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Where are the swindled savings?

PEOPLE ARE FINALLY REALIZING THEY HAVE BEEN taken in the most massive financial fraud in the history of the world. Americans are waking up to the fact that some officers and directors of failed financial institutions have fattened their pockets to the tune of multimillions of dollars. Some of those who controlled the failed institutions were truly world-class con artists and are responsible for a debt that will cost every American family the equivalent of a new car over the next five years. What has happened to that money?

The early savings and loan (S&L) fraudsters, the ones who cleaned out institutions in the early 1980s, did it by networking their institutions' financial transactions in what is commonly called a daisy chain. A daisy chain is a circle of transactions conducted from one institution to another, moving the same money around and then spinning it off into loans to shell companies controlled by the real owners of these institutions.

With this method, little neighborhood savings associations could appear to be multimillion-dollar entities overnight because hot money from other institutions made their deposits balloon through phony transactions and repeated real estate sales or "land flips." (Just think of this scheme as check-kiting on a grand scale, where you rotate the same money through three or four accounts to keep ahead of the bank that ultimately has to pay the bill.)

Once the money started spinning around in these daisy chains, the manipulators began to spin the money off into the shell companies that they and their lawyers created. These companies can be found by looking under wives' maiden names, names of children, other family members' married names, and names of attorneys used as trustees for other business dealings. These manipulators created offshore corporations-in Panama, the Cayman Islands, and the Netherlands Antilles-whose sole function was to funnel megabucks out of this country and eventually into Switzerland and Lichtenstein (a Lichtenstein trust is considered a hot item for hiding money these days).

Through my investigations of S&L looters over the past 15 years, I have established a profile of the typical looter. These people often purchase an extravagant, opulent home with cash or make a big down payment within a year of acquiring the institution. (Who financed the house? The S&L, of course.) They also buy luxury vehicles and aircraft in the institutions' name to take people around the world to hustle even more money for their sinking S&L.

They create a family trust or children's trust, which sucks all of the executive's assets out of his or her personal control and into the hands of trustees who manage the children's money. This way, when the executive files for bankruptcy, the individual can live off the charity of his or her children to the tune of hundreds of thousands of dollars a year.

While the institution is failing, the executive board raises board members' salaries hundreds of thousands of dollars to squeeze the last drop out of the institution. These executives often make $500,000 to $1 million a year.

When the institution fails, the chief executive and his or her cohorts file "friendly divorces" from their spouses, giving the family assets to their spouses and taking on all the community debts. Thirty days after the divorce, the executives file personal bankruptcy and wipe out all their obligations through their bankruptcy proceedings.

What happened to the spouses? Nothing! Couples have continued to live together and either remarry after the bankruptcy or simply continue to share all the assets one spouse gave to the other in the divorce decree.

If this scenario sounds familiar, it's because it has been repeated in case after case in hundreds of failed S&Ls. The money has not disappeared into a black hole. Most of it can be found if we trace the dummy corporations through the nominees, trustees, and family members and track the financial transfers of these executives through the various institutions to those foreign bank accounts.

Most of this money wasn't carried out in suitcases. It was sent out by telex, wire, and bank transfer. If the President and Congress would demand full financial disclosure from money-haven banking centers and require disclosure of wire transfers of more than $10,000, then we could get the money back.

In almost every investigation where fraud was a factor in a failed thrift, the trail points directly to those money centers in the Caribbean and Europe. For example, Manuel Noriega was given $100,000 by a number of executives just for an audience and his blessing to run their money through Panama. Private banks have blossomed to do nothing but take in deposits and launder the money through foreign countries. The Cayman Islands still welcomes ill-gotten gains and cloaks them in protection through its bank secrecy acts.

How do we combat this massive problem? The solution lies in aggressively targeting and investigating those people responsible for the losses-the officers and directors of the failed institutions, their nominees and straw borrowers, and their friends who got the sweetheart deals that caused the majority of the big losses. Who should do this? The Justice Department?

I think the record of the Justice Department speaks for itself. The department has failed to recognize and address this problem and still refuses to understand the magnitude of the fraud and the damage it will cause our nation. I firmly believe that a special prosecutor or special assistant attorney general for a new Financial Institution Crime Division should be appointed, with a special investigator appointed as his or her counterpart to manage and direct the national scope of the investigations.

The primary duties of these individuals should be to identify major targets, to determine the existing investigation conducted by the departments of Justice and the Treasury and private agencies that have already investigated these subjects, and to manage the continuing investigations necessary to prosecute these parties. This Financial Institution Crime Division would hire investigators already skilled in business and financial crime investigations from existing agencies and bring in new employees and private contractor investigators on cases where it feels the need is justified.

I believe this agency could be funded by the restitution made by the people who are found guilty and convicted of fraud. (It is my experience, in over 15 years of investigation in this area, that $10 can be returned for every $1 spent on investigation of financial fraud.) Just as the Drug Enforcement Agency has brought in millions of dollars from major narcotics seizures and money laundering operations, I think the Financial Institution Crime Division could recoup hundreds of millions of dollars and not only pay for its own prosecutions but also contribute a substantial portion of the funds necessary to reimburse the Federal Savings and Loan Insurance Corporation for its losses.

The key to the success of this program is obtaining the authority to coordinate interdepartmental investigations, reverse financial transactions made as a process of the fraud (to seize those multimillion-dollar homes, family trusts, and other entities where the money is now hidden), and employ a staff committed and dedicated to solving this problem. If this can be accomplished, the means are available to solve this national disgrace.

About the Author . . . Edmund J. Pankau, CPP, CFE (certified fraud examiner), is the chairman of Intertect Inc., a Houston-based national investigative firm. He is a member of the ASIS Standing Committee on Insurance Fraud. Pankau is also a regional president for the National Association of Certified Fraud Examiners.
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Title Annotation:savings and loan fraud
Author:Pankau, Edmund J.
Publication:Security Management
Date:Nov 1, 1990
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