The Fraud that Could Have Been Avoided if LEI Identifiers Were Requested…
On January 6th, 2018, a man who committed a massive $179 million fraud, was arrested when trying to escape to Ecuador on board of a private jet… Three months later he was sentenced to 25 years in prison.
“It was one of the most outrageous swindles in the recent years. For the judge who sentenced the man, it was the largest financial fraud he had seen in forty years on the bench.”
The discovery of the fraud was made 2 years earlier, and in a plea agreement the perpetrator admitted to the sales of 26 sham loan securities issued by First Farmers Financial LLC from Florida to Pennant Management from Milwaukee for $179 million.
There were a lot of criminal activities that led to the possibility of such massive fraud, like false documents showing the apparent government guarantees for the loans and many more bigger and smaller crimes. However, the most important fact was that all the loans did not have real borrowers. As the borrowers were presented with traditional identification methods (names, addresses) the securities buyers did not have straightforward mechanisms to verify that the loans in the securities were not given to real legal entities.
That created a ripple effect – the funds that bought the debt securities from Pennant Management, like Illinois Metropolitan Investment Fund (which alone lost $50 million) had no mechanisms to go three levels down to the borrowers.
How that could happen? This question should be asked at many levels of the financial industry regulators and government agencies.
However, we know for sure that the application of Legal Entity Identifiers would simply eliminate the very core of the sham – the inability of debt security buyers to identify all the players – from the investment funds that sold the securities, through the companies that created the securities down to borrowers. It is easy and straightforward to require the LEIs from all the players. With such a relatively simple requirement, the verification of the identity, checking the physical existence of borrowers and all the players in between them, could be done in split second using the system like LEI.INFO, its APIs and … a simple Excel spreadsheet….