It's like a country song where a bad deal has gone down. Federal prosecutors say Arizona businessman Frank Capri defrauded developers and contractors throughout the U.S. by entering deals for branded restaurants that were never built,
Arizona Republic reports.
According to a
Republic investigation, Capri's company, Boomtown Entertainment, licensed the names of country music stars Toby Keith and Rascal Flatts to establish restaurants at malls. Boomtown built 20 Toby Keith restaurants and made deals to develop more restaurants, which were never built.
Instead, authorities say Capri and his associates funneled construction money into their own accounts and covered it up using fraudulent paperwork, fabricated contractors, and forged signatures. Nineteen Toby Keith restaurants have closed since 2013, and Boomtown became insolvent. Toby Keith and Rascal Flatts are not implicated in the alleged fraud.
Capri and his associates face wire fraud, money laundering, and conspiracy charges. Separately, civil court judges have ordered Capri to pay $65 million in civil judgments.
Global studies by the Association of Certified Fraud Examiners (ACFE) have consistently ranked real estate and construction fraud as the second or third most costly frauds in terms of median loss, with estimated average losses of more than $600,000. Construction companies can be both the victims of this type of fraud and the perpetrators.
ACFE's studies also note that most occupational frauds in all industries were committed by individuals at the employee or managerial level. Most often these individuals work in accounting, operations, sales, and executive management. Not surprisingly, the higher the fraudster's authority level, the greater the losses. Overall, more than half were with their firms or in business relationships for more than five years.
Capri's alleged fraud encompasses many of the most common types of construction fraud schemes, including:
- False representations.
- Diverting money intended for construction purchases through money laundering and mail fraud.
- Nonpayment of subcontractors and materials suppliers.
- Falsifying payment applications.
- Billing for unperformed work.
Auditors should not overlook an additional group of fraudulent activities that does not appear as a central part of this story, such as:
- Diverting lump-sum cost to time-and-material costs.
- Substituting or removing materials, usually for lower quality items.
- Manipulating change orders.
- Subcontractor collusion.
- Theft of equipment or tools.
The need to have a strategy to prevent and detect construction fraud extends to a broad range of individuals and businesses involved in construction projects. These include investors — especially wealthy, famous, and busy investors — lawyers, real estate companies, property developers, and property management companies.
Particularly in the somewhat unusual circumstances of this fraud involving individuals in the entertainment industry, the best way to prevent and detect fraud on a construction project is careful oversight by both the owner/investor and a trusted management team. There are three specific measures auditors and their organizations should take for such projects.
Conduct Due Diligence When entering into a business relationship and hiring people for a project, especially larger scale national projects, perform research on the individuals' backgrounds, including reference checks. Where warranted, these can be conducted by private investigators. A "wheeler dealer" or anti-controls attitude can be a sign of future fraud trouble.
Local and established contractors can be better choices to reduce the possibility of fraud. Be well-informed about local market conditions, availability of competition, and bid pricing of comparable projects in the area.
Also, become familiar with their business structure and the people involved. Many times the people who appear to be primarily involved in the business will have relationships with others, such as subsidiary companies. They may have family members who are trying to conceal who the principal is.
If the primary investors don't have the time to perform due diligence, they should engage a manager, accountant, compliance officer, or similar professional to do it.
Ensure Projects Are Monitored Effectively A designated person, such as a chief compliance officer, should be a communication point between contractors on the project and the investor/owner/management team. This compliance officer should conduct initial investigations as well as ongoing reviews. Continuous monitoring is a simple way to decrease the likelihood of fraud. The compliance officer also should be empowered to conduct periodic audits and be able to review payrolls, invoices, and contracts.
Stay Alert Fraud occurs when people stop paying attention. Implementing some of these measures early on will help in the long run, but as a baseline action, staying alert can help ward off construction fraud. Litigation costs money, violations can lead to lawsuits and even criminal charges, and a history of fraud can destroy reputations. Always be vigilant!