Follow the Money: Bankruptcy Fraud

In America, overwhelming debt is often just one piece of bad luck away. A messy divorce, an unforeseen medical event, or a prolonged period of unemployment can often spell financial ruin when progressive social services are not in place. Up through to the mid-19th century, if you couldn’t pay what you owed, it was likely that you’d be thrown in a debtors’ prison and put to work. Society has evolved a little since then. Bankruptcy law now offers a slightly more civilized path to balancing the books.

Under the legal process of bankruptcy, a person (or business entity) gives up what they can, in return for some leniency on their debts. But not everyone is playing the game fairly. Bankruptcy fraud can take many forms: concealment of assets, destruction of property, conflict of interest, fraudulent claims, and fee-fixing. In some cases, bankruptcy fraud is used by predatory scammers to take advantage of people who lack an understanding of the bankruptcy process. But in the vast majority of cases, it simply involves someone concealing their assets to skirt paying the full amount they owe.

According to the US Department of Justice, one in every ten bankruptcy filings includes some element of fraud. While it directly affects businesses and financial institutions who act as creditors, it also has negative indirect effects on the consumer, as creditors increase their fees on credit cards and loans to compensate for losses to bankruptcy fraud. Furthermore, FBI investigations have shown that oftentimes bankruptcy fraud is committed in conjunction with other white collar crimes, such as money laundering, mortgage fraud, and identity theft.

Famous Case: Steve Zinnel and Done Deal, Inc.

Steve Zinnel, a Sacramento businessman, split with his wife in 1999. It was anything but amicable. In an email to his wife in 2001, he stated his intention to declare bankruptcy with the primary goal being to deprive her and their two teenage children of any financial benefit from the divorce. If that was all he intended to do, he might’ve only been guilty of being a gigantic jerk. But he was a greedy jerk, and he went further.

Zinnel submitted his first fraudulent bankruptcy filing in 2005. Working with his attorney (and eventual co-defendant) Derian Eidson, Zinnel began hiding assets and funneling money through a shell company: Done Deal Incorporated.

Primarily used to house money received through his investment as a silent partner in an electrical infrastructure company, Done Deal would eventually act as a way of concealing Zinnel’s income from five different corporate entities. Zinnel was thus able to declare bankruptcy and dodge his debts (as well as alimony and child support obligations) while still collecting a healthy stream of undeclared income.

He might have gotten away with it, too. Except Zinnel wasn’t just a jerk, and he wasn’t just a criminal; he was narcissistic and vindictive, too. He placed a call to the FBI and asked them to investigate his ex-wife, a dental hygienist, for attempting to gain access to his private health insurance information. The FBI investigated, but they also investigated Zinnel and his bankruptcy proceedings.

The head of the electrical infrastructure company that was paying Zinnel off the books agreed to cooperate with federal investigators. They set up a meeting between Zinnel, Eidson, and some undercover agents. Through this, investigators learned that Zinnel was anything but bankrupt: at the time he’d placed his call to the FBI, he was concealing some $4 million from the government.

In March of 2014, Zinnel was found guilty of 15 counts of money laundering and bankruptcy fraud. He was sentenced to 17 years and eight months in prison, fined half a million dollars, and ordered to forfeit assets worth over $2.8 million to begin paying back what he owed to his wife and children.

How Investigators Fight Bankruptcy Fraud

The FBI is the primary agency responsible for investigating bankruptcy fraud, often working in collaboration with the US Trustee Program and the US Department of Justice. Typically, an investigation begins with a single red flag. From there, investigators conduct interviews and review financial documents. Depending on the size and complexity of the case, undercover operations or electronic surveillance may be necessary.

Bankruptcy fraud also needs to be fought in the private sector, where creditors may employ investigators to both detect and prevent instances of fraud. Forensic investigators examine financial records for instances of red flags, and develop new metrics by which to discern which transactions look suspect. Given the enormous amount of possible leads (and possible dead ends), investigators need to know where to look and what questions to ask.

In both detection and prevention (and in both the public and private sector), investigators are designing and implementing new tools that utilize AI and machine learning to root out bankruptcy fraud. In the modern financial landscape, practically every transaction leaves a trail, and the modern forensic investigator needs to do more than follow the money; they need to follow the data.

Three Experts Who Teach How to Fight Bankruptcy Fraud

Cindy Greenman, PhD, CFE Embry-Riddle Aeronautical University

Dr. Cindy Greenman is chair of the forensic accounting and fraud examination program at Embry-Riddle Aeronautical University, where she also teaches as an associate professor. She received her master’s in business from Central Michigan University and her PhD in accounting from NorthCentral University. In 2019, Dr. Greenman won the Association of Certified Fraud Examiners’ Educator of the Year Award.

Dr. Greenman was the first full-time accounting instructor that Embry-Riddle hired. From the beginning, she was encouraged to develop other accounting courses that interested her. In the summer of 2013, she was asked to write the curriculum for the university’s bachelor program in forensic accounting and fraud examination. She conferred with contacts at the NCIS, the FBI, and in the psychology department. Since the program began, it’s earned 100 percent of its students a job placement within 30 days of graduation.

Suzanne Lynch Utica College

Suzanne Lynch is a professor of practice in economic crime management at Utica College, where she also serves as director of the financial crime and compliance management program. She earned her bachelor’s in criminal justice from Wayne State University, and her master’s in economic crime management from Utica College.

Prior to joining academia, Lynch accrued extensive experience in risk analysis, fraud control implementation, and investigations in the financial services industry. Between MasterCard, Comerica Bank, and Goldman Sachs, she’s held numerous leadership positions in the areas of risk assessment, fraud management, and security. She’s also led several training sessions on fraud detection and investigations for financial institutions and law enforcement entities across the globe. Lynch currently serves as assistant executive director of the Economic Crime Institute at Utica.

Patrick Malloy, DBA (University of New Haven)

Dr. Patrick Malloy is the director of the MS investigations program at the University of New Haven, where he’s helped develop a robust financial crimes program that focuses on white collar crime investigation. He earned his master’s in accounting from Adelphi University, and his DBA in accounting from Argosy University.

Prior to joining the faculty at UNH, Dr. Malloy was the chair of the accounting and fraud investigations program at Pfeiffer University. Through his work in private practice as a licensed CPA, Malloy has gained extensive experience in fraud investigations and internal controls compliance and implementation. In 2012, he won the Starnes Award for outstanding contributions as a teacher, mentor, and leader.