Senate Banking, Housing and Urban Affairs Committee

Subcommittee on Financial Services and Technology

Hearing on Financial Instruments Fraud

Prepared Testimony of Mr. Dana Brown
Deputy Special Agent-in-Charge
Financial Crimes Division
United States Secret Service

10:00 a.m., Tuesday, September 16, 1997

Mr. Chairman, Members of the Subcommittee, thank you for the opportunity to address this Subcommittee concerning the subject of recent trends in the area of financial crimes and the Secret Service's efforts to combat these crimes.

My name is Dana Brown, and I am representing the United States Secret Service in my capacity as the Deputy Special Agent in Charge of the Financial Crimes Division of the Secret Service.

Since its inception in 1865 the Secret Service has been involved in the investigation of counterfeit monetary instruments which affect the integrity and well being of this nation's monetary and economic systems. As a law enforcement bureau within the department of the treasury, the secret service has undergone an expansion of its investigative authority commensurate with the evolution of payment systems from cash to plastic and electronic media.

To combat problems relating to evolving global payment systems, the Secret Service has jurisdiction in the areas of credit card and other access device fraud, fraudulent identification, and financial fraud in relation to computer access. The recent trends in criminal activity have taught us that these crimes are often committed simultaneously and in conjunction with other fraud related activity as well as more violent crimes. We in the Secret Service have developed a visual aid entitled "the circle" (which is attached to this testimony) which we use to illustrate the correlation between some criminal activities and the global economy.

It would be difficult to fully explain our complete investigative mission in the area of financial crimes with the time allotted. Instead, we have chosen to concentrate on four areas of particular interest to the committee. These areas are fictitious negotiable instruments, desk top publishing, identity fraud through use of the internet, and advance fee fraud, often referred to as 4-1-9 fraud. I would first like to discuss fictitious negotiable instruments.

Types Of Fictitious Intruments

When one hears the term "fictitious instrument," it brings to mind a myriad of phony instruments such as: the U.S. dollar bond, the Indonesian promissory note, the Japanese yen bond, the Philippine victory note, the German war bond, the gold dore certificate, the Georgian IMEX bank certificate, and most recently the comptroller warrant as well as the Republic of Texas warrant. These instruments are either completely fictitious or have long since been de-monetized by the issuing governments. Individuals with these instruments and supporting fraudulent documentation are approaching financial institutions in alarming numbers in an attempt to negotiate such instruments. In the past, these phony instruments have been negotiated successfully in a myriad of criminal schemes. I would like to give some examples of these schemes.

Fictitious instruments are being used to underwrite loans; they are being sold to individual investors and they are being sold to pension fund and retirement accounts. Unfortunately, these instruments are being produced with high monetary values, and losses suffered by financial institutions and other investors are well into the millions of dollars.

In the case of the comptroller and Republic of Texas warrants, we have seen such instruments presented as a form of payment by self proclaimed anti-government groups such as the "freemen" and members of the "Republic of Texas."

Fictitious Instruments Investment Schemes

A fictitious instrument scheme referred to as "prime bank instrument" fraud, occurs when criminals present fictitious instruments such as standby letters of credit, prime bank guarantees and/or prime bank notes to fraudulently collateralize loans. These instruments are completely fictitious and are not endorsed by any financial institution yet they purport to guarantee the bearer has credit in the amount stated on the document that would be backed by the financial institution which is also named on the document.

From the criminal's point of view, prime bank instruments are extremely successful products. Through "desk top publishing," they have succeeded in creating a fraudulent product that not only appears financially attractive, sophisticated, and secretive, but can be marketed worldwide.

Recently, to further disguise their fraudulent schemes, criminals have used genuine terminology to describe these instruments in an effort to achieve the appearance of legitimacy (i.e., bonds and certificates of deposit).

Not only are individuals, pension funds, retirement funds, and financial institutions targeted by the criminal element and suffer large monetary losses, but charitable organizations, because of their monetary assets, have been targeted as well. These organizations have sustained losses into the millions of dollars. Often times these organizations are sold worthless fictitious instruments such as the U.S. dollar bond, the Indonesian promissory note, the Japanese yen bond, the Philippine victory note, and the German war bond.

Georgian IMEX International Bank Letter Of Credit

Since the break up of the former Soviet Union, there have been numerous appearances of fictitious instruments allegedly issued by the governments of the resulting new states. As I mentioned earlier, one of the more notorious is alleged to come from the republic of Georgia. This instrument is called the Georgian IMEX international bank letter of credit and is usually accompanied by a confirmation letter as well as a confirmation of blocked assets letter. These instruments are ornate and official in appearance, and use similar terminology to that used in the prime bank instrument fraud schemes.

The usual scenario would be for the individual to obtain some form of legitimate documentation (such as a safe keeping or escrow receipt) from an established financial institution in an attempt to "authenticate" the fictitious documents and thereby make it attractive to the victim investor. This is usually accomplished by correspondence or a message from a "bank" in another Russian Republic stating that the letter of credit is fully backed by gold on deposit at that particular bank. With "documentation" in hand from an established, legitimate financial institution, these individuals are then well on their way to successfully defrauding someone or some other financial institution out of a great sum of money.

In most cases, these letters of credit are "issued" in large dollar amounts such as five hundred million dollars.

Domestic Anti-government Groups/Fictitious Instruments

Other groups active in the manufacturing and distribution of fictitious negotiable instruments have received a great deal of publicity for other reasons. These groups, and others like them, i.e., "posse comitatus," "we the people," "w.d. mccall," "l.a. pethahia," "mount calvary baptist," "the central dominion trust bank," "Republic of Texas," and the "freeman", are well known for their activities as militia groups and their anti-government philosophy. What is not known is their criminal activities in the area of fictitious negotiable instruments. The philosophies of these groups are generally similar, however, each group has its own unique beliefs. Some groups argue that banks and credit companies do not loan money, only credit, and contend that their phony certified money orders and bankers checks are therefore "credit money" and legal tender.

These groups argue that the real money is in gold and silver and not in the Federal Reserve System, again maintaining that the instruments they use are as good as federal reserve notes. Groups such as the freeman, hold seminars and instruct individuals on how to become "sovereign citizens." This belief is allegedly based on common law and thereby precludes them from paying taxes. Additionally, they claim to have multi-million dollar liens against various federal, state, and local government agencies.

For a fee, some of these groups give seminars on how to create "comptroller warrants" and instructions on how to use them. These instructions include overpayment on each check issued, with the overpayment being shared with the organizers of this scheme.

As with other fictitious negotiable instrument schemes, all of these groups also use "official" looking documents and correspondence, citing non-existent laws and uniform commercial codes in an attempt to confuse and intimidate individuals, financial institutions, private companies, and law enforcement.

These groups attempt to intimidate those who refuse to accept these instruments as payments and those in law enforcement who are tasked with investigating these cases, with threats of liens on personal property as well as threats of personal harm. Losses attributed to these fictitious instruments have been incurred by individuals, financial institutions, automobile dealerships, and the U.S. government.

Recently, three individuals were arrested by agents from our Jacksonville and Oklahoma city field offices and were later indicted by a middle district of Florida federal grand jury for possession of fictitious financial instruments (18 USC 514). These three individuals were offering two fictitious certificates of deposit, supposedly worth $95 million and $50 million, as collateral to secure approximately $47.5 million in loans.

These certificates were drawn on Japanese and Indonesian banks. After a week long jury trial, all three defendants were found guilty. It should be mentioned that this was the first indictment of 18 USC 514 (possession of fictitious financial instruments) by any federal grand jury.

Unfortunately, in most of the examples that I have already cited, we are a victim of our own advancing technology. This technology has devised software which can create high quality fictitious instruments.

Desktop Publishing

I would now like to speak about desktop publishing. During the past several years the Secret Service has seen a dramatic increase in the number of investigations specifically relating to the counterfeiting of checks and other related instruments. The suspects in these investigations range from the lone individual to highly organized groups who target financial institutions and businesses nationwide.

As one would expect, the motivation behind these schemes is greed - the goal is always money. Financial systems are studied by the criminal and weaknesses are exploited. While arrests and convictions are a central component to any enforcement strategy, the Secret Service has always sought to identify and correct systemic weaknesses thus combining prevention with enforcement for a comprehensive, cost effective strategy.

While the suspects in these investigations have been traditionally thought of as white collar criminals we have recently witnessed the emergence of violent criminals engaging in these unlawful schemes. The proceeds of these criminal activities are not only used to support the lifestyles of the suspects, but also to fund other types of criminal activities, including the sale and distribution of narcotics and other violent crimes.

Instruments Produced Through Desktop Publishing

The use of relatively inexpensive computers and printers, often referred to as "desk top publishing," has enhanced the manufacturing of virtually undetectable fictitious checks, bonds, securities, an other counterfeit instruments and obligations. These computers, loaded with sophisticated graphics capabilities, can be purchased from most computer and office supply stores. A recent American Banking Association study revealed that "desk top publishing" poses the largest threat to international finance.

The use of computers and desktop publishing programs has made this crime attractive to a wide variety of criminal elements. The crime is low cost as is the risk of being apprehended (as compared to other types of criminal activity), while the potential for economic gain is high.

In 1995, the Federal Reserve Board reported overall check fraud losses to the United States' financial institutions at $615 million. A similar report in business week reported overall losses to customers for the same time period to be approximately $12 billion. The industry noted "this is ...400 times more than 1995 bank robberies." Additionally, according to a recent aba study, check fraud and access device fraud account for the greatest losses to financial institutions today.

Since 1990, when the Secret Service began investigating financial institution fraud, our cases have evolved to coincide with the fraud effecting financial institutions, today, the majority of our financial institution fraud investigations involve check fraud and access device fraud schemes. Many of these cases entail the counterfeiting of a variety of financial instruments to include, currency, commercial and travelers checks, credit and debit cards, and others.

Secret Service investigations have uncovered a wide range of methods by which various checks and financial instruments are counterfeited. These methods range from the unsophisticated cut and paste method to sophisticated desktop publishing techniques.

Today, many businesses produce their own checks using computers, graphics software, and laser printers. Unfortunately, as this occurs with many positive technological advancements, there are those who will use an otherwise useful tool to perpetrate crimes. In this type of crime, the same desktop software publishing programs, legally used by businesses, are illegally used to counterfeit various financial instruments. Criminals simply obtain a genuine check and scan this check into the computer.

These criminals can then change the date, the payee, the dollar value of the check, corporate logos, or any other feature. They then print the check on a printer loaded with check paper, which can be purchased in most business supply stores.

The result is a high quality counterfeit check which is indistinguishable from the genuine check. Since there is no standard check design (each business issues their own checks) a genuine check is no longer a necessity. Armed with relatively inexpensive technology and genuine account numbers a counterfeit check can be created. The mobility of these "printing plants" make these types of crimes difficult to investigate. When conducting searches of residences, motel rooms, or vehicles, the secret service has discovered an alarming trend which we refer to as "one stop shopping" for financial fraud. "One stop shopping" is one computer used to commit an assortment of financial crimes to include, check fraud, access device fraud, and telecommunications fraud among others.

The seizure of computers that were used to generate counterfeit checks, counterfeit traveler's checks, counterfeit credit cards, or counterfeit U.S. currency has become commonplace.

These computers also generate counterfeit identification needed to negotiate these counterfeit instruments and breeder documents (birth certificates or social security cards) which are used to obtain other forms of genuine identification for criminal use.

How the Counterfeit Instruments Are Passed

Frequently counterfeit checks are used in concert with false identification. They are cashed at financial institutions, small businesses, to purchase items from a variety of businesses through classified advertisements. The Secret Service has been investigating a large counterfeit check operation which originated in southern California and involves an asian criminal group. The "leaders" of this group obtain copies of genuine checks from a source inside a financial institution. Checking account information is targeted and compromised from large corporations, based on the number of employees, the geographic location of the corporation, and the account balance.

These "leaders" direct the activity of the counterfeit check "manufacturers" and "organizers." The "organizers" coordinate the travel of the "recruiters" and "drivers." Upon arrival in a targeted city the "recruiters" recruit persons to cash these counterfeit checks.

Banks and financial institutions that had a business relationship with the corporation whose checks had been counterfeited were targeted. A cell of six to ten persons, directed by the "organizers," would cash checks at several branches of the same bank over a two to three-day period. The counterfeited checks were generally under $1,000.00.

Identification was usually obtained by the "recruiters." Counterfeit corporate identification was sometimes provided. Banks would cash these counterfeit checks for non-account holders because of the business relationship they have with the corporation. Losses over this period would average between $20,000 to $40,000 per city. When last calculated in 1995, losses in this particular investigation stood at approximately $25 million.

Solutions To Fraud Committed Through Desktop Publishing

Combating these systematic attacks against financial systems and institutions requires a comprehensive approach. Partnerships and cooperation is essential amongst federal, state and local law enforcement, banks, credit card companies, non-banking financial systems, bank regulators and customers of these entities. Through these partnerships, a multi-faceted strategy can effectively combat the problem.

An integral part of this strategy is a "proactive risk analysis" of our financial systems. This is accomplished through regular interaction between law enforcement officials and individuals in the financial system and industry. This interaction, we believe, must occur on a local, national, and international basis. There are a multitude of organizations which have been active in this area.

Groups such as the International Association of Financial Crimes Investigators (IAFCI), American Bankers Association (ABA), the Interagency Bank Fraud Enforcement Working Group (comprised of representatives from all federal bank regulatory offices and related federal law enforcement agencies), local state bank security working groups (comprised of federal, state and local law enforcement and banks within those regions), just to name a few.

Security procedures and enhancements, such as security check stock; biometrics; and holograms are but a few of the proposals which law enforcement agencies have supported and proposed. Security enhancement proposals made through a similar public/private working group has proven successful in combating credit card fraud. We should build upon that success by following a similar strategy.

Security features are only one of the methods that will deter criminal activity in desktop publishing of counterfeit financial instruments. Financial institutions and businesses must apply the same principles which the secret service has been advocating for years.

The "know your customer" philosophy will go a long way in reducing fraud associated with counterfeit checks. Training of bank and business personnel to recognize unusual patterns, such as recently issued driver's licenses or identification cards, and characteristics of counterfeited identification will greatly enhance the probability of detection.

In conjunction with the working groups that are exchanging information and recommending security enhancements the Secret Service has created investigative taskforces. This is truly a partnership approach to combat these types of crimes. The implementation of task forces has allowed a combination of federal, state, and local law enforcement officials and prosecutors to pool resources and draw upon the individual expertise that each agency brings to the table. These task forces can maintain routine contact with the industry working group thus creating a complementary dynamic in uncovering criminal activity.

Because computers are used as a repository of recorded information, such as the counterfeit documents and proceeds of these crimes, the retrieval of this data as evidence for prosecution is essential and requires highly trained personnel and state of the art equipment.

Secret Service agents, highly trained in the forensic examination of computers and related equipment, are a major component of both the task force and unilateral secret service investigative efforts. These agents are part of the Electronic Crimes Special Agent Program (ECSAP) and are strategically placed throughout the country, to provide technical assistance to investigators and prosecutors when needed to retrieve evidence or provide additional technical services. The Secret Service electronic crimes laboratory possesses state of the art equipment which is used for the forensic examination of computers and related investigations.

The Secret Service has also established the counterfeit instrument database. This database contains specimens of counterfeit instruments, including payroll checks, bank checks, travelers checks, and other financial instruments, which enable the secret service to associate and link investigations based on common characteristics unique to each instrument. This tool has enabled us to identify specific equipment used to counterfeit these financial instruments and greatly enhances our ability to investigate these crimes.

Training of the law enforcement community and the public is always a crucial element to any comprehensive enforcement strategy.

The secret service believes that law enforcement officials must be kept abreast of the ever-changing technology that enables criminals to commit financial crimes.

Police officers should be able to recognize potential evidence, such as computers, software, and related equipment, which is easily transportable in a vehicle. Routine traffic stops have led to the suppression of counterfeit check printing operations and such efforts are directly attributable to the police officer's awareness of the tools of the crime.

The public, especially businesses, must be made aware of how counterfeit check schemes operate. The ability of individual bank tellers and support personnel to recognize the counterfeit check schemes is vital. These individuals are law enforcement's first line of defense. Banks should ensure that they have established policies and procedures to prevent check fraud and that these policies draw from the experiences in the banking and law enforcement communities. Financial institutions should ensure that bank employees are required to adhere to all internal policies, which are in place to prevent financial instrument fraud. We believe that the financial community and law enforcement are committed to enhance these efforts, and many of these types of deterrent measures are available to banks through the FDIC and ABA.

Identity Fraud Through the Internet

I would now like to discuss identity fraud perpetrated through the internet. The secret service has found that in general the major Internet Service Providers (ISP's) are constantly updating security measures and have been receptive in establishing liaison with law enforcement in its goal to preserve the integrity of the internet.

Discussions are currently underway between government and the internet service provider community to establish an association similar to other partnerships designed to share concerns and discuss issues amongst its members and law enforcement.

However, we all must realize that the internet has vulnerabilities which can allow confidential business information and sensitive personal information to be compromised.

The present day United States financial community makes 3.5 billion electronic payment transactions per year utilizing various telecommunication systems. Private industry has indicated its desire to utilize the internet to conduct electronic commerce which may revolutionize the way business is conducted and continue to lead us into a global economy.

Some projections indicate that by the year 2000, there could be one billion users on the internet. This equates to one billion potential customers. The internet is accessible by anyone with a computer, modem and access through various service providers.

How Your Identity Can Be Compromised On The Internet

Presently, various banks are implementing the use of the internet to allow on-line banking. In addition, many retailers are using the internet to allow customers access to goods and services in exchange for payment by credit card. This equates to the electronic transfer of not only credit card numbers but also the subscriber's personal information. Unfortunately "hackers" have demonstrated their ability to access and download this information for purposes of perpetrating account takeover schemes and other similar fraud. It is a frightening thought that an individual can literally take over one's credit card and/or bank account, and as a result, their credit history, without the subscriber knowing it.

The idea of someone fraudulently using personal information belonging to another person to perpetrate a separate fraud can have a negative impact on one's credit history as well as thwart law enforcement's ability to investigate such activities.

As a result, banks and credit card associations have been developing methods of encrypting credit card numbers and the attached biographical information to facilitate safe internet payments. However, individuals with access to internet access codes can still perpetrate a myriad of fraud using the identity of someone else. An investigation into an account takeover scheme conducted by the Secret Service resulted in the arrest of a bank employee after it was learned that while working online, using the company's internet access code, the employee was retrieving clients' accounts, changing their mailing addresses and sending newly issued credit cards with their true identities to himself.

The Prosecutive Role

Traditional federal statutes such as title 18, united states code, section 1028 (fraudulent use and production of identification documents), section 1029 (access device fraud), section 1030 (computer fraud), section 1343 (wire fraud), section 1831 (economic espionage), and section 1956 (money laundering) are currently in use to prosecute fraud on the internet.

Instances of Identity Fraud Through the Internet

Just recently, a popular internet service provider stopped direct access in Russia, after it found people signing on to the service using stolen credit card numbers and passwords. The obvious crime here is misuse of an access device. However, many additional crimes could have been committed on the internet while acting under the identity of someone else.

Hackers have been known to recruit dishonest company employees to obtain information regarding computer security implemented by that corporation in furtherance of committing fraud on the internet. In one instance, a hacker obtained access to an on-line service and while a legitimate user was on line, the criminal sent a message claiming provider service problems. The hacker requested and received the password of the user. The user, was subsequently bilked out of $1,100 of internet service.

In an intrusion/extortion case the secret service recently investigated, individuals hacked into an Internet Service Provider (ISP). This ISP provided internet service to approximately 10,000 customers in south Florida. The hacker was able to compromise the system and shut down 8 of the 10 servers on the provider's system.

In addition to the disruption of the service, the hackers also obtained the personal information and credit card numbers of the 10,000 customers. Communication between the owners of the internet company and the hackers was conducted via e-mail. Using some traditional and some technically sophisticated investigative methods, the secret service was able to determine the hackers were communicating through the compromised accounts.

The hackers sent a message, demanding $30,000 in exchange for the customer information and security information regarding their internet servers. The hackers demanded the money be delivered to a mail drop located in Germany. Working with the German authorities through our office in Bonn, surveillance was established at the mail drop. After the pick up, one individual was arrested. Two other individuals were consequently identified and all three confessed to the hacking and extortion.

Personal and sensitive information about on-line subscribers and shoppers are at times innocently stored in unsecured databases which can be accessed through poorly protected web sites. Web site architecture and design often vary allowing differing degrees of vulnerability.

Methods of Addressing Identity Fraud on the Internet

Bank customers who find the idea of online banking appealing should be aware that the internet is a public medium to conduct transactions and that the prospect of unauthorized access to personal information by internet abusers is real. Certain controls that exist to address privacy concerns in the context of credit cards, credit agencies, and banks can and should be applied to electronic payments.

Varying measures have been adopted by those seeking to conduct business and communicate on the internet to minimize internet fraud and protect sensitive information. Many merchants and others who transact business on the internet have successfully designed and implemented systems which reasonably ensure the integrity of sensitive information and transactions.

In addition to providing "firewalls," or protected compartmentalization of data, encryption and other useful tools enhance the safeguarding of sensitive data such as credit card numbers and other personal information.

Steps toward addressing internet fraud should start with the commitment to provide for the security of information and transactions while avoiding unnecessary risks.

In addition, Internet Service providers should not establish and instantaneously authorize an account or e-mail address for their customers based solely on a credit card number provided by that customer over the telephone or transmitted via computer. The ISP should authenticate the credit card and the user prior to allowing access. Merchants conducting business on the internet should know their customers, and service providers should take steps to know their merchants.

The Secret Service recognizes the Internet as an attractive target or venue for fraud: a balance must be struck between the respect for personal privacy as it relates to electronic communications and the preservation of the integrity of corporate and personal home based computer operations.

Law enforcement should be familiar with what is on the Internet and be capable of using it as an investigative tool. This is also the fastest way for law enforcement to stay current with new technological schemes that are being passed from one criminal to another.

West African Fraud

The last topic I would like to discuss is the issue of fraud perpetrated by some members of the west african population living inside and outside of U.S. borders. The Secret Service distinguishes between structured, traditional organized crime and what are now commonly referred to as organized criminal enterprises. Many of these groups do not follow prior patterns associated with organized crime in relation to structure. However, these groups do support themselves internally through national association while externally creating enclaves or cells for criminal enterprises on a domestic and international scale. An example of this would be the nigerian criminal groups which I have been asked to speak about.

In 1984, after the Secret Service received additional jurisdictional responsibility for credit card fraud and false identification, we began to engage the Nigerian criminal element on a regular basis. Prior to this, Nigerian criminals had come to the attention of the Secret Service due to their involvement in the counterfeiting of U.S. currency, most of which they claimed was purchased on the black market in Nigeria.

Nigerian organized criminals are heavily involved in the manufacture and use of false identification. Through the use of false identification many are entering the united states illegally and have proven adept at developing complex schemes to systematically defraud financial institutions.

Our investigations have shown that Nigerian criminals are gaining unauthorized access into credit bureau reports, social security files and other sources of personal and financial information of unsuspecting victims. Using this information, Nigerian criminals apply for additional lines of credit or take over existing accounts. The resultant fraudulent activity ultimately is reported as derogatory information on the credit report of the unwitting victim.

In 1986, the Senate permanent subcommittee on investigations determined that a formidable criminal network was forming within the large community of Nigerian nationals living in the United States.

In fiscal year 1992, the Congress of the United States appropriated funds to the Secret Service which were ear- marked for a Nigerian task force initiative.

The Secret Service has taken a proactive approach to the Nigerian organized crime problem by establishing and maintaining task forces throughout the United States whose main focus is the investigation of financial frauds committed by Nigerian nationals and their accomplices.

Membership in these task forces includes representatives from the U.S. Customs Service, U.S. Immigration and Naturalization Service, U.S. Postal Inspection Service, U.S. Drug Enforcement Administration, Internal Revenue Service, Department of State, Bureau of Diplomatic Service, bank investigators from the private sector, as well as numerous local, county and state police agencies. This diverse membership is indicative of the multitude of fraudulent activities being perpetrated by Nigerian organized criminals.

These fraudulent activities include credit card fraud, bank fraud, check kiting, various types of insurance fraud, entitlement fraud, false identification, passport and visa fraud, marriage fraud to obtain U.S. citizenship, vehicle thefts, theft of services, counterfeiting of U.S. currency, and counterfeiting of corporate checks and other obligations.

In addition to their involvement in financial institution fraud, Nigerian organized criminals are recognized as one of the top importers of heroin into the United States.

Evidence indicates that portions of the proceeds of financial fraud are used to support the trafficking of narcotics and other criminal enterprises.

Nigerian criminal cells have become experts in their many fields of endeavor. In short, they do their homework on financial systems and identify weaknesses that allow them fraudulent access to enormous sums of money. These attacks on our nation's financial system are often the result of careful planning, precise execution of the scheme, and ultimately taking advantage of financial systems designed to be consumer or customer friendly.

Advance Fee Fraud (4-1-9)

Since 1990, Nigerian "advance fee fraud," known internationally as 4-1-9 after a section of the Nigerian criminal code, has emerged as one of the most lucrative fraudulent activities perpetrated by organized criminal elements within the Nigerian community.

Worldwide financial losses associated with advance fee frauds are conservatively estimated in the hundreds of millions of dollars annually, with victims in the U.S. accounting for a significant percentage of the total. The most common forms of these business proposals fall into seven main categories:

The most prevalent form of Nigerian advance fee fraud is the over-invoiced contract scheme. A company or individual typically receives an unsolicited letter by mail from an individual claiming to be a senior civil servant in one of the Nigerian ministries, usually the Nigerian National Petroleum Corporation. The letter informs the recipient that the government official is seeking the assistance of a reputable foreign company into whose bank account he can deposit funds ranging from 35-60 million U.S. dollars. These funds are alleged to be the results of over-invoiced government contracts.

The intended victim is instructed to provide his Nigerian partner with company letterhead, business invoicing, bank account information, and telephone and facsimile numbers.

The target is advised that the completed contracts will be submitted to the Central Bank of Nigeria for remittance. Upon approval, the monies are then to be wired into the bank account provided by the foreign partner. The foreign partner is promised up to 35 percent of the monies received for his participation.

The initial contact letter sets the stage and is the opening round of a two-layered scheme. The criminal will eventually reach someone who, while skeptical, desperately wants the deal to be genuine.

Victims are often convinced of the authenticity of advance fee schemes by the forged or false documents bearing apparently official Nigerian government letterhead and seals, as well as false letters of credit, payment schedules, and bank drafts.

Once the trap has been set an alleged problem concerning the deal will suddenly arise. An unforeseen tax or fee payable to the government of Nigeria will have to be paid before the money can be transferred. These can include licensing or incorporation fees, or various forms of taxes and attorney fees. Each fee paid is described as the very last fee required. Invariably, errors and oversights are discovered by the nigerians, necessitating additional payments and allowing the scheme to be stretched out over many months. The foreign partner will then be provided with a bank account into which these fees should be transferred.

Recognizing the extent of the problem, the Secret Service initiated a project known as "operation 4-1-9" designed to combat advance fee fraud on an international basis.

It should be noted that these advance fee schemes emanate solely from within Nigeria, though our investigations indicate that Nigerians and non-Nigerians based in the United States, Great Britain, and other countries, are acting in complicity to further these schemes.

Addressing Advance Fee Fraud

This type of fraud has become so widespread throughout the United states and internationally that the Secret Service instituted a program that tracks these schemes and their victims.

The Secret Service continues to receive approximately 100 telephone calls and 300-500 pieces of related correspondence from victims and intended victims each day. In the past 14 months, we have interviewed over 20,000 of these individuals and have successfully interdicted over 2,000 individuals from further victimization.

Our financial crimes division has developed the world's largest database containing information obtained from over 25,000 Nigerian scam letters. A link analysis of this data has revealed the locations of the top advance fee criminals in Lagos, Nigeria.

Over the previous year, Secret Service agents have been periodically assigned on a temporary basis to the American embassy in Lagos. During this time they have worked closely with the Department of State Bureau of Diplomatic Decurity and Department of Commercial attache attached to the Embassy.

Agents have established a working relationship with the Federal Investigation and Intelligence Bureau (FIIB) special frauds unit of the Nigerian national police.

We have provided information in the form of investigative leads to the FIIB. Utilizing this information, officers of the FIIB, accompanied by Secret Service agents as observers, have executed a number of search warrants on the locations of some of the worst perpetrators in Lagos.

These search warrants resulted in the arrests of a number of Nigerian nationals. Evidence seized has included telephone and facsimile machines, forged government and central bank of Nigeria letterhead, international business directories, scam letters and envelopes, as well as files containing correspondence from victims throughout the world.

The Secret Service has adopted a three-pronged approach of investigation, interdiction, and public education to combat this problem. It is anticipated that public education will have a significant impact on reducing the fraud losses associated with these schemes.

Concluding Remarks

As I have previously stated, the financial losses that have been suffered by individuals, financial institutions, and private corporations as a result of these criminal schemes are increasing at an alarming rate. The Secret Service will continue to aggressively pursue investigations in this area.

This concludes my prepared statement. I would be happy to answer any questions that you or any other member of the subcommittee may have.

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