Chapter 3 - Financial Firms and Crime

Question 1

What is a Ponzi Scheme?

Answer 1

A scheme or financial product that claims a level of investment return that is not supported by the investment activity undertaken. The shortfall in the promised and actual returns is made up with the money from new investors.

Question 2

What are the warning signs of a Ponzi scheme?

Answer 2

Investment approach that the scheme cannot explain or guaranteed/high rates of return at little investment risk.

Question 3

What are boiler rooms?

Answer 3

Fraudsters selling customers overvalued or worthless securities by intensive sales campaign - telephone or direct mail.

Question 4

What are orphan structures?

Answer 4

They are offshore trusts where the beneficial owners are masked.

Question 5

Why might someone use an orphan strucutre?

Answer 5

Tax evasion of hide money obtained illicitly.

Question 6

In what stages of the money laundering process may offshore trusts be used?

Answer 6

The layering stage

Question 7

How can ownership of funds in a trust be hidden?

Answer 7

Nominee directors and bearer shares.

Question 8

What is mortgage fraud?

Answer 8

An attempt to materially misrepresent or omit information on a mortgage loan application to obtain a loan or larger loan than would have been obtained had the lender known the truth.

Question 9

In the US, what is the maximum penalty of mortgage fraud?

Answer 9

30 years imprisonment.

Question 10

What does the CDD Rule require?

Answer 10

FIs to identify and verify the identity of beneficial owners of legal entity customers, subject to certain exclusions and exemptions.

FIs to maintain written procedures to enable to the institution to identify the beneficial owners of legal entity customers at the account opening stage.

Question 11

What does FinCEN require in relation to beneficial owners?

Answer 11

Legal entities have to identify ultimate beneficial owner not nominees or straw men.

Question 12

What is a misstatement of financial circumstances?

Answer 12

Difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation or disclosure required for the item to be in accordance with the applicable financial reporting framework.

Question 13

How might a material misstatement of financial statements arise?

Answer 13

1. the appropriateness of the chosen accounting policies.
2. the application of the selected accounting policies
3. the appropriateness or adequacy of disclosures in financial statements.

Question 14

What are the typical objectives of misstatements?

Answer 14

1. earning management
2. misappropriation of assets - embezzling receipts through collections accounts, diverting write-offs to personal bank accounts.
3. payments for goods not received.
4. using entity’s assets - collateral for personal loan.

Question 15

What can include tax avoidance?

Answer 15

Transferring assets between spouses, making pension contributions in order to reduce the level of income tax.

Question 16

What are tax aggressive strategies?

Answer 16

The grey area between tax avoidance and tax evasion.

Question 17

What is a GAAR?

Answer 17

General Anti- Avoidance Rules - prohibit aggressive tax avoidance.

Question 18

In what cases might extradition law be applicable?

Answer 18

In instances of double criminality - crime in one country is also a crime in the other.

Question 19

Which international body has a convention governing extradition?

Answer 19

OECD

Question 20

Does the OECD convention also cover non criminal proceedings?

Answer 20

Yes - some are in scope of the convention.

Question 21

Can bank secrecy be used to decline a request for mutual legal assistance under the OECD Convention?

Answer 21

No