Bloomberg reports that prosecutions for bankruptcy fraud are at their lowest level in two decades despite a steep rise in bankruptcy filings due to the recession. The number of bankruptcy prosecutions dropped significantly after 9/11, when the federal government began prioritizing national security cases. However, with the financial meltdown revealing a number of scams and financial wrongdoing, the government has begun to shift its focus back towards white collar crime.
Bankruptcy fraud typically occurs when a debtor hides assets or money from creditors. The law requires that debtors disclose all of their financial information so that the trustee can collect assets and divvy them up among creditors. According to the Justice Department, over the fiscal year that ended September 30, prosecutors classified only 82 cases as bankruptcy fraud. That is the lowest number since 1986.
Bloomberg's article cites an anonymous former U.S. prosecutor who claims that tips are often not followed up on because of a lack of investigators. Proving fraud is a time and resource-intensive process for law enforcement. Doing so often times requires pouring over mountains of financial documents. There is rarely a smoking gun. Instead, prosecutors must infer fraudulent intent from the nature of financial transactions.
The FBI has recently assigned more agents to investigate crimes associated with the financial crisis, including mortgage fraud. Still, the FBI admits that bankruptcy fraud is not among the top five white-collar threats, and therefore it will probably not see much more attention.
Hopefully, more reporting will be done on the lack of bankruptcy fraud investigations so that the government intensifies its oversight. Fraud perpetuates distrust of the bankruptcy system. The vast majority of debtors file their paperwork honestly, and it is extremely unfair to them that others cheat the system and get away with it because of lax regulation.
