is great to be here with you today. As a kid, I
never imagined I could one day be excited about
attending an Internal Audit Conference, but here
I am. I am truly happy to be here, and happy to
be back in Chicago.
in my career as an FBI agent, I was assigned to
the Chicago Field Office, and worked on the first
violent crimes task force in the country. It was
a dream come true for me to work side-by-side with
other agents and state and local police, investigating
kidnappings, extortion, murder-for-hire
be honest—though I'm not sure it's safe to
say this in this crowd—I never actually planned
to become an accountant. Ever since I was a kid,
I wanted to be an FBI agent. When I was about 17,
I called an FBI recruiter to ask if I could come
to work for the Bureau. He asked me how old I was,
laughed, and then told me to go to college and get
an accounting degree so I would have a better chance
of becoming a special agent.
exactly what I did—a little reluctantly, I'll
admit. I wanted to be out catching bad guys, not
sitting behind a desk. I wanted to be protecting
and serving the American public, not crunching numbers.
I wanted to be the stuff of heroes, and I didn't
quite see what accounting had to do with it.
I sat for the CPA exam and went to work as an accountant.
And by the time I got the call from the FBI, and
traded in my calculator for my badge and gun, I
saw exactly what accounting had to do with it. I
understood that accountants are every bit as critical
to protecting and serving the public as law enforcement
officers. Though our roles are different, we are
both concerned with protecting the health of our
economy and the safety of our citizens.
I want to give you a "30,000-foot overview"
of the financial crime and public corruption threats
we are facing, and tell you what the FBI is doing
to protect the American public and how you are integral
to our success.
give you a bit of history, the FBI was created in
1908 in order to address criminal activity that
had begun crossing state lines. From combating gangsters
to investigating Nazi spies to fighting organized
crime, the FBI has built its reputation on successfully
investigating crime and bringing criminals to justice.
came September 11, 2001. Overnight, the world changed.
And so did the FBI. Our No. 1 priority is now counterterrorism,
followed by counterintelligence and cyber—all
under the umbrella of national security. But this
heightened national security mission has not replaced
our criminal mission. We are still upholding our
criminal responsibilities in addition to preventing
terrorism and protecting national security.
crime, fraud, and public corruption are still among
our top priorities. In fact, we have more agents
working financial crimes and public corruption today
than we did before the September 11 attacks. Currently,
we have nearly 2,000 agents working white collar
crime cases and over 500 working public corruption
you may know, the FBI investigates everything from
major corporate fraud to money laundering. I mainly
want to discuss our work in the area of combating
corporate fraud—but let me give you a brief
overview of some of the other threats we are confronting.
corruption is at the top of the list. We have all
heard the expression "the love of money is
the root of all evil." I don't know if this
is true, but it is certainly the root of all public
corruption. Unfortunately, there has always been
a small number of individuals whose desire to make
money overshadowed the desire to serve.
public officials betray the trust of our society
and threaten the foundations of our democracy. They
allow illicit drugs and weapons to flow freely;
they permit organized crime to operate with impunity;
and they can open the door for terrorists who threaten
our way of life. This is why public corruption is
the FBI's No. 1 criminal priority.
I said earlier, we have over 500 agents working
on public corruption squads across the country.
Just this month we formed a new public corruption
task force in western New York. From Philadelphia
to Phoenix and from Dallas to Detroit, we are investigating
and rooting out corruption ranging from voter fraud
to embezzlement to illegal kickbacks. We currently
have over 940 open investigations targeting corrupt
officials. In the last 12 months, we have indicted
469 public officials and convicted 634.
of our most notable recent successes is "Operation
Lively Green." You may have read the latest
installment of this case in the weekend papers.
In Arizona, we worked with federal law enforcement
agencies and the Tucson Police Department on a three-and-a-half-year
undercover operation targeting extensive public
corruption along the U.S.-Mexico border. Current
and former U.S. military and law enforcement officers
were participating in what they believed was an
illegal narcotics trafficking organization.
no drugs actually changed hands or crossed the border,
the officers accepted over $800,000 in bribes to
transport cocaine from undercover agents posing
as drug traffickers. Some individuals also accepted
cash bribes to recruit other public officials to
help the fake drug ring. So far, dozens of officers
have pled guilty to charges of bribery, extortion,
and conspiracy, and we anticipate more indictments
in the future.
another front, identity theft has become one of
the dominant white collar crime problems. You've
probably all seen the Citibank commercials that
feature the faces of identity theft victims speaking
with the voices of credit card thieves, who list
all the outlandish purchases they have made, saying,
"It's not like I'm paying for it anyway."
make us laugh, but they also drive home the point
that anyone can be a victim of identity theft. A
recent Federal Trade Commission survey revealed
that about 4.6 percent of U.S. consumers have been
victimized, resulting in losses of more than $52
billion. All too often, criminals steal identities
and then commit other crimes, such as credit card
fraud, check fraud, or mortgage fraud.
FBI has been working with federal, state, local,
and private sector partners to address this rapidly
growing problem. Right here in Chicago, the Chicago
Metro Identity Fraud Task Force has been instrumental
in obtaining 11 indictments and 37 prosecutions.
And in New York, the FBI teamed up with the Postal
Inspection Service and the Secret Service to successfully
investigate one of the largest identity theft cases
ever prosecuted in the U.S.
that case, a crooked insider at a Long Island company
that provided customers with access to credit history
bureaus downloaded over 30,000 credit histories.
He then sold them to conspirators who used them
to commit identity theft. They looted personal savings
accounts and racked up credit card charges. Their
crimes impacted over 30,000 victims and resulted
in over $11 million in losses. The subject pled
guilty, and was sentenced to 14 years in prison.
rapidly-growing threat the FBI investigates is mortgage
fraud. Nearly 22,000 mortgage-related suspicious
activity reports have been filed this year. Losses
have increased from $429 million in 2004 to over
$1 billion in 2005. Like corporate fraud, mortgage
lending and the housing market have a significant
impact on our nation's economy. Many people want
to believe their homes are worth more than they
are, and the recent housing booms across the U.S.
have attracted criminals who want to exploit the
situation to make a quick profit.
FBI investigates mortgage fraud in two distinct
areas: fraud for housing and fraud for profit. Fraud
for housing represents illegal action perpetrated
solely by the borrower—the motive being to
acquire and maintain ownership of a house under
false pretenses, such as misrepresenting income
or employment history, or using a stolen identity
for the transaction.
FBI focuses the majority of its mortgage fraud efforts
on fraud for profit. This is commonly referred to
as "Industry Insider Fraud," which speaks
for itself. We estimate that 80 percent of all reported
fraud losses involve collaboration or collusion
by industry leaders. Typically, their M.O. is revolving
equity, falsely inflating property values, or issuing
loans based on fictitious properties.
current mortgage fraud trend is property flipping,
which is best described as buying properties and
then artificially inflating their value through
false appraisals. Then, the properties are repurchased
several times at a higher price by associates of
the "flipper." Often, flipped properties
are repurchased for 50 percent to 100 percent of
their original value.
trend is equity skimming, which happens when corrupt
insiders persuade unsophisticated borrowers to refinance
their mortgages every few months. Corrupt employees
target people with high mortgage interest rates
and convince them to refinance at slightly lower
rates. A few months later, they repeat the scheme
with a slightly lower rate, but a higher loan amount
is generated each time to pay the origination fees.
In essence, the perpetrators strip the remaining
equity from the properties and line their pockets
with origination fees. Eventually the loans become
too large for the borrowers, who are forced to default.
are just some of the trends we are seeing, but we
have been working hard to educate the public and
to work with the mortgage industry to combat the
problem. For example, we are collaborating with
the Mortgage Bankers Association to improve and
promote reporting of fraudulent mortgage activity
through filing Suspicious Mortgage Activity reports.
This will give us a more complete picture of the
problem so we can more effectively disrupt and dismantle
care fraud is another area of great concern. And
as people continue to live longer, criminals will
continue their attempts to defraud health care programs.
We are seeing criminal activity ranging from the
traditionally unscrupulous—such as fraudulent
billing—to the truly unconscionable, such
as diluting cancer drugs and performing unnecessary
care fraud puts the health and finances of all Americans
at risk. And although we believe the problem will
persist, especially as the elderly population continues
to grow, we are making solid progress. In 2005,
for example, we secured 402 indictments and 500
FBI is working to investigate all these crimes and
bring perpetrators to justice. Much of that work
is done behind the scenes and is not reported on
the front pages. While many Americans are aware
of these issues, they have not exploded on to the
American consciousness in the dramatic way that
corporate fraud did back in the summer of 2002.
Tyco. WorldCom. Adelphia. One after another, extensive
and deceptive corporate fraud schemes were revealed.
Stocks tumbled. Each revelation of corporate malfeasance
further shook investor confidence. Even honest corporations
fell under the shadow of suspicion.
give you a sense of the scope of the problem, the
number of corporate fraud cases the FBI has opened
has increased over 300 percent between 2001 and
2005. At last count, we had 18 investigations in
which investors have lost at least $1 billion. Two
of these individual investigations represent $80
FBI investigates corporate fraud in publicly traded
companies in which corporate insiders knowingly
and willingly use improper accounting techniques
in an effort to meet street analyst expectations.
The schemes are typically contrived to overstate
revenue and the related overstatement of earnings
per share. I thought you probably hadn't heard enough
technical terms today, so let me tell you a little
about the six most common schemes that we see—in
no particular order of prevalence.
first is "phony sales," or making journal
entries to book a sale that never took place.
second is "parked inventory sales," or
recording revenue for goods shipped to a location
controlled by the seller, such as a warehouse or
parking lot, to provide the appearance that a sale
third is "swap transactions," in which
two companies conspire to exchange payment or service
simply to inflate revenue.
fourth is "channel stuffing," which is
quite different from channel surfing. Channel stuffing
involves overselling products to customers, resellers,
or distributors, with an unwritten agreement that
the customer will receive a discount on the full
price at some point in the future.
fifth is "accelerated revenues," or booking
revenue in the current period which should be deferred
until the earnings process is complete. Examples
would be billing for an unshipped product or overestimating
the percentage completion on a long-term construction
the sixth scheme we commonly see is "side deals,"
in which a seller books a sale, with an unwritten
understanding that the buyer has the right to cancel
the sales contract and return the product or get
a full rebate in the future.
on the expense side, corrupt companies will often
capitalize and/or defer expenses, in order to impact
earnings per share without affecting the revenue
line—thereby meeting analyst expectations.
are just some of the trends the FBI investigates.
I've described them in very basic terms, but as
you know, corporate fraud cases are incredibly complex,
wide in scope, and extremely sensitive. And it is
not just corrupt CEOs or managers who are affected.
Individual shareholders, employee pension plans,
mutual funds, financial institutions, and the securities
markets have all felt the aftershocks.
was heading up the FBI's Criminal Investigative
Division at the height of corporate scandal season
and lost many a night's sleep contemplating the
consequences of approving investigations into giant,
powerful corporations. It is a no-miss game: If
you are wrong, you will damage reputations, hurt
workers and investors, and impact the marketplace.
And the same is true if you are right. But that's
why the FBI has the responsibility for corporate
fraud and public corruption investigations. Like
internal auditors, we are one of the few agencies
that is independent and can make the tough calls.
the corporate fraud scandals erupted, we decided
not to extend the life of the problem, but to snuff
it out decisively. Once we identified the fraud,
we did not plan to negotiate. Too much was at stake,
and protecting employees, investors, and the economy
was paramount. Our goal was to work with cooperating
employees, gather evidence, make arrests, and secure
established a Corporate Fraud Reserve Team, composed
of special agent accountants and financial analysts
who fan out across the country, working on investigations
such as Enron, Qwest, and HealthSouth. We participate
on the President's Corporate Fraud Task Force, which
was established in July 2002.
also collaborate extensively with affected companies,
federal partners, and private organizations like
the American Institute of Certified Public Accountants.
And we have further leveraged our resources in corporate
fraud investigations by working side-by-side with
our civil regulatory partners, most notably the
Securities and Exchange Commission.
often work with the SEC in a parallel investigation
mode, whereby although we in no way direct their
efforts, we share the results of our investigative
efforts, as long as they did not stem from the grand
jury process. At the end of these investigations,
the civil investigation is stayed while the criminal
case moves forward for adjudication.
aggressive, interagency approach has been highly
successful. Our collaborative efforts have produced
545 indictments, 365 convictions, and over $1 billion
in restitutions in corporate fraud matters related
to accounting fraud and insider trading.
Enron Task Force has charged 34 individuals to date,
including 21 executives, and has seized over $227
million. Andrew Fastow, Enron's former chief financial
officer, pled guilty to conspiracy charges. He will
serve a 10-year sentence and will cooperate with
investigators concerning the role of other Enron
executives. Additionally, Enron Chairman Kenneth
Lay, CEO Jeffrey Skilling, and Chief Accounting
Officer Richard Causey were indicted on an array
of charges, including multiple counts of securities
fraud, wire fraud, bank fraud, insider trading,
another example, the WorldCom investigation has
resulted in six indictments and six convictions
so far, including those of CEO Bernard Ebbers and
CFO Scott Sullivan. And the Rite-Aid investigation
has also netted six indictments and six convictions,
including those of the chairman, president, and
have made significant progress. In 2002, Jay Leno
joked about the president calling for doubling the
punishment for corporate fraud, saying, "That
means they'll slap you on both wrists." Times
have certainly changed—and so has federal
you know, the Sarbanes Oxley Act, which Congress
passed in July 2002, imposed new specific criminal
felonies for securities fraud violations. It enhanced
the penalties for mail fraud/wire fraud violations,
which are charges typically filed in corporate fraud
investigations, from five-year felonies to 20-year
felonies. It also requires CEOs and CFOs to certify
addition, Sarbanes-Oxley made it a felony to obstruct
justice in corporate fraud investigations by prohibiting
anyone from altering, destroying, or otherwise impeding
a federal law enforcement or regulatory investigation.
In other words, if a secretary knowingly shreds
something that should be sent to regulators, that
secretary is just as culpable as the CEO who directed
old "I told him to ship the documents to the
feds, but he heard 'rip the documents to shreds'"
excuse will not work. CEOs and corporate managers
have seen that we will not tolerate collusion and
fraud and that corruption will be rooted out and
fact, there has been some debate in the public square
over whether corporate fraud has been "over-enforced."
Critics point to the prosecution and conviction
of Martha Stewart as an example. But think back,
for a moment, to the collapse of Enron and the wave
of corporate scandals that followed. Think about
the stature and power of the corrupt companies that
were disgraced. And then think about the retirees
whose lifelong savings were looted.
about the students whose parents can no longer afford
to send them to college. Think of the elderly who
can't pay for their medication. Monetary loss is
just one part of the problem. It is impossible to
quantify the magnitude of human loss that these
criminals deliberately caused.
that is why we must continue to work together to
detect and investigate corporate fraud and bring
corporate criminals to justice. Law enforcement
and the justice system play a large role. But the
importance of the auditing and accounting process
cannot be overstated, and its role is equally important.
By ensuring transparent and reliable financial reporting,
accountants are critical to keeping us all honest
and fair—from small businesses to vast federal
are the first line of defense against corporate
fraud—you are the beat cops and first responders.
You are the conscience of the organizations you
audit. You are the custodians of their ethics. You
are not just checking boxes—you are constantly
scanning the horizon for inconsistencies or irregularities,
like an FBI agent conducting routine surveillance.
as my role has changed since 9/11, your role has
changed since Enron and "SOX." If there
is advice I could give you from the law enforcement
perspective, it would be this: First, continue to
be proactive. We know you are under pressure from
many sides, but you must continue to alert the chain
of command to possible fraud. And you also have
to ask the tough questions, not just the "yes"
or "no" questions, but more aggressive
ones, such as "Tell me about the entries or
accounting processes that you disagree with."
continue to be independent. Your impartiality is
a valuable asset, both during investigations and
even on the stand. You make excellent witnesses,
by the way. But here I'm going to have to poke all
you internal auditors a bit
where were you
for Enron? Where were you for Qwest? Where were
you for WorldCom, and all the rest? We can't let
this happen again.
continue to work with the FBI—or, better yet,
come work for the FBI. Now, technically I'm not
an approved FBI recruiter, but I will tell you that
15 percent of new special agents hired in 2004 had
backgrounds in accounting. Currently, we have about
1,230 special agent accountants, but nearly 300
of them are eligible to retire next month. But you
don't have to carry a badge and gun. There are plenty
of non-agent accountants in the FBI, and we are
always looking for more. Just wanted to throw that
whether or not you bring your accounting skills
to the Bureau so that I can retire, your work is
critical to our success, and we must continue to
work together. I like to think that the men and
women of the FBI are the guardians of America's
freedom. In a very important sense, the men and
women of the accounting profession are the guardians
of America's economy.
are not so very different. In both professions,
our mission is to protect the American public. As
accountants, we seek truth. If we do our job right,
we increase investor confidence in the marketplace—and
the economy flourishes. Our goal as FBI agents is
to protect Americans from threats, whether from
terrorism, abuses of civil rights, or fraud. And
if we do our job right, our fellow citizens are
safer, they have more confidence in us—and
also share common values. The core values instilled
in every accountant —fairness, transparency,
ethics, and integrity—are the same core values
ingrained in every FBI agent. Guided by those values,
we have dedicated ourselves to restoring confidence
in our government and in our marketplace.
we have exposed and investigated corruption. We
have removed corrupt leaders from power. And we
have worked hard to remind Americans that we are
on their side. Whether by providing them with honest
and sound financial statements, or conducting an
ethical audit of company or government agency, or
arresting a corrupt CEO, together we have made great
strides towards repairing the damage that was done.
And together, we will succeed in protecting the
American public and the American marketplace.