What does loan lapping involve in the context of fraud?

Loan lapping is a fraudulent scheme typically associated with the manipulation of accounts receivable or loan payments rather than using new loans to pay off old ones. In this context, the act involves deliberately misapplying incoming payments. For instance, an employee may receive payments from one borrower and apply them to the account of another borrower to cover up a shortfall or theft. This creates a cycle where subsequent payments from new borrowers are then used to cover previous borrowers’ accounts, creating an illusion of legitimate transactions.

The other choices, while related to loan activities, do not accurately represent the essence of loan lapping. Forging loan documents refers to falsifying details to obtain larger loans, which is a different form of financial fraud. Submitting multiple loan applications often involves seeking credit from multiple sources, which may lead to issues of undue credit risk but doesn't specifically involve the manipulation of payments like loan lapping does. Investing loan funds into illegal activities is another form of fraud, typically involving the misappropriation of funds for illicit purposes, rather than the deceptive cycle seen in loan lapping. Overall, loan lapping uniquely captures a sophisticated method of concealing financial discrepancies.