FINANCIAL INSTITUTION FRAUD PAST PAPERS WITH ANSWERS

QUESTION 1 : Which of the following is NOT a problem situation regarding a construction loan that might be concealed using change orders?

  1. The original project is not feasible.
  2. Collusive bidding is occurring.
  3. Shortcuts are shoring up other problems.
  4. Design changes were requested.

Change orders are often submitted along with draw requests. Although many times the change orders represent legitimate construction changes (for design, cost, or other things), they can also be indicators of fraud schemes. For example, an increasing trend in the number of change orders or amounts on change orders might be an indication that construction changes have taken place that would alter the originally planned project to such an extent as to render the underwriting inappropriate. Change orders might have the same impact on a project as altering the original documents. As with anything that is contracted for on a bid basis, change orders could also be an indication of collusive bidding. Furthermore, change orders might be an indication that the original project was not feasible and that shortcuts are shoring up other problem areas. Change orders should be approved by the architect and engineer

 

QUESTION 2 : Which of the following real estate loan schemes would be best described as an air loan? A. A loan applicant falsifies his income sources to qualify for a mortgage.

  1. A fraudster files fraudulent property transfer documents with the property owner’s forged signature, and then takes out a loan using the property as collateral.
  2. A property developer applying for a loan submits instances of previous development experience that are fictitious or that he had no part in.
  3. A builder, in collusion with an appraiser and other real estate insiders, fraudulently applies for a loan to construct a building on a nonexistent property and keeps the proceeds.

An air loan is a loan for a nonexistent property—with air symbolizing the loan’s fraudulent absence of collateral. Most or all of the documentation is fabricated, including the borrower, the property ownership documents, and the appraisal. This type of scheme involves a high level of collusion, and perpetrators might have even set up a fictitious office with people pretending to be participants in the transaction, such as the borrower’s employer, the appraiser, and the credit agency. Usually, air loans go into early payment default.

 

QUESTION 3 : Excessive write-offs are a form of concealment for which of the following schemes?

  1. Phantom loans
  2. Embezzlement
  3. Conflicts of interest
  4. All of the above

Excessive write-offs are a form of concealment for phantom loans, conflicts of interest, and embezzlement.

 

QUESTION 4 : A property flipping scheme occurs when someone purchases a piece of real estate and sells it shortly thereafter at an unjustly inflated value.

  1. True
  2. False

Property flipping is the process by which an investor purchases a home and then resells it at a higher price shortly thereafter. For example, an investor buys a house in need of work for $250,000 in July, renovates the kitchen and bathrooms, and landscapes the yard at a cost of $50,000. He then resells the house two months later (the time it takes to make the renovations) for a price that is reflective of the market for a house in that condition. This is a legitimate business transaction, and many individuals and groups make an honest living flipping properties. Property flipping is not intrinsically illegal or fraudulent, but it becomes so when a property is purchased and resold within a short period of time at an artificially or unjustly inflated value, often as the result of a fraudulent appraisal. In a flipping scheme, the property is sold twice in rapid succession at a significant increase in value (also known as an ABC transaction , where the property moves from party A to party B to party C very quickly).

 

QUESTION 5 : If a bank loan is a nonperforming loan, it might be a red flag for fraud. Which of the following is a fraud scheme that is often connected to a nonperforming loan?

  1. Land flips
  2. Construction over-budget items
  3. Bribery
  4. All of the above

A nonperforming loan is a loan that is in default or close to being in default. The interest and principal payments might be overdue, and the creditor has reason to believe the loan will not be collected in full. This is often indicative of a fraud scheme. Fraud schemes resulting in a nonperforming loan include: Fraudulent appraisals—The cash flow cannot support an inflated loan and resulting debt amount. False statements—The loan was made on false or fraudulently presented assumptions. Equity skimming—The borrower never intended to make the underlying loan payments. Construction over-budget items—The amount over budget might be a concealment method for other schemes such as embezzlement, misappropriation, or false statements. Bribery—The loan was made because the lender received a bribe or a kickback from the borrower. Land flips—The purpose of the loan was to finance the seller out of a property that has an artificially inflated value. Disguised transactions—The loans are sham transactions without substance, made to conceal other ills.

 

QUESTION 6 : When a construction developer submits a draw request to a lender, all of the following would be red flags for loan fraud EXCEPT:

  1. Omission of developer’s personal account statements
  2. Failure to include lien releases from each subcontractor
  3. Invoice documentation that appears altered
  4. Missing inspection reports Construction loan advances are generally supported by draw requests.

A draw request is the documentation substantiating that a developer has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. Generally, a draw request is made once a month and is verified by a quantity surveyor (QS) or other authorized entity as agreed to by the financial institution. The request should be accompanied Paid invoices for raw materials Lien releases from each subcontractor Inspection reports Canceled checks from previous draw requests Bank reconciliation for construction draw account for previous month Loan balancing form demonstrating that the loan remains in balance Change orders, if applicable Wiring instructions, if applicable Proof of developer contribution, if applicable Any missing or altered documentation is a red flag that something is amiss with the draw request. All advances on the loan should be adequately documented. The developer’s personal account statements would never be included with a draw request.

 

QUESTION 7 : In a _________, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process.

  1. Daisy chain
  2. Reciprocal loan arrangement
  3. False swap scheme
  4. Linked financing arrangement

In a daisy chain, a bank buys, sells, and swaps its bad loans for the bad loans of another bank, creating new documentation in the process.

 

QUESTION 8 : Which of the following situations is often present in real estate fraud schemes?

  1. The services of an arms-length legal representative
  2. No expert assistance at closing
  3. A false appraisal report
  4. All of the above Real estate transactions assume a willing buyer and a willing seller. Fraud can occur when the transaction breaks down or the expert assistance is not at arm’s length.

 

QUESTION 9 : Which of the following methods might be used to conceal a sham loan transaction in which the loan officer receives part of the proceeds (kickback)?

  1. “Digging” the loan on the books
  2. Charging off the loan as a bad loan
  3. Turning the loan over to a collections agency
  4. Letting the loan go into arrears

Loan officers will sometimes make loans to accomplices who then share all or part of the proceeds with the lending officer. This is called a sham loan scheme. In some instances, the loans are charged off as bad debts; in other instances, the fake loans are paid off with the proceeds of new fraudulent loans.

 

QUESTION 10 : Which of the following best describes the difference between a flipping scheme and a flopping scheme in the context of mortgage fraud?

  1. In a flopping scheme, the original seller always ends up as the final owner of the property.
  2. In a flopping scheme, the lender is not one of the potential victims of the scheme.
  3. In a flopping scheme, the value of the first transaction is deflated instead of inflating the second transaction.
  4. In a flopping scheme, the second transaction in the scheme usually occurs several years after the first.

Property flipping is the process by which an investor purchases a home and then resells it at a higher price shortly thereafter. For example, an investor buys a house in need of work for $250,000 in July, renovates the kitchen and bathrooms, and landscapes the yard at a cost of $50,000. He then resells the house two months later (the time it takes to make the renovations) for a price that is reflective of the market for a house in that condition. This is a legitimate business transaction, and many individuals and groups make an honest living flipping properties. Property flipping is not intrinsically illegal or fraudulent, but it becomes so when a property is purchased and resold within a short period of time at an artificially or unjustly inflated value, often as the result of a fraudulent appraisal. In a flipping scheme, the property is sold twice in rapid succession at a significant increase in value (also known as an ABC transaction , where the property moves from party A to party B to party C very quickly). Property flopping is a variation on property flipping, but it generally involves a property subject to a short sale (meaning the owner sells the property at a lower value than the unpaid mortgage amount on the property). This variation typically is conducted by industry insiders or unscrupulous entrepreneurs rather than the homeowner. Property flopping involves a rapid transfer of property with an unjustified, significant change in value (like the ABC transaction in flipping schemes), but instead of inflating the value on the second transaction, the value on the first To prevent problematic short sale flopping, some lenders are starting to require all interested parties to sign an affidavit requiring disclosure of an immediate subsequent sale.

 

QUESTION 11 : The purpose of draw requests in construction lending is to provide:

  1. Documentation that all architectural and engineering designs and quotes have been completed
  2. Documentation that costs have been incurred and reimbursement is sought
  3. Documentation that the design is approved by the International Union of Architects
  4. Documentation that the construction project cannot continue without additional funding

Construction loan advances are generally supported by draw requests. A draw request is the documentation substantiating that a developer/borrower has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. A typical fraud scheme involves requesting advances on the loan for inappropriate costs, such as personal expenses and/or construction costs for an unrelated project.

 

QUESTION 12 : Generally, if the dollar amount of an embezzlement scheme at a financial institution is small enough such that the targeted entity’s financial statements will not be materially affected, the scheme can be most effectively detected through which of the following methods?

  1. Conducting a financial statement analysis
  2. Reviewing all disbursements below the approval limit
  3. Educating employees who are responsible for handling currency
  4. Conducting a review of source documents

There are several methods by which embezzlement can be detected. Generally, if the dollar amount of an embezzlement scheme is small enough such that the targeted entity’s financial statements will not be materially affected, embezzlement fraud can be most effectively detected through the review of source documents (e.g., receipts, deposit slips). There can be many types of clues in the source documents, and the particular situation will often determine what the fraud examiner needs to look for. The following are common red flags in source documents Missing source documents Payees on source documents (e.g., checks) do not match entries in the general ledger Receipts or invoices lack professional quality Duplicate payment documents for different transactions Payee identification information that matches an employee’s information or that of his relatives Apparent signs of alteration to source documents Lack of original source documents (photocopies only) If the scheme is so large that the financial statements of the institution are affected, then a review of the source documents will serve to confirm or refute an allegation that an embezzlement scheme has occurred or is occurring. Generally, for large embezzlements, the most efficient method of detection is an analysis of the financial statements.

 

QUESTION 13 : Because it is a common occurrence, the fact that documents are missing from a loan file is generally not a red flag for loan fraud.

  1. True
  2. False

Missing or altered documentation is a red flag for any type of fraud scheme, and it is a particular concern for loan fraud. While it is true that many loan files have missing documents, it is important to determine if the documents have been misplaced or were never received.

 

QUESTION 14 : Heather is a fraud examiner who is investigating a fraud case at a bank. Which of the following of Heather’s findings might be a red flag of embezzlement?

  1. Only photocopies are available as source documents instead of originals
  2. Some source documents are missing or altered
  3. Payees on source documents do not match entries on the general ledger
  4. All of the above There are several methods by which embezzlement can be detected.

Generally, if the dollar amount of an embezzlement scheme is small enough such that the targeted entity’s financial statements will not be materially affected, embezzlement fraud can be most effectively detected through the review of source documents (e.g., receipts, deposit slips). There can be many types of clues in the source documents, and the particular situation will often determine what the fraud examiner needs to look for. The following are common red flags in source documents Missing source documents Payees on source documents (e.g., checks) do not match entries in the general ledger Receipts or invoices lack professional quality Duplicate payment documents for different transactions Payee identification information that matches an employee’s information or that of his relatives Apparent signs of alteration to source documents Lack of original source documents (photocopies only)

 

QUESTION 15 : Which of the following is a red flag for new bank account fraud?

  1. A customer leaves out requested information on the account application
  2. A customer lists a mail drop as the account’s mailing address
  3. A customer requests a large cash withdrawal immediately after opening the account
  4. All of the above

Fraud is much more likely to occur in new accounts than in established accounts.  New account fraud is generally defined as fraud that occurs on an account within the first 90 days that it is open; often, perpetrators open these accounts with the sole intent of committing fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts. Some of the more common red flags of potential new account schemes are: Customer residence outside the bank’s trade area Dress and/or actions inconsistent or inappropriate for the customer’s stated age, occupation, or income level New account holder requesting immediate cash withdrawal upon deposit Request for large quantity of temporary checks Services included with the account that do not match the customer’s purpose Missing or inaccurate customer application information Invalid phone numbers or addresses in customer account information Use of a mail drop address (a service where a non-affiliated party collects and distributes a person or entity’s mail) Large check or ATM deposits followed by rapid withdrawal or transfer of funds (a flow-through account) Business accounts without standard business transactions, such as payroll or transactions that would be expected in that business Transactions without a clear purpose in jurisdictions known for high levels of corruption Opening deposit that is a nominal cash amount Rare customer ID type Applicants over the age of 25 with no credit history Customers who cannot remember basic application information (phone number, address, etc.)

 

 

QUESTION 16 : Which of the following is a common area for construction loan fraud schemes?

  1. Retainage
  2. Developer overhead
  3. Estimates of costs to complete
  4. All of the above

Construction lending has different vulnerabilities than other permanent or interim lending. More risks are associated with construction projects than with already-built projects.

 

QUESTION 17 : In most construction contracts, a certain amount will be withheld from each draw request by the contractor. This amount is not paid until the contract has been finished and approved by the owner. The withheld amount is referred

  1. Withholding
  2. Retainage
  3. Good faith deposit
  4. None of the above Retainage (sometimes called the holdback ) is the amount withheld from each draw request until such time as the construction is complete and the lien period has expired.

 

QUESTION 18 : Which of the following is most indicative that the winning bid on an original construction project was not feasible?

  1. High turnover in developer’s personnel
  2. Increasing trend in the number of change orders
  3. Draw requests
  4. Missing documentation

An increasing trend in the number of change orders or amounts on change orders might be an indication that construction changes have taken place that would alter the originally planned project to such an extent as to render Alternatively, some projects—especially large projects—tend to have many change orders. It might be more abnormal in situations like these to have few change orders or none at all than to have many. For instance, a lack of change orders for a large project might suggest that progress is not actually being made. Ultimately, the key characteristic that the fraud examiner should look for in change orders is abnormality, which can come in many forms. Fraud examiners should discover what the normal trend for change orders is in terms of both quantity and content with the particular type of industry and project, and then they can look for deviations from those trends.

 

QUESTION 19 : Which of the following situations would be MOST indicative of a customer committing new account fraud at a bank?

  1. A customer opens a business account and soon after has payroll transactions on the account.
  2. A customer deposits a substantial amount of funds in a new personal account and does not spend or withdraw them for several months.
  3. An invalid address or phone number is listed in the customer’s account information.
  4. A customer opens a new personal account and immediately requests two ATM cards.

Fraud is much more likely to occur in new accounts than in established accounts. New account fraud is generally defined as fraud that occurs on an account within the first 90 days that it is open; often, perpetrators open accounts with the sole intent of committing fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts. Some of the more common red flags of potential new account schemes are: Customer residence outside the bank’s trade area Dress and/or actions inconsistent or inappropriate for the customer’s stated age, occupation, or income level New account holder requesting immediate cash withdrawal upon deposit Request for large quantity of temporary checks Services included with the account that do not match the customer’s purpose Missing or inaccurate customer application information Invalid phone numbers or addresses in customer account information Use of a mail drop address (a service where a non-affiliated party collects and distributes a person or entity’s mail) Large check or ATM deposits followed by rapid withdrawal or transfer of funds (a flow-through account) Business accounts without standard business transactions, such as payroll or transactions that would be expected in that business Transactions without a clear purpose in jurisdictions known for high levels of corruption Opening deposit that is a nominal cash amount Rare customer ID type Applicants over the age of 25 with no credit history Customers who cannot remember basic application information (phone number, address, etc.)

 

QUESTION 20 : Common fraud schemes involving ATMs include all of the following EXCEPT:

  1. Unauthorized access to PINs and account codes
  2. Counterfeit ATM cards
  3. Credit data blocking
  4. Employee manipulation

There are a number of fraud schemes that are being perpetrated with regard to ATMs. These schemes include: Theft of card and/or unauthorized access to PINs and account codes for ATM transactions by unauthorized persons Employee manipulation Counterfeit ATM cards Counterfeit ATMs Magnetic strip skimming devices Shimming devices that target chip-based cards ATM deposit fraud

 

QUESTION 21 : Liam, a loan officer, and other real estate insiders colluded to steal a homeowner’s identity, take out a second mortgage on the individual’s property, and split the proceeds. Liam and his co-conspirators’ actions would best be described as a fraudulent second lien scheme.

  1. True
  2. False

Fraudulent second liens are a variation of the fraudulent sale scheme. In a second lien scheme, a person assumes a homeowner’s identity and takes out an additional loan or a second mortgage in the homeowner’s name. If there is not enough equity in the home to warrant a second loan, an inflated appraisal is obtained.

 

QUESTION 22 : ABC Bank recently acquired a new portfolio of consumer loans. Because this particular loan portfolio is experiencing a higher than normal default rate, management has asked Bradley, a Certified Fraud Examiner, to evaluate the portfolio. Bradley notices that the loan package was sold without recourse to the broker, the brokerage fee was high relative to other purchases, and the broker is no longer in business. Which of the following types of schemes has

  1. Letter of credit fraud
  2. Money transfer fraud
  3. Daisy chain fraud
  4. Brokered loan fraud Loan brokering applies to either packages of individual residential (consumer) loans or single commercial loans.

A variation of a brokered loan is loan participation , where multiple parties purchase and have interests in a loan or a package of loans. The fraud schemes associated with brokered loans or loan participation generally involve selling phony loans (packages) or selling participations in loans that have not been properly underwritten. Normally, a large fee is charged for these brokered loans. With residential loan packages, the broker sells the package, takes the money, and disappears. Brokered loans are not usually sold with any recourse to the broker. Therefore, the purchaser must look to the borrower and the underlying collateral for debt satisfaction. With loan participations, the lead bank generally performs the underwriting.

 

QUESTION 23: Zane obtained a loan from Bank A, agreeing to give the bank a security interest in his commercial property. Before Bank A’s lien was filed, Zane managed to get another loan from Bank B using the same commercial property as collateral (unbeknownst to Bank B). In which of the following schemes did Zane engage?

  1. Double-pledging collateral
  2. Sham loan
  3. Linked financing
  4. Daisy chain In a double-pledging collateral scheme, borrowers pledge the same collateral with different lenders before liens are recorded and without telling the lenders

 

QUESTION 24 : In a construction loan, developer overhead is a ripe area for abuse. The purpose of developer overhead is to provide:

  1. Operating capital
  2. Budget shortfall
  3. Labor reimbursements
  4. Profit margin

It is not uncommon in construction financing to have a budget line item for developer overhead. This is a ripe area for abuse. The purpose of developer overhead is to supply the developer with operating capital while the project is under construction.

 

QUESTION 25 : Jeff works as a teller at a bank. One of Jeff’s friends came in as a customer and presented a cashier’s check. Jeff could tell that the item was counterfeit, but the friend convinced him to cash it for a share of the proceeds. Which of the following best describes the scheme in which Jeff engaged?

  1. Theft of physical property
  2. False accounting entry
  3. Unauthorized use of collateral
  4. Unauthorized disbursement of funds to outsiders

There are various embezzlement schemes that have been used over time against financial institutions. The scheme in this scenario involves an employee abusing his authority to approve a fraudulent (counterfeit, forged, stolen, etc.) instrument to make an unauthorized disbursement of funds to an outsider.

 

QUESTION 26 : Karl finds a residential property with a non-resident owner. He then forges contractual property documents showing that the owner is transferring ownership of the property completely to Karl, such as would normally happen during a property sale. The property owner is unaware that Karl has created and filed the documents. Later, Karl takes the falsified documents to a lender and borrows money against the property. Which of the following best describes Karl’s

  1. Unauthorized draw on home equity line of credit
  2. Fraudulent sale
  3. Air loan
  4. Property flipping

Fraudulent sale scams are particularly harmful because they involve the fraudulent acquisition of real estate by filing a fraudulent deed or respective real estate document that makes it appear that the property legally belongs to the criminal. This scam does not happen at the origination of the loan, but rather it might occur without the homeowner’s knowledge decades after the property was originally sold. The perpetrator identifies a property—typically belonging to an estate or non-resident owner—that is owned free and clear. He then creates fictitious property transfer documents that purport to grant all rights and title on the property to the fraudster. The true owner’s signature is forged on the documents, and the scammer files them in the jurisdiction’s real property records. Once the ownership documents are filed, he applies for and executes a loan on the property (using a straw borrower). Often, the value is inflated. He absconds with 100% of the loan proceeds.

 

QUESTION 27 : A draw request on a construction loan should be accompanied by all of the following EXCEPT:

  1. Lien releases from subcontractors
  2. Change orders, if applicable
  3. Expenses from similar contracts
  4. Inspection reports

A draw request is the documentation substantiating that a developer has incurred the appropriate construction expenses and is now seeking reimbursement or direct payment. Generally, draw requests on construction loans are made on a periodic schedule (e.g., once a month) and are verified by a quantity surveyor (QS) or other authorized entity as agreed to by the financial institution. The request should be accompanied by the following documents: Paid invoices for raw materials Lien releases from each subcontractor Inspection reports Canceled checks from previous draw requests Bank reconciliation for construction draw account for previous month Loan balancing form demonstrating that the loan remains in balance Change orders, if applicable Wiring instructions, if applicable Proof of developer contribution

 

QUESTION 28 :

Roxanne works in the accounting department of a bank but is having difficulty paying her personal expenses. She decides to debit the bank’s general ledger and credit her own account. Which of the following best describes

  1. False accounting entry
  2. Sham loan
  3. Daisy chain
  4. Unrecorded cash payment There are various embezzlement schemes that have been used over time against financial institutions.
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