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Fraud Remains a Growing Concern Globally

Six out of every 10 businesses are experiencing the same or higher levels of losses to online fraud compared with a year ago, according to “The 2018 Global Fraud and Identity Report” from Experian. Fraud was cited as a growing concern by 72 percent of businesses that participated in the study. Bankrupt companies are also three times more likely to be cited for fraud by U.S. regulators, according to a study from Deloitte Financial Advisory Services LLP.  That study indicated companies that experience fraud are much more likely than those that do not to land in Bankruptcy Court.

Many companies that have fraudulent financial statements are found to have been dealing with adverse performance issues and resorted to fraud in an attempt to cover up those problems. We have seen this scenario play out time and again, including recently in the $1.8 billion fraud involving an Indian bank that led to bankruptcy filings in the United States. Fraud remains an ongoing concern for TMA members, and this month’s JCR features several articles on the subject.

Leading off, Michael Goldman, head of KCP Advisory Group’s Forensic Accounting and Litigation Support, offers advice on how to tell the difference between fraud and incompetence. The article focuses on the tools fraud investigators use to distinguish between deceptive intent and ineptitude or laziness, and how to address each.

Richard Pedone and Christopher Desiderio of Nixon Peabody discuss the complexities of franchise fraud. When a fraud is perpetrated by a franchisee on a franchisor or the public, the franchisor seeking relief must be cautious in its approach, as the public pursuit of legal remedies may put the spotlight on the party that the franchisor entrusted with its brand and reputation, creating even more damage.

In recent years, the EB-5 visa program has been a target for fraud activity. EB-5 investments provide substantial sources of foreign capital to fund various development projects in the United States and have become an increasingly popular financing avenue among U.S. developers. However, many of these projects fail and/or fall victim to fraud given their unique challenges. Jonathan Friedland and John Martin of Sugar Felsenthal Grais & Helsinger explore this issue in more detail.

Avoidance actions continue to be a major source of funding and recovery in Chapter 11 cases. Edward E. Neiger and Jennifer A. Christian of ASK LLP focus on the increasing value avoidance actions have played in cases for constituencies or the reorganization of the company. In some cases, avoidance actions have meant the difference between whether a company survived Chapter 11 or its case was converted to Chapter 7.

Adam H. Isenberg and Steven C. Reingold of Saul Ewing Arnstein & Lehr LLP indicate that a number of cases involving avoidance actions have been brought against overseas defendants in recent years. Several legal doctrines may apply in such circumstances, and the authors focus on differing opinions by courts on one of them, extraterritoriality.

Staying informed and vigilant about fraud can help mitigate risk and ensure corporate resiliency. Separately, understanding and leveraging avoidance actions can result in significant value/recovery in bankruptcy cases.

Jacen Dinoff

Jacen Dinoff, CTP

KCP Advisory Group

Jacen Dinoff, CTP, is co-founder and CEO of KCP Advisory Group, a business advisory firm providing creative solutions to rehabilitate businesses. Dinoff has hands-on accounting, finance, management, and operations experience that complements his technical expertise in bankruptcy case administration and financial advisory. His career has included financial and operational restructurings, asset divestitures, and senior debtor/creditor advisor roles for public and private companies.

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