Overview Flashcards

Question

Wire fraud is generally defined as the use of a country’s mail system to perpetrate fraud. A. True B. False

Answer 1

B. False | See pages 2.219 in the Fraud Examiner's Manual ## Footnote Mail fraud laws generally prohibit the use of a country’s mail system to perpetrate fraud. In the United States, the mail fraud statute also applies to the use of private interstate commercial carriers (e.g., FedEx, UPS, and DHL) in connection with a fraud scheme. Mail fraud laws generally give the government broad authority to prosecute fraud schemes, even if parts of the scheme occur in another country. For example, an international Ponzi scheme perpetrated from Nigeria could be prosecuted under the U.S. mail fraud statute if the Nigerian fraudsters used the U.S. mail system to advance the scheme in a significant way. The U.S. wire fraud statute makes it a crime to defraud a victim of money or property by means of wire or other electronic communications (e.g., computer, telephone, radio, or television) in foreign or interstate commerce.

Answer 2

D. All of the above | See pages 2.202 in the Fraud Examiner's Manual ## Footnote Fraudulent misrepresentation of material facts is most often thought of when the term fraud is used. The specific elements of proof required to establish a misrepresentation claim vary somewhat according to where the fraud occurred and whether the case is brought as a criminal or civil action, but the elements normally include: * The defendant made a false statement (i.e., a misrepresentation of fact). * The false statement was material (i.e., the statement was sufficiently important or relevant to influence decision-making). * The defendant knew the representation was false. * The victim relied on the misrepresentation. * The victim suffered damages because of the misrepresentation.

Answer 3

A. True | See pages 2.304 in the Fraud Examiner's Manual ## Footnote The structure of bankruptcy proceedings varies by jurisdiction, so it is always important to study the rules of the relevant jurisdiction when dealing with potential bankruptcy fraud. However, there are common types of bankruptcy filings, and most countries have adopted a similar version of at least one. Liquidation is the most basic type of bankruptcy proceeding and involves accounting for all dischargeable debts the subject owes, identifying all the subject’s assets, and liquidating nonexempt assets to pay off creditors. This process allows the debtor to get a court or administrative order under which some or all debts may be eliminated. Each jurisdiction determines what exceptions exist in terms of debts that may not be discharged and assets that may not be liquidated. Some debts, like taxes owed or child support payments, might be non-dischargeable, meaning the bankruptcy will not wipe these debts away. Typical items that may not be liquidated include the debtor’s primary residence, items of nominal value, or assets deemed necessary for the debtor to maintain employment.

Answer 4

C. In serious cases, some inquisitorial jurisdictions use juries that include both judges and laypersons. | See pages 2.109 in the Fraud Examiner's Manual ## Footnote While juries can be found in both adversarial and inquisitorial jurisdictions, most adversarial jurisdictions actively use juries as the fact-finding body while the judge decides issues of law. However, some cases in adversarial jurisdictions (often called bench trials) are decided factually and legally by a judge. The judge in an inquisitorial process both serves as the traditional fact finder and makes determinations on issues of law. However, some inquisitorial systems will use juries, laypersons, or a combination of judges (or legal professionals) and laypersons in serious cases.

Answer 5

A. True | See pages 2.219-2.220 in the Fraud Examiner's Manual ## Footnote Obstruction of justice occurs when an individual engages in an act designed to impede or obstruct the investigation or trial of other substantive offenses. Jurisdictions might have several criminal obstruction statutes. Some common types of obstruction statutes are those that prohibit: * Influencing or injuring any officer of the court or juror by force, threats of force, intimidating communications, or corrupt influence * Influencing a juror through a writing * Stealing or altering records or processes by parties that are not privy to the records * Using force or threats of force to obstruct or interfere with a court order * Destroying documents related to a future proceeding * Tampering with a witness, victim, or an informant (e.g., killing or attempting to kill, using force or threats of force, intimidating, influencing with bribes or other corrupt means, misleading, or harassing the protected parties) * Influencing, obstructing, or impeding a government auditor in the performance of their official duties * Obstructing the examination of a financial institution

Answer 6

B. A broker-dealer makes an investment without obtaining approval to make the transaction. | See pages 2.443-2.444 in the Fraud Examiner's Manual ## Footnote In many countries, securities laws and regulations impose a suitability requirement on broker-dealers. Broker-dealers subject to a suitability requirement are prohibited from recommending investments or investment strategies that are unsuitable for their clients. Thus, making unsuitable recommendations (e.g., recommending high-risk options to an older individual with limited assets) is prohibited in countries with such suitability requirements. In most countries, a suitability requirement only arises when broker-dealers make recommendations or provide advice to clients to purchase a product. Essentially, there are two rules relating to suitability: the know-your-customer (KYC) rule and the suitability rule. The KYC rule provides that securities broker-dealers must know their customers financially to effectively service their accounts and minimize the risk of recommending an inappropriate investment. To comply with the KYC rule, broker-dealers must use due diligence to ascertain relevant personal and financial information about clients and potential clients in regard to opening and maintaining accounts. Thus, this form of suitability violation occurs when a broker recommends an investment or an investment strategy to a client without having conducted due diligence to ascertain relevant personal and financial information about the client. In addition to the KYC rule, there are suitability requirements that broker-dealers must follow when making recommendations to a client. Suitability rules prohibit broker-dealers from making recommendations to clients if they do not have reasonable grounds for believing that the recommendations are suitable for the respective clients. That is, a suitability rule requires a broker-dealer to make a customer-specific determination of suitability and to tailor their recommendations to the customer’s financial profile and investment objectives.

Answer 7

B. False | See pages 2.304-2.305 in the Fraud Examiner's Manual ## Footnote The structure of bankruptcy proceedings varies by jurisdiction, so it is always important to study the rules of the relevant jurisdiction when dealing with potential bankruptcy fraud. However, there are common types of bankruptcy filings, and most countries have adopted a similar version of at least one. Liquidation is the most basic type of bankruptcy proceeding and involves accounting for all dischargeable debts the subject owes, identifying all the subject’s assets, and liquidating nonexempt assets to pay off creditors. This process allows the debtor to get a court or administrative order under which some or all debts may be eliminated. Unlike liquidation, which seeks to give the debtor a fresh start, the purpose of reorganization bankruptcy is to allow the debtor respite from creditors so that the debtor can reorganize its financial affairs and continue as a going concern. Some reorganization proceedings involve putting the debtor’s business under receivership for a certain period to ensure as much debt is paid back as possible.

Answer 8

D. An employee sells shares of their company's stock because they know that the company is going to publicly announce that it is filing for bankruptcy. | See pages 2.451 in the Fraud Examiner's Manual ## Footnote Insider trading occurs when an insider—someone who possesses inside information about a security—buys or sells securities based on material information about the security that is not available to the public. Inside information is any material, nonpublic information about a security that is not generally available to the public and that could affect the security’s price. Examples of insider trading include: * Corporate officers, directors, and employees who traded their corporation’s securities after learning of significant, confidential business developments * Friends, business associates, and family members of corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential business developments * Employees of law, banking, and accounting firms who were given inside information to provide services to the corporation whose securities they traded * Government employees who traded a corporation’s securities after learning of inside information about the corporation because of their employment with the government Most jurisdictions have rules that forbid investors from buying or selling securities where the decision to buy or sell is based on material, nonpublic information, but the rules and efforts to enforce them vary widely. Some countries are strengthening their existing insider trading laws, some countries are only beginning to establish insider trading laws, and others do not enforce the laws already in place.

Answer 9

A. True | See pages 2.306 in the Fraud Examiner's Manual ## Footnote Debtors often attempt to conceal their assets by transferring the assets to another person or a company. A transfer is a fraudulent conveyance if the purpose of the transfer is to hinder, delay, or defraud a creditor. Many countries have laws that prohibit fraudulent conveyances. Depending on the law, a court or a bankruptcy trustee might have the power to set aside a fraudulent conveyance and seize the assets that were fraudulently conveyed.

Answer 10

A. The designation of a compliance officer at the management level | See pages 2.534 in the Fraud Examiner's Manual ## Footnote Under the Financial Action Task Force (FATF) Recommendations, countries should require financial institutions to implement anti-money laundering (AML) and terrorist financing programs. A financial institution’s AML program is highly dependent on which jurisdictions it operates in, as well as the services that it offers. Generally, financial institutions should adopt the AML policies and procedures in the FATF Recommendations, but they need to tailor their programs to the requirements of the specific jurisdictions in which they operate. According to the FATF Recommendations, these programs should include: * The development of internal procedures and controls, including adequate screening procedures to ensure high standards in employee hiring * Ongoing employee training programs on money laundering risks * An independent audit function to test the effectiveness of the programs * The designation of a compliance officer at the management level While the FATF does recommend reports from financial institutions to the government on large cash transactions and suspicious transactions, it does not recommend the other choices mentioned.

Answer 11

A. Influencing a witness with bribes | See pages 2.219-2.220 in the Fraud Examiner's Manual ## Footnote Obstruction of justice occurs when an individual engages in an act designed to impede or obstruct the investigation or trial of other substantive offenses. Jurisdictions might have several criminal obstruction statutes. Some common types of obstruction statutes are those that prohibit: * Influencing or injuring any officer of the court or juror by force, threats of force, intimidating communications, or corrupt influence * Influencing a juror through a writing * Stealing or altering records or processes by parties that are not privy to the records * Using force or threats of force to obstruct or interfere with a court order * Destroying documents related to a future proceeding * Tampering with a witness, victim, or an informant (e.g., killing or attempting to kill, using force or threats of force, intimidating, influencing with bribes or other corrupt means, misleading, or harassing the protected parties) * Influencing, obstructing, or impeding a government auditor in the performance of their official duties * Obstructing the examination of a financial institution Contempt of court is the offense of showing disrespect or disobedience to a court and its officers (among other things, such as refusing to obey a judge's order).

Answer 12

D. All of the above | See pages 2.234-2.237 in the Fraud Examiner's Manual ## Footnote Each of the above acts would constitute a violation under the U.S. Foreign Corrupt Practices Act (FCPA). For individuals and businesses within its jurisdiction, the FCPA prohibits the payment or offer of anything of value to a foreign official for the purpose of obtaining or retaining business. Promises to pay are considered items of value. Furthermore, foreign companies are within the reach of the FCPA if they have registered securities or are otherwise required to file under the U.S. Securities Exchange Act of 1934 (the Exchange Act). Here, the German company would be subject to the FCPA because it is publicly traded on the New York Stock Exchange (NYSE), which requires registration with the U.S. Securities and Exchange Commission (SEC). The anti-bribery provisions of the FCPA make it unlawful to bribe a foreign official for business purposes. Only regulated parties, such as issuers, domestic concerns, and foreign nationals or businesses, are subject to FCPA jurisdiction. An issuer is a corporation that has issued securities that have been registered in the United States or that is required to file periodic reports with the SEC. A domestic concern is any citizen, national, or resident of the United States or any business entity that has its principal place of business in the United States or that is organized under the laws of a state, territory, possession, or commonwealth of the United States. Moreover, the FCPA applies extraterritorially to U.S. citizens working for foreign subsidiaries of domestic companies. A foreign national or business is subject to the FCPA if it takes any act in furtherance of a corrupt payment within U.S. territory. Additionally, the agents, subsidiaries, or other third-party representatives who act on behalf of an issuer, a domestic concern, or a foreign national or business are liable under the same conditions as the issuer, domestic concern, or foreign national or business. The FCPA’s anti-bribery provisions extend only to corrupt payments made to foreign officials. The FCPA does not, however, prohibit all payments to foreign officials; it contains an explicit exception for certain types of payments, known as facilitating payments, or grease payments, made to expedite or secure performance of a routine governmental action by a foreign official, political party, or party official that relates to the performance of that party’s ordinary and routine functions.

Answer 13

B. False | See pages 2.501-2.503 in the Fraud Examiner's Manual ## Footnote The three stages of money laundering are placement, layering, and integration. Placement is the first stage of the money laundering process. In this stage, the launderer introduces their illegal profits into the financial system. Placement occurs after the initial act of stealing or receiving illicit assets. If the placement of the initial funds goes undetected, the launderer can design numerous financial transactions in complex patterns to prevent detection. For example, the launderer can move funds between bank accounts, transfer funds from one form of currency to another, or transfer money between businesses. This stage of the money laundering process is referred to as layering. Integration is the final stage in the laundering process. In this stage, the money is integrated back into the economy in a way that makes it appear to be part of a legitimate business transaction.

Answer 14

A. True | See pages 2.235, 2.242-2.243 in the Fraud Examiner's Manual ## Footnote The U.S. Foreign Corrupt Practices Act's (FCPA) anti-bribery provisions make it unlawful for regulated parties (such as issuers, domestic concerns, and foreign nationals or businesses) to bribe foreign government officials to obtain or retain business. An issuer is a corporation that has issued securities that have been registered in the United States or that is required to file periodic reports with the U.S. Securities and Exchange Commission (SEC). Thus, the ABC Company is a regulated party under the FCPA because it is an issuer. The UK Bribery Act is the United Kingdom’s analogue of the FCPA, although with several distinctions. In short, the UK Bribery Act contains a specific offense for the bribery of foreign public officials; it contains a general commercial bribery offense; and it creates a corporate offense of failure to prevent bribery. The UK Bribery Act exercises broad jurisdiction over all individuals and corporate entities for such acts when any part of the offense occurs in the United Kingdom. Furthermore, liability exists for acts committed outside the United Kingdom by individuals and entities with a close connection to the United Kingdom, including: * British citizens, overseas citizens, overseas territories' citizens, and any person declared a British subject under the 1981 British Nationality Act * Individuals who normally reside in the United Kingdom * An entity incorporated under the law of any part of the United Kingdom

Answer 15

D. I, II, and IV | See pages 2.504-2.505 in the Fraud Examiner's Manual ## Footnote One of the most common methods of laundering funds is to filter the money through a seemingly legitimate business, known as a front business. A front business can be a very effective way to launder money for a number of reasons. Front businesses provide a safe place for organizing and managing criminal activity, where the comings and goings of large numbers of people will not arouse undue suspicion. In addition, a front that conducts legitimate business provides cover for delivery and transportation related to illegal activity. The expenses from illegal activity can be attributed to the legitimate enterprise, and the illegal revenues can be easily placed into the enterprise. One disadvantage to this, however, is that launderers usually end up having to pay taxes on their illegal income.

Answer 16

D. Yes, because she is transferring currency above the reporting threshold out of Country A. | See pages 2.537 in the Fraud Examiner's Manual ## Footnote Under the Financial Action Task Force’s (FATF) Recommendation 32, countries should implement disclosure requirements for individuals who are physically carrying currency or currency equivalents (i.e., bearer instruments) into or out of the country in amounts that are above the country's designated reporting threshold. Generally, individuals who are carrying currency or the equivalent above the reporting threshold while attempting to cross jurisdictional borders should be required to disclose the amount to authorities, or they will face penalties if they fail to do so.

Answer 17

D. All of the above | See pages 2.426-2.427 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets. IOSCO’s main objectives are to assist its members to: * Cooperate to promote high standards of regulation in order to maintain just, efficient, and sound markets. * Exchange information on their respective experiences in order to promote the development of domestic markets. * Unite their efforts to establish standards and an effective surveillance of international securities transactions. * Provide mutual assistance to promote the integrity of the markets through a rigorous application of the standards and effective enforcement against offenses.

Answer 18

D. An investment contract | See pages 2.412-2.413 in the Fraud Examiner's Manual ## Footnote In many countries, the term security includes investment contracts. The leading global definition of investment contract provides that a contract, transaction, or scheme is an investment contract if all the following four elements are met: * There is an investment of money or another asset. * The investment is in a common enterprise. * The investment was made with expectations of making a profit. * The profits are to come solely from the efforts of people other than the investor.

Answer 19

B. Mental illness | See pages 2.608-2.609 in the Fraud Examiner's Manual ## Footnote Some defenses will be ineffective against charges for tax crimes. The death of the taxpayer often cannot be used as a defense because taxes owed due to tax evasion typically survive the taxpayer’s death, meaning the deceased taxpayer’s estate will be held liable. Also, liabilities owed as a result of tax evasion may not be discharged in bankruptcy proceedings. If a person commits a tax fraud offense, amending fraudulent information held by the government will not generally relieve the taxpayer of criminal liability. Mental illness, however, may be an appropriate defense.

Answer 20

B. Bustout scheme | See pages 2.306 in the Fraud Examiner's Manual ## Footnote A bustout is a planned and fraudulent bankruptcy. It can take many different forms, but the basic approach is for an apparently legitimate business to order large quantities of inventory or other goods using credit, and then dispose of those goods through legitimate or illegitimate channels. Because the point of the bustout scheme is to quickly resell the goods for cash, the fraudster is likely to purchase more liquid items like inventory than real estate, insurance policies, or services. The perpetrator then closes the business, absconding with the proceeds and leaving the suppliers unpaid. The debtor might then go into bankruptcy. Often by this point, the debtor has already made false accounting entries or taken other steps to conceal the assets or make the sales look legitimate. Other times, debtors flee the jurisdiction or do not show up at the proceedings.

Answer 21

C. Sales are generally in cash. | See pages 2.508 in the Fraud Examiner's Manual ## Footnote Bars, restaurants, and nightclubs are commonly used to front money laundering operations for a number of reasons. These businesses charge relatively high prices, and customers vary widely in their purchases. Sales are generally in cash, and it is difficult to match the cost of providing food, liquor, and entertainment with the revenues they produce.

Answer 22

A. Electronics stores | See pages 2.508-2.509 in the Fraud Examiner's Manual ## Footnote Bars, restaurants, and nightclubs are commonly used to front money laundering operations. These businesses charge relatively high prices, and customers vary widely in their purchases. Vending machine operations also possess many characteristics favorable to a money laundering operation. Wholesale distribution businesses have historically been a prominent part of money laundering. Wholesale distribution is attractive for money laundering because it is well embedded in a community’s economic fabric.

Answer 23

D. An individual can be found guilty of making a false statement even if the government did not suffer a loss for relying on it. | See pages 2.221 in the Fraud Examiner's Manual ## Footnote Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue. Generally, to prove a violation, the government must show that the defendant: 1. Knowingly and willfully (or with reckless disregard for truth or falsity) 2. Made a false claim or statement (or used a false document) 3. That was material (i.e., sufficiently important or relevant to influence decision-making) 4. Regarding a matter within the jurisdiction of a government agency 5. With knowledge of its falsity An act is done knowingly and willfully if it is done voluntarily and intentionally and not by mistake or another innocent reason. Thus, an individual can be found guilty of making a false statement or claim only if the individual knew the statement or claim was false at the time it was made. Also, the following are general rules regarding laws that criminalize making false claims and statements to government agencies: * An individual can be found guilty of making a false claim or statement even if the claim or statement is not made directly to a governmental department or agency. That is, a false claim or statement need not be made directly to the government; it can be made to a third party if it involves a matter within the jurisdiction of a governmental department or agency. * An individual can be found guilty of making a false claim or statement even if the government was not deceived by the falsity. * An individual can be found guilty of making a false claim or statement even if the government did not rely on the falsity. * An individual can be found guilty of making a false claim or statement even if the government did not suffer a loss in reliance on the falsity. * For an individual to be found guilty of making a false claim or statement, the claim or statement at issue must have been capable of influencing the government entity involved.

Answer 24

D. Lack of tax deficiency | See pages 2.607 in the Fraud Examiner's Manual ## Footnote A suspect or a criminal defendant might raise various defenses to accusations of tax evasion. For example, the defendant can establish that there is no tax deficiency. If there is no deficiency, then there is no tax liability. This is generally the best defense, if available, because several other defenses might negate willfulness but do not necessarily eliminate a tax liability with interest and penalties.

Answer 25

B. Placement | See pages 2.501-2.502 in the Fraud Examiner's Manual ## Footnote Placement is the first stage of the money laundering process. In this stage, the launderer introduces their illegal profits into the financial system. It is at this stage that legislation has been developed to prevent launderers from depositing or converting large amounts of cash at financial institutions or taking cash out of the country. Money laundering schemes are most often detected at the placement stage.

Answer 26

A. Codified principles or statutes | See pages 2.105-2.106 in the Fraud Examiner's Manual ## Footnote Almost every country can be classified as having either a common law or a civil law judicial system; knowing the differences between the two is essential to understanding how legal and judicial processes work in foreign jurisdictions. Civil law systems apply laws from an accepted set of codified principles or compiled statutes. Individual cases are then decided in accordance with these basic tenets. Under a civil law system, judges or judicial administrators are bound only by the civil code and not by the previous decisions of other courts. In deciding legal issues, a civil law judge applies the various codified principles to each case.

Answer 27

B. False | See pages 2.606 in the Fraud Examiner's Manual ## Footnote A sales tax is a tax on goods or services that is usually assessed at the consumer level and collected by the retailer or seller at the point of sale. In contrast, a value-added tax is a tax on an item that is assessed incrementally based on its increase in value at each point along a supply chain, from manufacture, to wholesale, to retailer, to consumer; the tax is collected by the seller in each transaction, and only the difference between the price paid by the initial purchaser and the price paid by the subsequent purchaser is taxed.

Answer 28

A. The administrator has the ability to cancel fraudulent transactions entered into by the debtor. | See pages 2.311 in the Fraud Examiner's Manual ## Footnote Most bankruptcy processes, whether through a court or otherwise, appoint a person or group with administrative powers to oversee the process. The name of this appointee varies between jurisdictions but is often called the administrator, trustee, receiver, examiner, or supervisor. The World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (World Bank Principles) recommends that the administrator have broad powers, including: * The right to cancel fraudulent contracts or transactions entered into by the debtor * The power to collect, preserve, and dispose of the debtor’s property * The ability to interfere with contracts to meet the objectives of the insolvency process * The power to examine the debtor, the debtor’s agents, or other people who have knowledge of the debtor’s affairs and compel them to provide relevant information

Answer 29

D. All of the above | See pages 2.412-2.413 in the Fraud Examiner's Manual ## Footnote In many countries, the term security includes investment contracts. The leading global definition of investment contract provides that a contract, transaction, or scheme is an investment contract if all the following four elements are met: * There is an investment of money or another asset. * The investment is in a common enterprise. * The investment was made with expectations of making a profit. * The profits are to come solely from the efforts of people other than the investor.

Answer 30

B. The defendant, while acting with corrupt intent, gave or received something of value that was intended to influence an act or duty of the recipient who was (or was selected to be) a public official. | See pages 2.206 in the Fraud Examiner's Manual ## Footnote Official bribery refers to the corruption of a public official with intent to influence an official act of government. Illegal payments to public officials can be prosecuted as official bribery, and they can result in severe penalties. The elements of official bribery vary by jurisdiction, but they generally include: * The defendant gave or received (offered or solicited) something of value. * The recipient was (or was selected to be) a public official. * The defendant acted with corrupt intent. * The defendant’s scheme was designed to influence an official act or duty of the recipient.

Answer 31

B. False | See pages 2.234-2.235 in the Fraud Examiner's Manual ## Footnote The U.S. Foreign Corrupt Practices Act (FCPA) has two principal components: the anti-bribery provisions and the accounting provisions. In short, the anti-bribery provisions make it unlawful to bribe foreign government officials to obtain or retain business, and the accounting provisions require publicly traded companies subject to the FCPA’s jurisdiction to keep accurate books and records and adopt internal controls to prevent improper use of corporate funds.

Answer 32

A. True | See pages 2.504 in the Fraud Examiner's Manual ## Footnote Overstating revenues occurs when the money launderer records more income on a business’s books than the business actually generates. The fictitious revenue accounts for the illegal funds that are secretly inserted into the company.

Answer 33

D. All of the above | See pages 2.221 in the Fraud Examiner's Manual ## Footnote Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue. Generally, to prove a violation, the government must show that the defendant: 1. Knowingly and willfully (or with reckless disregard for truth or falsity) 2. Made a false claim or statement (or used a false document) 3. That was material (i.e., sufficiently important or relevant to influence decision-making) 4. Regarding a matter within the jurisdiction of a government agency 5. With knowledge of its falsity

Answer 34

A. True | See pages 2.439 in the Fraud Examiner's Manual ## Footnote In some jurisdictions, securities markets are regulated through a combination of self-regulation by self-regulatory organizations (SROs) and direct government regulation. An SRO is a nongovernmental entity that exercises some level of regulatory authority over the operations, standards of practice, and business conduct of an industry or profession.

Answer 35

A. True | See pages 2.208-2.209 in the Fraud Examiner's Manual ## Footnote A conflict of interest occurs when an employee or agent—someone who is authorized to act on behalf of a principal—has an undisclosed personal or economic interest in a matter that could influence their professional role. Conflicts of interest do not necessarily constitute legal violations if they are properly disclosed. Thus, for a conflict of interest claim to be actionable, the conflict must be undisclosed.

Answer 36

A. True | See pages 2.242-2.243 in the Fraud Examiner's Manual ## Footnote Both the UK Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) make it a crime to offer foreign public officials bribes or to accept bribes from them in connection with international business transactions, and their prohibitions on bribing foreign government officials are broadly comparable. Thus, like the FCPA, the UK Bribery Act seeks to punish corruption on a global level, but the UK Bribery Act has an even broader application than the FCPA. One way in which the UK Bribery Act has a broader application than the FCPA is that it makes commercial bribery—bribes paid to people working in the private sector—a crime, whereas the FCPA only prohibits bribes involving foreign government officials.

Answer 37

B. Jurisdiction | See pages 2.111 in the Fraud Examiner's Manual ## Footnote Jurisdiction is the power of a court to hear and decide a given case; it refers to both the subject matter and people over which lawful authority may be exercised by a court. For instance, a country might have a system of probate courts that only have jurisdiction to hear cases whose subject matter is related to wills, inheritance, and other probate matters. Some countries have low-level trial courts that only have jurisdiction to hear matters under a certain monetary amount. Similarly, a court’s jurisdiction is defined by the parties that it may hear a case about. For example, courts usually do not have jurisdiction over foreign parties who have never been to and have had no business or presence in the court’s jurisdiction. Venue refers to the geographical area covered by the court; it is the physical location where the lawsuit is to be tried. Venue is technically an element of the court’s jurisdiction. This issue may be important in deciding where to file charges or claims.

Answer 38

B. False | See pages 2.536-2.537 in the Fraud Examiner's Manual ## Footnote Under the best practices provided in the Financial Action Task Force (FATF) Recommendations, countries should implement a reporting requirement for financial institutions and designated nonfinancial businesses and professions (DNFBPs) that engage in cash transactions above the jurisdiction's designated threshold. The reports should cover domestic and international cash transactions. Many jurisdictions implement this reporting requirement. Note that the recommended reporting requirement does not apply to everyone; it only applies to financial institutions and DNFBPs. DNFBPs include: * Casinos (including internet- and ship-based casinos) * Real estate agents * Dealers in precious metals and stones * Legal professionals at professional firms (not internal legal professionals) * Trust and company service providers

Answer 39

A. True | See pages 2.536 in the Fraud Examiner's Manual ## Footnote Under the Financial Action Task Force's (FATF) Recommendation 20, a financial institution should be required to file a report when it “suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing.” The name of these reports varies by jurisdiction, but they are generally called suspicious activity reports (SARs) or suspicious transaction reports (STRs). The FATF Recommendations define financial institutions to include: * Depository and lending institutions (i.e., traditional banks) * Money services businesses (MSBs) * Financial guarantors * Securities brokers or traders * Security issuing services * Investment portfolio managers * Parties that invest, administer, or manage funds or assets on behalf of others * Insurance companies servicing life insurance and other investment-related insurance

Answer 40

C. If an organization’s anti-corruption program complies with the FCPA, then it will also comply with the UK Bribery Act. | See pages 2.242-2.243 in the Fraud Examiner's Manual ## Footnote Both the UK Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) make it a crime to offer foreign public officials bribes or to accept bribes from them in connection with international business transactions, and their prohibitions on bribing foreign government officials are broadly comparable. Thus, like the FCPA, the UK Bribery Act seeks to punish corruption on a global level, but the UK Bribery Act has an even broader application than the FCPA. One way in which the UK Bribery Act has a broader application than the FCPA is that it makes commercial bribery—bribes paid to people working in the private sector—a crime, whereas the FCPA only prohibits bribes involving foreign government officials. Consequently, even if an organization’s anti-corruption program is sufficiently robust for the purpose of complying with the FCPA, it might not be sufficient to comply with the UK Bribery Act. Therefore, it is important for international organizations to be aware of the differences between the FCPA and the UK Bribery Act. Another way that the UK Bribery Act differs from the FCPA concerns facilitating payments. The FCPA does not prohibit all payments to foreign officials; it contains an explicit exception for facilitating payments made to expedite or secure performance of a routine governmental action. The UK Bribery Act, however, makes no such exception. The UK Bribery Act exercises broad jurisdiction over all individuals and corporate entities for acts of corruption when any part of the offense occurs in the United Kingdom. Furthermore, liability exists for acts committed outside the United Kingdom by individuals and entities with a close connection to the United Kingdom, including: * British citizens, overseas citizens, overseas territories’ citizens, and any person declared a British subject under the 1981 British Nationality Act * Individuals who normally reside in the United Kingdom * An entity incorporated under the law of any part of the United Kingdom More specifically, foreign companies that have offices in the United Kingdom, employ UK citizens, or provide any services to a UK organization are responsible for complying with the UK Bribery Act. A listing on the London Stock Exchange will not, in itself, subject a company to the Act.

Answer 41

B. The International Organization of Securities Commissions (IOSCO) | See pages 2.426 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets.

Answer 42

B. Structuring scheme | See pages 2.502 in the Fraud Examiner's Manual ## Footnote Bearer instruments (such as cashier’s checks) could provide evidence of structuring operations. Many countries require financial institutions to report all currency transactions above a certain threshold (e.g., more than $10,000) to the government. However, criminals might attempt to illegally evade these laws. Structuring occurs when a deposit or other transfer is made using a method that is specifically designed to avoid regulatory reporting requirements or an institution’s internal controls. The most common type of illegal structuring scheme in the money laundering context occurs when the launderer breaks up the illicit money into smaller amounts and then makes multiple deposits into bank accounts or purchases bearer instruments, such as cashier's checks, traveler’s checks, or money orders. This type of scheme is sometimes known as smurfing, especially in cases where the launderer uses runners (i.e., smurfs) to perform multiple transactions. A red flag of a structuring scheme is a customer who attempts to make many transactions just under the reporting threshold.

Answer 43

A. True | See pages 2.234-2.235 in the Fraud Examiner's Manual ## Footnote The U.S. Foreign Corrupt Practices Act (FCPA) has two principal components: the anti-bribery provisions and the accounting provisions. In short, the anti-bribery provisions make it unlawful to bribe foreign government officials to obtain or retain business, and the accounting provisions require publicly traded companies subject to the FCPA’s jurisdiction to keep accurate books and records and adopt internal controls to prevent improper use of corporate funds.

Answer 44

C. Imposing criminal sanctions against individuals who violate industry rules | See pages 2.439-2.440 in the Fraud Examiner's Manual ## Footnote In some jurisdictions, securities markets are regulated through a combination of self-regulation by self-regulatory organizations (SROs) and direct government regulation. An SRO is a nongovernmental entity that exercises some level of regulatory authority over the operations, standards of practice, and business conduct of an industry or profession. Some jurisdictions, such as the United Kingdom, do not rely on SROs to regulate their securities markets, however. SROs can perform various regulatory functions in securities markets, but in basic terms, they oversee the markets in which they operate and police the members and member firms participating in those markets. More specifically, the regulatory responsibilities of SROs might include matters such as: * Creating rules to protect the integrity of the market in which they operate (e.g., rules that govern market conduct and that regulate exchange trading) * Establishing the standards and rules under which their members operate (e.g., regulating their members' trading practices, member qualifications, and how members should relate to their clients) * Offering professional training, testing, and licensing to individuals in their industry * Monitoring compliance with and enforcing the rules of the markets in which they operate through market surveillance programs, trading analyses, and examinations of member firms' trading operations In addition, many SROs play an important role in the resolution of disputes arising from market transactions. For instance, SROs might provide venues for hearing customer disputes.

Answer 45

A. True | See pages 2.110 in the Fraud Examiner's Manual ## Footnote A domestic judgment against a foreign defendant is usually helpful for recovering the defendant’s assets located in the domestic country, but it might be worthless for obtaining the defendant’s assets in a foreign country. Some, but not all, countries enforce foreign judgments concerning parties or assets within their jurisdiction. Whether the country will enforce a foreign court’s judgment usually depends on the circumstances in which the internal laws of the jurisdiction recognize foreign judgments and whether the two countries of each court have an enforcement treaty.

Answer 46

B. False | See pages 2.110 in the Fraud Examiner's Manual ## Footnote A domestic judgment against a foreign defendant is usually helpful for recovering the defendant’s assets located in the domestic country, but it might be worthless for obtaining the defendant’s assets in a foreign country. Some, but not all, countries enforce foreign judgments concerning parties or assets within their jurisdiction. Whether the country will enforce a foreign court’s judgment usually depends on the circumstances in which the internal laws of the jurisdiction recognize foreign judgments and whether the two countries of each court have an enforcement treaty.

Answer 47

D. Tax shelters | See pages 2.603 in the Fraud Examiner's Manual ## Footnote Individuals frequently use tax shelters, tax havens, and secrecy jurisdictions to evade taxes. Tax shelters are investments that are designed to yield a tax benefit to the investor. Such investments are made to produce tax write-offs, generate deductions, or convert ordinary income into capital gains taxed at a lower rate. Tax shelters might be legal or illegal; they are generally aimed at avoidance although they might, on occasion, cross the line into evasion if they take abusive forms.

Answer 48

A. True | See pages 2.219 in the Fraud Examiner's Manual ## Footnote The U.S. wire fraud statute makes it a crime to defraud a victim of money or property by means of wire or other electronic communications (e.g., computer, telephone, radio, or television) in foreign or interstate commerce. Unlike mail fraud, the wire fraud statute requires an interstate or foreign communication to constitute a violation. Thus, a wire communication does not violate the federal wire fraud statute unless it traveled via interstate or international (foreign) commerce in furtherance of the scheme.

Answer 49

B. False | See pages 2.218 in the Fraud Examiner's Manual ## Footnote Conspiracy refers to a situation in which two or more people agree to commit an illegal act. The essential elements that must be shown to prove a conspiracy are as follows: * The defendant entered into an agreement with at least one other person to commit an illegal act. * The defendant knew the purpose of the agreement and intentionally joined in the agreement. * At least one of the conspirators knowingly committed at least one overt act in furtherance of the conspiracy. Under the first element, the government must prove that the defendant reached an agreement or understanding to commit an illegal act with at least one other person. The conspirators must agree about the precise illegal act. Under the second element, the government must establish that the defendant knew of the conspiracy’s existence and its objective. The government, however, does not have to establish that the defendant knew all the details or objectives of the conspiracy, and it does not have to prove that the defendant knew the identity of all the participants in the conspiracy. Finally, the purpose of the conspiracy need not be accomplished for a violation to occur, but at least one of the co-conspirators must have executed at least one overt act in furtherance of the conspiracy. The overt act need not be criminal and could be as innocuous as making a phone call or writing a letter.

Answer 50

C. Front business scheme | See pages 2.501, 2.508 in the Fraud Examiner's Manual ## Footnote Money laundering is the disguising of the existence, nature, source, control, beneficial ownership, location, and disposition of property derived from criminal activity. Bars, restaurants, and nightclubs are commonly used to front money laundering operations for a number of reasons. These businesses charge relatively high prices, and customers vary widely in their purchases. Sales are generally in cash, and it is difficult to match the cost of providing food, liquor, and entertainment with the revenues they produce. As a result, a red flag of front businesses is observing a low amount of business, despite the business’s books showing a relatively high income for that period.

Answer 51

C. Common law | See pages 2.105 in the Fraud Examiner's Manual ## Footnote Almost every country can be classified as having either a common law or a civil law legal system; knowing the differences between the two is essential to understanding how legal processes work in foreign jurisdictions. In most common law systems, there are laws that judges develop through court decisions (called the common law), as well as codes and statutes that establish laws. The common law is developed on a case-by-case basis. That is, the common law is a system of legal principles developed by judges through decisions made in courts. It consists of the usages and customs of a society as interpreted by the judiciary, and it is often referred to as judge-made law. Common law originated as a legal system in England, and some of the principles established hundreds of years ago in court decisions remain influential to contemporary legal issues. Today, common law systems exist in the United Kingdom, the United States, India, Australia, and many other countries that were once part of the British Empire or were influenced by such legal systems.

Answer 52

B. False | See pages 2.114-2.115 in the Fraud Examiner's Manual ## Footnote Although administrative penalties vary by jurisdiction, some common types of administrative penalties include monetary fines and penalties, license suspension or revocation, and debarment. Administrative proceedings can result in the suspension or revocation of a professional license. For example, a government medical board might revoke a doctor’s license to practice medicine after determining that the doctor engaged in health care fraud. Under some laws, individuals and businesses can be debarred (i.e., excluded) from participating in government programs. For example, a contractor who engages in procurement fraud might be prohibited from bidding on government contracts in the future. Debarment can be temporary or permanent, and debarred parties are often added to a list that is maintained by the government agency and viewable by the public.

Answer 53

A. True | See pages 2.443-2.444 in the Fraud Examiner's Manual ## Footnote In many countries, securities laws and regulations impose a suitability requirement on broker-dealers. Broker-dealers subject to a suitability requirement are prohibited from recommending investments or investment strategies that are unsuitable for their clients. Thus, making unsuitable recommendations (e.g., recommending high-risk options to an older individual with limited assets) is prohibited in countries with such suitability requirements. In most countries, a suitability requirement only arises when broker-dealers make recommendations or provide advice to clients to purchase a product. Essentially, there are two rules relating to suitability: the know-your-customer (KYC) rule and the suitability rule. The KYC rule provides that securities broker-dealers must know their customers financially to effectively service their accounts and minimize the risk of recommending an inappropriate investment. To comply with the KYC rule, broker-dealers must use due diligence to ascertain relevant personal and financial information about clients and potential clients in regard to opening and maintaining accounts. Thus, this form of suitability violation occurs when a broker recommends an investment or an investment strategy to a client without having conducted due diligence to ascertain relevant personal and financial information about the client. In addition to the KYC rule, there are suitability requirements that broker-dealers must follow when making recommendations to a client. Suitability rules prohibit broker-dealers from making recommendations to clients if they do not have reasonable grounds for believing that the recommendations are suitable for the respective clients. That is, a suitability rule requires a broker-dealer to make a customer-specific determination of suitability and to tailor their recommendations to the customer’s financial profile and investment objectives.

Answer 54

C. A criminal habitually deposits cash or purchases bearer instruments in amounts just under the jurisdiction’s currency reporting requirements. | See pages 2.502 in the Fraud Examiner's Manual ## Footnote Many countries require financial institutions to report all currency transactions above a certain threshold (e.g., more than $10,000) to the government. However, criminals might attempt to illegally evade these laws. Structuring occurs when a deposit or other transfer is made using a method that is specifically designed to avoid regulatory reporting requirements or an institution’s internal controls. The most common type of illegal structuring scheme in the money laundering context occurs when the launderer breaks up the illicit money into smaller amounts and then makes multiple deposits into bank accounts or purchases cashier’s checks, traveler’s checks, or money orders. This type of scheme is sometimes known as smurfing, especially in cases where the launderer uses runners (i.e., smurfs) to perform multiple transactions. A red flag of a structuring scheme is a customer who attempts to make many deposits just under the reporting threshold.

Answer 55

D. All of the above | See pages 2.312 in the Fraud Examiner's Manual ## Footnote According to the World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (World Bank Principles), there are three preferred approaches in reorganization proceedings: * Exclusive control of the proceeding is entrusted to an independent insolvency representative. * The entity’s management retains governance responsibilities. * Supervision of management is undertaken by an impartial and independent insolvency representative or supervisor.

Answer 56

B. Layering | See pages 2.501-2.503 in the Fraud Examiner's Manual ## Footnote The three stages of money laundering are placement, layering, and integration. Placement is the first stage of the money laundering process. In this stage, the launderer introduces their illegal profits into the financial system. Annika “placed” her stolen funds into the financial system when she deposited cash into a bank account incrementally. If the placement of the initial funds goes undetected, the launderer can design numerous financial transactions in complex patterns to prevent detection. For example, the launderer can move funds between bank accounts, transfer funds from one form of currency to another, or transfer money between businesses. This stage of the money laundering process is referred to as layering. This is the stage Annika was engaged in when she created additional transfers and fake loans involving foreign entities that she controlled. Integration is the final stage in the laundering process. In this stage, the money is integrated back into the economy in a way that makes it appear to be part of a legitimate business transaction. Annika performed this stage when she brought the funds home and integrated them as seemingly legitimate proceeds from investments.

Answer 57

B. False | See pages 2.605 in the Fraud Examiner's Manual ## Footnote Sarita’s scheme can best be described as a falsified tax deduction scheme. Tax deductions are itemized expenses subtracted from gross income or assets to reduce the taxpayer’s total liability. For instance, a company that is taxed by a percentage of its gross sales might be allowed to deduct the cost of making the goods (e.g., materials and employee costs) from its taxable income. Deductions are designed to make certain taxes fairer, but they can also be used inappropriately by tax evaders. Examples of the fraudulent use of deductions include: * Falsifying expenses, such as recording fictitious salaries to nonexistent employees * Fraudulently inflating expenses, such as bribing a supplier to inflate an invoice * Submitting false information to qualify for improper deductions, such as pretending to qualify for a tax deduction for having children living at home * Misclassifying nondeductible expenses as deductible

Answer 58

B. False | See pages 2.215-2.216 in the Fraud Examiner's Manual ## Footnote People in a position of trust or fiduciary relationship—such as officers, directors, high-level employees of a corporation or business, and agents and brokers—owe certain duties to their principals or employers, and any action that runs afoul of such fiduciary duties constitutes a breach. The principal fiduciary duties are loyalty and care. The duty of loyalty requires that the employee/agent act solely in the best interest of the employer/principal without any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. The duty of care means that people in a fiduciary relationship must act with such care as an ordinarily prudent person would employ in similar positions.

Answer 59

B. Mail fraud | See pages 2.219 in the Fraud Examiner's Manual ## Footnote Mail fraud laws generally prohibit the use of the country’s mail system to perpetrate fraud. In the United States, the mail fraud statute also applies to the use of private interstate commercial carriers (e.g., FedEx, UPS, and DHL) in connection with a fraud scheme. Mail fraud laws generally give the government broad authority to prosecute fraud schemes, even if parts of the scheme occur in another country. For example, an international Ponzi scheme perpetrated from Nigeria could be prosecuted under the U.S. mail fraud statute if the Nigerian fraudsters used the U.S. mail system to advance the scheme in a significant way.

Answer 60

C. No, because there was no tax deficiency. | See pages 2.607-2.608 in the Fraud Examiner's Manual ## Footnote A suspect or a criminal defendant might raise various defenses to accusations of tax evasion. Whether these defenses are legally recognized depends on the laws of the jurisdiction. The following are common defenses to tax evasion: * No tax deficiency—The defendant can establish that there is no tax deficiency. In most jurisdictions, if there is no deficiency, then there is no tax liability. This is generally the best defense, if available, because several other defenses might negate willfulness but do not necessarily eliminate a tax liability with interest and penalties. * Lack of willfulness—A lack of willfulness reduces the defendant’s culpability for fraud. A good faith belief that one is not violating the tax law, based on a misunderstanding caused by the law’s complexity, negates willfulness. * Avoidance, not evasion—A taxpayer charged with tax crimes might argue that they engaged in legal means of lowering their tax bill through legitimate avoidance mechanisms, such as deductions, credits, and shelters. Thus, establishing that the taxpayer was engaging in tax avoidance and not evasion provides a defense to tax fraud. * Reliance on an attorney or accountant—If a taxpayer properly relied on expert advice for the conduct in question, then the jurisdiction might find no criminal liability. * Mental illness—Certain mental illnesses and incapacitating conditions negate criminal intent for tax crimes.

Answer 61

B. False | See pages 2.107-2.108 in the Fraud Examiner's Manual ## Footnote Adversarial and inquisitorial judicial processes refer to the type of approach that courts take to discover evidence in a case. Theoretically, neither of these processes is exclusive of common law or civil law systems. Civil law jurisdictions, however, almost always favor an inquisitorial process while common law systems typically feature an adversarial system. The United States, for example, is a common law jurisdiction with an adversarial process. An inquisitorial process refers to a fact-finding approach that places the primary responsibility of discovering evidence on the presiding judge. In an inquisitorial process, the primary goal is to find the truth. Rather than serving as a referee over the parties’ production of evidence, the judge is actively involved in discovery. For instance, judges may request relevant documents on their own accord and ask factual questions to witnesses themselves. As a result, attorneys play a smaller role in the evidentiary process than in an adversarial process. Adversarial processes are those in which the parties to a proceeding drive the discovery process (the search for evidence). The theory behind this approach is that the competing interests of the parties will serve to expose the relevant facts of the case. In adversarial systems, the parties to the litigation gather and present the evidence to the court. For example, the parties (usually through legal counsel) conduct questioning of fact and expert witnesses. The fact finder of the court, which can be a judge, jury, or administrator, is unaware of the details of the case until the parties present evidence. Judges facilitate the production of evidence between the parties, but they generally do not seek evidence on the court’s behalf.

Answer 62

D. All of the above | See pages 2.224 in the Fraud Examiner's Manual ## Footnote The Recommendation on Combating Bribery in International Business (the Recommendation), which was published by the Organisation for Economic Co-operation and Development (OECD) in 1994, urges member states to deter and penalize the bribery of foreign public officials by taking “concrete and meaningful steps” to improve the following areas within their respective infrastructures: * Criminal, civil, commercial, and administrative laws * Tax systems and regulations * Banking and accounting requirements and practices * Laws and regulations related to public subsidies, licenses, and contract procurement

Answer 63

A. Income and wealth tax evasion | See pages 2.605 in the Fraud Examiner's Manual ## Footnote Taxes on periodic income or wealth (e.g., real property taxes) are a source of revenue for many governments, but fraudsters often commit tax evasion by falsifying or omitting material information. Common forms of criminal income and wealth tax evasion include: * Failing to submit a report of one’s taxable income, if such a report is required * Intentionally misrepresenting one’s income or wealth * Pretending to transfer assets to another person or entity to lower tax liability * Intentionally failing to withhold the taxable portion of an employee’s income, if so required * Failing to report foreign bank accounts or other taxable assets, if required * Falsely claiming income was earned in another jurisdiction to lower tax liability

Answer 64

D. Keeping a single set of books | See pages 2.601-2.602 in the Fraud Examiner's Manual ## Footnote To establish criminal liability for tax evasion, most jurisdictions require a willful attempt to evade or defeat taxes in an unlawful manner. Willfulness might be inferred from conduct such as: * Keeping a double set of books (not to be confused with keeping separate books and tax records, which might require different recording techniques) * Making false entries or alterations or creating false invoices or documents * Destroying books or records * Concealing assets * Covering up sources of income * Avoiding making records that are typical in transactions of the kind * Moving taxable assets beyond the government's reach (e.g., into offshore accounts) * Engaging in misleading or deceitful conduct

Answer 65

B. False | See pages 2.426-2.427 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets. IOSCO develops, implements, and promotes adherence to recognized standards for securities regulation, and while IOSCO’s documents are not binding, IOSCO’s work shapes securities regulation worldwide.

Answer 66

D. All of the above | See pages 2.607-2.608 in the Fraud Examiner's Manual ## Footnote A suspect or a criminal defendant might raise various defenses to accusations of tax evasion. Whether these defenses are legally recognized depends on the laws of the jurisdiction. The following are common defenses to tax evasion: * No tax deficiency—The defendant can establish that there is no tax deficiency. In most jurisdictions, if there is no deficiency, then there is no tax liability. This is generally the best defense, if available, because several other defenses might negate willfulness but do not necessarily eliminate a tax liability with interest and penalties. * Lack of willfulness—A lack of willfulness reduces the defendant’s culpability for fraud. A good faith belief that one is not violating the tax law, based on a misunderstanding caused by the law’s complexity, negates willfulness. * Avoidance, not evasion—A taxpayer charged with tax crimes might argue that they engaged in legal means of lowering their tax bill through legitimate avoidance mechanisms, such as deductions, credits, and shelters. Thus, establishing that the taxpayer was engaging in tax avoidance and not evasion provides a defense to tax fraud. * Reliance on an attorney or accountant—If a taxpayer properly relied on expert advice for the conduct in question, then the jurisdiction might find no criminal liability. * Mental illness—Certain mental illnesses and incapacitating conditions negate criminal intent for tax crimes.

Answer 67

D. All of the above | See pages 2.205 in the Fraud Examiner's Manual ## Footnote An action for fraud may be based on the concealment of material facts, but only if the defendant had a duty in the circumstances to disclose. The essential elements of fraud based on the failure to disclose material facts are: * The defendant had knowledge of a material fact. * The defendant had a duty to disclose the material fact. * The defendant failed to disclose the material fact. * The defendant acted with intent to mislead or deceive the victim(s).

Answer 68

A. Under-invoicing scheme | See pages 2.518-2.519 in the Fraud Examiner's Manual ## Footnote In over- and under-invoicing schemes, importers and exporters conspire to misrepresent the price of the goods or services being traded, thus transferring additional value between the importer and exporter. These schemes can be used to create a complex paper trail for the colluding parties to launder illicit funds. The amount available to launder is the difference between the market value of the goods and the invoiced amount. In an under-invoicing scheme, the exporter invoices goods or services to the importer at a price below their market value. This scheme transfers value to the importer because the amount the importer pays for the goods or services is less than the amount they can be sold for on the open market. For example, Company A sends a shipment of widgets worth $200,000 to Company B but only invoices Company B for $100,000. Company B then sells the widgets on the open market for $200,000 and deposits the extra $100,000 into an account controlled by Company A. In an over-invoicing scheme, the exporter invoices goods or services to the importer at a price above their market value. This scheme transfers value to the exporter because the exporter collects the amount of the higher price that was invoiced, which is more than the goods or services can be sold for on the open market. For example, Company A sends a shipment of widgets worth $100,000 to Company B but invoices Company B for $200,000. Company A then deposits the extra $100,000 into an account controlled by Company B. In a duplicate invoicing scheme, the exporter issues more than one invoice for the same trade transaction. By issuing duplicate invoices, a money launderer can justify multiple payments for the same goods or services. In an over-shipment scheme, money launderers understate the quantity of goods that are shipped. More goods are shipped than the company invoices for. For example, Company A invoices 100,000 widgets to Company B at a price of one dollar per widget. However, Company A ships 200,000 widgets to Company B. Company B then sells the widgets on the open market for $200,000 and deposits the extra $100,000 into an account controlled by Company A. In contrast, the quantity of goods that are shipped is overstated in an under-shipment scheme. The company invoices for more goods than it actually ships.

Answer 69

B. False | See pages 2.423 in the Fraud Examiner's Manual ## Footnote To be effective, securities regulation must balance the legitimate needs of businesses to raise capital against the need to protect investors. In addition to protecting investors, securities regulation serves other purposes, including: * Promoting an active and competitive market * Maintaining market confidence * Reducing financial crime * Discouraging behavior that might harm the market

Answer 70

C. Tax evasion is illegal, but tax avoidance is not | See pages 2.601 in the Fraud Examiner's Manual ## Footnote The term tax evasion refers to any fraudulent actions that a taxpayer commits to avoid reporting or paying taxes. Tax evasion, however, should not be confused with tax avoidance. Tax avoidance refers to a legal means of lowering one’s tax bill through legitimate deductions, credits, and shelters. The intent of the taxpayer to wrongly file a tax return or provide other false tax information will determine the difference between tax evasion and tax avoidance. The primary distinguishing characteristic of tax evasion as compared to tax avoidance is that tax evasion is illegal, but tax avoidance is legal.

Answer 71

B. False | See pages 2.609 in the Fraud Examiner's Manual ## Footnote Some defenses will be ineffective against charges for tax crimes. For example, the death of the taxpayer often cannot be used as a defense because taxes owed due to tax evasion typically survive the taxpayer’s death, meaning the deceased taxpayer’s estate will be held liable. Also, liabilities owed as a result of tax evasion may not be discharged in bankruptcy proceedings. If a person commits a tax fraud offense, amending fraudulent information held by the government will not generally relieve the taxpayer of criminal liability.

Answer 72

D. All of the above | See pages 2.606 in the Fraud Examiner's Manual ## Footnote Consumption taxes are those collected from the proceeds of the sale of goods or services. Some of the common taxes include: * Sales tax—A tax on goods or services, usually assessed at the consumer level and collected by the retailer or seller at the point of sale * Value-added tax (VAT)—A system that imposes a tax on an item that is assessed incrementally based on its increase in value at each point along a supply chain, from manufacture, to wholesale, to retailer, to consumer; the tax is collected by the seller in each transaction, and only the difference between the price paid by the initial purchaser and the price paid by the subsequent purchaser is taxed * Excise tax—A tax on a narrow class of goods or services (e.g., tobacco or gasoline), usually assessed one time (per jurisdiction) at the manufacturer or wholesaler level

Answer 73

A. True | See pages 2.221 in the Fraud Examiner's Manual ## Footnote Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue. Also, the following are general rules regarding laws that criminalize making false claims and statements to government agencies: * An individual can be found guilty of making a false claim or statement even if the claim or statement is not made directly to a governmental department or agency. That is, a false claim or statement need not be made directly to the government; it can be made to a third party if it involves a matter within the jurisdiction of a governmental department or agency. * An individual can be found guilty of making a false claim or statement even if the government was not deceived by the falsity. * An individual can be found guilty of making a false claim or statement even if the government did not rely on the falsity. * An individual can be found guilty of making a false claim or statement even if the government did not suffer a loss in reliance on the falsity. * For an individual to be found guilty of making a false claim or statement, the claim or statement at issue must have been capable of influencing the government entity involved.

Answer 74

C. Structuring | See pages 2.502 in the Fraud Examiner's Manual ## Footnote Many countries require financial institutions to report all currency transactions above a certain threshold (e.g., more than $10,000) to the government. However, criminals might attempt to illegally evade these laws. Structuring occurs when a deposit or other transfer is made using a method that is specifically designed to avoid regulatory reporting requirements or an institution’s internal controls. The most common type of illegal structuring scheme in the money laundering context occurs when the launderer breaks up the illicit money into smaller amounts and then makes multiple deposits into bank accounts or purchases cashier’s checks, traveler’s checks, or money orders. This type of scheme is sometimes known as smurfing, especially in cases where the launderer uses runners (i.e., smurfs) to perform multiple transactions. A red flag of a structuring scheme is a customer who attempts to make many deposits just under the reporting threshold.

Answer 75

A. True | See pages 2.428 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) is based on the following three objectives: * The protection of investors * Ensuring that markets are fair, efficient, and transparent * The reduction of systemic risk

Answer 76

D. Excise tax | See pages 2.606 in the Fraud Examiner's Manual ## Footnote Consumption taxes are those collected from the proceeds of the sale of goods or services. Some of the common taxes include: * Sales tax—A tax on goods or services, usually assessed at the consumer level and collected by the retailer or seller at the point of sale * Value-added tax (VAT)—A system that imposes a tax on an item that is assessed incrementally based on its increase in value at each point along a supply chain, from manufacture, to wholesale, to retailer, to consumer; the tax is collected by the seller in each transaction, and only the difference between the price paid by the initial purchaser and the price paid by the subsequent purchaser is taxed * Excise tax—A tax on a narrow class of goods or services (e.g., tobacco or gasoline), usually assessed one time (per jurisdiction) at the manufacturer or wholesaler level

Answer 77

A. Sandra will not be subject to criminal penalties because her improper act was not willful. | See pages 2.601-2.602 in the Fraud Examiner's Manual ## Footnote Tax evasion refers to any fraudulent actions that a taxpayer commits to avoid reporting or paying taxes. To establish criminal liability for tax evasion, most jurisdictions require a willful attempt to evade or defeat taxes in an unlawful manner. In the context of tax evasion, a good faith or legitimate misunderstanding of the applicable law typically negates willfulness (the voluntary, intentional violation of a known legal duty). That is, honest mistakes, in contrast to willful evasion, do not constitute tax evasion. However, a court might find that a defendant’s claimed misunderstanding of the law is implausible given the evidence presented.

Answer 78

D. All of the above | See pages 2.110 in the Fraud Examiner's Manual ## Footnote A domestic judgment against a foreign defendant is usually helpful for recovering the defendant’s assets located in the domestic country, but it might be worthless for obtaining the defendant’s assets in a foreign country. Some, but not all, countries enforce foreign judgments concerning parties or assets within their jurisdiction. Whether the country will enforce a foreign court’s judgment usually depends on the circumstances in which the internal laws of the jurisdiction recognize foreign judgments and whether the two countries of each court have an enforcement treaty.

Answer 79

A. True | See pages 2.515-2.516 in the Fraud Examiner's Manual ## Footnote Digital currencies are often vulnerable to money laundering because many of them function as international person-to-person (P2P) payment systems that cross jurisdictional boundaries, creating difficulties for authorities pursuing enforcement or legal actions. Money launderers can complicate fund-tracing efforts by distributing digital currencies among many addresses—unique identifiers that represent the destination where cryptocurrency can be sent—or digital wallets in complex transactions.

Answer 80

B. False | See pages 2.521-2.522 in the Fraud Examiner's Manual ## Footnote Insurance policies are designed to protect assets (as well as life and health), but they are also assets in their own right. As is the case with most assets, they can become part of a money laundering scheme. This scenario is a redemption scheme. A person can redeem some insurance policies, such as life insurance, before the event that triggers the insurance occurs. In other words, the insurer agrees to pay the beneficiary of the policy an amount less than what the payout on a claim occurrence (in the case of life insurance, the death of the insured) would be. Using illicit assets, launderers can purchase life insurance or other redeemable contracts for themselves or their associates. If the investigator did not know that the launderer bought the insurance policy with illicit assets, the redemption payout would appear legitimate. In an insurance prepayment scheme, the launderer makes advance payments on insurance premiums. For instance, if a health insurer allowed $10,000 in advance premium payments, then the launderer could use the illicit assets to “store” those funds. Perhaps the launderer was going to buy that health insurance anyway; now illicit assets have taken care of that bill.

Answer 81

A. True | See pages 2.426-2.427 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets. IOSCO’s main objectives are to assist its members to: * Cooperate to promote high standards of regulation in order to maintain just, efficient, and sound markets. * Exchange information on their respective experiences in order to promote the development of domestic markets. * Unite their efforts to establish standards and an effective surveillance of international securities transactions. * Provide mutual assistance to promote the integrity of the markets through a rigorous application of the standards and effective enforcement against offenses.

Answer 82

B. False | See pages 2.242-2.243 in the Fraud Examiner's Manual ## Footnote Both the UK Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) make it a crime to offer foreign public officials bribes or to accept bribes from them in connection with international business transactions, and their prohibitions on bribing foreign government officials are broadly comparable. Thus, like the FCPA, the UK Bribery Act seeks to punish corruption on a global level, but the UK Bribery Act has an even broader application than the FCPA. One way in which the UK Bribery Act has a broader application than the FCPA is that it makes commercial bribery—bribes paid to people working in the private sector—a crime, whereas the FCPA only prohibits bribes involving foreign government officials.

Answer 83

B. Whether a reasonable investor would want to know the information to make an informed decision | See pages 2.453 in the Fraud Examiner's Manual ## Footnote Securities laws require that the investor receive full and fair disclosure of all material information, and they make it unlawful for anyone to obtain money or property by using a material misstatement or omission in the offer or sale of any securities. As a general rule, to determine materiality, the fraud examiner needs to answer the following question: “Would a reasonable investor want to know this information to make an informed decision?” If the answer is “yes,” then this information, or the lack thereof, has a high likelihood of being deemed material. (If an actual investor acted based on the misrepresentation, then that clearly strengthens the case, but it is not essential that the false or misleading statement influenced an investor, merely that a reasonable investor could have been so influenced.)

Answer 84

C. The defendant made a false statement (i.e., a misrepresentation of fact). | See pages 2.202 in the Fraud Examiner's Manual ## Footnote Fraudulent misrepresentation of material facts is most often thought of when the term fraud is used. The specific elements of proof required to establish a misrepresentation claim vary somewhat according to where the fraud occurred and whether the case is brought as a criminal or civil action, but the elements normally include: * The defendant made a false statement (i.e., a misrepresentation of fact). * The false statement was material (i.e., the statement was sufficiently important or relevant to influence decision-making). * The defendant knew the representation was false. * The victim relied on the misrepresentation. * The victim suffered damages because of the misrepresentation.

Answer 85

B. False | See pages 2.311 in the Fraud Examiner's Manual ## Footnote Most bankruptcy processes, whether through a court or otherwise, appoint a person or group with administrative powers to oversee the process. The name of this appointee varies between jurisdictions but is often called the administrator, trustee, receiver, examiner, or supervisor. The World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (World Bank Principles) recommends that the administrator have broad powers, including: * The right to cancel fraudulent contracts or transactions entered into by the debtor * The power to collect, preserve, and dispose of the debtor’s property * The ability to interfere with contracts to meet the objectives of the insolvency process * The power to examine the debtor, the debtor’s agents, or other people who have knowledge of the debtor’s affairs and compel them to provide relevant information

Answer 86

A. True | See pages 2.428 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) is based on the following three objectives: * The protection of investors * Ensuring that markets are fair, efficient, and transparent * The reduction of systemic risk

Answer 87

D. To restrict market competition | See pages 2.423 in the Fraud Examiner's Manual ## Footnote To be effective, securities regulation must balance the legitimate needs of businesses to raise capital against the need to protect investors. In addition to protecting investors, securities regulation serves other purposes, including: * Promoting an active and competitive market * Maintaining market confidence * Reducing financial crime * Discouraging behavior that might harm the market

Answer 88

B. False | See pages 2.423 in the Fraud Examiner's Manual ## Footnote To be effective, securities regulation must balance the legitimate needs of businesses to raise capital against the need to protect investors. In addition to protecting investors, securities regulation serves other purposes, including: * Promoting an active and competitive market * Maintaining market confidence * Reducing financial crime * Discouraging behavior that might harm the market

Answer 89

A. Canceled policy scheme | See pages 2.521-2.522 in the Fraud Examiner's Manual ## Footnote Insurance policies are designed to protect assets (as well as life and health), but they are also assets in their own right. As is the case with most assets, they can become part of a money laundering scheme. Launderers do not always need to keep or redeem the insurance policies they purchase. Many policies have cancellation provisions that, for a certain amount of time, allow the launderer to cancel the policy and have any unused premiums returned. This technique can be used to temporarily store illicit assets and confuse the money trail by having the cancellation paid out to a different account.

Answer 90

C. Statutory law | See pages 2.105 in the Fraud Examiner's Manual ## Footnote In common law countries, there are two sources of substantive law: statutory law and common law. Statutory law includes statutes passed by legislatures (and regulations passed by administrative bodies). The common law is developed on a case-by-case basis. That is, the common law is a system of legal principles developed by judges through decisions made in courts. It consists of the usages and customs of a society as interpreted by the judiciary, and it is often referred to as judge-made law. In the modern era of law, the trend in common law countries has been to move away from rules that originate in common law and instead rely on statutory law—laws created by a legislature or other governing authority—as the basis of a dispute. Additionally, civil law systems use statutory law or a codified set of principles as their primary source of law.

Answer 91

B. Churning | See pages 2.442 in the Fraud Examiner's Manual ## Footnote Churning is the excessive trading of a customer account to generate commissions while disregarding the customer’s interests. Specifically, churning occurs when an investment professional excessively trades an account for the purpose of increasing their commissions instead of furthering the customer’s investment goals.

Answer 92

A. Alternative remittance system | See pages 2.525 in the Fraud Examiner's Manual ## Footnote Alternative remittance systems (also called parallel banking systems) are methods of transferring funds from a party at one location to another party (whether domestic or foreign) without the use of formal banking institutions. These systems do not require a direct physical or digital transfer of currency from the sender to the receiver. Instead, in the typical alternative remittance system, the payer transfers funds to a local broker who has a connection to another broker in the region where the payee is located. The latter broker then distributes the funds to the payee. The parties involved in alternative remittance systems form a network and track their exchanges on an informal ledger. Unlike formal financial institutions, these ledgers will generally not list specific information about the payers and payees (such as bank account numbers and names) but will keep track of amounts owed. When the first broker requests that another broker in the network distribute funds, the debt is recorded in the ledgers. These debts between brokers could be paid back by offsetting transactions (i.e., the first broker pays someone locally at the request of the second broker). Alternatively, the parties could meet to settle all outstanding debts at a later time.

Answer 93

B. Violating the duty of loyalty | See pages 2.215-2.216 in the Fraud Examiner's Manual ## Footnote People in a position of trust or fiduciary relationship—such as officers, directors, high-level employees of a corporation or business, and agents and brokers—owe certain duties to their principals or employers, and any action that runs afoul of such fiduciary duties constitutes a breach. The principal fiduciary duties are loyalty and care. The duty of loyalty requires that the employee/agent act solely in the best interest of the employer/principal without any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. Thus, as part of her duty of loyalty, Paula is obligated to act solely in the best interest of her principal, free of any conflicts of interest. But here, Paula is engaged in an undisclosed conflict of interest by being on the boards of both companies at the same time.

Answer 94

B. An independent insolvency representative | See pages 2.312 in the Fraud Examiner's Manual ## Footnote According to the World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (World Bank Principles), in liquidation proceedings, an independent insolvency representative who has the authority to manage the estate in the interest of creditors should replace a company’s management. In creditor-initiated filings, where circumstances warrant, an interim administrator with limited functions should be appointed to monitor the business to ensure that creditor interests are protected. Due to conflicts of interest, creditors typically do not administer estates or the debtor’s business in bankruptcy proceedings.

Answer 95

B. Ensuring that markets are fair, efficient, and transparent | See pages 2.428 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) is based on the following three objectives: * The protection of investors * Ensuring that markets are fair, efficient, and transparent * The reduction of systemic risk

Answer 96

A. True | See pages 2.105 in the Fraud Examiner's Manual ## Footnote Almost every country can be classified as having either a common law or a civil law judicial system; knowing the differences between the two is essential to understanding how legal and judicial processes work in foreign jurisdictions. In most common law systems, there are laws that judges develop through court decisions (called the common law), as well as codes and statutes that establish laws. As opposed to legislative statutes, the common law is developed on a case-by-case basis. That is, the common law is a system of legal principles developed by judges through decisions made in courts. It consists of the usages and customs of a society as interpreted by the judiciary, and it is often referred to as judge-made law. Common law originated as a legal system in England, and some of the principles established hundreds of years ago in court decisions remain influential to contemporary legal issues. Today, common law systems exist in the United Kingdom, the United States, India, Australia, and many other countries that were once part of the British Empire or were influenced by such legal systems. In common law countries, there are two sources of substantive law: statutory law and common law. Statutory law includes statutes passed by legislatures (and regulations passed by administrative bodies).

Answer 97

D. Over-shipment scheme | See pages 2.518-2.519 in the Fraud Examiner's Manual ## Footnote Over- and under-shipment schemes can be used to create a complex paper trail for the colluding parties to launder money. In an over-shipment scheme, money launderers understate the quantity of goods that are shipped. More goods are shipped than the company invoices for. For example, Company A invoices 100,000 widgets to Company B at a price of one dollar per widget. However, Company A ships 200,000 widgets to Company B. Company B then sells the widgets on the open market for $200,000 and deposits the extra $100,000 into an account controlled by Company A. In contrast, the quantity of goods that are shipped is overstated in an under-shipment scheme. The company invoices for more goods than it actually ships. In an over-invoicing scheme, the exporter invoices goods or services to the importer at a price above their market value. This scheme transfers value to the exporter because the exporter collects the amount of the higher price that was invoiced, which is more than the goods or services can be sold for on the open market. For example, Company A sends a shipment of widgets worth $100,000 to Company B but invoices Company B for $200,000. Company A then deposits the extra $100,000 into an account controlled by Company B. In a duplicate invoicing scheme, the exporter issues more than one invoice for the same trade transaction. By issuing duplicate invoices, a money launderer can justify multiple payments for the same goods or services. Inflated shipment scheme is not the name of a trade-based money laundering scheme.

Answer 98

B. False | See pages 2.105-2.106 in the Fraud Examiner's Manual ## Footnote Almost every country can be classified as having either a common law or a civil law legal system; knowing the differences between the two is essential to understanding how legal processes work in foreign jurisdictions. In most common law systems, there are laws that judges develop through court decisions (called the common law), as well as codes and statutes that establish laws. The common law is developed on a case-by-case basis. That is, the common law is a system of legal principles developed by judges through decisions made in courts. It consists of the usages and customs of a society as interpreted by the judiciary, and it is often referred to as judge-made law. In the modern era of law, the trend in common law countries has been to move away from rules that originate in common law and instead rely on statutory law—laws created by a legislature or other governing authority—as the basis of a dispute. However, an additional feature of the common law system that remains important is the precedential value of court decisions. Due to the ambiguity or incompleteness of statutes, legal disputes often arise in which parties support competing interpretations of a law. To decide disputes in common law systems, judges analyze prior cases with similar circumstances and apply the basic principles set forth in those cases to the problem at hand. Common law originated as a legal system in England, and some of the principles established hundreds of years ago in court decisions remain influential to contemporary legal issues. Today, common law systems exist in the United Kingdom, the United States, India, Australia, and many other countries that were once part of the British Empire or were influenced by such legal systems.

Answer 99

D. All of the above | See pages 2.451 in the Fraud Examiner's Manual ## Footnote Insider trading occurs when an insider—someone who possesses inside information about a security—buys or sells securities based on material information about the security that is not available to the public. Inside information is any material, nonpublic information about a security that is not generally available to the public and that could affect the security’s price. Examples of insider trading include: * Corporate officers, directors, and employees who traded their corporation’s securities after learning of significant, confidential business developments * Friends, business associates, and family members of corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential business developments * Employees of law, banking, and accounting firms who were given inside information to provide services to the corporation whose securities they traded * Government employees who traded a corporation’s securities after learning of inside information about the corporation because of their employment with the government Most jurisdictions have rules that forbid investors from buying or selling securities where the decision to buy or sell is based on material, nonpublic information, but the rules and efforts to enforce them vary widely. Some countries are strengthening their existing insider trading laws, some countries are only beginning to establish insider trading laws, and others do not enforce the laws already in place.

Answer 100

A. True | See pages 2.105, 2.107 in the Fraud Examiner's Manual ## Footnote Almost every country can be classified as having either a common law or a civil law legal system. One of the main distinctions between civil law jurisdictions and common law jurisdictions is that judges under common law systems are bound by precedent while judges under civil law systems are not; instead, judges under civil law systems are bound by the civil code. Judges in civil law systems will need to interpret the code, but they need not rely on previous cases in doing so. As a practical matter, however, most civil judges do consider previous decisions to guide their interpretations of the code.

Answer 101

C. Churning | See pages 2.442 in the Fraud Examiner's Manual ## Footnote Churning is the excessive trading of a customer account to generate commissions while disregarding the customer’s interests. Specifically, churning occurs when an investment professional excessively trades an account for the purpose of increasing their commissions instead of furthering the customer’s investment goals.

Answer 102

A. Paper trail | See pages 2.503 in the Fraud Examiner's Manual ## Footnote A money laundering scheme cannot be successful until the paper trail is eliminated or made so complex that individual steps cannot be easily traced. The number of steps used depends on how much distance the money launderer wishes to put between the illegally earned cash and the laundered asset into which it is converted. A greater number of steps increases the complexity of tracing the funds, but it also increases the length of the paper trail and the chance that the transaction will be reported.

Answer 103

D. All of the above | See pages 2.220 in the Fraud Examiner's Manual ## Footnote Perjury is an intentional false statement given under oath on a material point at issue. The basic elements for the crime of perjury are as follows: * The defendant made a false statement. * The defendant made the false statement while under oath. * The false statement was material or relevant to the proceeding. * The defendant made the statement with knowledge of its falsity. Laws that criminalize perjury, however, do not require that the false statement be given in a court of law. Generally, the forum for a perjurious statement includes any court proceeding, depositions in connection with litigation, bail hearings, venue hearings, suppression hearings, and so on. Thus, an individual can commit perjury for false statements made somewhere other than a court of law. Also, for a statement to be perjurious, it must be material. Generally, a statement is material if it tends to influence, or is capable of influencing, the decision of the decision-making body to whom it is addressed.

Answer 104

B. False | See pages 2.521 in the Fraud Examiner's Manual ## Footnote Money services business (MSB) is a term used with growing frequency to define a regulatory class of non-depository financial service providers that transmit or convert money. Although an MSB has particular meanings in different jurisdictions, it generally includes any business that operates in one or more of the following capacities: * Currency exchangers * Check cashers * Issuers, sellers, or redeemers of traveler’s checks, money orders, or stored value * Money transmitters * Prepaid access providers or sellers MSBs offer an alternative to depository institutions for both financial services and money laundering. For this reason, an individual unable to transfer illegal funds into the traditional depository banking system might turn to an MSB. In addition, most MSBs operate under less strict regulations than traditional financial institutions. For example, an MSB might not check a customer’s credit report before opening an account, or it might require less rigorous proof of a customer’s identity than a traditional bank. These overall less stringent requirements tend to raise the money laundering risk in certain transactions involving users of MSBs. However, there is a regulatory trend to expand certain requirements, such as customer due diligence (CDD) programs, to MSBs.

Answer 105

D. Placement, layering, and integration | See pages 2.501-2.503 in the Fraud Examiner's Manual ## Footnote Placement is the first stage of the money laundering process. In this stage, the launderer introduces their illegal profits into the financial system. It is at this stage that legislation has been developed to prevent launderers from depositing or converting large amounts of cash at financial institutions or taking cash out of the country. Money laundering schemes are most often detected at the placement stage. If the placement of the initial funds goes undetected, the launderer can design numerous financial transactions in complex patterns to prevent detection. For example, the launderer can move funds between bank accounts, transfer funds from one form of currency to another, or transfer money between businesses. This stage of the money laundering process is referred to as layering. Integration is the final stage in the laundering process. In this stage, the money is integrated back into the economy in a way that makes it appear to be part of a legitimate business transaction.

Answer 106

A. The owner of an electronics store transfers 20% of the store’s inventory to her son, and then she files for bankruptcy on the company’s behalf one week later. | See pages 2.306-2.308 in the Fraud Examiner's Manual ## Footnote The owner of the electronics store most likely made a fraudulent conveyance. Debtors often attempt to conceal their assets by transferring the assets to another person or a company. A transfer is a fraudulent conveyance if the purpose of the transfer is to hinder, delay, or defraud a creditor. The owner of the rug store perpetrated a bustout scheme. A bustout can take many different forms, but the basic approach is for an apparently legitimate business to order large quantities of inventory or other goods using credit, and then dispose of those goods through legitimate or illegitimate channels. The perpetrator then closes the business, absconding with the proceeds and leaving the suppliers unpaid. The debtor might then go into bankruptcy. Johanna is trying to hide her books and records, which is often part of a concealed assets scheme. Sam filed for bankruptcy using forged documents. Bankruptcy petitions are sometimes filed using forged documents, and often, the filings are made using stolen identities, usually as part of a larger scheme using an assumed identity. If someone files for bankruptcy using a stolen identity, it can take years to correct the credit records of the person whose identity was stolen. Alternatively, a debtor might file for bankruptcy using a name obtained from obituary notices.

Answer 107

B. False | See pages 2.215-2.216 in the Fraud Examiner's Manual ## Footnote People in a position of trust or fiduciary relationship—such as officers, directors, high-level employees of a corporation or business, and agents and brokers—owe certain duties to their principals or employers, and any action that runs afoul of such fiduciary duties constitutes a breach. The principal fiduciary duties are loyalty and care. The duty of loyalty requires that the employee/agent act solely in the best interest of the employer/principal without any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. Employees/agents who owe a duty of loyalty must act solely in the best interest of their principal and may not seek to advance their personal interests to the detriment of their principal. The duty of care means that people in a fiduciary relationship must act with such care as an ordinarily prudent person would employ in similar positions. In general, officers and directors do not owe fiduciary duties to other constituencies, such as creditors, whose rights are purely contractual.

Answer 108

A. III then II then IV then I | See pages 2.306 in the Fraud Examiner's Manual ## Footnote A bustout is a planned and fraudulent bankruptcy. It can take many different forms, but the basic approach is for an apparently legitimate business to order large quantities of inventory or other goods using credit, and then dispose of those goods through legitimate or illegitimate channels. Because the point of the bustout scheme is to quickly resell the goods for cash, the fraudster is likely to purchase more liquid items like inventory than real estate, insurance policies, or services. The perpetrator then closes the business, absconding with the proceeds and leaving the suppliers unpaid. The debtor might then go into bankruptcy. Often by this point, the debtor has already made false accounting entries or taken other steps to conceal the assets or make the sales look legitimate. Other times, debtors flee the jurisdiction or do not show up at the proceedings.

Answer 109

B. False | See pages 2.502 in the Fraud Examiner's Manual ## Footnote Many countries require financial institutions to report all currency transactions above a certain threshold (e.g., more than $10,000) to the government. However, criminals might attempt to illegally evade these laws. Structuring occurs when a deposit or other transfer is made using a method that is specifically designed to avoid regulatory reporting requirements or an institution’s internal controls. The most common type of illegal structuring scheme in the money laundering context occurs when the launderer breaks up the illicit money into smaller amounts and then makes multiple deposits into bank accounts or purchases cashier’s checks, traveler’s checks, or money orders. This type of scheme is sometimes known as smurfing, especially in cases where the launderer uses runners (i.e., smurfs) to perform multiple transactions. A red flag of a structuring scheme is a customer who attempts to make many deposits just under the reporting threshold.

Answer 110

A. Pretending to transfer assets to another person or entity to lower tax liability | See pages 2.605-2.606 in the Fraud Examiner's Manual ## Footnote Taxes on periodic income or wealth (e.g., real property taxes) are a source of revenue for many governments, but fraudsters often commit tax evasion by falsifying or omitting material information. Common forms of criminal income and wealth tax evasion include: * Failing to submit a report of one’s taxable income, if such a report is required * Intentionally misrepresenting one’s income or wealth * Pretending to transfer assets to another person or entity to lower tax liability * Intentionally failing to withhold the taxable portion of an employee’s income, if so required * Failing to report foreign bank accounts or other taxable assets, if required * Falsely claiming income was earned in another jurisdiction to lower tax liability Abusing excise and value-added taxes (VAT) would fall under consumption tax evasion schemes.

Answer 111

B. False | See pages 2.234-2.235 in the Fraud Examiner's Manual ## Footnote The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act (FCPA) make it unlawful to bribe a foreign official for business purposes. Only regulated parties, such as issuers, domestic concerns, and foreign nationals or businesses, are subject to FCPA jurisdiction. An issuer is a corporation that has issued securities that have been registered in the United States or that is required to file periodic reports with the U.S. Securities and Exchange Commission (SEC). A domestic concern is any citizen, national, or resident of the United States or any business entity that has its principal place of business in the United States or that is organized under the laws of a state, territory, possession, or commonwealth of the United States. Moreover, the FCPA applies extraterritorially to U.S. citizens working for foreign subsidiaries of domestic companies. A foreign national or business is subject to the FCPA if it takes any act in furtherance of a corrupt payment within U.S. territory. Additionally, the agents, subsidiaries, or other third-party representatives who act on behalf of an issuer, a domestic concern, or a foreign national or business are liable under the same conditions as the issuer, domestic concern, or foreign national or business. The FCPA’s anti-bribery provisions extend only to corrupt payments made to foreign officials. Although the UK private company is attempting to influence a foreign official, the UK company did not violate the FCPA because it is not subject to FCPA jurisdiction. The UK company does not have its principal place of business in the United States, and it is not organized under the laws of the United States. Also, the UK company is a private company, so it is not an issuer. Moreover, the UK company did not take any act in furtherance of a corrupt payment within U.S. territory; the $60,000 transfer was made to a Chinese public official. Therefore, the $60,000 transfer does not violate the FCPA.

Answer 112

D. The defendant acted with intent to mislead or deceive the victim(s). | See pages 2.205 in the Fraud Examiner's Manual ## Footnote An action for fraud may be based on the concealment of material facts, but only if the defendant had a duty in the circumstances to disclose. The essential elements of fraud based on the failure to disclose material facts are: * The defendant had knowledge of a material fact. * The defendant had a duty to disclose the material fact. * The defendant failed to disclose the material fact. * The defendant acted with intent to mislead or deceive the victim(s). It is not necessary to prove that the defendant knew for certain that the victim would be harmed. It is only necessary to prove that they intended to mislead or deceive the victim.

Answer 113

A. True | See pages 2.305 in the Fraud Examiner's Manual ## Footnote The most common type of bankruptcy fraud scheme involves the concealment of assets rightfully belonging to the debtor’s estate to avoid forfeiting the assets in bankruptcy. In these schemes, concealed assets might include cash, consumer property, houses, and interests in partnerships and corporations, as well as lawsuits in which the debtor is a plaintiff. Concealed assets might also include the debtor’s books and records.

Answer 114

B. A criminal defendant who is also subject to a civil suit regarding the same conduct alleged in the criminal action | See pages 2.113 in the Fraud Examiner's Manual ## Footnote Parallel proceedings are simultaneous criminal and civil actions against the same defendant that are based upon a single set of facts. For example, a victim of fraud might sue the fraudster in civil court while the fraudster is being prosecuted in criminal court. Some jurisdictions permit parallel proceedings while others do not.

Answer 115

B. False | See pages 2.426 in the Fraud Examiner's Manual ## Footnote The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets.

Answer 116

D. None of the above | See pages 2.525 in the Fraud Examiner's Manual ## Footnote Alternative remittance systems (also called parallel banking systems) are methods of transferring funds from a party at one location to another party (whether domestic or foreign) without the use of formal banking institutions. These systems do not require a direct physical or digital transfer of currency from the sender to the receiver. Instead, in the typical alternative remittance system, the payer transfers funds to a local broker who has a connection to another broker in the region where the payee is located. The latter broker then distributes the funds to the payee. The parties involved in alternative remittance systems form a network and track their exchanges on an informal ledger. Unlike formal financial institutions, these ledgers will generally not list specific information about the payers and payees (such as bank account numbers and names) but will keep track of amounts owed. When the first broker requests that another broker in the network distribute funds, the debt is recorded in the ledgers. These debts between brokers could be paid back by offsetting transactions (i.e., the first broker pays someone locally at the request of the second broker). Alternatively, the parties could meet to settle all outstanding debts at a later time.

Answer 117

D. All of the above | See pages 2.219-2.220 in the Fraud Examiner's Manual ## Footnote Obstruction of justice occurs when an individual engages in an act designed to impede or obstruct the investigation or trial of other substantive offenses. Jurisdictions might have several criminal obstruction statutes. Some common types of obstruction statutes are those that prohibit: * Influencing or injuring any officer of the court or juror by force, threats of force, intimidating communications, or corrupt influence * Influencing a juror through a writing * Stealing or altering records or processes by parties that are not privy to the records * Using force or threats of force to obstruct or interfere with a court order * Destroying documents related to a future proceeding * Tampering with a witness, victim, or an informant (e.g., killing or attempting to kill, using force or threats of force, intimidating, influencing with bribes or other corrupt means, misleading, or harassing the protected parties) * Influencing, obstructing, or impeding a government auditor in the performance of their official duties * Obstructing the examination of a financial institution

Answer 118

B. The Financial Action Task Force Recommendations | See pages 2.531 in the Fraud Examiner's Manual ## Footnote The Financial Action Task Force (FATF) releases various model policies and data to help countries combat money laundering, the most influential of which is its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation: the FATF Recommendations (referred to as the "FATF Recommendations"). The FATF created the most comprehensive standard with which to measure a country’s anti-money laundering (AML), counterterrorism, and nuclear proliferation laws and policies. They serve as a basic framework of laws that its members should have.

Answer 119

D. A depository investment bank | See pages 2.521 in the Fraud Examiner's Manual ## Footnote Money services business (MSB) is a term used with growing frequency to define a regulatory class of non-depository financial service providers that transmit or convert money. Although an MSB has particular meanings in different jurisdictions, it generally includes any business that operates in one or more of the following capacities: * Currency exchangers * Check cashers * Issuers, sellers, or redeemers of traveler’s checks, money orders, or stored value * Money transmitters * Prepaid access providers or sellers MSBs offer an alternative to depository institutions for both financial services and money laundering. For this reason, an individual unable to transfer illegal funds into the traditional depository banking system might turn to an MSB. In addition, most MSBs operate under less strict regulations than traditional financial institutions. For example, an MSB might not check a customer’s credit report before opening an account, or it might require less rigorous proof of a customer’s identity than a traditional bank. These overall less stringent requirements tend to raise the money laundering risk in certain transactions involving users of MSBs. However, there is a regulatory trend to expand certain requirements, such as customer due diligence (CDD) programs, to MSBs.

Answer 120

C. Change of venue | See pages 2.111 in the Fraud Examiner's Manual ## Footnote Most jurisdictions require the court to have proper venue as an element of jurisdiction. Venue is the physical location where the lawsuit is to be tried. Rules of venue can be based on a mixture of factors, including convenience to the parties (e.g., where they reside) and where the acts that underlie the case occurred. In some instances, there will be multiple courts that have jurisdiction over a case, and the parties that believe they are subject to prejudice in a court will seek to change the venue to a court more favorable to themselves.

Answer 121

A. Overstating revenues | See pages 2.504 in the Fraud Examiner's Manual ## Footnote Overstating revenues occurs when the money launderer records more income on a business’s books than the business actually generates. The fictitious revenue accounts for the illegal funds that are secretly inserted into the company.

Answer 122

B. False | See pages 2.537 in the Fraud Examiner's Manual ## Footnote Under the Financial Action Task Force’s (FATF) Recommendation 32, countries should implement disclosure requirements for individuals who are physically carrying currency or currency equivalents (i.e., bearer instruments) into or out of the country in amounts that are above the country's designated reporting threshold. Generally, individuals who are carrying currency or the equivalent above the reporting threshold while attempting to cross jurisdictional borders should be required to disclose the amount to authorities, or they will face penalties if they fail to do so.

Answer 123

D. The government suffered damages as a result. | See pages 2.206 in the Fraud Examiner's Manual ## Footnote Official bribery refers to the corruption of a public official to influence an official act of government. Illegal payments to public officials can be prosecuted as official bribery, and they can result in severe penalties. The elements of official bribery vary by jurisdiction, but they generally include: * The defendant gave or received (offered or solicited) something of value. * The recipient was (or was selected to be) a public official. * The defendant acted with corrupt intent. * The defendant’s scheme was designed to influence an official act or duty of the recipient.

Answer 124

D. All of the above | See pages 2.218 in the Fraud Examiner's Manual ## Footnote Conspiracy refers to a situation in which two or more people agree to commit an illegal act. The essential elements that must be shown to prove a conspiracy are as follows: * The defendant entered into an agreement with at least one other person to commit an illegal act. * The defendant knew the purpose of the agreement and intentionally joined in the agreement. * At least one of the conspirators knowingly committed at least one overt act in furtherance of the conspiracy. Under the first element, the government must prove that the defendant reached an agreement or understanding to commit an illegal act with at least one other person. The conspirators must agree about the precise illegal act. Under the second element, the government must establish that the defendant knew of the conspiracy’s existence and its objective. The government, however, does not have to establish that the defendant knew all the details or objectives of the conspiracy, and it does not have to prove that the defendant knew the identity of all the participants in the conspiracy. Finally, the purpose of the conspiracy need not be accomplished for a violation to occur, but at least one of the co-conspirators must have executed at least one overt act in furtherance of the conspiracy. The overt act need not be criminal and could be as innocuous as making a phone call or writing a letter.

Answer 125

C. Tax systems and regulations | See pages 2.224 in the Fraud Examiner's Manual ## Footnote The Recommendation on Combating Bribery in International Business (the Recommendation), which was published by the Organisation for Economic Co-operation and Development (OECD) in 1994, urges member states to deter and penalize the bribery of foreign public officials by taking “concrete and meaningful steps” to improve the following areas within their respective infrastructures: * Criminal, civil, commercial, and administrative laws * Tax systems and regulations * Banking and accounting requirements and practices * Laws and regulations related to public subsidies, licenses, and contract procurement

Answer 126

B. Had an undisclosed interest in a matter that could influence their professional role | See pages 2.208-2.209 in the Fraud Examiner's Manual ## Footnote A conflict of interest occurs when an employee or agent—someone who is authorized to act on behalf of a principal—has an undisclosed personal or economic interest in a matter that could influence their professional role. Conflicts of interest do not necessarily constitute legal violations if they are properly disclosed. Thus, for a conflict of interest claim to be actionable, the conflict must be undisclosed.

Answer 127

C. Justified gaps in a promoter’s work history | See pages 2.446-2.447 in the Fraud Examiner's Manual ## Footnote True brokerages are required to register and meet certain financial thresholds, and broker-dealers must register with the appropriate regulatory authority. Thus, operating a security business without a license or acting as broker-dealer without proper registration violates the law. Also, the personnel at true brokerages must be registered, and often, the salespeople at such firms must pass certain tests. There might also be other licensing or registration requirements depending on the type of business in which the brokerage engages. The following red flags might indicate that an entity is operating a security business without the proper license or registration: * Agents with criminal records * Unexplained gaps in a promoter’s work history * Prior customer complaints * A history of regulatory problems * Questionable credentials * Website lacks background information or contains generic contact information

Answer 128

D. The individual acted knowingly and willfully when making the statement. | See pages 2.221 in the Fraud Examiner's Manual ## Footnote Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue. Generally, to prove a violation, the government must show that the defendant: 1. Knowingly and willfully (or with reckless disregard for truth or falsity) 2. Made a false claim or statement (or used a false document) 3. That was material (i.e., sufficiently important or relevant to influence decision-making) 4. Regarding a matter within the jurisdiction of a government agency 5. With knowledge of its falsity An act is done knowingly and willfully if it is done voluntarily and intentionally and not by mistake or another innocent reason.

Answer 129

C. The defendant had a duty in the circumstances to disclose. | See pages 2.205 in the Fraud Examiner's Manual ## Footnote An action for fraud may be based on the concealment of material facts, but only if the defendant had a duty in the circumstances to disclose.

Answer 130

C. Inventory or goods | See pages 2.306 in the Fraud Examiner's Manual ## Footnote A bustout is a planned and fraudulent bankruptcy. It can take many different forms, but the basic approach is for an apparently legitimate business to order large quantities of inventory or other goods using credit, and then dispose of those goods through legitimate or illegitimate channels. Because the point of the bustout scheme is to quickly resell the goods for cash, the fraudster is likely to purchase more liquid items like inventory than real estate, insurance policies, or services. The perpetrator then closes the business, absconding with the proceeds and leaving the suppliers unpaid. The debtor might then go into bankruptcy. Often by this point, the debtor has already made false accounting entries or taken other steps to conceal the assets or make the sales look legitimate. Other times, debtors flee the jurisdiction or do not show up at the proceedings.

Answer 131

A. Parallel proceedings | See pages 2.113 in the Fraud Examiner's Manual ## Footnote Parallel proceedings are simultaneous criminal and civil actions against the same defendant that are based upon a single set of facts. For example, a victim of fraud might sue the fraudster in civil court while the fraudster is being prosecuted in criminal court. Some jurisdictions permit parallel proceedings while others do not.

Answer 132

B. The customer’s business relationships and transactions should be checked once to ensure that they are consistent with the customer’s profile. | See pages 2.534 in the Fraud Examiner's Manual ## Footnote The Financial Action Task Force (FATF) Recommendations state that the customer’s business relationships and transactions should be subject to ongoing monitoring and not just a single check. The FATF Recommendations set out the fundamental measures that financial institutions must take to identify and verify the identity of customers and beneficial owners. Although it is most important to conduct due diligence when a business relationship is first established, due diligence should be exercised on an ongoing basis. These requirements set firm and detailed standards while also providing flexibility and allowing adaptation to new industry practices. In addition to the fundamental obligations, the FATF Recommendations deal with other issues, such as the timing of verification, the measures to be taken with respect to existing customers and legal persons or arrangements, and when simplified customer due diligence (CDD) measures might be appropriate. According to the FATF Recommendations, the CDD measures to be taken by financial institutions and designated nonfinancial businesses and professions (DNFBPs) are: * Identifying the customer and verifying the customer’s identity through reliable, independent source documents or data * Identifying the beneficial owner of the account or service, including the ownership and control structure of organizations * Obtaining information and understanding the purpose and intended nature of the business relationships involved in the account or service * Conducting ongoing due diligence on the business relationship and transactions of the customer to ensure that they are consistent with the customer’s profile

Answer 133

C. Trading in securities based on material, nonpublic information | See pages 2.451 in the Fraud Examiner's Manual ## Footnote Insider trading occurs when an insider—someone who possesses inside information about a security—buys or sells securities based on material information about the security that is not available to the public. Inside information is any material, nonpublic information about a security that is not generally available to the public and that could affect the security’s price. Examples of insider trading include: * Corporate officers, directors, and employees who traded their corporation’s securities after learning of significant, confidential business developments * Friends, business associates, and family members of corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential business developments * Employees of law, banking, and accounting firms who were given inside information to provide services to the corporation whose securities they traded * Government employees who traded a corporation’s securities after learning of inside information about the corporation because of their employment with the government

Answer 134

B. False | See pages 2.530-2.532 in the Fraud Examiner's Manual ## Footnote The Financial Action Task Force (FATF) is an intergovernmental body that was established at the G-7 Summit in 1989. Its purpose is to develop and promote standards and policies to combat money laundering and terrorist financing at both the national and international levels. The FATF Recommendations, revised in 2012, created the most comprehensive standard with which to measure a country’s anti-money laundering (AML), counterterrorism, and nuclear proliferation laws and policies. They serve as a basic framework of laws that its members should have. While the FATF Recommendations are not required by the FATF's members, and the FATF acknowledges that following each rule might not be possible, members often adopt them. Some of the key measures in the FATF Recommendations provide that countries should: * Use a risk-based approach when setting AML policies. * Create policies that increase cooperation and coordination with other countries. * Specifically criminalize money laundering and terrorist financing. * Enable authorities to trace, suspend, and confiscate assets suspected in laundering and terrorist financing. * Require financial institutions to keep certain records and establish AML policies, avoid correspondent banking with shell banks, and continuously monitor wire transfers.

Answer 135

B. Domestic and international transactions over the designated threshold should require a report to the government. | See pages 2.536-2.537 in the Fraud Examiner's Manual ## Footnote Under the best practices provided in the Financial Action Task Force (FATF) Recommendations, countries should implement a reporting requirement for financial institutions and designated nonfinancial businesses and professions (DNFBPs) that engage in cash transactions above the jurisdiction's designated threshold. The reports should cover domestic and international cash transactions. Many jurisdictions implement this reporting requirement. Note that the recommended reporting requirement does not apply to everyone; it only applies to financial institutions and DNFBPs. DNFBPs include: Casinos (including internet- and ship-based casinos) Real estate agents Dealers in precious metals and stones Legal professionals at professional firms (not internal legal professionals) Trust and company service providers

Answer 136

B. False | See pages 2.237 in the Fraud Examiner's Manual ## Footnote While the U.S. Foreign Corrupt Practices Act (FCPA) prohibits bribes to foreign officials for business purposes, it does not prohibit all payments to foreign officials. It contains an explicit exception for certain types of payments, known as facilitating payments, or grease payments, made to expedite or secure performance of a routine governmental action by a foreign official, political party, or party official that relates to the performance of that party’s ordinary and routine functions. For example, the payment of a foreign corporation fee that is statutorily required in a country to conduct business in that country would fall under this exemption and would not be considered a violation of the FCPA.

Answer 137

A. A concealed assets scheme | See pages 2.305 in the Fraud Examiner's Manual ## Footnote The most common type of bankruptcy fraud scheme involves the concealment of assets rightfully belonging to the debtor’s estate to avoid forfeiting the assets in bankruptcy. In these schemes, concealed assets might include cash, consumer property, houses, and interests in partnerships and corporations, as well as lawsuits in which the debtor is a plaintiff. Concealed assets might also include the debtor’s books and records.

Answer 138

B. False | See pages 2.220 in the Fraud Examiner's Manual ## Footnote Perjury is an intentional false statement given under oath on a material point at issue. The basic elements for the crime of perjury are as follows: * The defendant made a false statement. * The defendant made the false statement while under oath. * The false statement was material or relevant to the proceeding. * The defendant made the statement with knowledge of its falsity. Laws that criminalize perjury, however, do not require that the false statement be given in a court of law or that the false statement influence a jury’s decision. Generally, the forum for a perjurious statement includes any court proceeding, depositions in connection with litigation, bail hearings, venue hearings, suppression hearings, and so on. Thus, an individual can commit perjury for false statements made somewhere other than a court of law.

Answer 139

C. A criminal engages in a process to disguise the criminal nature of stolen funds to make it seem as though they earned the funds legitimately. | See pages 2.501 in the Fraud Examiner's Manual ## Footnote Money laundering is the disguising of the existence, nature, source, control, beneficial ownership, location, and disposition of property derived from criminal activity. Put differently, money laundering is the process by which criminals attempt to disguise illicit assets as legitimate assets that they have a right to possess and spend. In this context, the term assets assumes the wider definition of that which is physical, intangible, or represented in the form of rights or obligations, such as a pension or trust fund. Money laundering operations are designed to take the proceeds of illegal activity, such as profits from drug trafficking, and cause them to appear to come from a legitimate source. Once illegal money has been laundered, the perpetrator is able to spend or invest the illicit income in legitimate assets.

Answer 140

D. All of the above | See pages 2.534 in the Fraud Examiner's Manual ## Footnote Under the Financial Action Task Force (FATF) Recommendations, countries should require financial institutions to implement anti-money laundering (AML) and terrorist financing programs. A financial institution’s AML program is highly dependent on which jurisdictions it operates in, as well as the services that it offers. Generally, financial institutions should adopt the AML policies and procedures in the FATF Recommendations, but they need to tailor their programs to the requirements of the specific jurisdictions in which they operate. According to the FATF Recommendations, these programs should include: * The development of internal procedures and controls, including adequate screening procedures to ensure high standards in employee hiring * Ongoing employee training programs on money laundering risks * An independent audit function to test the effectiveness of the programs * The designation of a compliance officer at the management level

Answer 141

A. Debarment | See pages 2.114-2.115 in the Fraud Examiner's Manual ## Footnote Although administrative penalties vary by jurisdiction, some common types of administrative penalties include monetary fines and penalties, license suspension or revocation, and debarment. Administrative proceedings can result in the suspension or revocation of a professional license. For example, a government medical board might revoke a doctor’s license to practice medicine after determining that the doctor engaged in health care fraud. Under some laws, individuals and businesses can be debarred (i.e., excluded) from participating in government programs. For example, a contractor who engages in procurement fraud might be prohibited from bidding on government contracts in the future. Debarment can be temporary or permanent, and debarred parties are often added to a list that is maintained by the government agency and viewable by the public.

Answer 142

C. A customer who is shopping in a jewelry store purchases an expensive ring using cash. | See pages 2.536 in the Fraud Examiner's Manual ## Footnote Under the Financial Action Task Force's (FATF) Recommendation 20, financial institutions and certain other businesses should be required to file a report when they “suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing.” The name of these reports varies by jurisdiction, but they are generally called suspicious activity reports (SARs) or suspicious transaction reports (STRs). The transactions in all but one of the choices are suspected of stemming from money laundering or the proceeds of predicate illegal conduct, while the correct answer is not necessarily suspicious. It is not unusual for a customer to purchase jewelry using cash.

Answer 143

B. The parties or their legal counsel | See pages 2.107-2.108 in the Fraud Examiner's Manual ## Footnote Adversarial and inquisitorial judicial processes refer to the type of approach that courts take to discover evidence in a case. Adversarial processes are those in which the parties to a proceeding drive the discovery process (the search for evidence). The theory behind this approach is that the competing interests of the parties will serve to expose the relevant facts of the case. In adversarial systems, the parties to the litigation gather and present the evidence to the court. For example, the parties (usually through legal counsel) conduct questioning of fact and expert witnesses. The fact finder of the court, which can be a judge, jury, or administrator, is unaware of the details of the case until the parties present evidence. Judges facilitate the production of evidence between the parties, but they generally do not seek evidence on the court’s behalf.