Money???

1. Money??? Money Laundering

2. 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”

3. Magic!!!! • Disappears • Changes Form • Harder to Find • Clean

4. 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

5. 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!

6. 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

7. Evolution • Exchange or Transaction Systems • Cash Transaction Systems • Financial or Business Systems

8. 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.

9. 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.

10. Internationalization of Crime • Organized crime The old Syndicates • The home-grown syndicate • The new breed More tech savvy More aggressive

11. Basis for “Laundering” • Drug trafficking. • Testing and probing of interdiction systems. • Drug trafficking organizations and Cartels • Smuggling • Sheer volume of traffic

12. 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,

13. 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

14. Indicators • 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 Some Indicator that may point to the “Washing Machine”

15. Books and Records • Cash Receipt Journals • Cash Disbursement Journals • Sales Journals • Purchases Journals • Voucher Register • General Journals

16. 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!!!!!!!!

17. 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.

18. 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

19. 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

20. Case Study-Aldrich “Rick” Ames Treason – Laundering money from the KGB KGB Moscow, USSR Cash $2,700,000.00 Ames CIA

21. 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

22. Hansen 2001?? The story is being written

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

24. Banking Beware of:

25. 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.

26. 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.

27. 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.

28. 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

29. 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.

30. 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.

31. 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.

32. 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.

33. 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

34. Egotistical Risk taker Hard worker Greedy Disgruntled or a complainer Overwhelming desire for personal gain Pressured to perform Inquisitive Rule breaker Under stress Financially needy Big spender Close relationship with vendors/suppliers Employee Fraudsters Lisa Eversole, in “Profile of a Fraudster,” lists the following characteristics of occupational fraudsters:

35. 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 résumés. 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 you’re looking for sinister waxed mustache and shifty eyes, you’re in for a surprise—scoundrels come in every description.

36. 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

37. 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)

38. 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)

39. Types of Misappropriations • Fictitious disbursements • Doctored sales figures • Sham payments • Price manipulations: land flipping, pump and dump, and cybersmearing • Money laundering • Bid rigging

40. Fighting Fraud An organization may want to: • Put in place a business ethics policy • Reflect the company’s 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 company’s security measures • Select and promote staff based on sound employment practices

41. 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)

42. 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)

43. 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 résumés • Think outside the box

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

45. Steps to Consider Once Fraud Is Detected • Consider communications very carefully whether they are to employees or those outside the company. • Consider setting aside time immediately to scope out an action plan. • Consider those who might assist in the crisis and take steps to eliminate any conflict of interest issues. • Consider prosecution which acts as a deterrent for future fraud.

46. 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)

47. 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 don’t have the personnel size required for a real segregation of duties. They often don’t require much approval for disbursements. And, when fraud is discovered, they frequently don’t prosecute it very aggressively because of the perceived negative publicity.

48. 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.

49. 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

50. 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