Finding Hidden Income and Assets

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Cases of financial fraud often focus on the core issue of where the money went. Successfully carrying out a fraud scheme involves not only taking the money, but covering up the fraud and hiding the money trail. Recent headlines have consumers wondering how someone like John Corzine of MF Global could have no idea where hundreds of millions of dollars went. But skilled financial investigators know there is always a trail, and while the money may or may not be recovered, it can be located.

Cases involving allegations of security fraud, money laundering, misappropriation of assets, income tax fraud, and Foreign Corrupt Practices Act (FCPA) violations require investigators to follow a money trail. However, sometimes it is difficult to know where to start, or where to continue when you’ve come to an apparent dead end.

Third Party Records

Regardless of the type of case for which there is a need to trace the flow of funds, the most reliable source of information is third party records. The records of an alleged fraudster are always suspect. How are we to know if the accounting records have been manipulated?

In contrast, records from a disinterested third party are much more likely to be authentic and to tell the truth about the money. The most common and reliable sources of third party records are banks, brokerage houses, and credit card companies. Except in rare cases in which a secret relationship facilitates the manipulation of these records, they will tell us exactly where money came from and where it went.

Do you know where to start getting these records? It may be simple in the case of a bona fide business with one or two sets of books. Even if the accounting records are manipulated or altered in some way, the records will likely point to financial institutions that hold at least some of the company’s money. The first place to start is the accounts disclosed by the target of the investigation or the accounts documented in the target’s records.

If we’re tracking down a fraudster with no disclosed or confirmed accounts, we will have to be creative. It’s not practical to subpoena every bank in existence, so some precision is required in our investigation. We must look to parties other than the target for information on accounts and activities of the scammer.

For example, an investor in a Ponzi scheme may have canceled checks relating to his investment, and the information on the back of the checks can go a long way in telling us what banks the target was using. Gather together the documentation of multiple victims of the Ponzi scheme, and suddenly several financial institutions used by the fraudster may be revealed. We can then get those records and dig through them to find evidence of other accounts used.

Detailed Analysis

A skilled fraudster is going to tangle a very intricate web of accounts, transactions, people, and entities. Money is intentionally bounced from bank to bank, account to account, and entity to entity in varying amounts with seemingly random timing. These things make it difficult to trace the flow of money and to tie funds to any particular act or scheme.

A capable investigator is going to be able to unravel the mess and make sense of the money movements. This isn’t easy, especially when the number of involved bank or brokerage accounts climbs. Cataloging individual transactions is simple. The more institutions, accounts, and entities involved, the greater the complexity of the analysis.

The difficulty is in ensuring that all accounts and all time periods have been analyzed, and all transactions between these accounts are properly documented. It is easy to get so caught up in the details of individual transactions, that the investigator could lose sight of the big picture. This could result in a failure to analyze all transactions, a missed link between accounts, an overlooked payment to an outside party that be a smoking gun, or a failure to have a complete and accurate tracing of money through the web of accounts.

Don’t think of this as simply a data entry exercise. It is much more than that, and it is a critical part of prosecuting or defending a fraud case. It’s easy for just about anyone to look at one bank statement or check copy and tell me where the money went. It is another thing entirely to look at 100 bank accounts over a period of three or five years and get a complete picture of the flow of funds over time.

Dead End?

What happens when you seem to have come to a dead end in the money trail? There is usually no such thing as a dead end unless you’ve come to a piece of real estate, a boat, an airplane, or a sizable bank account that can be seized (or at least tied up in the legal system for the foreseeable future). Whether a case is civil or criminal, part of the endgame will be recovering the proceeds of the fraud. In many cases, it is the most critical thing, especially for the victims.

If frequent small transactions are all you are seeing, and there is no apparent pot of gold, you just haven’t found the right information yet. Somewhere within all this evidence is a clue to a piece of real estate that was purchased with illicit funds. A payment to a municipality, a utility company, a real estate attorney, or a construction company may hint to the existence of real estate. A payment for a registration fee, to a fuel company, or to an insurance company might lead us to the existence of a luxury yacht.

Again, the key will be to dig deep into the details of the financial transactions without losing sight of the big picture. As questions are raised regarding certain transactions, the investigation still must continue through the remaining transactions. Although one lead may look promising, it should not be the reason to stop going down other roads that may lead to the discovery of other valuable information.

Pulling It All Together

Equally as important as wading through a financial labyrinth skillfully is presenting the findings in a way in which non-accountants can understand it. Attorneys, judges, and juries may need to understand the flow of money in the scheme, so telling a story about the money is critical.

The best way to communicate results to people with varying levels of accounting and financial sophistication is with three approaches: words, numbers, and pictures. The financial investigator should start with an explanation of the work completed and the findings and conclusions. Then set forth summary tables of the most important numbers that are discussed, followed by charts and graphs that further demonstrate the findings. This gives the user an opportunity to see a picture of what has been explained about the disposition of funds or relationships between entities.

When these three approaches are combined, it is much easier for a reader to understand the conclusions that have been drawn after an exhaustive financial analysis. After all, a complex analysis and conclusion that is helpful to your case is not worth anything if the important people can’t understand the opinions and how they were reached.

Tracy L. Coenen, CPA, CFF is a forensic accountant and fraud investigator with Sequence Inc. in Milwaukee and Chicago. She has conducted hundreds of high-stakes investigations involving financial statement fraud, securities fraud, investment fraud, tax fraud, and criminal defense. Tracy is the author of Expert Fraud Investigation: A Step-by-Step Guide and Essentials of Corporate Fraud, and has been qualified as an expert witness in both state and federal courts. She can be reached at [email protected] or 312.498.3661.

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Book Review: Bribery and Corruption: Navigating the Global Risks

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Originally printed in The Value Examiner

Bribery and Corruption: Navigating the Global Risks focuses primarily on the U.S. Foreign Corrupt Practices Act (FCPA), but also provides information on the U.K. Bribery Act and some other key international regulations.

For the uninitiated, the early chapters of the book provide a good overview of the laws, their application, and related regulations. For those already familiar with the laws, these chapters are a good review of the high points of the regulations. Continue reading

Common Sense in Internal Investigations

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Last week Mike Volkov had a great post on his blog about using common sense in your internal investigations. Mike is an FCPA expert, and the guy you want to go to if your company is the target of a government investigation or inquiry.

What makes Mike the better choice than the other attorneys who sell their services for internal investigations and compliance issues (and there are a lot of them!) is his level of experience. He was a federal prosecutor for a long time, and has deep experience with government prosecutions. You don’t want someone who just knows how to push paper. You need someone who knows the government process and how parts of the investigation are going to happen, what chance there may be for settlement, and how the government investigators are going to react to certain pieces of information (beyond the laws, and into the reality). Continue reading

The Justice Department’s Slippery Slope: Enforcement Versus Regulation

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Guest post by Michael Volkov, Esq.

The Department of Justice is proud of its record on FCPA enforcement. They take credit whenever and wherever they can. They trumpet every settlement. They proudly proclaim that over half of last year’s criminal fines were collected for FCPA violations. They are entitled to claim success.

It is hard to argue against prosecutions of private companies and individuals who engage in foreign bribery. Such conduct skews competition in the global marketplace, undermines the integrity of foreign governments and threatens to destabilize governments. These harms are more than evident – they are inescapable and persuasive. Our national interest supports reducing foreign bribery to protect the integrity of the global economy and foreign governments. Continue reading

Article at CFO.com: Investigating a Compliance Failure

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How to determine the right mix of expertise for a fraud investigation.

By Tracy Coenen, Contributor to CFO.com

It’s every CFO’s worst nightmare: despite your best efforts, your company’s compliance program has failed. There are credible reports of fraud and corruption inside the company, and an initial analysis of the situation confirms a problem. An internal investigation is necessary to determine the magnitude of the fraud, the parties involved, and the company’s financial and reputational exposure under government regulations.

How should you proceed? These investigations are often high stakes, so it is important to do things the right way from the start. In-house counsel should be involved in any situation involving allegations or evidence of fraud. Once executives have sufficient reason to believe the allegations are credible, they should involve outside counsel as well. Continue reading

FCPA Guidance to be Released by Department of Justice

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Guest Post by David Quinones, Executive Director, International Association for Asset Recovery

While it was just a brief comment during a lengthy speech, United States Assistant Attorney General Lanny Breuer’s mention of impending guidance on the resurgent Foreign Corrupt Practices Act (FCPA) from the Justice Department

Amendments made to the 1977 Act in 1988 said that consultations between regulators, department heads and legislators should be held to devise guidance and ensure “the business community would be assisted by further clarification.” But the clarification never came. Starting in 2009, FCPA enforcement increased in size and scope, and businesses snared in controversy over what had been business-as-usual chirped that the goal posts had moved. Continue reading

Michael Volkov on Internal Investigations: Best Practices

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Guest Post by Michael Volkov

In-House counsel and corporate compliance officers dodge bullets everyday as they stare down the barrels of aggressive prosecutors, regulators, civil litigants, whistleblowers, disgruntled employees and shareholders prodded by trial attorneys to file derivative suits at the drop of a hat. In the face of all of these risks, internal investigations have become commonplace and a standard defensive tactic for a company to regain some leverage, learn the scope of a potential problem and then develop a plan for resolving a particular issue.

All too often, companies follow the rote formula developed in the Sarbanes-Oxley era of the early 2000s. Those same formulas are being applied in the Foreign Corrupt Practices Act, and in more discrete global anti-corruption, money laundering, export compliance and antitrust enforcement matters. Continue reading

Article at CFO.com: When Your Compliance Program Fails

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cfo.comThe steps to take when an employee comes forward with a fraud tip, whether the allegations are false or not.

By Tracy Coenen, Contributor to CFO.com

You think your company has a robust compliance program to prevent financial-statement fraud, asset misappropriation, Foreign Corrupt Practices Act violations, and other financial frauds. There are checks and balances in place, with lawyers, internal auditors, executives, and the board of directors keeping an eye on things.

Still, the unthinkable happens. Reports of a major internal fraud surface, and the scheme may involve several members of middle or upper management. The information – received through an employee’s whisper, an internal hotline, or the rumor mill – has enough substance to be deemed credible, yet not enough to know exactly who is involved, how wide-reaching the fraud may be, the amount of money stolen, or the exposure to government action and penalties. Continue reading

When Your Compliance Program Fails

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The steps to take when an employee compes forward with a fraud tip, whether the allegations are false or not.

Tracy L. Coenen – CFO Magazine

You think your company has a robust compliance program to prevent financial-statement fraud, asset misappropriation, Foreign Corrupt Practices Act violations, and other financial frauds. There are checks and balances in place, with lawyers, internal auditors, executives, and the board of directors keeping an eye on things.

Still, the unthinkable happens. Reports of a major internal fraud surface, and the scheme may involve several members of middle or upper management. The information – received through an employee’s whisper, an internal hotline, or the rumor mill – has enough substance to be deemed credible, yet not enough to know exactly who is involved, how wide-reaching the fraud may be, the amount of money stolen, or the exposure to government action and penalties.

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CFO Magazine: Creating a Culture of Compliance

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I was recently quoted in CFO Magazine for an article on creating an ethical culture within companies. Below are a few excerpts, including my comments.

In December, the federal government cited a “lax corporate control environment” at Alcatel, which extended right up to the CEO and CFO, as a primary cause of the scandal. It was a finding that more companies should take to heart.

Nearly a decade after the passage of the Sarbanes-Oxley Act, and amid heightened FCPA enforcement, the responsibility for shaping what is often called a “culture of compliance” inside U.S. corporations falls heavily on the C-suite — and, more than ever, on the CFO. Continue reading