Many times when a person falls victim to a natural disaster it is not the end of their suffering. Their loss is often worsened by criminals who prey on their desperation via fraud schemes. In a preview of his Forensic Accounting column in the winter 2019 Pennsylvania CPA Journal, James A. Stavros, CPA, CFF, managing director of Forensic Resolutions Inc., joined us to discuss why victims of natural disasters become targets of fraudsters and what CPAs can do to help prevent these crimes.

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By: Bill Hayes, Pennsylvania CPA Journal Managing Editor

Podcast Transcript

As we saw during our most recent storm seasons and Hurricanes Florence and Michael, natural disasters can bring a great deal of pain and suffering to people affected by the aftermath. However, oftentimes for people who are victimized by natural disasters, their anguish doesn't stop there. Frequently, criminals will take times such as these to hatch crime schemes that will prey on people just trying to get their lives back together after a traumatizing event. To talk about how CPAs can help prevent these fraud plans from reaching fruition, today we are with Jim Stavros, managing director of Forensic Resolutions Inc. and author of “Keep an Eye Open for Fraud after Disaster,” the Forensic Accounting column for the upcoming winter 2019 Pennsylvania CPA Journal.

It's a sad question to ask, but why do you think people who have been victimized by a natural disaster make an attractive target for people trying to commit financial frauds?

[Stavros] I think the simple answer is that people are more vulnerable to deception when they are preoccupied by a catastrophic loss. A fraud at its base is an intent to deceive. And when you have a catastrophic loss, you have an opportunity for fraudsters who have a different moral compass than you or I. And they look at that as an opportunity because people are not paying attention as they normally would in the normal course of their lives. People who have claims or need to rely on others through the claim process, you've got human emotion supplanting the, I would say, normal checks and balances that you have when you're looking at financial transactions.

And if you're paying claims, you've got a different checks and balances that are in effect. When you put all these elements together, you have an environment that is really more ripe for fraud. Fraudsters are actively looking to commit fraud exactly when people need help because they have little or no moral compass. So this is their opportunity to commit fraud. Having a natural disaster or catastrophic loss involving a wide area, involving lots of people, just creates more opportunity because of the various factors.

One thing I will point out that was set up to help combat that after Katrina is the National Disaster Fraud Hotline. The National Center for Disaster Fraud was developed after Katrina to help identify some of the key aspects of fraud after disasters.

I guess the other side of what's a pretty ugly coin is people looking to commit scams on organizations looking to help the victimized, such as insurance scams. A statistic from your piece, for example, was over $1 billion of the claims paid out during Hurricane Katrina were fraudulent. How are these scams able to be effective?

[Stavros] $1 billion, and that’s only an estimate. And that’s looking at Hurricane Katrina, which really set the standard on the size of disasters, both in insured and uninsured claims of over close to $110 billion. I think there are a number of factors. Number one, there are so many fraudsters out there looking for an opportunity as I mentioned earlier. It’s an opportunity, and part of any fraudulent activity, whether it be in an office where you’d normally hear about fraud, you have to have an opportunity. And because there’s so many fraudsters out there after a natural disaster, that’s one issue.

Another factor is speed. Information today is 24/7. Fraudsters can click on a mouse button hours after a disaster and advertise charity websites. Send out emails for relief donations. So speed is a factor.

Location can also be a factor. Unique circumstances, like for instance the tsunami in Southeast Asia a couple of years ago. Scattered passports and credit cards all over the place. You know, that’s an issue.

Another factor would be the confidence factor. Fraudsters are very bold. They bluff their way into restricted disaster sites.

Another aspect is the public attitude. It might surprise you that our federal government sometimes is not held in the highest esteem. And that affects people’s whole attitude about fraud. And also, insurance companies. People sometimes may not have the highest level of trust in insurance companies. So the public attitude does, in a way, form some type of environment or groundwork too. That affects whether or not scams will be successful. Putting these pieces together, you’re creating attitude and an environment that may be conducive to fraud.

Let’s talk about some of the fraud types CPAs and others need to combat. The first one is charity fraud. Can you give us an example of such a fraud and how it would work?

[Stavros] Yeah, charity frauds are typically the first ones that you see. As I mentioned a moment ago, people can get on their computers and put out fake websites. The National Weather Service releases a list of storm names each year. And people buy up the domain names such as Irma Relief or Help Harvey in the past. So people, ahead of any kind of disasters are already thinking about an opportunity that they may have in the future to defraud people. It gets back to the morals and core values of some of these fraudsters. Investigators found close to 5,000 questionable websites after Katrina. It's just amazing.

Another story, and I may have mentioned this in my piece, was while Katrina was going on, a Louisiana man launched a website called AirKatrina.com claiming to be a private pilot performing all kinds of rescues. Now, on his website, there were pictures and success stories. He needed money for fuel and one of his quotes, it was, "I will hear their screams for the rest of my life." You know, showing people on roofs. This guy ended up collecting over $40,000 in two days just based on having this website.

So the charity frauds, it taps into people's base emotions that the majority of us are willing to help and want to help. And for a relatively low cost and not even being in the area, you know, fraudsters can take advantage. One practical example of public awareness are the California wildfires. I just saw something yesterday morning that websites had already reported over a hundred million dollars in collections. And only eight hours later at the end of the day I wanted to check to see if there was an update, and they'd received $200 million. Now, I can only hope that these websites have been properly vetted and they haven't been done by fraudsters.

How about the contractor and vendor fraud? How does that work, and how do these vendors continue in business after this?

[Stavros] It can happen a couple of different ways. You can have false contractors come in and pose as legitimate contractors, collect money upfront, talk about assigning over FEMA fees or claims, and never be seen again, right? You know, the collecting deposits. There's lots of stories from past disasters where they've collected money on 30 or 40 homes, never to be seen again. Other contractors may end up doing the work. Now, these are contractors that may be in the area and legitimate members in the community, but they will inflate prices. They will perform other tasks. They will look at this as an opportunity to gouge. So that's another way that contractors can commit fraud.

Another way is public corruption. Government officials will steer contracts or equipment licenses to friends or to companies that they themselves have ownership. There was a fire chief in Louisiana after Katrina that tried to profit on a million dollars of defibrillators that were being distributed. And he got caught. The contractor fraud can take many different forms from your simple contractor that lives around the corner to posers to even our local government.

You mentioned gouging to an extent there. There's a whole category for price gouging. And that's an interesting one, because it sort of walks the line of what's legal and what's not. In your piece, you gave the example of someone in a disaster zone selling cases of water for a hundred dollars. Is this something that happens frequently? What sort of laws are there to stop this?

[Stavros] A good definition of price gouging is the practice of rising prices on certain goods and services at an unfair level during the state of emergency. Now, what does that mean, an unfair level? There have been 34 different states that have passed specific laws that identify what gouging is, with civil and criminal penalties. And they talk about the criteria that's needed to prove what gouging is. Number one, it has to be an emergency situation or crisis. Number two, it has to be an essential item or service. And there are lists. The state will give you a list. And then there's a price limit. It sets the limit, the price that can be charged. This is a good thing. The states are applying at least some type of measure.

In the piece, I think I talked about the hundred dollar water bottle. But, in essence, price gouging gets to a central tenet here in the piece, which is fraudsters are looking to take advantage and their moral compass is certainly off-center. But it's good to know that the states do have some type of guidelines and remedy for this.

But price gouging is a problem because vendors get to the gray area of overcharging consumers for important goods and services in the disaster area. It's just a matter of how much are they going to go over? Or there's a tipping point in which they do go over and then violate the law.

Property and insurance fraud is listed as perhaps the most frequent type of fraud that takes place in this sort of situation. Why do you think that's so effective and difficult to detect?

[Stavros] This is the biggest amount of fraud in dollars and cents. Faking claims. I'm sure you've probably heard some of the stories. I'll just go over a handful that'll just have your head shaking a little bit. You know, people making claims that were not there. After Katrina, I think that there were false claims in almost all 50 states and in foreign countries making claims down there.

One example is a hotel owner in Texas submitted $232,000 in bills for phantom victims. That's just kind of typical. But here's the one that really takes the cake for me. Roughly 1,100 prison inmates in the Gulf Coast collected more than $10 million in disaster relief assistance. It's just amazing.

Another Illinois woman tried to collect federal benefits after claiming she watched her two daughters drown in rising New Orleans waters. It never happened. The list goes on and on. The audacity of these schemes and the scale of their stories is really kind of breathtaking. You know, why did this happen? How did these inmates collect $10 million? For a couple of reasons. Number one, I keep going back to Katrina because it just did break all records. Number one, the systems were overwhelmed. We had temporary workers, FEMA workers, in an area and you're setting up shop to pay claims. The systems are overwhelmed.

They tried to create new systems of payment for individuals, understanding that in some aspects in some areas, the entire building or homes are completely wiped out. It's tough to prove anything. And the government had never before used untested processes. So a combination of all of those aspects converged and create an environment for people to make these outrageous claims. Some of which they received money for and got around the system.

Identity theft is a big deal everywhere, but it's especially rampant in the wake of a natural disaster. How does that work?

[Stavros] I look at this in two different aspects or two different ways. Based upon our research here, one way to have your identity stolen is that stuff is literally scattered all over the place in a flood. When I talked about the tsunami in Southeast Asia, there was loss of passports and credit cards and they were dealing with fraud based upon the loss of all that personal information. PII, or personal identifying information, is a term that's used. PII was in that area for years and months afterwards. So losing all your stuff is one way.

Another way is that fraudsters in a natural disaster are looking to pick and purloin information from unsuspecting victims to be used later. They're looking to steal your personal information maybe to use at another time. There are numerous examples after the wake of Katrina and Harvey and some of the others. But one that I recall is there were two men that had convinced over 2,500 New Orleans relief workers to sign up for compensatory debit vouchers. Corporations were donating time and money and they, under the fraud that they would be getting something, had all these workers sign up and give personal information. Well, these fraudsters turned around and either sold that information or used that information later in the future.

There are other examples that I could give you, such as phony inspectors will come knocking at your door. FEMA inspectors asking for personal information and other schemes to get your personal PII. So it can happen on a couple of different scales in a natural disaster.

As you said earlier, these people are out there, they're constantly working to come up with these schemes. We had a decent little laundry list there of the things that they've come up with to scam people. But the good thing is that we have CPAs here to do the work to stop it, right? What can CPAs do to help prevent these frauds? Why are they particularly equipped to do that?

[Stavros] CPAs are uniquely valued, especially in natural disasters, in two different ways. First off, CPAs have a high level of skill to perform the calculation in business income losses alone. Even aside from any kind of catastrophic loss, CPAs are a step or two above the volunteers. But God bless the volunteers. We need them. We also need CPAs because they are highly educated and uniquely skilled. CPAs are also uniquely valued because they can identify fraud. Because we can identify the red flags of fraud.

This would also apply to those who I would say have a CFE designation, Certified Fraud Examiners. CPAs are really qualified because they've got the business aspect of calculating the losses as well as the fraud aspect of awareness and helping clients understand the red flags.

That's the background of what they can do. But practically, when you have a situation like this top of the list is to verify the validity of the claimant. Identify who they are and that they exist. Because there are so many stories that have come out of these disasters that the fraudsters were telling the whole story. And quite frankly, it's tough to sometimes independently verify. The CPAs would need to do that by getting tax records from the IRS or some kind of pre-disaster documentation, social media, authenticate who they are and what the records are.

And once you have identified the authenticity of the claimant, then everything else I think we as CPAs do in evaluating the business merits of the business income loss kind of kick in and the records and the information that we need to do a reasonable computation would have to be done. But verifying the validity and making sure you have who you have is an extra added element that CPAs need to do when you have a catastrophic loss and a situation like we've had in the last several years in Florida and the South.