TRACING ILLICIT TRANSACTIONS

Question 1

Identification

Answer 1

• Full name
• Alias
• Reason for alias

Question 2

Birth

Answer 2

• Date and place of birth
• Citizenship
• Father’s name; living? (If deceased, when?)
• Mother’s name; living? (If deceased, when?)

Question 3

Address During Pertinent Years

Answer 3

• Resident address; phone number
• Business address; phone number
• Other present or prior address(es)
• Marital status; if married, date and place of marriage
• If divorced, when and where
• Spouse’s maiden name
• Spouse’s parents; living? (If deceased, when?)
• Children’s names and ages; other dependents

Question 4

Occupation

Answer 4

• Present occupation
• Company name and address
• Present salary
• Length of time employed
• Additional employment
• Prior occupations
• Spouse’s occupation

Question 5

General Background

Answer 5

• Physical health
• Mental health
• Education
• Professional qualifications
• Military service
• Passport, Social Security, and/or social insurance numbers (for identification purposes)
• Ever been investigated for financial crimes?
• Ever been arrested?
• Ever filed bankruptcy? If so, who acted as receiver/trustee?
• Hobbies and interests

Question 6

Financial Institutions (Business and Personal)

Answer 6

• Financial institution accounts
• Safe deposit boxes (request inventory); in whose name; contents; does anyone else have access?
• Credit cards
• Trusts; beneficiary, donor, or trustee
• Mutual funds or other securities owned
• Brokers; currency exchanges used
• Life insurance
• Indirect dealings (e.g., through lawyers or accountants)
• Cashier’s cheques
• Money orders, bank drafts, traveller’s cheques

Question 7

Source of Income

Answer 7

• Salaries, wages, business receipts
• Interest and dividends
• Sale of securities
• Rents and royalties
• Pensions, trusts, annuities, etc.
• Gifts (money, property, etc.)
• Inheritances
• Loans
• Mortgages
• Sales of assets
• Municipal bond interest
• Insurance settlements
• Damages from legal actions
• Any other source of funds, ever

Question 8

Net Income and Expenditures

Answer 8

•  Current cash on hand, including cash in safe deposit boxes, but not cash in bank 
accounts  
•  Location of current cash  
•  Largest amount of cash ever on hand; location 
•  End-of-year cash  
•  Notes receivable 
•  Mortgages receivable 
•  Life insurance policies 
•  Automobiles 
•  Real estate 
•  Stocks, bonds, and other securities 
•  Jewellery, furs 
•  Airplanes, boats  
•  Any other assets valued

Question 9

Liabilities

Answer 9

• Payables
• Loans
• Assets purchased by financing
• Mortgages
• Bonds

Question 10

Expenditures

Answer 10

• Debt reduction
• Insurance premiums
• Interest expense
• Contributions
• Medical
• Travel
• Real estate and other taxes
• Household wages (e.g., babysitter, housekeeper, gardener)
• Casualty losses

Question 11

Business Operations

Answer 11

• Name and address
• Date organised and nature (corporation, partnership)
• Company or business registration numbers
• Tax identification numbers
• Title and duties
• Reporting arrangements—to and from whom?
• Banking and cash handling arrangements
• Investment; where and when
• Subsidiaries and associates
• Key people

Question 12

Books and Records

Answer 12

• Nature of accounting system (e.g., cash, accrual)
• Period covered
• Location
• Name of person maintaining and controlling
• Types (journal, ledgers, minute books, cancelled cheques, bank statements, invoices, cash)

Question 13

Business Receipts

Answer 13

• Form (electronic, cheque, or cash)
• Are all receipts deposited? Where?
• Are business receipts segregated from personal ones?
• Are expenses ever paid with undeposited receipts?
• Arrangements for foreign currency payments
• Trade finance arrangements, letters of credit, etc.

Question 14

Types of Bank Records

Signature Cards

Answer 14

When a depositor opens an account, the bank requires that a signature card be signed. By signing the card, the depositor becomes a party to a contract with the bank under which he accepts all rules and regulations of the bank and authorises the bank to honour his orders for withdrawing funds, the card usually contains such data as banking connections and the date and amount of the initial
deposit.

Question 15

Direct Methods of Tracing Financial Transactions Negotiated Cheques

Answer 15

Cancelled cheques written by a subject or received from others often provide the fraud examiner with much more than amounts, payees, and endorsees. When looking for assets, a review of the reverse side of negotiated cheques can provide further avenues of investigation and subsequent recovery.

Question 16

Tracing cheques is facilitated by

Answer 16

the use of bank institution numbers.

Question 17

Magnetic Ink Character Recognition (MICR) is

Answer 17

a machine language and is a cheque design
standard to which all banks must conform. Numeric information is printed in magnetic ink on the bottom of bank cheques and other documents. This coding is electronically scanned by computers that convert the magnetic ink notations into electronic impulses readable by a computer. MICR information is printed in groupings called fields. These fields usually the
cheque serial number, the branch transit number, the financial institution, and the customer’s account number

Question 18

The deposit slip is

Answer 18

the principal source document for crediting the customer’s account. Deposits are first recorded on the deposit slip that usually segregates currency, coins, and cheques. The cheques are listed separately. In some cases, the depositor writes the name of the maker of the cheque on the deposit slip

Question 19

Bank Drafts

Answer 19

Bank drafts are prepurchased instruments payable on demand and drawn by or on behalf of the bank itself. It is regarded as cash and cannot be returned or paid.

Question 20

Cashier’s Cheques

Answer 20

These cheques, which are issued by the bank, are called treasurer’s cheques when issued by a
trust company.

Question 21

Bank Money Orders

Answer 21

These are similar to drafts but are for a maximum of $1,000. Like drafts, money orders may be purchased by customers who do not want to carry cash.

Question 22

Certified Cheques

Answer 22

These are customer’s cheques on which “certified” is written or stamped across the front by
the bank. This certification is a guarantee that the bank will pay the amount of the cheque.
Certified cheques are liabilities of the bank and, when paid, are kept by the bank. These
cheques are immediately charged against the customer’s account by debit memoranda during
certification.

Question 23

Stock Brokerage Records
All records pertaining to the subject should be requested; however, make sure that the request specifically includes the following:

Answer 23

• Application. When a customer opens an account, he will typically fill out an account application that will contain personal and financial data such as bank accounts.
• Customer account information. This information is usually computerised and is kept in the broker’s files for reference. It will include all transactions conducted for the customer.
• Signature card. A signature card should be on file that will show all those authorised to conduct transactions on the account.
• Securities receipts. These receipts are issued to a customer when he delivers securities to the
broker for sale.
• Cash receipts. These receipts are issued to a customer when he delivers currency to the
broker.
• Confirmation slips. These are issued to a customer to show the type of transaction (buy or
sell) and the amount involved in the transaction.
• Securities delivered receipt. This receipt is signed by the customer when a securities purchase is delivered to the customer.
• Brokerage account statement. This statement is usually issued monthly and provides
information on all transactions conducted during the reporting period. It lists all purchases and sales, the name of the security, the number of units, the amount per unit, the total amount of the transaction, the account balance, payments received from the
customer, disbursements to the customer, and the securities that are held by the brokerage firm for the customer.

Question 24

Direct Methods of Tracing Financial Transactions

Answer 24

Financial Institutions
Stock Brokerage Records

Tax Returns and Related Documents

Question 25

To examine company books and records for fraud, the fraud examiner must know and
understand

Answer 25

the environment in which the entity operates, the entity’s accounting system (including the types of schemes relevant to the entity and the controls that are designed to prevent fraud), basic concealment methods, and various detection techniques

Question 26

Sampling risk is

Answer 26

the probability that the sample is not representative of the population

Question 27

nonsampling risk is

Answer 27

the possibility of making the wrong decision

Question 28

SAMPLING FOR ATTRIBUTES

Answer 28

EXAMPLE
For each sales invoice in the sample, is there a corresponding shipping order? The answer to the
question can only be “yes” or “no.” If the control condition is that each sales invoice is not
recorded until there has been a shipping order attached, then any “no” response for a booked
sale would represent an error.

Question 29

DISCOVERY SAMPLING

Answer 29

“If I believe some kind of error or irregularity might exist in the records, what sample size will I have to
audit to have assurance of finding at least one example?”

Question 30

Net Worth Methods

Answer 30

used to prove illicit income circumstantially, by showing that a person’s assets or expenditures for a given period exceed that which can be accounted for from known or admitted sources of income

Question 31

Net worth can be defined as

Answer 31

the difference between assets and liabilities at a particular point in time

Question 32

The asset method should be used when

Answer 32

he subject has invested illegal funds to accumulate

wealth and acquire assets, causing net worth (value of assets over liabilities) to increase from year to year.

Question 33

The expenditures method is best used when

Answer 33

the subject spends illicit income on

consumables (such as travel and entertainment) that would not cause an increase in net worth.

Question 34

net worth computation, stages:

Answer 34

prepare the financial/Behavioural profile of the suspect

Question 35

THE FINANCIAL PROFILE

Answer 35

STEP 1
Identify all significant assets held by the suspect. An asset is cash (on hand) or anything else
of value that can be converted into cash.
STEP 2
Identify all significant liabilities. A liability is an obligation (debt) arising from an oral or
written promise to pay.
STEP 3
Identify all income sources during the relevant time period. Income includes money or other things of value received in exchange for services or goods. Income is never included as an asset. Loan proceeds are not included as income but are treated as an asset that is offset by a orresponding liability.
STEP 4
Identify all significant expenses incurred during the relevant period. An expense is any
payment for consumables, for personal or business reasons, over the relevant time period.
Expenses are not included as liabilities.
STEP 5
Analyse the information you have collected

Question 36

To establish a firm starting net worth, it must be shown that the target had no large cash sums for which he was not given credit. This is usually done by offering evidence that negates the existence of a cash hoard. Such evidence might include:

Answer 36

• Written or oral admissions of the subject concerning net worth (a signed net-worth
statement or an oral statement as to cash on hand)
• Low earnings in pre-examination years, as shown by records of former employers
and/or tax returns filed by subject
• Net worth, as established by books and records of the subject
• Financial statement presented for credit or other purposes at a time before or during the
period under examination (banks, loan companies, and bonding companies are some of
the better sources from which to obtain this type of document)
• Bankruptcy before examination periods
• Prior indebtedness, compromise of overdue debts, and avoidance of bankruptcy
• Instalment buying
• History of low earnings and expenditures, and cheques returned for insufficient funds (a
financial history covering members of the subject’s family also might be helpful)
• Loss of furniture and business because of financial reasons
• Receipt of some type of public assistance

Question 37

For each significant asset, determine:

Answer 37

– When was it acquired and from whom?
– How much did it cost?
– How was it paid for (currency, cheque, cashier’s
cheque)?
– What source of funds was used to acquire it?
– What documentation exists for the purchase and
where is it?

Question 38

For each significant liability, determine:

Answer 38

• What was the original amount of the liability?
  – What is the present balance due?
  – When was the liability incurred?
  – What was the purpose for the loan or debt?
  – How were the proceeds used and where were they deposited?
  – What security (collateral), if any, was given for the
  debt?
  – What documentation exists for the transaction and where is it?
  – Was the debt written off as a bad loan for tax
  purposes?
  – Who was the creditor or lender?

Question 39

For each source of funds, determine:

Answer 39

– What was the total amount during a given period?
– What was the source?
– How was it paid for (currency, cheque, other means)?
– When were the funds received?
– Where was it deposited?
– How was it spent?
– What documentation exists and where is it?

Question 40

For each major expenditure item, determine:

Answer 40

– What was the total amount spent?
– How was it paid for?
– Where were the funds obtained to pay the expense?
– What documentation exists and where is it?
– When was the payment made?

Question 41

ny recipient of funds, whether honest or suspect, has only four ways of disposing of income:

Answer 41

save it, buy assets, pay off debts, or spend it.

Question 42

In computing the comparative net worth, these issues should be considered:

Answer 42

• All assets should be valued at cost, not fair market value. Subsequent appreciation or
depreciation of assets is ignored.
• The amount of funds available to the subject from legitimate sources should be estimated or computed generously. The amount of the subject’s expenditures, particularly hard-to-document living costs, such as food and entertainment, should be
estimated conservatively to give the subject the benefit of any doubt.
• Always attempt to interview the subject to identify all alleged sources of funds and to negate defences that he might raise later.
• Establish the starting point, generally the year before the target’s illegal activities begin. This will be referred to as “year one” in the following computations.
• Compute the target’s net worth at the end of year one. Identify all assets held by the subject, valued at cost, including assets acquired earlier, and the amount of current liabilities.

Question 43

COMPARATIVE NET WORTH: ASSET METHOD FORMULA

Answer 43

Assets – Liabilities = Net worth
– Prior year’s net worth = Net worth increase
+ Living expenses = Income (or expenditures)
– Funds from known sources = Funds from unknown sources

Question 44

COMPARATIVE NET WORTH: EXPENDITURES METHOD

Answer 44

Expenditures (Application of Funds) – Known source of funds = Funds from unknown sources

Question 45

BANK DEPOSITS METHOD

Answer 45

Total Deposits to All Accounts – Transfer and redeposits = Net deposits to all accounts
+ Cash expenditures = Total receipts from all sources
- Funds from known sources = Funds from unknown or illegal sources

Question 46

TOTAL DEPOSITS

Answer 46

Total deposits consist not only of amounts deposited to all bank accounts maintained or
controlled by the target but also deposits made to accounts in savings and loan companies,
investment trusts, brokerage houses, and credit unions. Total deposits also include the
accumulation (increase) of cash on hand.
Additional items that must be included in deposits are property and notes that the subject
received in payment for services. The accepted practice is to consider these items as
depositories into which funds have been placed for future use.

Question 47

NET DEPOSITS

Answer 47

All transfers or exchanges between bank accounts as well as funds that are redeposited are
non-income items and are subtracted from total deposits to yield net deposits. Failure to
eliminate these items would result in an overstatement of income.

Question 48

CASH EXPENDITURES

Answer 48

Cash expenditures consist of the total outlay of funds less net bank disbursements.
Total outlays include but
are not limited to:
• Purchase of capital assets to investments (determined from settlement sheets, invoices,
statements, and the like)
• Loan repayments (determined from loan ledgers of banks or other creditors)
• Living expenses (can be determined from the same sources presented in the net worth
and expenditures sections)
• Purchases, business expenses (less non-cash items, such as depreciation), rental expenses,
and the like

Question 49

REBUTTING DEFENCES TO THE COMPARATIVE NET-WORTH ANALYSIS

Answer 49

To rebut these defences, the fraud examiner must pin down the amount of cash on hand at the beginning of the relevant period (through, for example, amounts listed on financial statements or claimed in interviews) and do the following:
• Obtain a financial history of the target and spouse, through interviews and other means,
showing dates and places of employment, salary and bonuses, and any other related
income.
• Determine whether the spouse had any separate source of funds that were used to
purchase jointly held assets or deposited in joint accounts. If so, the spouse must be
included in the financial profile calculations.
• Claims of a prior substantial cash hoard might be rebutted by showing that the target
lived carelessly, borrowed money, made instalment purchases, incurred large debts, was
delinquent on accounts, had a poor credit rating, or filed for bankruptcy. Claims that
cash came from family or other private loans might be rebutted by showing that the
alleged lender was incapable of generating the amounts supposedly lent, the absence of
any documentation reflecting the source of the alleged loan (no bank account
withdrawals), and the absence of other sources of funds available to the lender.

Question 50

Common Asset Hiding Techniques

Answer 50

• Transfer to Family Members or Parties Under Their Control
• Children’s or Family Trust
• Home Mortgage Pay-Down
• Insurance Policies
• Prepaid Credit Cards
• Savings Bond Purchases
• Cashier’s Cheques and Traveller’s Cheques

Question 51

Locating Hidden Assets

Answer 51

Computer Databases
Locating Assets Through Subpoenas
Locating Assets Offshore

Question 52

Locating Assets Offshore

Answer 52

• Review domestic bank account records for wire transfers or other transactions involving
offshore bank accounts
• Determine whether the subject personally travelled overseas
• Attempt to locate the subject’s travel agency

Question 53

ttempt to identify means employed to move cash off shore by:

Answer 53

• Use of multiple cashier’s cheques
• Overnight mail envelopes
• Other methods

Question 54

In his book Competitor Intelligence, Leonard Fuld provides a useful chapter on locating information on foreign businesses. He suggests the following resources as starting points:

Answer 54

• Securities brokers with expertise in dealing with foreign businesses
• The International Trade Commission
• International trade shows
• Foreign consulates
• Foreign chambers of commerce
• Foreign magazines and directories

Question 55

If the subject engages in a mail-order or retail business, a simple way to get information
about his bank accounts is

Answer 55

to send him a cheque.

Question 56

if the subject does not engage in mail-order

sales

Answer 56

by sending the subject a small “refund” cheque

Question 57

Letters Rogatory are

Answer 57

formal requests by the courts of one country to

the courts of another country

Question 58

Mutual Legal Assistance Treaties (MLATs) are

Answer 58

agreements between two foreign countries that provide for the exchange of information and documents relating to narcotics, money laundering, and other financial crimes

Question 59

The information needed for a letter rogatory request generally includes:

Answer 59

• The facts of the case showing at least a reasonable suspicion that the offence under
investigation might have been committed
• The names and identifying information of people or entities involved in the matter
• The names and identifying information of witnesses or entities whose names might be
on bank records (if accounts are held in other names)
• The names, addresses and other information concerning banks, businesses, or bank
account numbers
• The offences being investigated or prosecuted including penalties
• The assistance requested of the foreign country, whether it is documents, testimony, freezing of assets, etc. (If you want a foreign magistrate to question a witness, write out the questions that you want the witness to be asked, even if you ask to be present during the questioning.)
• The procedures to be followed (how to authenticate business documents and records for use in court)

Question 60

Requests for foreign assistance under Mutual Legal Assistance Treaties (MLATs) are usually
quicker and more efficient than filing letters rogatory. The procedure for making formal
requests by MLAT is as follows:

Answer 60

• No court involvement is required.
• The investigator calls the appropriate government agency (such as the Department of
Justice) for current guidance and will send a draft request to agency for editing.
• When the request is approved, it is transmitted to the foreign central or competent
authority.
• If a translation is required, the requesting agency is responsible for obtaining it.
• The requested country’s proper authority determines whether the request meets treaty
requirements, and if it does, transmits the request to the appropriate recorder agency for
execution.
• The executing authority transmits the evidence through the proper authority to the
requesting country.
• The fraud examiner/investigator should inspect the evidence for responsiveness and
completeness, as well as certificates of authenticity business records (notify the agency at once of any problems).