Bankruptcy Fraud

What is insolvency/bankruptcy fraud?

Insolvency proceedings are a process which deals with imminent bankruptcy of a debtor in one of the methods set forth by the insolvency legislation in order to settle the financial relations between the indebted company and its creditors and to satisfy the creditors’ claims to the maximum possible extent.

Insolvency fraud is little-known yet it is a very topical “white collar” fraud type. It includes concealment and illegal transfers of assets from a company, conflict of interest, fictitious claims, falsification, concealment and destruction of documentation and financial statement fraud.

Asset concealment is a very common form of insolvency fraud wherein company representatives attempt to conceal, hide and falsify asset documentation so that rather than being registered to the estate, the assets can be transferred to related parties. These company assets might include not only tangible assets such as cars, machines, land or equipment, but also intangible ones such as technology, patents and know-how.

Motives

The motives are very simple. The offender does not intend to relinquish valuable assets still belonging to the indebted company, knowing well that such assets should be used to settle the company debts.

A company in insolvency often no longer has effective controls in place and is weakened both in terms of capital and personnel. This presents an opportunity for the fraudster to use the situation for his own enrichment.

Indicators

Indicators of insolvency fraud include:

• Incomplete and confusing list of company assets
• Sale of assets to related parties
• Unexpected sale of valuable technology or equipment at a fraction of its actual value
• Discrepancies between accounting and bank account transactions