Banksters: Predators becoming Prey?

by Joel D. Hesch

Thanks to the financial crisis, we have a new breed of racketeer: the bankster. Crossing the line beyond aggressive accounting and fraud, banksters use full-blown racketeering practices into the financial arena, where they prey on unsuspecting clients. In corporations and financial institutions where the only concern is the bottom line, being a bankster is a badge of honor. The money made with these predatory financial practices is frequently in the hundreds of millions or even billions of dollars.

Financial statement fraud is rampant among banksters. Some of the newer variations include channel stuffing, where banksters offer customers discounts in the future, in exchange for accepting excess inventory now. Bill and hold allows banksters to cook the books by recording sales now, but shipping later. Round-tripping involves selling an asset with an agreement to buy the asset (or similar item) back later. Swaps allow two companies to alter their reported revenue by selling each other nearly identical products.

Of course, banksters keep using more familiar fraud practices as well. Reporting sales to fictitious customers, colluding with others to buy or sell assets above or below market values, creating multiple affiliate or shell companies or even banks are still as popular as they have been for decades. Most of these financial dealings are so complex there is virtually no risk of an eyebrow being raised by the Department of Justice (DOJ), IRS, or SEC.

To a financial professional, everything is measured by risk versus reward. The amount of money made through financial fraud schemes is so astronomical that it would take a huge risk to exit.

Up until now, the risk of being caught by a financial regulator has been minuscule.   But the economic downturn and the government’s two anti-fraud secret weapons has begun to tip the risk-reward calculation.

It just became more profitable to prey on their fellow banksters than to seek out new victims for racketeering schemes. The government has adopted two whistleblower programs which turn up the heat on predators by offering rewards worth up to a billion dollars simply for switching sides and teaming up with the government.

Originally, the Department of Justice (DOJ) reward program only paid whistleblowers if the government was the victim of the fraud. Even if employees or fellow banksters at Worldcom or Enron had reported that those companies were preying on investors, they would not have received a reward.  So there was little incentive to turn in a fellow bankster.

Now, however, the IRS is offering whistleblower rewards. This means that if a company engages in financial trickery that also results in underpaid taxes, a reward of up to 30% is paid for the one who reports it. If, for instance, a manager had reported Worldcom or Enron for income tax evasion, they could have received a sizeable reward.

Recently, the new IRS reward program has been made even more appealing: the IRS will agree to not disclose the name of the person reporting the bankster—even if they receive a $100 million reward for turning in their company!

The DOJ program has been around since 1986. It pays between 15 and 30 percent of what the government recovers from anyone, including financial professionals who work for a predatory company, for their help in uncovering fraud. In the 1990’s military contractors had to fork over nearly $5 billion to the government. In the early 2000’s the focus was on Medicare fraud, with $5 billion recovered from pharmaceutical companies and another $10 billion from healthcare providers. As a result, the DOJ has paid out nearly $3 billion in rewards. Since the size of the reward is determined by the amount recovered, with no limit, the highest rewards are now exceeding $150 million.

When both the DOJ and IRS programs are combined, the benefits for reporting fraud now outweigh the risk of continuing to participate in financial fraud in the company of banksters.

Unless the person reporting the fraud actually planned or initiated the fraud, they are usually eligible for a reward—even if they participated in the scheme.

If the direct victim of the bankster scheme is the government, the person reporting the fraud can collect rewards from both reward programs. For instance, the federal government is rapidly chumming the waters by throwing $3 trillion dollars into a dozen TARP and other bailout programs. Conservative estimates are that 10% of this money is lost due to financial fraud; the true figure may be as high as 30%. Mathematically, DOJ is poised to pay billions of dollars in rewards on the $500 billion being lost due to financial fraud. That means $100 billion in rewards are possible for financial professionals who report fraud under any one of these or other federal programs. If the fraud also results in underpaid taxes, another 30% reward is possible.

The DOJ and IRS are getting smart about financial fraud. They know that it takes an insider to root out the fraud. To entice these participants to turn away from the lucrative bankster schemes, they know their best option is to offer huge monetary rewards.

For example, fraud committed under TARP includes lying about collateral by overstating its worth; using collateral already in default; using collateral from a fraudulent loan; or committing balance sheet fraud, such as hiding assets offshore, using shell banks in tax haven countries, using special purpose vehicles to hide liabilities, hiding contingent liabilities, or disguising debt. Other forms of financial fraud against the government include taking federal funds through hidden fees; not giving credit for interest or gains; creating fake capital losses by back-dating trade tickets; or selling fake capital losses to those who need deductions.

Consider this example. In 2007, a large pharmaceutical company allegedly evaded federal income taxes through a complex financial transaction between related entities. It transferred ownership of patents to just two of its popular drug to a shell company it formed in Bermuda. The Bermuda company charged the related U.S. company huge royalties for being allowed to sell the two drugs in the United States. The U.S. company claimed large deductions for the so-called royalties expenses, thereby eliminating the amount of taxes owed. Because the companies were related entities, the IRS argued that it could pierce through the transaction and ignore the claimed royalty expenses. The company settled tax evasion allegations by paying $2.3 billion. A year later, another pharmaceutical company settled with the IRS for $3.4 billion for allegedly engaging in similar accounting trickeries.

If the new IRS reward program had been in existence, a manager in either corporation could have recovered reward of $750 million or $1 billion. If either company had also lied to the government about the prices charged to Medicaid for these drugs, the manager could have recovered another mind-boggling reward, based on a percentage of the overcharges.

For banksters, the rewards now outweigh the risks of remaining in shark infested waters. If you are working for a bankster, the twin DOJ and IRS reward programs may just be your ticket to financial freedom. If you are a bankster, watch out! Or better yet, clean up your act before you become shark bait.

Provided by: Joel D. Hesch, Esq.

Author of “Whistleblowing: A Guide to Government Reward Programs (How to Collect Millions of Dollars for reporting fraud)

Author of Reward: Collect Millions for Reporting Tax Evasion ((Your complete guide to the IRS Whistleblower Reward Program)

Mr. Hesch represents whistleblowers filing for rewards. Visit his website at:



Banksters: Are the Predators Becoming the Prey?