CFE Exam Quiz 46

The financial profile is essentially a financial statement about an individual. This indicates what the subject makes, holds, owes, and spends at any point or for a period of time; this represents the profits, expenditures, property, and liabilities of the subject.
The financial profile of the subject contains financial information capable of identifying illegal conduct. The numbers in the financial profile of a subject will show where the money of the subject comes from (income) and where it is going (expense).

The behavioral profile is complementary to the financial profile. While the financial profile works best for big transactions, it is better to recognize minor events and smaller currency transactions with the behavioral profile.
Information in the behavioral profile of the subject may suggest that he lives beyond his obvious means and is therefore likely to have hidden income or hidden sources of income.

Fraud examiners should use the asset method if the subject is believed to have accrued wealth and to have purchased assets with illicit proceeds, leading to an increase in the subject’s net worth.
The asset method allows fraud examiner to prove income circumstantially.
The fraud investigator calculates, under the asset method the increase or decrease in the net value of the subject from year to year by measuring the net worth of the subject at the beginning and end of the period in question.
While the asset method can be applied for any number of years, it is best to start the year before the suspected fraudulent activity began.

The expenditures method is also known as the sources and application of funds method. It compares the known expenditure of the suspect and known sources of funds over a given period of time.
This method is best used when the subject spends illicit income on consumables that would not cause an increase in net worth. This method is also suitable where there is evidence that the subject’s income cannot support his lifestyle and spending habits.

Expenditures – funds from known sources = funds from unknown sources.
Since bank balance and credit card payments are expenditures and salary comes from known sources, $3,000 have come from illegal or unknown sources.

Establish the known expenses of the subject for the year in relevance. Expenditures include the use or application of funds for any purpose, including deposits to bank accounts, purchase of major assets, travel and entertainment expenses, and payment of loan and credit card debts.
Identify all available sources of funds, including loans and gifts, and cash on hand from previous years.
To determine the amount attributed to unknown sources, measure the difference between the amount of the suspect’s expenditure and his known income.

Net deposits to all accounts
+ Cash expenditures
= Total receipts from all sources
– Funds from known sources
= Funds from unknown or illegal sources

The bank deposit analysis method can be used by indirect or circumstantial evidence to prove unknown sources of funds. It is a difference in the source and application of the method of funding in which deposits are linked to legitimate income for financial institutions.
The bank deposit analysis method is best applied to circumstances where it is assumed that the majority of the subject’s income is deposited into established bank accounts, the assets and liabilities of the subject are fairly constant from year to year, and there is no sign of excessive spending.
The method of bank deposits is recommended as a primary method of proof when most of the income of the subject is deposited and the books and records of the subject are unavailable, withheld, incomplete or kept in cash.

Total deposits of the subject consist of sums deposited on all bank accounts owned or managed by the target as well as deposits made on savings and loan companies accounts, investment trusts, brokerage houses, and credit unions. Total deposits also include on-spot cash accumulation (increase).
If a subject lists checks on a deposit ticket and deducts a cash amount (split deposit) paid to him, only the net amount of the deposit should be used to calculate total deposits.
Additional items to be included in the deposits are assets and the subject earned in the service payment is noted.

Total outlay of funds– Net bank disbursements= Cash expenditures

Net deposits to all accounts
+ Beginning balances
= Net bank funds available
– Ending balances
= Net banking disbursements

While any form of asset may be concealed, fraudsters tend to hide liquid assets (assets that can be quickly purchased and sold) more often than illiquid assets (assets that are not easily converted into cash). Nonetheless, by transferring ownership and title to another person or entity, illiquid resources such as real estate, cars, ships, and aircraft can be covered.

People hide the property for a variety of reasons, such as:
-Fraudulently through a marital estate’s wealth in divorce proceedings.
-Save them or withdraw them from bankruptcy from lenders.
-Misrepresent the company’s assets.
-Do not have to pay a civil judgment.
-Taxes evade.
-Disguise their relation with criminal acts and disguise as legitimate illegal property.

Hoarding happens when an individual stores resources in a hidden location, usually in his or her home or estate. This is the proverbial strategy of “cash under the mattress.” Hoarding has occurred if assets are hidden in walls and beams. In hoarding, people can hide assets in their house and outside for instance, in safe deposit boxes.

A fraudulent transfer is a transaction made by a debtor to attempt to circumvent the attempts of a creditor to collect against the asset. This transfer is useful when hiding assets in someone else’s name. This technique serves to protect the assets from taxes, seizure, and creditors. It is designed to leave little or nothing in the name of the debtor so that he is simply judgment proof.

Banks and other depository institutions are susceptible to individuals attempting to hide illicit funds as they are the primary gateway to the financial system. In order to cover up their illegal proceeds, fraudsters may deposit money into financial institutions ‘ accounts and then use wire transfers to move funds from different accounts and break the audit trail. Many fraudsters use wire transfers to transmit their illegal proceeds to offshore accounts.

Cashier’s checks, traveler’s checks, and other negotiable instruments— written instructions promising to pay a fixed amount of money — can also be used to hide assets. For several purposes, these devices are useful to asset hiders, including
-They conceal the financial dealings of a person.
-Reduce the amount of money to be transported.
-Almost everywhere in the world, they can be exchanged.

Offshore assets are typically concealed in tax havens — countries that give investment favorable tax treatment. Based on the nationality and residency of the person and the tax code of the country in which the activity takes place, tax havens may be legal or illegal.

A trust includes a settlor, a trustee, beneficiaries, and a bond of trust. The settlor is the person who generates trust. It is the duty of the trustee or trustees to manage and execute the terms of the trust. The beneficiaries are those who, at the present time or in the future, have the right to trust income or principal. The trust arrangement is the written agreement between the settlor and the trustee, and it states that the settlor must transfer those assets to the trustee and the trustee will keep those assets in trust and administer them to the designated beneficiaries.

In the insurance sector, assets are mainly covered by life insurance policies. Some life insurance policies can be purchased with a single down payment.
Individuals can overfund policies with illegal money and then, upon withdrawal, collect clean disbursement checks from the insurer.
Also, asset hiders may purchase life insurance policies or other redeemable insurance contracts using illicit funds.

Individuals can use various bookkeeping systems to dissimulate funds by filtering them through a legitimate business, otherwise known as a front business. Front companies are legitimate entities engaging in the legal business, but their assets are mixed with illegal money disguised as profits.

Limited partnerships are easy and inexpensive to set up. Generally, resources tied up in a limited partnership are difficult to reach as the partners do not own the assets and a limited partner’s liability is limited to the amount of his investment.
Most countries have limited partnership regulations, but the laws vary in scope and implementation.

A limited liability company (LLC) is a non-corporate company that places limited liability on its owners (members) and enables them to take part in the management of the entity. LLCs can be managed and maintained without the company’s rigid requirements. In fact, LLC members are free to administer the business and divide profits in any way, and this element of administrative freedom can be of great benefit to the hider asset

Under the doctrine of piercing a corporate entity’s veil, a corporation’s separate personality may be disregarded if used for fraudulent or illegal reasons or to avoid the faithful execution of an obligation. Although the doctrine was originally created as a way to pierce the special protection provided to corporate shareholders it was modified and extended to pierce the LLC’s veil and impose liability on its members.
The party bringing the case must persuade the court that the company is not a completely separate entity to pierce the corporate veil; it is just a shell that has been set up to control its owners ‘ private assets, debts, and interests.

Few methods include:
-Using commercial database vendors and investigative service providers
-Performing surveillance
-Conducting interviews
-Searching digital media
-Using online sources
-Using legal processes

Surveillance is the covert observation of targets for information-gathering purposes — can be used to locate residences, businesses, or other places of investigation interest, and can be used to produce important evidence about the scope and nature of a person’s activities.

If a plaintiff requests a third party disclosure order in a civil case, the court can enforce a no-say or gag order to prevent the third party from telling the defendant that there is an order for disclosure.

Mutual legal assistance (MLA) is a process through which countries request and assist in law enforcement matters, such as collecting information, seeking temporary redress, and enforcing foreign orders and judgments. However, MLA is only available in criminal investigations in most jurisdictions. There is no access to MLA for private parties.

A forfeiture order (or a confiscation order) is a court order requiring the confiscation of specified assets in connection with criminal activity by a designated official.

Letters rogatory are formal applications for judicial assistance from a court in another country by a court in one country.
Letters rogatory also allow for formal communication in another country between the judiciary, a prosecutor, or a law enforcement official. letters rogatory are handled through each country’s respective ministry of justice.