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Valuation & Litigation Advisor - July 2019

 

It’s Hurricane Season for Fraud

Contributor: Ricardo Zayas, Partner, Advisory Services

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The frequency of significant natural disasters seems to be increasing at an alarming rate. And with it, unfortunately, has come a spike in disaster fraud.

In recent years, we have experienced every type of catastrophic event including massive hurricanes, tornadoes, tsunamis, wildfires, volcanic eruptions, and floods. The most recent and costliest events in the United States for which statistics are available include:1

  • Hurricane Michael – A Category 5 storm that made landfall in October 2018 in Mexico Beach, Florida. Estimated costs totaling $25.2 billion with 49 deaths.
  • Hurricane Florence – A large and slow moving storm that occurred in September 2018 in the Carolinas. Estimated costs totaling $24.2 billion with 53 deaths.
  • Hurricane Maria – A category 4 storm that made landfall in September 2018 and caused widespread devastation in Puerto Rico. Estimated costs totaling $92.7 billion with 2,981 deaths.
  • Hurricane Harvey – Made landfall in August 2018 and caused historic flooding across the Houston area. Estimated costs totaling $128.8 billion with 89 deaths.
  • The Western U.S. Wildfires – Occurred in California in the summer and fall of 2018. Estimated costs totaling $24.2 billion with 106 deaths.

It is during these times of disaster and devastation, when neighbors pull together and step up to help one another rebuild. Unfortunately, a darker side also can emerge in crisis, with people attempting to capitalize on the hardship of others. Disaster fraud is defined as a deliberate act committed to defraud individuals, private organizations or the government after a natural or man-made catastrophe.

In the wake of Hurricane Katrina and in response to the increase in disaster fraud, in 2005 the National Center for Disaster Fraud (“NCDF”) was established. The NCDF is a partnership between the U.S. Department of Justice and various law enforcement and regulatory agencies. It is the national coordinating agency within the Criminal Division of the Department of Justice established to detect, prevent, investigate, and prosecute frauds related to natural and man-made disasters.2

With the 2019 Atlantic hurricane season now underway, it is important to be aware of potential scams and schemes that surface during these times.

CHARITY SCAMS

Solicitation of Donations and Fraudulent Websites

One of the easiest scams for a fraudster to perpetrate is soliciting donations for illegitimate charities. This type of scam preys upon generous individuals who are interested in giving aid to the individuals affected in a disaster. These solicitations can come through emails, phone calls or even door to door.

Fraudulent charitable giving can be carried out through counterfeit websites created to prey on the uninformed public. The fraudsters set up websites that sound like legitimate charities or have similar names to dupe the public. For example, many charity websites end in .org, such as redcross.org. A fraudster could set up a domain name of redcross.com in an attempt to divert charitable donations for his or her own benefit.

While the charity and the individual seeking the donation may seem legitimate, it is important to perform simple due diligence prior to making a donation. Certain organizations have already performed the vetting process for you. The Better Business Bureau Wise Giving Alliance provides reports on national charities and also allows users to file a complaint on charities that they believe to be suspicious. The American Institute of Philanthropy is a charity “watchdog” service which helps donors make informed giving decisions. Guidestar compiles data on more than 1.8 million non-profit agencies.

CROWDFUNDING

Crowdfunding has become a hot area where fraudsters take advantage of the charitable public. Crowdfunding is a means to raise funds from a large group of individuals, usually in small dollar increments. Many crowdfunding internet-based platforms exist, such as GoFundMe.com. Many have little oversight and can be easily exploited. When donating via crowdfunding sites, be aware of the creator’s background and credentials, do your research to see if any public complaints have been filed, and be vigilant.

ANTICOMPETITIVE CONDUCT

A natural disaster is an opportune time for fraudsters to take advantage of individuals or companies that need to rebuild. Types of illegal / anticompetitive schemes include the following:

  • Bid-rigging is a scheme where two or more parties in the same industry work together to circumvent the bidding process. Bid-rigging schemes include:
    • Bid rotation – two or more contractors collude to alternate business between them on a rotating schedule.
    • Bid suppression – When new competition threatens to uncover the contractors’ bid-rigging schemes, the schemers bribe or pay off the new competition to withdraw from bidding.
    • Complementary bids – when two or more contractors collude, whereby one company submits a bid that is artificially high in order for the other company to receive the contract to complete the work. While the bids seem competitive, all bids submitted are at an inflated price.
  • Market division schemes occur when one or more companies in the same industry divide the marketplace into various areas and refrain from working in each other’s designated areas. This in essence creates a monopoly in each divided area.
  • Price fixing occurs when companies in the same industry agree to set, raise or maintain prices for products or services extended to the individual or company affected by the natural disaster, thereby controlling the supply.

Each of these anticompetitive schemes leads to increased costs to the individual or company affected by the natural disaster, and in turn, they are cheated out of fair competition in purchasing good or services.

CONTRACTOR/VENDOR FRAUD

Contractor and vendor fraud takes advantage of individuals or companies needing to rebuild. These types of scams include individuals posing as contractors or vendors, requiring cash deposits, and then never returning to complete the work. Fraudulent contractors/vendors may also perform subpar work, requiring the victim to pay double in order to have the shoddy repairs redone.

INSURANCE FRAUD

Insurance fraud is prevalent in the wake of natural disasters. Individuals and businesses file claims with insurance companies, claiming fraudulent losses. Forensic accountants are typically hired by insurance companies to vet these large loss claims. For example, in response to a natural disaster, a manufacturing company filed a million dollar claim with its insurer claiming loss of inventory. After my investigation of the entity’s financial records and documentation produced in litigation, it became clear that there was no loss of inventory, and the claim was overstated by approximately 80%.

IDENTITY THEFT

Natural disasters, such as tornadoes and hurricanes, have the power to demolish your home and send your personal property in a million different directions. While you are primarily concerned with the safety of your family and your home, it is possible that your sensitive financial documentation has been swept away and landed in the hands of a potential fraudster. It is important that you pay close attention to your credit card and bank statements subsequent to the occurrence of such an event. This is a good time to check your credit report to see if any suspicious activity has occurred. Federal law entitles you to one free copy of your credit report annually from each of the three credit reporting agencies (Experian, TransUnion and Equifax), which can be requested from annualcreditreport.com. If you believe you have lost your credit cards, social security card or passport, contact these agencies right away. It is also important to request that a “fraud alert” be put on your credit file. This will allow the agency to monitor any attempts to open a new credit account in your name, requests to increase credit limits on existing accounts, or requests to obtain a new card on an existing account.

Another form of identity theft occurs through offers of assistance in obtaining federal or state aid. This happens through emails, phone calls or door-to-door solicitations. These fraudsters will look or sound official, but you should confirm their identity by calling the purported representative agency prior to releasing any personal information. Additionally, the Federal Emergency Management Agency (“FEMA”) will always schedule an appointment with you and will always wear photo identification badges.3 If you feel that you have been unofficially solicited in this manner, contact FEMA immediately.

The rise in the occurrence of natural disasters increases the chances that any one of us may become a victim of a crisis -- and of the nefarious tendencies of some of our fellow humans. After securing the safety and security of your family and home, the next imperative step is to remain alert to the possibility of fraud as you face rebuilding. Knowledge is power, and being aware of potential schemes to defraud puts you one step ahead of the fraudsters.

RESOURCES

1. National Centers for Environmental Information - National Oceanic and Atmospheric Administration (https://www.ncdc.noaa.gov/billions/events)
2. U.S. Department of Justice (https://www.justice.gov/disaster-fraud)
3. https://www.usa.gov/disaster-financial-help

 
Contributor
Heather Wilson, Director, Advisory

Director
Advisory
Philadelphia, PA
Ricardo Zayas, Partner, Advisory

Partner
Advisory
Philadelphia, PA
 





 
 
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