PREPARED STATEMENT OF MICHAEL C. STENGER U.S. SECRET SERVICE JULY 17, 1996 Mr. Chairman, Members of the Committee, thank you for the opportunity to address this Committee concerning the subject of fictitious negotiable instruments and other associated criminal schemes. My name is Michael C. Stenger, and I am representing the U.S. Secret Service in my capacity as the Special Agent In Charge of the Financial Crimes Division of the Secret Service. As a law enforcement bureau within the Department of the Treasury, the Secret Service is well known for its expertise in the suppression of counterfeit activities and other financial crimes. Over the years the Secret Service has undergone an expansion of its investigative authority and expertise in protecting the integrity of this Nation's financial systems. One such area that the Secret Service continues to actively investigate is the area of fictitious negotiable instruments. When one hears the term "fictitious instrument," it brings to mind a myriad of bogus instruments such as: The Indonesian Promissory Note, The Japanese Yen Bond, The Philippine Victory Note, The German War Bond, and The U.S. Dollar Bond. These instruments are either completely fictitious or have long since been demonetized 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 bogus instruments have been negotiated successfully in a myriad of criminal schemes. Today this criminal activity continues. These instruments are being used to underwrite loans; they are being sold to individual investors and they are being sold to pension funds 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. It has been the experience of the Secret Service that Federal prosecution is carried out only when these instruments are presented to a financial institution as collateral for a loan or outright negotiation, and the transaction is carried out, or the items are mailed or faxed to an intended victim. These scenarios are violations of Federal Bank, Mail, and Wire Fraud statutes respectively. In most instances, when interviewed by law enforcement, the criminal claims to be nothing more than a representative or broker for someone else, or claims to have purchased the fictitious instruments from another person and to be a victim himself; or have just recently uncovered the instruments from the estate of a deceased family member. As a result, many times, the only option for law enforcement is to seize the fictitious instruments from the individual who then moves on to another location where the same scheme is carried out again with more fictitious instruments. Another fictitious instrument scheme is referred to as "Prime Bank Instrument" fraud. Standby letters of credit, prime bank guarantees, and prime bank notes are three of the most commonly known "Prime Bank Instruments" used in these frauds. From the criminals' point of view, Prime Bank Instruments are extremely successful products. 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, certificates of deposit). In this scheme, 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. As a result, they too, have sustained losses into the millions of dollars. Oftentimes the victim who sustains a loss, sees no instrument at all, but has acted upon information provided by the criminal. Federal prosecutors in some instances have decided not to prosecute these cases if there is insufficient evidence that the activity used the U.S. Mail, Interstate Wire Communications, or that the activity resulted in a loss to a victim. Additionally, most State Criminal Codes emulate the Federal Criminal Code in this particular area and there have been instances where the individuals involved in these criminal activities are not prosecuted. 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. One of the more notorious is alleged to come from the Republic of Geor gia. 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 all use similar terminology that is 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 document 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. Again, if the scheme is uncovered prior to any deal being consummated or prior to the item being mailed or faxed, Federal prosecutions are extremely rare. Oftentimes "lack of intent and knowledge" is cited as a reason for not prosecuting the individuals who peddle these instruments for a living. Other groups active in the manufacturing and distribution of fictitious negotiable instruments have recently 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. Pethahiah," "Mount Calvery Baptist," and "The Central Dominion Trust Bank" 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 bogus certified money orders and bankers checks are therefore "credit money" and legal tender. They 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. Other 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 local, State, and Federal Government agencies. Further, they claim that they wish to share the proceeds from these liens with those in attendance. For a fee, attendees are provided "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 bogus 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 payment 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. Federal Law Enforcement and prosecutors are operating at a disadvantage. In some cases, where Federal prosecutors believe the evidence of Federal criminal violations is lacking, Federal law enforcement agencies have begun to refer cases to State or local prosecutors, even though the criminal penalties may be lower than similar penalties on the Federal level. 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. 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, and other instruments and obligations. These computers, loaded with sophisticated graphics capabilities, can be purchased from most computer and office supply stores. In many of our investigations, we are finding a combination of financial fraud activities being conducted from the same manufacturing plant. This includes the manufacturing of other fictitious documents and identification that are used to support the fictitious negotiable instrument. 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 Committee may have. Additionally, I have brought along samples of many of the fictitious instruments and documents that I have mentioned here today, and I would be more than happy to make them available to you or any other Member of the Committee during today's hearing. Good Morning. I am pleased to appear today on behalf of the FBI and provide you with some information related to various financial crimes matters, including fictitious financial instruments. The FBI's White-Collar Crime Program is the largest and most diverse of all FBI Criminal programs. During Fiscal Year (FY) 1995 (10/1/94-9/30/95), the White-Collar Crime Program utilized approximately 25.59 percent of FBI agent work years and achieved 18.2 percent of the FBI's total convictions and pretrial diversions. Approximately 2,600 agents are dedicated to this program, which is identified as the number one or number two priority in 53 of the 56 FBI field offices (95 percent). In terms of workload, the White-Collar Crime Program encompasses approximately 23,000 pending matters, of which Financial Institution Fraud constitutes 8,869 cases. By any measure, this is a healthy, robust program which has experienced explosive growth and globalization in recent years. The White-Collar Crime_Program maintains an inventory of some of the most complex cases in the FBI. Resources dedicated to this program have increased more than 65 percent since 1985. Whitecollar crime is of significant interest to the public as well as the Congress. Our investigative arsenal encompasses an abundance of investigative techniques, including undercover operations and court-ordered electronic surveillance. Prior to the 1980's, financial institution fraud investigations were primarily routine in nature. Bank frauds generally involved only a few transactions, were perpetrated by a single individual or small group, and generated losses that averaged less than $100,000 to the victim institution. Following deregulation of the savings and loan industry in 1982, and the initiation of more speculative, risk-enhanced ventures by those in charge of these institutions, a new wave of fraud investigations emerged. During the late 1980's and early 1990's, FBI efforts were focused on large-scale frauds perpetrated by institution insiders and those held in trust within the banking industry. Impressive results were achieved from these large-scale investigations, some of which were task forceoriented investigations, and the banking industry as a whole has stabilized and continues its efforts to minimize insider abuse. FBI bank failure investigations peaked in July 1992, with 758 active cases. As of the conclusion of Calendar Year 1995, there were 371 pending failure cases, mostly in the New England and Southern California regions. With a reduction in the number of manpower-intensive failure investigations, the FBI has been able to refocus its efforts on other high-priority Financial Institution Fraud and financial crimes matters. Even though the number of failure investigations has declined, the number of major financial institution fraud investigations, defined as those involving sustained losses over $100,000, has continued to increase, from 3,026 during December 1991 to 4,424 as of December 31, 1995. Outsider fraud now accounts for more than 60 percent of the criminal referrals provided to the FBI by the financial institutions. Fraud as perpetrated by outsiders, especially organized international groups, has risen dramatically since 1987. During the past several years, a number of new and complex financial crimes have developed, including negotiable instrument fraud, credit card fraud, and money laundering. These schemes often involve sophisticated counterfeiting techniques. Additionally, computer crimes relative to cyber banking, Automatic Loan Machines, and electronic fund transfers are growing problems which will continue to challenge law enforcement well into the next century. Many of these crimes involve both organized groups operating in this country, and outsiders conducting illegal transactions between U.S. and foreign institutions. Presently, a sizable portion of this annual negotiable instrument fraud activity is being perpetrated by organized ethnic and international groups located regionally throughout the country. Of the 80 billion checks written worldwide annually, 60 billion are written in the United States. Numerous criminal ethnic groups which have immigrated to this country have taken the time to study and analyze American banking, noting the deficiencies in the banking system relative to negotiable instruments, and the inherent fraudulent opportunities underlying this system, including check theft, manipulation, and counterfeiting. The country's major financial institutions believe that over 50 percent of all such frauds, to which they fell victim, can be attributed to these professional and organized group efforts. A number of other schemes involving bogus financial instruments have periodically emerged in different regions of the country. At various times, individuals and organized groups have attempted to pass fraudulent negotiable instruments, including Comptroller Warrants, Letters of Credit, and Prime Bank Instruments, such as notes, debentures, and guarantees, through the country's financial institutions. Criminals have attempted a number of fraud schemes using these instruments over the past decade. Several years ago, a number of international perpetrators pro |