud, how to navigate risks, looking for red flags and latest regulatory enforcement trends.
We lucky to have the following experts in this field lead us in this conversation today. Nelson assists clients on issues related to disputes, forensic accounting, fraud investigation including matters involving allegation of bribery and corruption, financial reporting irregularities and occupational fraud. And I urge all to listen to Nelson's podcast which is available in English or in Spanish Mitigating Fraud Risk in Real Estate.
Next David Sumner, a Director in EisnerAmper Financial Advisory Services Group. David has more than 20 years of audit and forensic accounting experience. David works with clients to design and develop corporate investigative functions. Also Ariel Glasner a Partner in Blank Rome White Collar Defense and Investigations Group. Ariel represents clients and companies across a broad scope or industries and in connection with matter pending in court and internal corporate investigations and audits, examining potential wrong doings. And finally Ed Opall, Ed is a Partner in EisnerAmper's Real Estate and Construction Services Group. Ed leads the accounting and audit engagement for private real estate and construction companies and advises on accounting processes reviews.
Ed will lead us today with our prestigious all star team. So let me welcome and thank all the speakers for taking their time to share their expertise with us. With that, Ed I turn the program over to you and thank you all again for being here today.
Ed Opall:Thank you so much Lisa. Good afternoon everybody and welcome to our webinar on fraud in real estate companies. As an audit partner I always worry about fraud happening at our clients. Real estate companies are typically flat organizations without deep bureaucracy, they get a lot of things done and there is a lot of money at stake. Frequently there are outside investors involved they sometimes they're closely held company, held by family or business partners. There's significant fraud risks in all aspects of the business, property acquisition and financing, construction and development, property management and financial reporting of course. And that is in normal times, but right now the industry itself is influx.
We all know what's happening in retail and in the hospitality sectors and no one knows for sure how the office market is going to turn out. Multi family seems to be okay in most markets but very challenged in other markets, the macro situation creates stress. Inside companies financial stress of individuals may increase fraud risk, loss of expected bonuses, spouses laid off, other financial stresses happening to people in positions of trust. Reduction of staff may weaken oversight and hurt morale, budgets have been cut due to reductions in transactions, lowering fees they're earned, yet the business of real estate continues. All this increases fraud risks tremendously. Company leaderships should be aware of the heightened fraud risk, working from home has caused shifts in every aspect of operations. Formal and informal networks of intelligence that previously enabled business owners and principals to keep an eye on things have been disrupted. Is management able to prevent and detect fraud in this environment? Today we'll discuss fraud in general, drill down on real estate industry and offer some insight into best practices to get a better edge on fraud prevention in the pandemic.
So our overview is, the perfect storm is brewing. We are going to talk about red flags at what company should be doing. And then I am going into the regulatory enforcement trends. This is really cool video it's meant to be a depiction of how fraud risk happen in all companies. All season procedures that keep us focusing on the movement of the ball, that's very, very important it is easy to miss something major that's happening in plain view. So watch this. Are you counting? It's easy to miss something that's really big that's happening right in front of you. Let's try it again, here he is. Now I'm sure most of you missed it the first time because I had to watch it a few times before I really got it.
But that's really what happens in companies everybody is focused on what they have to focus on but there could be something going on right in plain view and people miss it and it could be bad. So the definition of fraud as defined by the Association of Certified Fraud Examiners it's defined as the use of ones occupation for personal enrichment through the deliberate misuse and misapplication of the organization resources or assets. The keyword is deliberate misuse. And the Institute of Internal Auditors have a similar definition but it's a little more expansive. It's generally defined as an intentional misrepresentation of material existing facts made by one person to another with the knowledge of it's falsity and for inducing the other person to act and upon which the other person relies with resulting injury or damage.
So we're going to get into the Association of Certified Fraud Examiners the 2020 report to the nation. Nelson is going to speak to this in depth, but they do this report every two years and they collect data on reported frauds. I think this year there is around 2,500 cases around 125 countries and they gather deep insight into cost schemes and perpetrators. So I'm going to turn this over to Nelson now.
Nelson Luis:Great, thank you Ed. And hello everyone, thanks for joining us. As Ed had just indicated we going to get into some fraud statistics here. Before we start getting into the meat of the presentation with what folks should be looking out for and red flags and different procedures we going to give you an overview as to whose committing fraud out there, how is it occurring based on some benchmarking industry surveys that have been done.
This one that you see here in front of you really talks around what are the most common fraud schemes across a variety of different industries. You see them all those kind of lined up in the first column and all the way at the bottom you have real estate and of the three highest most frequent types of fraud schemes that are seen in the industry are corruption, scheming and billing. And just to frame this a bit normally when we talk about fraud we talk about it in three main areas: it's your financial misstatement risk, that's your classic cooking of the books. Your second would be your corruption related risk, and then thirdly you will have your asset misappropriation related risk, which are like T&E fraud and things like that. You can see here a variety of different schemes who are at the top and in this instance corruption is deemed to be the most significant fraud scheme is real estate.
Next we go into what most people sometimes are surprised to hear is that real estate is actually one of the industry that has the highest medium fraud losses of any industry so here you have a list of over 20 plus industries and real estate is ranked third. Some of the reasons why real estate ranks so high is to a number of different driving factors. It's not as high regulated of an industry as others might be such as pharma or financial services. Sometimes lack of fraud controls, sometimes lack of formal whistle blower hotlines for employees to provide tips. So as a result you could have large frauds and you have things like mortgage fraud you can have things such as money laundering and because of the high dollar value of some of the transactions, it's likely it would drive up some of the medium fraud losses.
I have asked my little detective to join me to help. What this one does, it kind of just shows you very broad, brush strokes but the common questions sometimes that we get when we doing investigations is how can you tell who is the typical fraudster? What is the typical fraudster profile? Any tell-tale signs? So here is some interesting statistics to give you a sense as to who's on average committing fraud out there. First is on our gender perspective normally it is more males than females. Normally the high fraud losses are contributed with males. On the education side as we see here is that most of your frauds normally are perpetrated by those that have university degrees or higher. And that correlates as well with the higher medium losses. And then towards the right to see that those that have longer tenure in organizations that 55 plus range are those where the higher dollar frauds are occurring and they have higher tenure in the organizations. That is further underscored with this slide where we can see towards the left it shows what percentage of cases are attributed to fraud by different levels of folks within the organization employee, manager, owner/executive. You see that there is more frequent fraud that occurs with the employee managers but look at when you get to the owner executive, while they might not occur as frequently when they do occur they have much higher medium losses.
And why is that? Because they know the company well, they know the controls in place, normally they could exert some type of pressure. It's easier for them to have collusion within the organization. That is some of the contributing factors of why you could have larger fraud losses from the owner-executive areas.
Ed Opall:What is the most common behavioral red flag displayed by a fraud perpetrator? Which is the most common? Practically how well do you know your people? Their work habits, their behavior, with respect to red flags of possible fraud.
Nelson Luis:In a second here we are going to be able to show the results. And we are going to show you what the bench marking standards are out there. We always find that this is perhaps helpful to those that are either within the organization if you're consultant and you're in the fraud com body world really want to be able to understand what are some of this exhibited red flags.
Wow this is interesting we've done this presentation in a few different ways I don't think I've ever seen any exact tie. So we have financial difficulties and control issues as the top two and then living beyond means as our third. So the actual answer is living beyond means. As you see they at the top of the survey 42%. What we want to highlight here if you see this list in front of you is normally when we performing investigations it's most of the time we see one or a variety of these different factors coming into play. David is going to go into putting yourselves into the heads of your employees, is have you see anyone that has gone out is sporting a new car or talking about some vacation or jewelry purchases that they have made.
Are they blowing up their Facebook or Instagram accounts and you are asking yourself how did he or she come up with that money based on what you think they likely making at the company. So that is a classic living beyond means. So when we doing investigations we'll tell you that social media has now become a big focal point of one of the procedures that we looking into. But don't forget some of these other ones, you could have financial difficulties obviously what we living through right now, people have medical bills perhaps they didn't have in the past. Look towards the middle there a wheeler dealer attitude I think that kind of coincides well with those in the real estate industry. Family divorce problems, addiction problems, and etc. You will have this and you will have this whole list as a reference point. With that I'm going to turn it over to my colleague David. David, why are we living in the perfect fraud storm right now?
David Sumner: Thank you Nelson for setting up my section with that background information. Just a quick story reminding me of living beyond the means is an investigation that I was assisting with a number of years ago in which the controller was exhibiting the lifestyle evidence that we will be looking at. This was a controller for a construction company, I think his salary at the time was in the middle 100s he had a yacht, multiple super cars, not just a Porsche but a Lamborghini, a Ferrari and his home was featured in architectural digest. Those were big signs and what was interesting about that case was that everyone we talked to about how this was missed had different responses. One person said that his wife's family owned Greyhound tracks, and then another person would say his brother in law is a big stock broker in New York, and another one was some sort of diamond mines or gold mines I forget which. And it's funny that everyone had a different answer and if anyone had ever talked together and compared their stories there might have been some suspicions early on as it was he had perpetrated a fraud over 10 years. Almost 10 years and he walked away with 40, 45 million dollars from this company. The signs were there, they were just ignored.
But, so back on track hopefully for most previous slides everyone understands that fraud can happen anywhere or anytime. And there's a potential that fraud especially during a period of crisis or upheaval. You think back to the dot com crashes and financial crisis those were times when a lot of frauds came to light and were a result of those crisis, so we are in one of those right now. The pandemic is certainly something I would consider a period of crisis or upheaval. So any of you who've taken a course on fraud will probably recognize that graphic in the bottom right hand side of the slide and that's the fraud triangle. And it depicts the three elements that exist when fraud occurs. There is pressure, opportunity and rationalization all occurring at the same time. What I will be going over on the next few slides are the steps that we can take or you can take to reduce your fraud risk. And those steps will be, assessing your fraud vulnerabilities, implementing fraud reduction procedures and then monitoring your business environment for the red flags related to fraud.
That first step is to properly assess your fraud vulnerabilities, and an important piece of this process is to understand what is present when someone commits fraud and that's when we are going back to that fraud triangle and you will see that those same three categories are listed on this slide. If you thinking about what fraud risk you have, think about what pressures are your employees under. I think Ed mentioned a couple early on, if you a public company there is of course certain performance expectations like EPS or revenue growth year over year. But those aren't the only pressures there also personal pressures. There's addictions, debt, medical bills. The pandemic has also created tremendous pressure on individuals, they may be worried about their job or the job of the spouse, health concerns and I think it's understated right now, but I think the lack of social interaction is also a risk. I think humans are social creatures and you take away that social interaction, and I think the technical term is get a little bit squirrely. And so I think that's something you need to be aware of.
Then you have to look at your opportunities. The switch to the virtual work environment happened very quickly and I'm pretty confident myself that most organizations really didn't have this event planned for. As a result, many policies and procedures were altered or even just removed from the internal control environment. And that was done because businesses needed to operate, they needed to keep running. They couldn't shut down. Then lastly you need to think about the rationalizations. Why or how could someone rationalize his or her fraud? In other words how did an otherwise ethical person decide to make an unethical decision? You could see a scenario arising if raises were postponed or hours were cut back, was a promotion delayed, some might think they're just borrowing, or perhaps they think they will just pay it back eventually but in most cases they don't unless forced to. One of most common rationalization I've seen, is that the organization can afford it or the insurance will cover the loss; In effect “no harm no foul”.
Ed Opall:This question is related to the real estate industry not necessary your individual companies and we don't trace who said what this is just for discussion. I supposed you wouldn't be interested in this webinar if the answer was decreased, but who knows?
David Sumner:Great. I think as Ed alluded to I'm happy to see that the majority thinks that there is going to be an increase and no one thinks there is going to be a decrease. That's fantastic. And I thinks it's good that people acknowledge that risk. And so we got your opinion but now and they very similar to what is shown on this slide here. The ACFE which also put out that report to the nations that Nelson and Ed were talking about earlier also has been doing a series of polls and surveys to help people understand the impact of the pandemic on fraud. So they’ve been taking surveys almost from the very beginning and releasing results every couple of months. And what those surveys have shown is that 77% which is very close to what you guys got, so I think everyone got passing grade on that question. But was is also even more surprising at least to me was that over 90% expect an increase over the next 12 months. So beyond what they seeing it's going to continue to increase worse the 77% is what people have observed.
So then one thing that we are going to move on to now is the second piece of making your organization more resilient or prepared for fraud and that's the second piece which is adapting your risk management control frameworks to focus on fraud mitigation. And there are three lines here, and in these lines are different areas within the organization that can have specific fraud risk responsibilities. The first line is operational management, they are the closest to most incidents of the three categories of fraud that Nelson mentioned: asset misappropriation, corruption, and financial statement fraud. Operational management can start with tone at the top. It's very cost effective, it really doesn't cost anything but it is highly effective in being a deterrent to fraud. Additionally when operational management is more involved they gain a better insight into their teams’ daily procedures and challenges. If a person is considering fraud and they have weekly meeting, monthly meetings with their operational management who's asking questions, who is involved, who is thinking about ways to improve or looking at trends, it's going to be very difficult for that person to perpetrate a fraud if they see that someone is watching.
The second line of defense is the financial group which also includes risk management and compliance if there is one. Here targeted training throughout the organization, taking responsibility for that is also another very cost effective manner of reducing fraud risk. The other thing that the second line of defense can do is the use of analytics, with the operational first line they very much in the details, they have a very micro overview. The second line has a macro overview and so that's where analytics maybe useful in identifying potential problem areas. And lastly there is internal audit which is the third line, they too should also be using analytics as a very cost effective proactive tool. And one thing that we certainly when we talking with internal audit functions is don't rely on your schedule especially not in the pandemic environment, if a certain audit is scheduled in the third quarter that doesn't mean that you can't look at or analyze data related to that audit in the first and second quarters, take a look at all the information that's available to you.
Travel obviously is impaired and that's something that a creative internal audit team can get around. And lastly one of the most effective internal audit procedures we certainly help companies do it especially in the anti-corruption space is surprise audits. This can be a disruption to the auditee but they are much more effective.
Ed Opall:What is your expectation of your organization's anti fraud program budget over the next 12 months? So there is no answer here that says "Ha, what anti-fraud budget?" Some things, as you see, don't cost that much extra, like tone at the top, segregation of duties, accountability to budgets, vendor selection policies. However as David mentioned unpredictability and monitoring and oversight is a fantastic preventive tool, so that's one of the bigger takeaways. Even if you a lean company and don't have an internal audit department just making sure you are doing things a little bit different all the time so that people are kept honest it helps.
David Sumner:Okay no surprise there. I think a lot of people do not know what their fraud budget is. So that doesn't surprise me one bit. So then the third step is to actively monitor for red flags. And depending on what your organization does, how it's set up, where you use vendors, where you do things in-house all of these things are very specific to your individual entity. If you’re thinking about what kind of red flags you should be looking for, they have a bunch on this slide but I'm going to highlight a couple that I think are fairly effective. So for example if you use a property manager, do you know how they select vendors? Are there ones that are retained over and over? So you’re not seeing any vendor turnover for some fairly competitive style services like janitorial services or things of that nature. If one company is always winning that work and you don't see really evidence of a competitive process that might be a red flag. Do you ever analyze your spend by vendor, and when you see large increases do they make sense are you taking a look at that on detailed level?
Another area to look at is if you have sales agents or property managers that are compensated based on maybe rentals. What is their compensation structure look like. Are there some incentives where they might be able get away with fraud, one indication of that may be a lot of refunds early on in a calendar year or credits at the start of a new year. Those may be red flags of someone who is being very aggressive with signing up new people with some terms and crediting on the back end the next year after they received their commission, or they met certain criteria in their contract. Each organization is very different but it's important for you to look at these types of red flags or talking to someone else who might be able to help who knows the organization who will be able to help you identify those red flags that are specific to your company. Ariel I think you also wanted to add something in this section as well.
Ariel Glasner:I did, thank you David and let me beginning by just saying it's a pleasure to be here today and I appreciate having the opportunity to do this with my friends at EisnerAmper. I did just want to say when I'm working with clients one of the things I make sure to highlight is that investing in a good corporate compliance program designed to catch red flags like the kind that you just mentioned David, can save money on the back end should they be the subject of an enforcement action. Because prosecutors and law enforcement take into account the effectiveness of corporate compliance programs in deciding the kinds and level of sanctions to impose against companies, if an employee does engage in misconduct and the company faces some liability. So corporate penalties can be lower or mitigated for companies that have good compliance programs in place. So it is not just about preventing misconduct but it is also about saving money on the backend and why these investments are worthwhile for corporate entities.
David Sumner:I think that's very good advice and I'll like to almost take it one step further Ariel, and that is I'm reminded of one engagement that I worked on for a very large multi-national company based in another country that was trying to pull itself out of a very large bribery scandal. The bribes were not insignificant there were some pretty large number but the amount that they spent on attorneys fees and accountants were very, very large, and then add on to that the fines and the penalties and then all of the cost associated with redoing that's what I was there, they were paying another army of consultants after the investigation to remediate. But one of the things that really stood out to me was when I was talking with one of their internal audit leaders during that project and they said to me that all of that monetary amounts they have been spending as a result of this scandal was not even their biggest concern.
Their biggest concern beyond all that was that now their reputation was forever tarnished and they had at one point been the number one employer of choice in their home country. And now they were barely in the top ten and they recognized that they could no longer hire or in the primary position to get the best and the brightest of people. And they thought that intellectual drain and leadership drain would be a price that they will pay decades into the future long after they had paid the fines.
Ariel Glasner:I think that's absolutely right David.
David Sumner:All right. So on this next slide we are going to talk about specific fraud risk examples in the real estate industry. I think we've talked about a couple of these, Ed mentioned a couple early on and I'm going to highlight a couple here that stand out to me as well. As Nelson said, real estate is not highly regulated industry and as Ed mentioned earlier while the real estate organizations are fairly flat so you will think about the compliance and the fraud risk functions are generally not as sophisticated as other banking or pharmaceutical industries. One big area I think is construction fraud. When you’re taking a look at the amount of money and you’re usually using outside sources when you went to bid... You may be dealing with a lot of entities that you aren't familiar with, you don't have a business history with, these are all people that are of risk to you so make sure that you are looking at your payment applications. You visiting the construction sites. Also when you delegating daily operations to a third party to manage your property that's another significant risk. Ed is there anything else you will like to highlight?
Ed Opall:I think on the construction and development side, a lot of companies hire CM firms or they hire owners representatives that are independent from inside the company and that's fraud mitigation tool, they going to be a bad person monitors the compliance with the contracts and making sure that the cost that are billed are exactly what's appropriate and dealing with change order and making sure that those numbers are proven out before they agreed to. It's always worth it to have independent oversight of construction contracts just as a good business practice but also a fraud mitigation tool. Same thing with property management there's lot of contracts being let out every year by the various properties to different vendors and sometimes the vendors get comfortable and sometimes those relationships between your people and those vendors can get a little too close and that's always a risk. You want to have good sold cadre of people that do work for you and are loyal but at the same time you will have to make sure that they at arms length, and your people are not getting too cozy.
Having gift policies as a corporate policy is very important to make sure that people aren't taking undue ball games and restaurants and vacations, it can accelerate from something very minor to something major if you let it happen.
Nelson Luis:Yes thank you David. What we wanted to share here of one of the examples that was on the prior slide was around the risk of check tempering and we wanted to highlight one specific case that we worked on where it dealt with a investor fraud that you often see times unfortunately in the real estate sector that you can have Ponzi schemes or investor frauds, pulling of monies investor funds together to purchase a specific property or land or et cetera. And this was one where the real estate venture had a scenario where they were siphoning cash out of the business with some of the other partner not being aware of it so it was considered a kind of check kiting scheme. So what our little detective is showing you is that in a classic check tampering scheme, you could have the risk of forged bank statements, expense reports of factitious vendors. So you want to look out for those red flags like what a lot of us have been talking about here today: lack of segregation of duties, lack of approvals, inappropriate entertainment expenses, et cetera.
We actually going to show you a live example here and in this investigation what you see here are two bank statements where one of them was being submitted by one of these real estate venture partners on a monthly basis for years and one of these statement here is factitious so we'll just give you a second here to look. The one the left or the one on the right, you look at the detail and thin to yourself which one do you think is the factitious bank statement. So no polling question here so I hope you have that in your mind and the answer is the one on the left was actually the forged bank statement. We are showing you some examples where on a true bank statement on the right you can see that we circled the $3,000,000 check that was written and it was around an August time frame and on the left hand side around that same August time frame that check was omitted from the bank statement that was being submitted. This individual was doing this for quite some period of time until ultimately the partners got wind of it when they were looking into the actual balance in the account. So be careful. Trust but verify.
And then just some last recommendations, I know we've thrown a lot at everyone here, but here is some good ones that are also included in a white paper that will be made available to everyone if you will like to read it around real estate fraud and here are some ones to focus on. Number one kind of a potential weakening of your approval processes with the remote working. So what are you doing particular on areas of cash to ensure that you don't have issued from that perspective. Secondly, any changes in terms of salaries or bonus entries that could have been made to the payroll system now that folks have been working from home. Three the new vendors so that's a class area, are you familiar with these vendors, are the one off payments to these vendors, do you know what some of them have been doing? The PPP fraud Ariel I know we'll be hearing on that, you can't get around that in nowadays because of all the funds that have been circulated by the government. Frequency of payments to these vendors are you doing bank reconciliation how is that being done timely. Any odd wires that have gone out recently and any unauthorized movements of funds. So with that I'm going to turn it for Ariel to really provide us with the regulatory enforcement trend and risk update.
Ariel Glasner:Thank you Nelson, and before I get into these slides I did just want to comment. One of the questions that I frequently get asked in these kinds of panels is, how do attorneys and forensic accountants work together when they are representing clients that have been impacted by fraud? Attorneys and forensic accountants have very specific roles when they represent the client that really help protect clients who find themselves in these kinds of situations. So, take the check tampering example that you just gave. In that kind of example you might have the partners who were not aware of the scheme call their attorney and say "hey we think something fishy is going on what can we do". In that kind of case I'm the attorney, I'm going to some in I going to say okay well let’s start an internal investigation to try to get a sense of what has happened. Then I'm going to say well we need to bring in a forensic accountant to track exactly what has happened what are the transactions that have taken place, where might that fraud be taking place. And the forensic accountant is going to prepare a fraud examination report.
One of the things that I typically recommend and that I think is critical is that often the engagement with the forensic accountant is done with the attorney. Because that's a way of protecting what we call the attorney client privilege and the attorney work product doctrine. So it's a way to keep the internal investigation findings confidential and then we can make a decision with the client whether this is something that needs to be referred to law enforcement and also how we are going to remediate the misconduct that's take place. But, I think what I want to make clear is that we work together to protect our clients interest and it is usually a very successful relationship.
With that, I want to get into this slide. We talked about the fact that the real estate industry is not a highly regulated industry. Nonetheless, there are many agencies both at the federal and at the state level that have the ability to pursue and prosecute fraud in the real estate industry. For example the Department of Justice conducts both criminal and civil investigations and is responsible for enforcing federal statues including things like mail and wire fraud statues, which often come into play in any kind of fraud scheme, especially or as well in the real estate sector. The SEC also conducts civil enforcement of securities fraud which also often comes into play in our fraud cases involving the real estate industry. One agency that I don't have listed but I think is important to keep in mind under the new administration is the Consumer Financial Protection Bureau. We are going to see a lot of enforcement actions under the CFPB going forward and they are going to be looking at fair landing practices, which I think is going to impact the real estate industry. And then we also see state agencies prosecuting real estate fraud and just as an example both the New York Attorney General and the Manhattan DA's office have divisions within their office that are specifically designed to investigate fraud in the real estate industry and then to pursue the enforcement of state laws in that space.
What are some of the trends that are taking place in the industry? First of all, mortgage fraud is always a specific concern in the real estate industry where borrowers try to mislead lenders about the intended use of their property. So it could be for example what the occupancy rate of their property is, so that they are able to obtain financing. One of the things that we've seen recently is that especially with respect to investment purchases, fraud is increasing because it's driven by profit and that is motivating investors to engage in fraud in order to obtain financing. By contrast fraud related to refinancing has gone down and I think that's mostly attributable to the fact that refinancing rates are so low. The real estate industry is also getting a fair amount of scrutiny as many of you I think may be aware, the Trump organization for example is under investigation by the New York Attorney General's office and the Manhattan DA, with respect to practices that I don't think are particular or specific to the Trump organization and that is for example providing different information concerning the value of your real estate property to different audiences.
So devaluing the property in one context say with respect to tax assessments and inflating the value of your property when you going to financial institutions to obtain financing and that is an issue that is specifically that the Trump organization is facing a lot of scrutiny for now but I think other entities could be dealing with similar issues. Likewise, in the last month congress passed a law called the anti-money laundering act and this is a very significant law that is going to impact many companies. One particular piece of it is requiring many companies to disclose their beneficial ownership to the department of the treasury and this I think could have a very significant impact in the real estate industry, particularly with respect to anonymously held shell companies that use real estate as a vehicle for illicit means. The disclosure requirements are not yet in effect but we will be seeing them coming into effect the next year as the regulations for the corporate transparency act are promulgated.
I also wanted to talk about PPP fraud, and how that has impacted the real estate industry during the pandemic. Real estate companies as I imagine many of you are aware are eligible for and have obtained PPP loans, they are also eligible to obtain second draw loans through I think the first quarter of 2021, and these loans can be very impactful for real estate companies in trying to manage and survive through the pandemic. Notably companies that are in bankruptcy are ineligible for PPP loans and in fact the Department of Justice just reached a settlement, a civil settlement the first civil settlement with a company that was alleged to have committed PPP fraud. It was a real estate company that was involved. They were a debtor in bankruptcy proceedings and it failed to disclose that. And I think the numbers are very telling, the company, which is called SlideBelts obtained 350,000 dollars in financing. The damages at issue were only 17,000 dollars and those were loan processing fees. But it faced liabilities or exposure of up to over 4,000,000 dollars in penalties because of the fraudulent scheme that it had engaged in. These can have great very significant consequences for companies. Of course, the DOJ is also bringing criminal case against fraudster in the real estate industry.
One of the things that is making prosecutors jobs easier in prosecuting fraud in the real estate industry in particular with respect to PPP loans is that companies are required to make certifications when they get loans and those certifications are basically doing the prosecutor job for him because it's very easy to prove whether or not they were lying. As I said at the beginning of my presentation there are many agencies that can go after real estate fraud, there are also different legal regimes that can be used by prosecutors to prosecute real estate fraud and this is just a few examples. You have federal and state fraud statues, which involve material misrepresentations being made in connection for example with the issuance of securities so there you have a securities fraud case that both an agency like the SEC and the DOJ can pursue. You also have corruption statues where companies may be paying bribes to for example obtain construction permits to build real estate or obtain licenses. And then you have also money laundering laws that are used to enforce against money laundering, which is the use of criminal proceeds for otherwise legitimate transactions. With that, I am going to turn it back to I believe Ed to take it over.
Nelson Luis:I'm just going to do one more slide here Ariel, so thanks for that as we kind of board the end here. We skipped our last polling question just in the interest of time but we wanted to make sure that we highlight one other big threat that of we talking about fraud we will be remiss without mentioning the risk is cyber threats. Ever since the pandemic started this has been one of the most prolific ways that we finding a lot of our clients are being falling victims to some of these schemes. SO the FBI themselves actually set up their own website since the pandemic commenced around the risk of cyber threats. What we want to caution everyone here is don't put your guard down this is an easy way for you to send a quick note to those in the organization to remind them about the risk of cyber threats, and not only for yourselves for those that might be sophisticated on this call but a quick remind is remember to just mention it to your family and friends, our parents, our grandparents, you know that they might be receiving these text messages or these different calls about the vaccine or about unemployment benefit or host of other things that people are preying on, so just be careful with that.
And really what we want to make sure we also leave you with is we showed you the video at the beginning we are going to leave you with a picture here at the end. They say a picture is worth a thousand words here, so stay alert don't be caught of guard as it relates potential fraud that lies beneath the surface. Where they say you know the predominant cases of fraud really are what's unknown to the public, if there is one thing that we asking everyone is to just remain vigilant and alert. So Ed I think that wraps us up here I know we maybe have one or two minutes left, any final comments that we want to leave everyone?
Ed Opall:I thank everybody for tuning in and I hope this was worthwhile and any questions please reach out to any of us. We'd want to talk to you. Thank you.
Transcribed by Rev.com
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