Money Laundering vs. Hidden Assets March 28, 2013 Money Laundering vs. Hidden Assets: Agenda Program Agenda Introduction Background on money laundering Evolution of laws and statues Description of money laundering Methodologies for exposing money laundering
Background on hidden assets Methodologies for hiding assets Case studies Red Flags How to search for hidden assets Resources Questions 2 Interplay Between Money Laundering and Hidden Assets Hidden Assets Money Laundering 3 Definition of and Background of Money Laundering Globally, money laundering is estimated to be between $500 billion to a
trillion annually1 ACFE Fraud Manual defines money laundering as: the disguising of the existence, nature, source, ownership, location, and disposition of property derived from criminal activity Blacks Law Dictionary defines money laundering as: the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced 1 SOURCE. FIN. CRIMES ENFORCEMENT NETWORK, U.S. DEPT OF THE TREASURY, PROPOSEDADDENDUM TO AICPA AUDIT RISK ALERT: SECURITIES INDUSTRY DEVELOPMENTSMONEY LAUNDERING RISK AND RELATED REGULATORY DEVELOPMENTS 4 Evolution in the Statutes Surrounding Money Laundering
Bank Secrecy Act 1970 Required banks to (1) report cash transactions over $10,000 using the Currency Transaction Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions Money Laundering Control Act (1986) Established money laundering as a federal crime Directed banks to establish and maintain procedures to ensure and monitor compliance with the reporting and recordkeeping requirements of the BSA Anti Drug Abuse Act of 1986 Expanded the definition of financial institution to include businesses such as car dealers and real estate closing personnel and required them to file reports on large currency transactions Required the verification of identity of purchasers of monetary instruments over $3,000
5 Evolution in the Statutes Surrounding Money Laundering Annunzio-Wylie Anti-Money Laundering Act (1992) Required Suspicious Activity Reports and eliminated previously used Criminal Referral Forms Required verification and recordkeeping for wire transfers Money Laundering Suppression Act (1994) Required each Money Services Business (MSB) to be registered by an owner or controlling person of the MSB Money Laundering and Financial Crimes Strategy Act (1998) Created the High Intensity Money Laundering and Related Financial Crime Area
(HIFCA) Task Forces to concentrate law enforcement efforts at the federal, state and local levels in zones where money laundering is prevalent 6 Evolution in the Statues Surrounding Money Laundering: 2001-2004 PATRIOT Act (October 26, 2001) Criminalized the financing of terrorism and augmented the existing BSA framework Banks required to establish AML and customer identification programs SARs for broker-dealers Prohibited financial institutions from engaging in business with foreign shell banks Non financial businesses required to file currency transaction reports Government has greater power to obtain information from financial institutions Facilitated records access and required banks to respond to regulatory requests for information within 120 hours
7 Evolution in the Statues Surrounding Money Laundering: 2001-2004 Intelligence Reform & Terrorism Prevention Act of 2004 Amended the BSA to require the Secretary of the Treasury to prescribe regulations requiring certain financial institutions to report cross-border electronic transmittals of funds, if the Secretary determines that such reporting is "reasonably necessary" to aid in the fight against money laundering and terrorist financing SOURCE for history: Financial Crimes Enforcement Network: http://www.fincen.gov/
news_room/aml_history.html 8 The Criminal Nature of Money Laundering Hidden assets can be derived from both legal and illegal activities, but money laundering is derived only from illicit and illegal activities. Due to the illegal nature of the proceeds, they need to be hidden or shielded from law enforcement as part of the process to make them legally accessible. 9 Money Laundering Methodologies and Vehicles The three steps involved with money laundering:
Placement: Cash currency to business based institution, such as a bank Layering: money moved between institutions (layers of institutions) Integration: Integrate into legitimate business 10 Money Laundering Mechanisms Money laundering techniques: Casinos: Chips are purchased with cash, then after time passes (weeks or several months) the chips are converted to cash. This scheme usually can involve various individuals. Life Insurance: The lump sum purchase of an insurance policy,
only to be redeemed several months or years later after paying any fees for early withdrawal or cancelation fees. The result is a clean check from an insurance company Smurfing - Couriers or smurfs are used to make multiple transactions at banks, breaking large amounts of cash into small. The transactions often involve cash for cashiers checks in small denominations. Gift Cards: Gifts cards are loaded with cash in countries outside the United States, then used as debit cards in the U.S. 11 Money Laundering Mechanisms (continued) Money laundering techniques (continued): Real Estate: A shell company is established in a foreign country (British Virgin Islands). The company purchases real estate in
multiple parts of the world under fake names or shell names. These transactions will assist in the layering phase of money laundering. Securities: Simultaneous puts and calls on the same stock. The broker will pay out the winning transaction, and destroys the losing transaction. There may not be any profit made from these investments, but they return clean money. 12 Money Laundering Mechanisms (continued) Money laundering techniques (continued): Legitimate Business Ownership: Dirty money is combined with clean money. These amounts are added to the top-line, and reported as taxable income. Works well in cash intensive businesses, such as bars or restaurants Overstate reported revenues (income sheet laundering)
Overstatement of reported expenses Deposit cash and write checks in excess of reported revenues and expenses (balance sheet laundering) The greedier the launderer, the easier it is to spot 13 So Who Launders Money in 2012? College Students
Personal Assistants Mortgage Brokers Investment Managers Corporate Executives 14 Computer Based and Statistical Methods for Detecting and Combating Money Laundering Technique Description Linear regression Most basic approach. Predicts values by describing the linear relationship between a dependent variable and one or more independent variables. Logistic regression Involves categorical variables such as yes/no or male/female. Cluster analysis Requires substantial amounts of data that can be grouped
categorically. Inductive algorithms Algorithms that generate decision trees based on historical outcomes. Neural networks An AI technique that mimics the human brain by learning from and storing inputs and outputs. Can be used with continuous/categorical variables and non-linear and collinear data. Fuzzy logic A theory that allows incomplete information to be processed and conclusions derived. Genetic algorithms Algorithms based on evolutionary rules used to solve optimization tasks. SOURCE: Tracking Dirty Proceeds: Exploring Data Mining Technologies As Tools To Investigate Money Laundering, R. C. Watkins, K. M. Reynolds, R. F. DeMara, M. Georgiopoulos, A. J. Gonzalez, and R. Eaglin
15 Hidden Assets Basic definition: Assets not shown on a balance sheet Typical methods: Overseas accounts Shell companies Use of an alias Bank accounts or companies listed under different names Real estate Undisclosed property, rental units - local or overseas Valuable purchases or possessions Art, antiques, vehicles, etc Possible transfer of title Items such as art and antiques can have hidden value
16 Hidden Assets Typical Methods (continued): Bank transfers Disbursement amongst accounts in an attempt to hide assets Relatives or close friends An individual may try to temporarily store assets with a safe source, knowing they will be able to recover them later
17 Assets Hidden Overseas Hidden Assets Out of State or Overseas IMF study states $25 Trillion stashed overseas Assets are hidden out of state or overseas for many of the reasons previously listed (Tax evasion, bankruptcy, divorce, etc) Offshore Asset Protection Trusts Some jurisdictions dont recognize fraudulent transfers Almost impossible to collect against Second passports 18
Hidden Assets to Avoid Paying a Jury Verdict The jury awarded the Plaintiff an eight figure judgment for patent infringement. The Defendant was a closely held business, with base operations over seas. On the night before the case went to the jury, Defendants transferred virtually all liquid assets held in the United States into accounts outside the United States. This was done in a effort to hide assets. The Plaintiffs had to file suit to obtain recovery After two years of litigation, where a private investigator was hired to find assets, the parties settled. The settlement was for significantly less than the award. Jury awards dont guarantee recovery, and when dealing with companies that have base operations over seas, it is wise to strategize about recovery of hidden assets prior to that becoming an issue.
19 Hidden Assets in Family Law How Common? Forbes study from 2007 survey of 433 people with net worth between $1 million to over $10 million 56% of women had hidden assets 36% of men had hidden assets Common techniques in marital dissolution cases: CASH! Trusts Gifts/ endowments Unknown bank accounts, large purchases Overseas accounts A cooperative boss/co-conspirator A spouse could request that their bonus be held until after the divorce is finalized
20 Hidden Assets in a Divorce Proceeding Case Study: Hidden assets in marital dissolution Wealthy spouses: securities, real estate and business investments. Assets both inside and outside the United States Both spouses disclosed assets known to each other, such as securities held, retirement accounts, bank accounts, business investments and real estate holdings. One spouse had wealthy parents who supported his lifestyle in America and abroad, as well as assisted with his business endeavors. This spouse did not disclose income from business proceeds outside the United States and did not disclose income received from parents. CA divorce precedent allows for 100% recovery of hidden and
unreported assets in divorce Rossi v. Rossi, 2001 21 Hidden Assets, Hidden Liabilities Case Example: Hidden Liabilities One mans asset is anothers liability Post-closing earn out dispute for a light manufacturing company Liabilities allegedly understated
22 Hidden Assets on the Balance Sheet Case Example: Balance Sheet Fraud Another post closing dispute Regional tire company sold to a multi-national company Original owners kept on for transition Sales and profitability missed expectations Balance sheet was found to be misstated 23 Indicators of Hidden Assets Potential Red Flags
Disparity in control Secretiveness Unprecedented actions Large purchases or gifts Numerous money transfers Transfer of title of property or possessions Creation of multiple companies or companies with similar names
24 Indicators of Hidden Assets Potential Red Flags (continued): Withdrawn court filings New financial planners or advisors Not introducing a spouse to work colleagues Lifestyle not matching resources
Overseas trips to known tax havens 25 Finding Hidden Assets Tips to uncover or trace hidden assets: Start with the basics from the personal or company search: Name, current address, SSN, employment history, drivers license history Use that information to dig deeper for example, if a tie to a new location is discovered, use the search tools to focus on records in that area ; if a person filed for a business license, but has not disclosed a business of that type, it may be an area to investigate Use data from 3rd party, uninterested sources when possible: Bank records statements, wire transfer confirmations, canceled checks Payroll slips:
If accessible, may show deposits into unlisted bank accounts or retirement accounts 26 Finding Hidden Assets Tips to uncover or trace hidden assets (continued): Storage units or safety deposits boxes: May be hiding jewelry, heirlooms, other items of value A persons lifestyle can tell a lot: Hobbies and interests may highlight areas to investigate Travel patterns may point in the direction of hidden accounts or properties Unprecedented behavior may be a red flag
27 Finding Hidden Assets Available Resources to uncover hidden assets: CLEAR Database (Consolidated Lead Evaluation and Reporting) Investigative platform designed for professionals who need information about people and companies Locate people, assets, businesses, affiliations, and other crucial facts such as connections among individuals, incidents, activities, and locations Acquired by Thomson Reuters
LexisNexis comprehensive collection of public records and time-saving research tools 28 Finding Hidden Assets Available resources continued: District Civil Records (most court records are public information): Cases involving divorce, debts, judgments, damages, accidents, business disputes, etc These can show assets and financial information, business partners, and other useful information
County Assumed Name records: Alias names and DBA (doing business as) May help uncover businesses or business partners County Tax Assessor 29 Finding Hidden Assets Available resources continued: UCC Financial Statements Provides public notice of a security interest in a specific collateral Information can be discovered by reviewing recent loan details
Various online search sites to find information such as investments, lawsuits, property ownership, liens, licensing information, biographical information: www.knowx.com www.iqdata.com www.dnb.com Association of Certified Fraud Examiners (AFCE) Private Investigator 30 Money Laundering vs. Hidden Assets Questions?
31 Money Laundering vs. Hidden Assets Todd Sigler Bio Summary of Experience Todd Sigler is a Manager in McGladreys litigation consulting and financial forensics practice. He has provided clients with litigation consulting and forensic accounting services for ten years, and has extensive experience planning and executing engagements relating to fraud investigations, contract disputes, construction claims, partnership disputes, royalty inspections, and asset tracing. He previously worked for two international consulting firms, and began his career in the Financial Advisory Services group at Deloitte & Touche. Qualifications Phone: 213.330.4634 Email: todd.sigler @mcgladrey.com
Certified Public Accountant, State of California Admitted to the Bar, State of California Association of Certified Fraud Examiners, Member American Institute of Certified Public Accountants, Member and Certified in Financial Forensics Representative Engagements Prepared a damage analysis in a dispute between a multi-jurisdictional government entity and a member city. Provided forensic accounting analysis to defend a claim of fraud in a post-acquisition earn out dispute. Conducted royalty inspections in the high tech, telecommunications, and entertainment industries. 32 Money Laundering vs. Hidden Assets Presenter Contact Information: Todd Sigler McGladrey LLC 515 S. Flower St., 41st floor Los Angeles, CA 90071 Email: [email protected] Phone: 213.330.4634 33
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