Money???

1
 Money Laundering
The money derived
from illegal activity by
concealing the identity of
the individuals who
obtained the money and
converting it to assets
that appear to have come
from legitimate sources

2
 Disappears
Changes Form
Harder to Find
Clean

3
 What is Money Laundering?
The process used to disguise the source of
money or assets derived from criminal
activity
Include:
Drug trafficking
Extortion
Corruption
Fraud

4
 What is Money Laundering?
They try to launder the money so that the
source cannot be found.
International Monetary Fund estimates $900
billion to $2.25 trillion annually worldwide.
Government of Canada estimates

the amount in Canada to be in the billions!

5
 Why do the laundry?
Criminals want to:
Avoid prosecution
Increase profits
Avoid seizure of accumulated wealth
Appear legitimate
Tax evasion

They are trying to conceal the origin of the cash

6
 Evolution
Exchange or Transaction Systems
Cash Transaction Systems
Financial or Business Systems

7
 Laundry Cycle
Placement Converting currency to some
other form. Lots of cash.
Layering Reduce the impact of paper trail.
Front Business Entities. Other forms of
concealment
Integration Make the origin look
legitimate.

8
 Factors
Advances in communications and transportation.
Technological methods for the concealment of
crime and the proceeds of crime
Criminals can move themselves and their stolen
property between countries within hours.

Funds can be wired from one location to another

in seconds.

9
 Internationalization of Crime
Organized crime
The old Syndicates
The home-grown syndicate
The new breed

More tech savvy

More aggressive

10
 Basis for Laundering
Drug trafficking.
Testing and probing of interdiction systems.
Drug trafficking organizations and Cartels
Smuggling
Sheer volume of traffic

11
 Basis for Laundering 2
International criminals
and organizations
Technology and the
conduct of Sensitive
meetings
Domestic organizations
and terror groups
Confidentiality afforded
by some countries
banking laws,

12
 Combat
Laws
Racketeering Influenced and Corrupt
Organization (R.I.C.O.)
Interstate Travel in Aid of Racketeering (ITAR)
(travel acts)
Bank Secrecy Act
Forfeiture
Money Laundering Control Act
Mail and Wire Fraud

13
 Indicators
Some Indicator that may point to the Washing
Machine
Concealing of assets
Two sets of records
Destruction of records
Large frequent cash Transactions
Payments to fictitious persons or companies
False or altered billings or invoices
Large company loans to individuals or officers with no particular
repayments
Personal expenses paid out of company funds

14
 Books and Records
Cash Receipt Journals
Cash Disbursement Journals
Sales Journals
Purchases Journals
Voucher Register
General Journals

15
 Other Sources and Records
Personal Records
Informants
Real Estate Records
Court Records
Bankruptcy and Motor Vehicles
Loan Applications
Tax Return
Divorce and Child Support Records
Employment and Bank Records
Household Trash!!!!!!!!

16
 Financial Investigations
A blend of traditional investigative techniques and
accounting
Auditors look for violations of accounting principles,
recommending changes to management.
Criminal Investigator looks for proof of the
commission of a crime beyond a reasonable doubt.

17
 Security of Information Systems-Fraud
Prevention
Security Program
Prepare a project plan
Identify assets
Value assets
Identify threats
Assess likelihood of threats
Analyze exposure
Adjust controls
Prepare security report

18
Use of Computers in Fraud and Money
Laundering-Exposure

Threat Likelihood
Exposure Analysis
Identify controls in place
Assess the reliability of controls
Evaluate the likelihood threat will be
successful
Assess the resulting loss
Cost Benefit Analysis

19
 Case Study-Aldrich Rick Ames
Treason Laundering money from the KGB

KGB Moscow, USSR

Cash $2,700,000.00

Ames CIA

20
 Aldrich Rick Ames
$950,000.00 $1,500,000.00
Accounts Account
Mother in Law/Ames Trustee Personal Account
Personal Account Zurich First Union Vienna VA.

Lifestyle Expenditure Ames and Wife

Maid Salary $540,000.00 Cash Purchases
Telephone Bills Home.Arlington VA 1992 Jaguar $50G
Travel 1989 Honda $15G
Credit Cards Renovations $99G

21
 Hansen 2001??
The story is being written

22
 Financial Approach
Proved:
Where the money come from
How much
Where is it going
How is it moving
Is it been kept or spent

23
Banking

24
 Customer
Beware of A Customer Who Provides Insufficient or
Suspicious Information
A business that is reluctant to provide complete
information regarding: the purpose of the business, prior
banking relationships, officers or directors, or its location.
A business that refuses to provide information to qualify
customers for credit or other banking services.
A customer who is unwilling to provide personal
background information when opening an account or
purchasing monetary instruments above a specified
threshold.

25
 Customer
A customer who opens an account without references, a local address,
or identification (passport, alien registration card, driver's license, or
social security card), or who refuses to provide any other information
the bank requires to open an account.
A customer who presents unusual or suspicious identification
documents that the bank cannot readily verify.
A customer whose home phone is disconnected.
A customer who includes no record of past or present employment on
a loan application.

26
 Customer
A customer who has no record of past or present
employment but makes frequent large transactions.
A business that is reluctant to reveal details about its
activities or to provide financial statements.
A business that presents financial statements noticeably
different from those of similar businesses.

27
 Customer Transactions
Sending or receiving frequent or large volumes of wire
transfers to and from offshore institutions.
Depositing funds into several accounts, usually in amounts
below a reportable threshold, and then consolidating into a
master account and transferring them outside of the
country.
Instructing the bank to transfer funds abroad and to expect
an equal incoming wire transfer from other sources

28
 Customer Transactions
Regularly depositing or withdrawing large amounts by
wire transfers to, from, or through countries that are
known sources of narcotics or whose bank secrecy laws
facilitate the laundering of money.
Wiring cash or proceeds of a cash deposit to another
country without changing the form of currency.
Receiving wire transfers and immediately purchasing
monetary instruments prepared for payment to a third
party.

29
 Customer Accounts
Beware of Activity Not Consistent With the Customer's Business
Corporate account(s) where deposits or withdrawals are primarily in
cash rather than checks.
A customer who operates a retail business and provides check cashing
service and does not make large draws of cash against checks
deposited. This may indicate the customer has another source of cash.
Unusual cash purchases of money orders and cashier's checks.
Accounts with a large volume of deposits in cashier's checks, money
orders, and/or wire transfers, when the nature of the accountholder's
business does not justify such activity.

30
 Customer Accounts
Accounts that show frequent large bill transactions (i.e., deposits,
withdrawals, monetary instrument purchases) without a business
reason.
Accounts that show frequent large bill transactions for a business that
generally does not deal in large amounts of cash.
A single, substantial cash deposit composed of many $50 and $100
bills.
Frequent exchanges of small bills for large bills or vice versa.
Retail deposits of numerous checks but rare withdrawals for daily
operations.

31
 Customer Accounts
Sudden and inconsistent change in currency transactions or patterns.
A business owner (e.g., a one-location store owner) who makes several
deposits on the same day at different bank branches.
An account that shows unusually large deposits of U.S. food stamps (often
used as currency in exchange for narcotics).
An account that sends and receives wire transfers (especially to/from bank-
haven countries), without an apparent business reason or when inconsistent
with the customer's business or history.
An account that receives many small incoming wire transfers or makes
deposits using checks and money orders, and almost immediately wire
transfers all but a token amount to another city or country, when such activity
is not consistent with the customer's business or history.

32
 Forensic and Investigative Accounting

Chapter 5
Employee Fraud:
The Misappropriation of Assets
2003, CCH INCORPORATED
4025 W. Peterson Ave.
Chicago, IL 60646-6085
http://tax.cchgroup.com
A WoltersKluwer Company
 Employee Fraudsters
Lisa Eversole, in Profile of a Fraudster, lists the
following characteristics of occupational fraudsters:
Egotistical Pressured to perform
Risk taker Inquisitive
Hard worker Rule breaker
Greedy Under stress
Disgruntled or a Financially needy
complainer Big spender
Overwhelming desire Close relationship with
for personal gain vendors/suppliers
34
 Employee Fraudsters
Bev Harris, in How to Unbezzle a Fortune, says
that fraudsters and embezzlers are the nicest people
in the world:
Wide-eyed mothers of preschoolers. Your best
friend. CPAs with impeccable rsums. People who
profess deep religious commitments. Your partner.
Loyal business managers who arrive early, stay late,
and never take a vacation. And sometimes, even
FAMILY MEMBERS. So if youre looking for
sinister waxed mustache and shifty eyes, youre in
for a surprisescoundrels come in every
description.
35
Discrepancies That May Indicate Fraud
Transactions that are not recorded in a complete
or timely manner or are improperly recorded as
to amount, accounting period, classification, or
entity policy
Unsupported or unauthorized balances or
transactions
Last-minute adjustments that significantly affect
financial results
Evidence of employees access to systems and
records inconsistent with that necessary to
perform their authorized duties
36
 Types of Misappropriations
Embezzlement
Cash and check schemes
Larceny of cash
Skimming
Swapping checks for cash
Check tampering
Kiting
Credit card refund and cancellation schemes
(continued on next slide)

37
 Types of Misappropriations
Accounts receivable fraud
Lapping
Fictitious receivables
Borrowing against accounts receivable
Inventory fraud
Stealing inventory
Short shipments with full prices
(continued on next slide)

38
 Types of Misappropriations

Fictitious disbursements
Doctored sales figures
Sham payments
Price manipulations: land flipping, pump
and dump, and cybersmearing
Money laundering
Bid rigging

39
 Fighting Fraud
An organization may want to:
Put in place a business ethics policy
Reflect the companys position on fraud in Rules of
Conduct
Identify and assess primary potential risks faced by the
business
Determine adequate plans and procedures to deal with
fraud once it has been discovered
Have a forensic accountant review and help to audit the
companys security measures
Select and promote staff based on sound employment
practices
40
 Preventing Employee Fraud

Have a fraud hotline

Institute a mandatory vacation policy
Rotate assignments of employees who handle
cash, payables, and receivables
Have a written and signed ethics policy
Have internal auditors do different
procedures each time they audit a unit
(continued on next slide)

41
 Preventing Employee Fraud
Observe and listen to employees; look for
lifestyle changes
Really understand the business unit and
what functions employees actually perform
Do not allow employees or executives to get
away with anything
In a small business, the owner should
receive the monthly bank statements
unopened
(continued on next slide)
42
 Preventing Employee Fraud
Bank statements should always be
reconciled
Supervisors should try to think like
criminals
Do not assume employees behave honestly
Check employee references and rsums
Think outside the box

43
 Steps to Consider Once Fraud
Is Detected
1. Call legal counsel.
2. Get the insurance carrier involved as early as
possible.
3. Take immediate steps to safeguard existing assets
from further damage.
4. Quietly and confidentially gather evidence.
5. Manage information on a need to know basis in
the early stages of discovery.
(continued on next slide)

44
 Steps to Consider Once Fraud
Is Detected
6. Consider communications very carefully whether
they are to employees or those outside the
company.
7. Consider setting aside time immediately to scope
out an action plan.
8. Consider those who might assist in the crisis and
take steps to eliminate any conflict of interest
issues.
9. Consider prosecution which acts as a deterrent for
future fraud.
45
 Wells Report Measures
The 2002 Wells Report provides an excellent ranking
of the helpful measures for preventing fraud (where 1
is most effective and 8 is least effective):
Strong internal controls (1.62)
Background checks of new employees (3.70)
Regular fraud audit (3.97)
Established fraud policies (4.08)
Willingness of companies to prosecute (4.47)
Ethical training for employees (4.86)
Anonymous fraud reporting mechanisms (5.02)
Workplace surveillance (6.07)
46
 Fraud in Not-for-Profit Organizations
The website of Clark, Schaefer, Hackett &
Company states the following reasons not-for-profit
organizations become targets of fraud:
Many smaller not-for-profits just dont have the
personnel size required for a real segregation of
duties. They often dont require much approval for
disbursements. And, when fraud is discovered, they
frequently dont prosecute it very aggressively
because of the perceived negative publicity.

47
 State and Local Government
Susceptibility
Government bankruptcy is an important issue
for fraud prevention and detection because
likes business corporations and organizations,
governments facing severe financial
difficulties can be fertile ground for fraud.
Government bankruptcy also may trigger an
investigation in order to determine if fraud
has contributed to such financial distress.

48
 Uncovering Elusive Fraud
Analyze account records and trace funds
Research background and search for assets
Develop confidential sources
Interview/interrogate persons and find
witnesses
Conduct surveillance efforts
Guide undercover operations
Recognize and preserve physical evidence

49
 Forensic and Investigative Accounting

Chapter 6
Indirect Methods of
Reconstructing Income

2003, CCH INCORPORATED

4025 W. Peterson Ave.
Chicago, IL 60646-6085
http://tax.cchgroup.com
A WoltersKluwer Company
 Forensic Audit Approaches Used
by the IRS
Direct methods involve probing missing
income by pointing to specific items of
income that do not appear on the tax return. In
direct methods, the agents use conventional
auditing techniques such as looking for
canceled checks of customers, deed records of
real estate transactions, public records and
other direct evidence of unreported income.

51
 Forensic Audit Approaches Used
by the IRS
Indirect methods use economic reality and
financial status techniques in which the
taxpayers finances are reconstructed
through circumstantial evidence.

52
 Minimum Income Probes
For nonbusiness returns, an agent is to
question the taxpayer or the representative
about possible sources of income other than
reported on the return. If there is no other
information in the file indicating potential
unreported income, the minimum income
probe is met.

53
 Minimum Income Probes

For taxpayers who are self-employed and

file a Schedule C or F, an analysis is made
of tax return information to determine if
reported income is sufficient to support the
taxpayers financial activities.

54
 Lifestyle Probes
The lifestyle of a taxpayer or employee may
give clues as to the possibilities of unreported
income. Obvious lifestyle changes may indicate
fraud and unreported income:
Lavish residence
Expensive cars and boats
Vacation home
Private schools for children
Exotic vacations

55
 IRS Financial Status Audits

If someone is spending beyond his or her

apparent means, there should be concern. If a
forensic accountant suspects fraud or
unreported income, a form of financial audit
may be appropriate that will enable the
investigator to check the lifestyles of the
possible perpetrators.

56
 Indirect Methods
An indirect method should be used when:
The taxpayer has inadequate books and records
The books do not clearly reflect taxable income
There is a reason to believe that the taxpayer has
omitted taxable income
There is a significant increase in year-to-year net worth
Gross profit percentages change significantly for that
particular business
The taxpayers expenses (both business and personal)
exceed reported income and there is no obvious cause
for the difference

57
Market Segment Specialization Program

The Market Segment Specialization Program

focuses on developing highly trained examiners
for a particular market segment. An integral part
of the approach used is the development and
publication of Audit Technique Guides.
(continued on next slide)

58
Market Segment Specialization Program

These Guides contain examination

techniques, common and unique industry
issues, business practices, industry
terminology, and other information to assist
examiners in performing examinations. A
forensic accountant can use this resource to
learn about a particular industry.

59
 Cash T
A cash T is an analysis of all of the cash
received by the taxpayer and all of the cash
spent by the taxpayer over a period of time.
The theory of the cash T is that if a taxpayers
expenditures during a given year exceed
reported income, and the source of the funds
for such expenditures is unexplained, such
excess amount represent unreported income.

60
 Source and Application of Funds
Method (Expenditure Approach)
This technique is a variation of the net worth
method that shows increases and decreases in a
taxpayers accounts at the end of the year. The
format of this method is to list the applications
of funds first and then subtract the sources. If
the taxpayers applications exceed his or her
known cash receipts (including cash on hand at
the beginning of the year), any difference may
be unreported income.

61
 Net Worth Method
The net worth method is a common indirect balance sheet
approach to estimating income. To use the net worth
method, an IRS agent or forensic accountant must:
1. Calculate the persons net worth (the known assets
less known liabilities) at the beginning and ending of
a period
2. Add nondeductible living expenses to the increase in
net worth
3. Account for any difference between reported income
and the increase in net worth during the year as (a)
nontaxable income and (b) unidentified differences

62
 Bank Deposit Method

The bank deposit method looks at the funds

deposited during the year. This method
attempts to reconstruct gross taxable receipts
rather than adjusted.

63
 Gross Business Receipts Formula
1. Total bank deposits $XXX

Less:
2. Nontaxable and nonbusiness receipts deposited (XXX)

3. Net deposits resulting from business receipts $XXX

Add:
4. Business expenses paid by cash $XXX

5. Capital items paid by cash XXX

6. Personal expenses paid by cash XXX

7. Cash accumulated during the year from receipts XXX

8. Subtotal $XXX

9. Less: Nontaxable and nonbusiness cash used for (XXX)

(4) through (7)
64
$XXX
 Forensic and Investigative Accounting

Chapter 7
Money Laundering and
Transnational Financial Flows

2003, CCH INCORPORATED

4025 W. Peterson Ave.
Chicago, IL 60646-6085
http://tax.cchgroup.com
A WoltersKluwer Company
 Definition

A definition of money laundering that covers

both legal and illegal contexts is to take
money that comes from one source, hide that
source, and make the funds available in
another setting so that the funds can be used
without incurring legal restrictions or
penalties.

66
 Steps in Money Laundering
The traditional money laundering process can be
divided into three steps:
1. Money is deposited in a bank or financial
institution.
2. A set of complex transfers is made to disguise
the original source for the money and to hide
the audit trail. (This step is called layering the
transactions.)
3. The money is integrated back into the
legitimate money supply.

67
Cybercash Creates New Laundering
Opportunities
Using the Internet, it will be possible for
anyone to transfer large sums of money from
one location to another without using a bank
and with the transfers being totally
anonymous.

68
Cybercash Creates New Laundering
Opportunities
Today, cybercash transactions are beginning to
take place without the need for third parties
and the consequential scrutiny that might
otherwise exist.
Furthermore, cybercash transfers can be
structured so that they originate in a
jurisdiction where such activities are not
considered illegal.

69
Possible Users of Money Laundering
Practices
Grant recipients
Criminals
Political asylum seekers

70
 Correspondent Banking
Correspondent banking takes place when one
bank provides services to another bank to
move funds, exchange currencies, and access
investment services such as money market
accounts, overnight investment accounts, CDs,
trading accounts, and computer software for
making wire transfers and instant updates on
account balances.

71
 Correspondent Banking

A payable-through account enables the

respondent banks clients within the country
where the bank is registered to write checks
that are drawn directly on the respondent
banks correspondent account in the United
States.

72
 Tools Banks Use to Identify
Money Launderers
Monitoring software
Currency Transaction Reports (CTRs)
Suspicious Activity Reports (SARs)

73
 Due Diligence Laws for Banks

Laws and regulations require that a bank

perform due diligence in its relationships with
other banks and important clients as well as
continually monitor account transactions.
Within banks, due diligence must co-exist
with the clients need for privacy and the
secrecy laws existing in many foreign
jurisdictions that prevent access to bank
documents.

74
 Shell Banks
Shell banks are generally high-risk banks that
exist without any physical presence in any legal
jurisdiction. These banks have a banking license
in a specific country, but they are not likely to
have a staff and may be operated as part of
another business or operated out of an
individuals personal residence.

75
 Offshore Banks

An offshore banking license prevents the

organization from transacting banking
activities with any citizens of the licensing
jurisdiction or transacting business with the
currency of the licensing jurisdiction. These
bank operations solely exist within
international financial transactions.

76
 Cash-Oriented Businesses

Currency exchanges
Online auctions
Casinos
Purchasing departments

77
 Audit Trail
Churning
Laundering cycles
1. Illegal cash
2. Deposited into bank
3. Purchase asset
4. Sell asset
5. Documented legal cash

78
Finding Money Laundering Schemes

Web logs
Tracing IP addresses
HTTP common logfile format
Wire transfers
Bank reports

79
 Guarding Against Money Laundering
Individual due diligence
Business associations
Employment
Company due diligence in verification
procedures
Corporate ownership and governance
Bearer shares
Trust due diligence
Trust deeds
Beneficiaries
80
Accountants Role as Gateway Keeper
AICPA Auditing Standards Governing
Money Laundering
SAS No. 54, Illegal Acts by Clients
SAS No. 82, Consideration of Fraud in a
Financial Statement Audit (now replaced
by SAS No. 99)
Lack of Reporting Requirement

81
 USA Patriot Act of 2001

International Money Laundering Abatement

and Financial Anti-Terrorism Act of 2001
(MLAA)
Payable-through accounts
Enhancements and restrictions under MLAA
Reporting requirements under MLAA

82