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Money???. Money. Laundering. Money Laundering. “The money derived from illegal activity by concealing the identity of the individuals who obtained the money and converting it to assets that appear to have come from legitimate sources”. Magic!!!!. Disappears Changes Form Harder to Find

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money
Money???

Money

Laundering

money laundering
Money Laundering

“The money derived from illegal activity by concealing the identity of the individuals who obtained the money and converting it to assets that appear to have come from legitimate sources”

slide3

Magic!!!!

  • Disappears
  • Changes Form
  • Harder to Find
  • Clean
what is money laundering
What is Money Laundering?
  • “The process used to disguise the source of money or assets derived from criminal activity”
  • Include:
      • Drug trafficking
      • Extortion
      • Corruption
      • Fraud
what is money laundering1
What is Money Laundering?
  • They try to “launder” the money so that the source cannot be found.
  • International Monetary Fund estimates $900 billion to $2.25 trillion annually worldwide.
  • Government of Canada estimates

the amount in Canada to be in the billions!

why do the laundry
Why do the laundry?

Criminals want to:

  • Avoid prosecution
  • Increase profits
  • Avoid seizure of accumulated wealth
  • Appear legitimate
  • Tax evasion

They are trying to conceal the origin of the cash

evolution
Evolution
  • Exchange or Transaction Systems
  • Cash Transaction Systems
  • Financial or Business Systems
laundry cycle
Laundry Cycle
  • Placement – Converting currency to some other form. Lots of cash.
  • Layering – Reduce the impact of paper trail. Front Business Entities. Other forms of concealment
  • Integration – Make the origin look legitimate.
factors
Factors
  • Advances in communications and transportation.
  • Technological methods for the concealment of crime and the proceeds of crime
  • Criminals can move themselves and their stolen property between countries within hours.
  • Funds can be wired from one location to another in seconds.
internationalization of crime
Internationalization of Crime
  • Organized crime

The old Syndicates

  • The home-grown syndicate
  • The new breed

More tech savvy

More aggressive

basis for laundering
Basis for “Laundering”
  • Drug trafficking.
  • Testing and probing of interdiction systems.
  • Drug trafficking organizations and Cartels
  • Smuggling
  • Sheer volume of traffic
basis for laundering 2
Basis for “Laundering” 2
  • International criminals and organizations
  • Technology and the conduct of Sensitive meetings
  • Domestic organizations and terror groups
  • Confidentiality afforded by some countries’ banking laws,
combat
Combat
  • Laws
    • Racketeering Influenced and Corrupt Organization (R.I.C.O.)
    • Interstate Travel in Aid of Racketeering (ITAR) (travel acts)
    • Bank Secrecy Act
    • Forfeiture
    • Money Laundering Control Act
    • Mail and Wire Fraud
indicators
Indicators
  • Concealing of assets
  • Two sets of records
  • Destruction of records
  • Large frequent cash Transactions
  • Payments to fictitious persons or companies
  • False or altered billings or invoices
  • Large company loans to individuals or officers with no particular repayments
  • Personal expenses paid out of company funds

Some Indicator that may point to the “Washing Machine”

books and records
Books and Records
  • Cash Receipt Journals
  • Cash Disbursement Journals
  • Sales Journals
  • Purchases Journals
  • Voucher Register
  • General Journals
other sources and records
Other Sources and Records
  • Personal Records
  • Informants
  • Real Estate Records
  • Court Records
  • Bankruptcy and Motor Vehicles
  • Loan Applications
  • Tax Return
  • Divorce and Child Support Records
  • Employment and Bank Records
  • Household Trash!!!!!!!!
financial investigations
Financial Investigations

A blend of traditional investigative techniques and accounting

Auditors look for violations of accounting principles, recommending changes to management.

Criminal Investigator looks for proof of the commission of a crime beyond a reasonable doubt.

security of information systems fraud prevention
Security of Information Systems-Fraud Prevention

Security Program

  • Prepare a project plan
  • Identify assets
  • Value assets
  • Identify threats
  • Assess likelihood of threats
  • Analyze exposure
  • Adjust controls
  • Prepare security report
use of computers in fraud and money laundering exposure
Use of Computers in Fraud and Money Laundering-Exposure

Threat Likelihood

Exposure Analysis

  • Identify controls in place
  • Assess the reliability of controls
  • Evaluate the likelihood threat will be successful
  • Assess the resulting loss
  • Cost Benefit Analysis
case study aldrich rick ames
Case Study-Aldrich “Rick” Ames

Treason – Laundering money from the KGB

KGB Moscow, USSR

Cash $2,700,000.00

Ames CIA

aldrich rick ames
Aldrich “Rick” Ames

$950,000.00 $1,500,000.00

Accounts Account

Mother in Law/Ames Trustee Personal Account

Personal Account Zurich First Union Vienna VA.

Lifestyle Expenditure Ames and Wife

Maid Salary $540,000.00 Cash Purchases

Telephone Bills Home.Arlington VA 1992 Jaguar $50G

Travel 1989 Honda $15G

Credit Cards Renovations $99G

hansen 2001
Hansen 2001??

The story is being written

financial approach
Financial Approach

Proved:

  • Where the money come from
  • How much
  • Where is it going
  • How is it moving
  • Is it been kept or spent
banking
Banking

Beware of:

customer
Customer

Beware of A Customer Who Provides Insufficient or Suspicious Information

  • A business that is reluctant to provide complete information regarding: the purpose of the business, prior banking relationships, officers or directors, or its location.
  • A business that refuses to provide information to qualify customers for credit or other banking services.
  • A customer who is unwilling to provide personal background information when opening an account or purchasing monetary instruments above a specified threshold.
customer1
Customer
  • A customer who opens an account without references, a local address, or identification (passport, alien registration card, driver's license, or social security card), or who refuses to provide any other information the bank requires to open an account.
  • A customer who presents unusual or suspicious identification documents that the bank cannot readily verify.
  • A customer whose home phone is disconnected.
  • A customer who includes no record of past or present employment on a loan application.
customer2
Customer
  • A customer who has no record of past or present employment but makes frequent large transactions.
  • A business that is reluctant to reveal details about its activities or to provide financial statements.
  • A business that presents financial statements noticeably different from those of similar businesses.
customer transactions
Customer Transactions
  • Sending or receiving frequent or large volumes of wire transfers to and from offshore institutions.
  • Depositing funds into several accounts, usually in amounts below a reportable threshold, and then consolidating into a master account and transferring them outside of the country.
  • Instructing the bank to transfer funds abroad and to expect an equal incoming wire transfer from other sources
customer transactions1
Customer Transactions
  • Regularly depositing or withdrawing large amounts by wire transfers to, from, or through countries that are known sources of narcotics or whose bank secrecy laws facilitate the laundering of money.
  • Wiring cash or proceeds of a cash deposit to another country without changing the form of currency.
  • Receiving wire transfers and immediately purchasing monetary instruments prepared for payment to a third party.
customer accounts
Customer Accounts

Beware of Activity Not Consistent With the Customer's Business

  • Corporate account(s) where deposits or withdrawals are primarily in cash rather than checks.
  • A customer who operates a retail business and provides check cashing service and does not make large draws of cash against checks deposited. This may indicate the customer has another source of cash.
  • Unusual cash purchases of money orders and cashier's checks.
  • Accounts with a large volume of deposits in cashier's checks, money orders, and/or wire transfers, when the nature of the accountholder's business does not justify such activity.
customer accounts1
Customer Accounts
  • Accounts that show frequent large bill transactions (i.e., deposits, withdrawals, monetary instrument purchases) without a business reason.
  • Accounts that show frequent large bill transactions for a business that generally does not deal in large amounts of cash.
  • A single, substantial cash deposit composed of many $50 and $100 bills.
  • Frequent exchanges of small bills for large bills or vice versa.
  • Retail deposits of numerous checks but rare withdrawals for daily operations.
customer accounts2
Customer Accounts
  • Sudden and inconsistent change in currency transactions or patterns.
  • A business owner (e.g., a one-location store owner) who makes several deposits on the same day at different bank branches.
  • An account that shows unusually large deposits of U.S. food stamps (often used as currency in exchange for narcotics).
  • An account that sends and receives wire transfers (especially to/from bank-haven countries), without an apparent business reason or when inconsistent with the customer's business or history.
  • An account that receives many small incoming wire transfers or makes deposits using checks and money orders, and almost immediately wire transfers all but a token amount to another city or country, when such activity is not consistent with the customer's business or history.
forensic and investigative accounting

Forensic and Investigative Accounting

Chapter 5

Employee Fraud:

The Misappropriation of Assets

© 2003, CCH INCORPORATED

4025 W. Peterson Ave.

Chicago, IL 60646-6085

http://tax.cchgroup.com

A WoltersKluwer Company

employee fraudsters
Egotistical

Risk taker

Hard worker

Greedy

Disgruntled or a complainer

Overwhelming desire for personal gain

Pressured to perform

Inquisitive

Rule breaker

Under stress

Financially needy

Big spender

Close relationship with vendors/suppliers

Employee Fraudsters

Lisa Eversole, in “Profile of a Fraudster,” lists the following characteristics of occupational fraudsters:

employee fraudsters1
Employee Fraudsters

Bev Harris, in “How to Unbezzle a Fortune,” says that fraudsters and embezzlers are the nicest people in the world:

Wide-eyed mothers of preschoolers. Your best friend. CPAs with impeccable résumés. People who profess deep religious commitments. Your partner. Loyal business managers who arrive early, stay late, and never take a vacation. And sometimes, even FAMILY MEMBERS. So if you’re looking for sinister waxed mustache and shifty eyes, you’re in for a surprise—scoundrels come in every description.

discrepancies that may indicate fraud
Discrepancies That May Indicate Fraud
  • Transactions that are not recorded in a complete or timely manner or are improperly recorded as to amount, accounting period, classification, or entity policy
  • Unsupported or unauthorized balances or transactions
  • Last-minute adjustments that significantly affect financial results
  • Evidence of employees’ access to systems and records inconsistent with that necessary to perform their authorized duties
types of misappropriations
Types of Misappropriations
  • Embezzlement
  • Cash and check schemes
    • Larceny of cash
    • Skimming
    • Swapping checks for cash
    • Check tampering
    • Kiting
    • Credit card refund and cancellation schemes

(continued on next slide)

types of misappropriations1
Types of Misappropriations
  • Accounts receivable fraud
    • Lapping
    • Fictitious receivables
    • Borrowing against accounts receivable
  • Inventory fraud
    • Stealing inventory
    • Short shipments with full prices

(continued on next slide)

types of misappropriations2
Types of Misappropriations
  • Fictitious disbursements
    • Doctored sales figures
    • Sham payments
    • Price manipulations: land flipping, pump and dump, and cybersmearing
    • Money laundering
    • Bid rigging
fighting fraud
Fighting Fraud

An organization may want to:

  • Put in place a business ethics policy
  • Reflect the company’s position on fraud in Rules of Conduct
  • Identify and assess primary potential risks faced by the business
  • Determine adequate plans and procedures to deal with fraud once it has been discovered
  • Have a forensic accountant review and help to audit the company’s security measures
  • Select and promote staff based on sound employment practices
preventing employee fraud
Preventing Employee Fraud
  • Have a fraud hotline
  • Institute a mandatory vacation policy
  • Rotate assignments of employees who handle cash, payables, and receivables
  • Have a written and signed ethics policy
  • Have internal auditors do different procedures each time they audit a unit

(continued on next slide)

preventing employee fraud1
Preventing Employee Fraud
  • Observe and listen to employees; look for lifestyle changes
  • Really understand the business unit and what functions employees actually perform
  • Do not allow employees or executives to get away with anything
  • In a small business, the owner should receive the monthly bank statements unopened

(continued on next slide)

preventing employee fraud2
Preventing Employee Fraud
  • Bank statements should always be reconciled
  • Supervisors should try to think like criminals
  • Do not assume employees behave honestly
  • Check employee references and résumés
  • Think outside the box
steps to consider once fraud is detected
Steps to Consider Once Fraud Is Detected
  • Call legal counsel.
  • Get the insurance carrier involved as early as possible.
  • Take immediate steps to safeguard existing assets from further damage.
  • Quietly and confidentially gather evidence.
  • Manage information on a need to know basis in the early stages of discovery.

(continued on next slide)

steps to consider once fraud is detected1
Steps to Consider Once Fraud Is Detected
  • Consider communications very carefully whether they are to employees or those outside the company.
  • Consider setting aside time immediately to scope out an action plan.
  • Consider those who might assist in the crisis and take steps to eliminate any conflict of interest issues.
  • Consider prosecution which acts as a deterrent for future fraud.
wells report measures
Wells Report Measures

The 2002 Wells Report provides an excellent ranking of the helpful measures for preventing fraud (where 1 is most effective and 8 is least effective):

  • Strong internal controls (1.62)
  • Background checks of new employees (3.70)
  • Regular fraud audit (3.97)
  • Established fraud policies (4.08)
  • Willingness of companies to prosecute (4.47)
  • Ethical training for employees (4.86)
  • Anonymous fraud reporting mechanisms (5.02)
  • Workplace surveillance (6.07)
fraud in not for profit organizations
Fraud in Not-for-Profit Organizations

The website of Clark, Schaefer, Hackett & Company states the following reasons not-for-profit organizations become targets of fraud:

Many smaller not-for-profits just don’t have the personnel size required for a real segregation of duties. They often don’t require much approval for disbursements. And, when fraud is discovered, they frequently don’t prosecute it very aggressively because of the perceived negative publicity.

state and local government susceptibility
State and Local Government Susceptibility

Government bankruptcy is an important issue for fraud prevention and detection because likes business corporations and organizations, governments facing severe financial difficulties can be fertile ground for fraud. Government bankruptcy also may trigger an investigation in order to determine if fraud has contributed to such financial distress.

uncovering elusive fraud
Uncovering Elusive Fraud
  • Analyze account records and trace funds
  • Research background and search for assets
  • Develop confidential sources
  • Interview/interrogate persons and find witnesses
  • Conduct surveillance efforts
  • Guide undercover operations
  • Recognize and preserve physical evidence
forensic and investigative accounting1

Forensic and Investigative Accounting

Chapter 6

Indirect Methods of Reconstructing Income

© 2003, CCH INCORPORATED

4025 W. Peterson Ave.

Chicago, IL 60646-6085

http://tax.cchgroup.com

A WoltersKluwer Company

forensic audit approaches used by the irs
Forensic Audit Approaches Used by the IRS
  • Direct methods involve probing missing income by pointing to specific items of income that do not appear on the tax return. In direct methods, the agents use conventional auditing techniques such as looking for canceled checks of customers, deed records of real estate transactions, public records and other direct evidence of unreported income.
forensic audit approaches used by the irs1
Forensic Audit Approaches Used by the IRS
  • Indirect methods use economic reality and financial status techniques in which the taxpayer’s finances are reconstructed through circumstantial evidence.
minimum income probes
Minimum Income Probes
  • For nonbusiness returns, an agent is to question the taxpayer or the representative about possible sources of income other than reported on the return. If there is no other information in the file indicating potential unreported income, the minimum income probe is met.
minimum income probes1
Minimum Income Probes
  • For taxpayers who are self-employed and file a Schedule C or F, an analysis is made of tax return information to determine if reported income is sufficient to support the taxpayer’s financial activities.
lifestyle probes
Lifestyle Probes

The lifestyle of a taxpayer or employee may give clues as to the possibilities of unreported income. Obvious lifestyle changes may indicate fraud and unreported income:

  • Lavish residence
  • Expensive cars and boats
  • Vacation home
  • Private schools for children
  • Exotic vacations
irs financial status audits
IRS Financial Status Audits

If someone is spending beyond his or her apparent means, there should be concern. If a forensic accountant suspects fraud or unreported income, a form of financial audit may be appropriate that will enable the investigator to check the lifestyles of the possible perpetrators.

indirect methods
Indirect Methods

An indirect method should be used when:

  • The taxpayer has inadequate books and records
  • The books do not clearly reflect taxable income
  • There is a reason to believe that the taxpayer has omitted taxable income
  • There is a significant increase in year-to-year net worth
  • Gross profit percentages change significantly for that particular business
  • The taxpayer’s expenses (both business and personal) exceed reported income and there is no obvious cause for the difference
market segment specialization program
Market Segment Specialization Program

The Market Segment Specialization Program focuses on developing highly trained examiners for a particular market segment. An integral part of the approach used is the development and publication of Audit Technique Guides.

(continued on next slide)

market segment specialization program1
Market Segment Specialization Program

These Guides contain examination techniques, common and unique industry issues, business practices, industry terminology, and other information to assist examiners in performing examinations. A forensic accountant can use this resource to learn about a particular industry.

cash t
Cash T

A cash T is an analysis of all of the cash received by the taxpayer and all of the cash spent by the taxpayer over a period of time. The theory of the cash T is that if a taxpayer’s expenditures during a given year exceed reported income, and the source of the funds for such expenditures is unexplained, such excess amount represent unreported income.

source and application of funds method expenditure approach
Source and Application of Funds Method (Expenditure Approach)

This technique is a variation of the net worth method that shows increases and decreases in a taxpayer’s accounts at the end of the year. The format of this method is to list the applications of funds first and then subtract the sources. If the taxpayer’s applications exceed his or her known cash receipts (including cash on hand at the beginning of the year), any difference may be unreported income.

net worth method
Net Worth Method

The net worth method is a common indirect balance sheet approach to estimating income. To use the net worth method, an IRS agent or forensic accountant must:

  • Calculate the person’s net worth (the known assets less known liabilities) at the beginning and ending of a period
  • Add nondeductible living expenses to the increase in net worth
  • Account for any difference between reported income and the increase in net worth during the year as (a) nontaxable income and (b) unidentified differences
bank deposit method
Bank Deposit Method

The bank deposit method looks at the funds deposited during the year. This method attempts to reconstruct gross taxable receipts rather than adjusted.

forensic and investigative accounting2

Forensic and Investigative Accounting

Chapter 7

Money Laundering and Transnational Financial Flows

© 2003, CCH INCORPORATED

4025 W. Peterson Ave.

Chicago, IL 60646-6085

http://tax.cchgroup.com

A WoltersKluwer Company

definition
Definition

A definition of money laundering that covers both legal and illegal contexts is to take money that comes from one source, hide that source, and make the funds available in another setting so that the funds can be used without incurring legal restrictions or penalties.

steps in money laundering
Steps in Money Laundering

The traditional money laundering process can be divided into three steps:

  • Money is deposited in a bank or financial institution.
  • A set of complex transfers is made to disguise the original source for the money and to hide the audit trail. (This step is called layering the transactions.)
  • The money is integrated back into the legitimate money supply.
cybercash creates new laundering opportunities
Cybercash Creates New Laundering Opportunities

Using the Internet, it will be possible for anyone to transfer large sums of money from one location to another without using a bank and with the transfers being totally anonymous.

cybercash creates new laundering opportunities1
Cybercash Creates New Laundering Opportunities

Today, cybercash transactions are beginning to take place without the need for third parties and the consequential scrutiny that might otherwise exist.

Furthermore, cybercash transfers can be structured so that they originate in a jurisdiction where such activities are not considered illegal.

possible users of money laundering practices
Possible Users of Money Laundering Practices
  • Grant recipients
  • Criminals
  • Political asylum seekers
correspondent banking
Correspondent Banking

Correspondent banking takes place when one bank provides services to another bank to move funds, exchange currencies, and access investment services such as money market accounts, overnight investment accounts, CDs, trading accounts, and computer software for making wire transfers and instant updates on account balances.

correspondent banking1
Correspondent Banking

A payable-through account enables the respondent bank’s clients within the country where the bank is registered to write checks that are drawn directly on the respondent bank’s correspondent account in the United States.

tools banks use to identify money launderers
Tools Banks Use to Identify Money Launderers
  • Monitoring software
  • Currency Transaction Reports (CTRs)
  • Suspicious Activity Reports (SARs)
due diligence laws for banks
Due Diligence Laws for Banks

Laws and regulations require that a bank perform due diligence in its relationships with other banks and important clients as well as continually monitor account transactions. Within banks, due diligence must co-exist with the client’s need for privacy and the secrecy laws existing in many foreign jurisdictions that prevent access to bank documents.

shell banks
Shell Banks

Shell banks are generally high-risk banks that exist without any physical presence in any legal jurisdiction. These banks have a banking license in a specific country, but they are not likely to have a staff and may be operated as part of another business or operated out of an individual’s personal residence.

offshore banks
Offshore Banks

An offshore banking license prevents the organization from transacting banking activities with any citizens of the licensing jurisdiction or transacting business with the currency of the licensing jurisdiction. These bank operations solely exist within international financial transactions.

cash oriented businesses
Cash-Oriented Businesses
  • Currency exchanges
  • Online auctions
  • Casinos
  • Purchasing departments
audit trail
Audit Trail
  • Churning
  • Laundering cycles
    • Illegal cash
    • Deposited into bank
    • Purchase asset
    • Sell asset
    • Documented legal cash
finding money laundering schemes
Finding Money Laundering Schemes
  • Web logs
    • Tracing IP addresses
    • HTTP common logfile format
  • Wire transfers
  • Bank reports
guarding against money laundering
Guarding Against Money Laundering
  • Individual due diligence
    • Business associations
    • Employment
  • Company due diligence in verification procedures
    • Corporate ownership and governance
    • Bearer shares
  • Trust due diligence
    • Trust deeds
    • Beneficiaries
accountant s role as gateway keeper
Accountant’s Role as Gateway Keeper
  • AICPA Auditing Standards Governing Money Laundering
    • SAS No. 54, Illegal Acts by Clients
    • SAS No. 82, Consideration of Fraud in a Financial Statement Audit (now replaced by SAS No. 99)
  • Lack of Reporting Requirement
usa patriot act of 2001
USA Patriot Act of 2001
  • International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (MLAA)
  • Payable-through accounts
  • Enhancements and restrictions under MLAA
  • Reporting requirements under MLAA