Financial Fraud - Special Report

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Financial Fraud - Special Report

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Special Report

Testimony of Mr. Bruce A. Townsend

Special Agent in Charge - Financial Crimes Division


The Subcommittee on National Security, Veterans Affairs, and International Relations House Committee on Government Reform

U.S. House of Representatives

July 24, 2001

Mr. Chairman, members of the Subcommittee, thank you for the opportunity to address the Subcommittee on the subject of federal interagency data-sharing and the Secret Service's role in the Anti-Drug Network/Nigerian Crime Initiative.

In addition to providing the highest level of physical protection to our nation's leaders, the Secret Service exercises broad investigative jurisdiction over a variety of financial crimes. As the original guardian of our nation's financial payment systems, the Secret Service has a long history of pursuing those who would victimize our financial institutions and law-abiding citizens. In recent years, the combination of the information technology revolution and the effects of globalization have caused the investigative mission of the Secret Service to evolve in a manner that cannot be overstated.

With the passage of the Omnibus Crime Control Act of 1984, the Secret Service was provided jurisdiction to investigate access device fraud. One of the first groups that the Secret Service identified as being heavily involved in this crime was a loosely organized criminal element within the growing Nigerian population in the United States.

It is important to emphasize from the outset that despite the Nigerian criminal elements that now dominate crime emanating from West Africa, we in the Secret Service recognize that there are millions of law-abiding Nigerians, at home and abroad, whose rich tradition and culture we admire and whose contributions to our society we value.

The democratically-elected government that came to power in Nigeria in 1999 is keenly aware that the extensive involvement by Nigerians in financial scams carried out around the world, and in the international drug trade, creates not only enormous financial losses, but also feeds widespread, but unjustified, perceptions about Nigerians. Nigeria still retains many legitimate opportunities for business and investment. However, there are corporations around the world that are reluctant to deal with Nigerian companies for fear of becoming embroiled in fraudulent activity. It is simply unfair that the activities of these criminal elements negatively impacts the economic potential of Nigeria. Only by sharing our combined expertise and resources will we be able to effectively address the Nigerian organized crime problem that plagues us all.

In the late 1980s, the Secret Service took a proactive approach to combating Nigerian organized crime by establishing and maintaining task forces throughout the United States whose main focus was the investigation of financial fraud committed by Nigerian nationals and their accomplices. Membership in these task forces included representatives from the United States Customs Service, the Immigration and Naturalization Service, the United States Postal Inspection Service, the Drug Enforcement Administration, the Federal Bureau of Investigation, the Internal Revenue Service, the Department of State’s Bureau of Diplomatic Security, bank investigators from the private sector, as well as numerous state and local law enforcement agencies. This diverse membership is indicative of the multitude of crimes being perpetrated by Nigerian criminals.

These crimes 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, the counterfeiting of U.S. currency, and the counterfeiting of corporate checks and other obligations. These attacks on our nation's financial systems usually involve careful planning, a precise execution of the scheme, and often focus on taking advantage of financial systems designed to be consumer or customer friendly.

Nigerian advance fee fraud, also known as “4-1-9 fraud” 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 United States accounting for a significant percentage of the total.

Experience has shown that seldom, if ever, are these enterprises engaged in one form of criminal activity to the exclusion of other types of crime. These organizations are responsible for financial crimes and fraud schemes costing Americans, and citizens of countries around the world, hundreds of millions of dollars a year, as well as for the importation of a significant amount of the heroin used in the United States, and much of the cocaine smuggled to Europe, Asia and Africa.

Nigerian criminal enterprises have proven to be particularly adept at taking advantage of opportunities created by the combined effects of globalization and the information technology revolution. They are now engaged in a broad range of criminal activities that reach across borders and victimize citizens, businesses and financial institutions in Africa, Europe, Canada, the United States and around the world. Nigerian criminal enterprises present unique challenges to law enforcement because their organizational structures and criminal activities are so varied.

Nigerian criminal groups are highly fluid in personnel and in methods of operation. Although there is a degree of structure to these organizations, their hierarchical composition and relationships are not comparable to those of more traditional criminal organizations. In terms of structure, these enterprises seem to range from independent entrepreneurs to highly organized syndicates. These groups are able to change and adapt as needed, both in the nature of the criminal activities they pursue, and in the members they employ. This flexibility allows them to remain in operation and to insulate themselves from law enforcement. The only viable means of attacking these groups is through a multi-agency or task force approach, while also finding ways to better share criminal intelligence information.

Although crimes committed by groups of Nigerians may seem unrelated, connections and patterns are being developed in criminal activities from credit card fraud to drug smuggling, and from identity theft to money laundering. The speed with which some of these groups react to enforcement efforts and adopt new techniques demonstrates the effectiveness of their inter-group intelligence sharing and the coordination between the various syndicates. If we are to be successful, it is critical that we in law enforcement share information and coordinate our efforts as effectively as the syndicates we investigate.

On October 21, 1995, Presidential Decision Directive 42 (PDD-42) was issued, directing government agencies to increase the level of resources devoted to combating international organized crime, to achieve greater effectiveness by improving the coordination of federal law enforcement efforts, to work more closely with other governments to develop a global response to this threat, and to aggressively and creatively use all legal means to combat international crime. In response to PDD-42, the Attorney General directed federal law enforcement to increase their cooperative efforts against international organized crime, including Nigerian organized crime.

In May of 1996, pursuant to PDD-42, a federal law enforcement interagency working group was created to develop a domestic law enforcement strategy regarding Nigerian organized crime. The strategy that was developed targeted both domestic and international Nigerian criminal activity, and emphasized increased coordination of U.S. law enforcement, the sharing of investigative leads and information, and enhanced cooperation with our foreign law enforcement counterparts to coordinate multinational cases and investigations. Moreover, by improving coordination and dialogue with the government of Nigeria, especially Nigerian law enforcement officials, this strategy strengthened their ability to combat crime occurring within Nigeria, and assist in combating crimes committed elsewhere in the world by individuals and organizations located in Nigeria. The proposed enforcement effort of the strategy became known as the Nigerian Crime Initiative (NCI).

The working group also proposed to utilize a computer database to share Nigerian case data electronically. It was later agreed that the Department of Defense/Defense Information Systems Agency’s Anti-Drug Network (ADNET) would be the mechanism for sharing this information. ADNET uses web-based technologies and a classified communication system to enable participants to securely exchange data.

In 1998, then-Attorney General Reno approved the recommendation of the working group to establish the Interagency Nigerian Organized Crime Task Force (INOCTF). Additionally, it established the installation of the ADNET-NCI system to support these task forces and selected foreign sites.

It was recognized by the interagency working group that the Secret Service had been combating criminal issues related to Nigerian organized crime prior to the creation of the working group in 1996. The Secret Service had hosted existing task forces designed to combat aspects of Nigerian organized crime—specifically that of access device fraud—since the late 1980s.

It was agreed by the Attorney General and participants of the interagency working group that existing Secret Service Nigerian Task Forces would evolve into new Interagency Nigerian Organized Crime Task Forces (INOCTFs). Additionally, these task forces would continue to be hosted by the Secret Service. It was also agreed that the creation of future task force sites and the agency-host of these sites would be determined at the discretion of the interagency working group.

Accordingly, Secret Service hosted INOCTFs were established from existing Secret Service Nigerian Crime task forces located in New York, Newark, Chicago, Houston and Atlanta. The process of installing ADNET terminals for these offices began in early 1998 and was completed in late 1999.

Since the inception of NCI, other task forces have been established in Dallas and Washington, DC. Proposed NCI task force sites include Baltimore and Los Angeles. Overseas, ADNET terminals have been installed at the U.S. Consulates in Lagos, Nigeria, and Accra, Ghana. These overseas terminals help to further the law enforcement efforts waged against Nigerian organized crime in those countries. Additional terminals have been installed at the headquarters of most of the participating agencies involved with NCI.

The Secret Service provides the following resources as host to a task force:

· A full-time Criminal Research Specialist (CRS), trained in the use of the ADNET terminal, is assigned directly to each task force. This individual acts as a point-of-contact for all participating task force personnel. The CRS can provide information obtained from ADNET to all law enforcement participants assigned to the task force.

· Task force space is also provided. Each task force site must follow strict security regarding the housing of each ADNET terminal. Each site must also allow independent access to members of each participating agency twenty-four hours a day, seven days a week.

It has been the experience of the Secret Service that the criminal groups involved in financial crimes routinely operate in a multi­-jurisdictional environment. By working closely with other federal, state, and local law enforcement officials, as well as international police agencies, we have been able to jointly develop a comprehensive network of intelligence sharing, resource sharing, and technical expertise that bridges jurisdictional boundaries. Moreover, the use of a classified, secure communication system, and its attendant regulations and protections, furthers the goal of safeguarding the privacy of citizens.

These task forces have had success in disrupting the access device and bank fraud activities of these groups, and have even been able to affect ongoing advanced fee fraud schemes, demonstrated by recent investigations in New York. In two separate undercover investigations, meetings were arranged in which members of the INOCTF, posing as Nigerian advance fee fraud victims, met with suspects who were perpetrating a “black money” scam. In one such meeting, the “sales pitch” of the suspects, and their demonstration of the chemical process for removing the black substance from a genuine $100 Federal Reserve Note, was captured on video tape.

These meetings led to the arrest of four suspects on wire fraud charges. Subsequently, two federal search warrants were executed on a residence and a storage locker used by another suspect, who was thought to control the majority of the advanced fee fraud activity in the New York metropolitan area, particularly "black money" scams. Extensive documentary and electronic evidence was seized, including volumes of victim information and four footlocker style trunks containing approximately one thousand pounds of "black money.” A review of the recovered documents has enabled INOCTF members to link eight defendants from other advanced fee fraud related cases to this suspect, and identified actual losses in excess of $3 million.

Despite such successful investigations by the INOCTF, lasting success in dismantling the advanced fee fraud operations of Nigerian criminal enterprises has been much more elusive. One problem has been that advanced fee fraud schemes originate in Nigeria and other West African countries with letters, faxes, and e-mails, and the suspects defraud U.S. citizens without ever entering the United States. This is accomplished by either conducting all of the “business” by telephone, fax, mail, e-mail, and wire, or by having face-to-face meetings in Canada, the United Kingdom, or Africa.

Interdiction efforts and consumer education initiatives have been further complicated by the evolution of the schemes themselves. Nigerian criminal enterprises have adopted new technologies and modern marketing practices more quickly than most multi-national corporations, constantly refining their delivery methods and their “pitch” to circumvent the efforts of law enforcement and consumer protection agencies.

In an effort to take the fight against these criminal organizations to its source, on January 12, 1999, the Secret Service began a cooperative effort with the U.S. Embassy in Nigeria, and the Nigerian National Police (NNP). The purpose of this effort was to provide operational, investigative and training assistance to the NNP and other Nigerian federal law enforcement agencies.

A task force was established in Lagos, Nigeria that was initially staffed by two Special Agents of the Secret Service on rotating temporary assignments. Over the next sixteen months, using information supplied by the eleven domestic task forces, the Secret Service assisted the NNP in executing search warrants at more than one hundred suspected advance fee fraud plants around Lagos, which in turn resulted in nearly two hundred arrests.

Information developed by the task force in Lagos also led to the arrests of Nigerian criminals operating within the United States, as well as the identification and seizure of the proceeds of advanced fee fraud schemes secreted in financial institutions in the United States. Due to the overwhelming success of this initiative, as well as the support of the U.S. Embassy, the newly established U.S. Consulate, and the NNP, the Secret Service established a permanent office in Lagos in June of 2000, which has continued to build on the positive trend begun by the temporary initiative.

The Secret Service is proud of the relationships we have developed, and have continued to strengthen, with our foreign law enforcement counterparts, especially the Special Frauds Unit of the Nigerian National Police. We believe that such international partnerships are an essential component of efforts to carry out the mandate of PDD-42.

I would like to take this opportunity to commend the Department of State for their tireless and unwavering support of our efforts in Nigeria. The extensive cooperation that the Secret Service has received from the staff of the U.S. Embassy and the U.S Consulate has been instrumental in our success, as has the support of the Bureau of International Narcotics and Law Enforcement.

The challenge we face is great. But the progress we are making against Nigerian criminal elements is extremely positive, as is the commitment by the new democratically elected government in Nigeria to become a full partner in these efforts. Increased cooperation among federal, state, and local officials in the U.S., our foreign partners, international organizations, and private institutions around the world, is the only way to make an effective and united stand against transnational crime.

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