Follow the greenback road: criminal's downfall: what good is all that loot if you can't spend it?With a sixth-grade education, legendary gangster Al Capone thought he was smart enough. By the time he was 26, "Scarface" had 1,000 employees and a weekly payroll of $300,000. In the 1930s, when the average American worker made about $2,400 annually, Capone was raking raking of an elephant—see back raking. in more than a hundred million dollars a year. The mobster, thought to be responsible for more than 300 gangland executions, was chauffeured around the mean streets of Chicago in a seven-ton limousine with 18 bodyguards. He had everything money could buy. But Alphonse Capone wasn't so smart after all. He'd thought of protecting himself from all but his worst enemy: the Internal Revenue Service. Capone never bothered to declare his income and pay tax on it. So Elliot Ness and the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. asked a simple but powerful question: How could someone live so well on nothing? A federal jury in the Northern District of Illinois came to the only obvious conclusion--Capone had evaded his tax obligations. On October 7, 1931, the legendary gangster's career came to an abrupt stop when he was sentenced to 11 years in prison. Capone wasn't the first or the last to try to escape the cold logic of simple arithmetic--if you spend more than you legitimately bring in, the difference could come from illegal sources. Another Elliott--that is Elliott Leafy leaf·y adj. leaf·i·er, leaf·i·est 1. Covered with or having leaves. 2. Consisting of leaves: Spinach is a leafy green vegetable. 3. Similar to or resembling a leaf. , CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , of KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm) KPMG Kaiser Permanente Medical Group KPMG Keiner Prüft Mehr Genau (German) KPMG Kommen Prüfen Meckern Gehen in Washington, D.C.--says, "Financial investigators know the credo by heart: Follow the money." In this article we will explore the most effective ways that fraud examiners and prosecutors prove that funds were derived from criminal activity. CPAs specializing in forensic accounting Forensic accounting, sometimes called investigative accounting, involves the application of accounting concepts and techniques to legal problems. Forensic accountants investigate and document financial Fraud and white-collar crimes or litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. support regularly employ the same methods, because they can help uncover embezzlements, bribes, drug money and other illegal income. COMPILE A FINANCIAL PROFILE To begin, the CPA develops a financial profile of the subject under suspicion. "The most important and difficult part of a net worth investigation is gathering enough evidence to prepare a financial profile," Leary said. The goals are to obtain sufficient data to document the suspect's changes in net worth or income and to determine his or her typical spending habits. According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. Leary, "If financial records are not readily available, they often can be developed from alternative sources, such as interviews with the suspect, acquaintances and business associates and from public documents, including real estate and business filings and court records." Once you determine the comparative financial statements are complete, you can confirm their validity by addressing the following questions. Assets * When and from whom were they acquired? * How much did they cost? * What was the manner of payment? (Currency, check or cashier's check cashier's check n. a check issued by a bank on its own account for the amount paid to the bank by the purchaser with a named payee, and stating the name of the party purchasing the check (the remitter). , for example.) * Where did the suspect get the funds to purchase them? * What documentation exists for the transactions? Liabilities * What were the original amounts of the liabilities? * What are the current balances? * When were the liabilities incurred? * What was the purpose of the loans or debts? * What security or collateral, if any, was given? * Who was the creditor or lender? * Were any of the debts written off?. * From what sources were the liabilities paid? * What documentation exists? Sources of funds * What were the total amounts of funds or income during the questioned periods? * From what sources were the funds received? * How, when and where were the funds deposited? * What documentation exists? Expenditures or applications of funds * What were the total amounts spent? * What was the manner of payment? * From what sources were the expenditures made? * What were the expenditures for? * What documentation exists? Money from any source--lawful or not--can be disbursed in only four ways: It can be spent, saved, used to acquire assets or to pay debts. "The choice of method used to prove illegal income is largely determined by how most of the money was spent. All are variations of funds statements funds statement See statement of cash flows. that CPAs use regularly in accounting for the inflows and outflows of a company's money," says Lear. THE ASSET METHOD Investigators use this technique (see exhibit 1, above) to prove the target's net worth materially increased during the time of the suspect illegal activity. CPAs begin by comparing the beginning and ending net worth, then adjust for known income and expenditures. The result is income from unknown sources. They follow these rules when using this method. Note that items 2 and 3 give the benefit of the doubt to the subject under scrutiny. * They value assets at original cost, ignoring appreciation or depreciation. * They overestimate o·ver·es·ti·mate tr.v. o·ver·es·ti·mat·ed, o·ver·es·ti·mat·ing, o·ver·es·ti·mates 1. To estimate too highly. 2. To esteem too greatly. funds available to the subject from legitimate sources. * They underestimate expenditures on legitimate items--especially hard-to-document living costs, such as food and entertainment. For an example of a computation using the asset method, see exhibit 2, page 85. The difference between the target's income and expenses equals the increase (or decrease) in net worth from year one to year two which can be attributed to known sources. In exhibit 3, page 85, it is $13,985. When you subtract A relational DBMS operation that generates a third file from all the records in one file that are not in a second file. the increase in net worth from known sources from the total increase in net worth, you determine the amount from unknown sources. The results reflect that nearly $41,000 might be attributed to illegal income (see exhibit 4, at right). In some situations, the suspect will attempt to explain away this mysterious wealth as coming from legitimate sources. Later in this article, we will discuss ways CPAs can rebut To defeat, dispute, or remove the effect of the other side's facts or arguments in a particular case or controversy. When a defendant in a lawsuit proves that the plaintiff's allegations are not true, the defendant has thereby rebutted them. TO REBUT. these defenses. THE EXPENDITURES METHOD The formula (see exhibit 5, at right) for this analysis is the essence of simplicity. "The expenditures method is easy for jurors to comprehend," says Leary, who has testified as an expert accounting witness in a number of court trials. "For a given period, you simply take the subject's total expenditures and deduct the known sources of funds. The difference is funds from unknown sources." In one of Leary's cases, the defendants bought items such as $2,200 alligator alligator, large aquatic reptile of the genus Alligator, in the same order as the crocodile. There are two species—a large type found in the S United States and a small type found in E China. Alligators differ from crocodiles in several ways. shoes, $300 bottles of cologne and a dozen automobiles. "They were known for their shopping sprees on Rodeo Drive Rodeo Drive (IPA: /roʊˈdeɪoʊ/) generally refers to a famous three-block long stretch of boutiques and shops in Beverly Hills, California, United States, although the street stretches further north and south. in Hollywood," Leary said. "But they could not identify a legitimate source for their lavish spending. Because of the strength of the accounting evidence, the subjects were convicted on money laundering The process of taking the proceeds of criminal activity and making them appear legal. Laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds. charges." Funds include money received from all sources--loans, salary, inheritance, gifts and cash on hand at the beginning of the period. See exhibit 6, at right, for an example of the same computation using the expenditures method. THE BANK DEPOSITS METHOD This formula (see exhibit 7, at right) operates on the assumption that only two things can be done with money: It can be deposited or spent. Leary says, "The bank deposits method should be used when the CPA can substantiate To establish the existence or truth of a particular fact through the use of competent evidence; to verify. For example, an Eyewitness might be called by a party to a lawsuit to substantiate that party's testimony. that the illegal income has been deposited in financial institutions." See an example in exhibit 8, page 87. REBUTTING DEFENSES TO NET WORTH ANALYSES It is common for a subject to attempt explaining away income from unknown sources. Some of the usual defenses are the money came from * Cash hordes Hordes may refer to:
* Gifts from friends and relatives. * Private loans. * Spouse's funds. * Gambling winnings. In each of these cases, the CPA must be prepared to negate ne·gate tr.v. ne·gat·ed, ne·gat·ing, ne·gates 1. To make ineffective or invalid; nullify. 2. To rule out; deny. See Synonyms at deny. 3. the specific defense. A CPA can rebut the cash hordes explanation by showing the subject borrowed money, lived penuriously pe·nu·ri·ous adj. 1. Unwilling to spend money; stingy. 2. Yielding little; barren: a penurious land. 3. Poverty-stricken; destitute. , made large installment purchases, was delinquent on debts, had a poor credit rating or filed for bankruptcy. Gambling winnings often can be negated by proving the subject did not list them on income tax returns. CPAs typically can debunk de·bunk tr.v. de·bunked, de·bunk·ing, de·bunks To expose or ridicule the falseness, sham, or exaggerated claims of: debunk a supposed miracle drug. the excuse of gifts or loans from friends, relatives and spouses by proving the alleged providers were financially incapable of generating such funds. In one of Leary's cases, a defendant claimed she had received substantial income from a relative. Leary was able to prove otherwise. "This person hardly existed in a financial sense. He had no job, no bank account, no credit cards and no tax returns" he said. Another way a CPA can rebut the defense that money was received from acquaintances is to show the lack of documentation reflecting the transaction (for example, the absence of bank withdrawals by the alleged provider). I'm frequently asked about the best method to hide illegal loot and get away with it. My answer? Secretly bury the cash in the middle of the desert in the dark of night. Tell no one. Wait until the statute of limitations A type of federal or state law that restricts the time within which legal proceedings may be brought. Statutes of limitations, which date back to early Roman Law, are a fundamental part of European and U.S. law. expires before you dig it up and spend it. Although I suspect that is what a smart criminal would do, I've never encountered one; Elliott Leary says he hasn't either. But as long as dumb criminals like Al Capone and others spend their ill-gotten booty BOOTY, war. The capture of personal property by a public enemy on land, in contradistinction to prize, which is a capture of such property by such an enemy, on the sea. 2. , they can eventually be caught--if CPAs follow the greenback greenback, in U.S. history, legal tender notes unsecured by specie (coin). In 1862, under the exigencies of the Civil War, the U.S. government first issued legal tender notes (popularly called greenbacks) that were placed on a par with notes backed by specie. road.
Exhibit 1: Asset Method
Assets
- Liabilities
= Net worth
- Prior-year net worth
= Net worth increase
+ Living expenses
= Income (or expenditures)
- Funds from known sources
= Funds from unknown sources
Exhibit 2: Schedule of Increases (Decreases) in Net Worth
Year one Year two
Assets (at cost)
Cash-on-hand $ 0 $ 0
Bank account balance 3,500 6,500
Stocks and bonds 6,500 10,500
Real estate-residence 135,000 135,000
Automobile 23,000 23,000
Boat 0 23,500
Total $ 168,000 $ 198,500
Liabilities
Mortgage $ 92,000 $ 73,000
Automobile 13,275 7,850
Total $ 105,275 $ 80,850
Assets $ 168,000 $ 198,500
Liabilities 105,275 80,850
Net worth $ 62,725 $ 117,650
Note that in the example the target's net worth rose by $54,925 during
year two. To determine the source of such increase, the fraud examiner
finds the suspect's known income during year two and subtracts known
expenses for year two.
Exhibit 3: Increases (Decreases) in Net Worth From Known Sources
Year two
Income
Salary $ 28,250
Commissions 7,000
Total $ 35,250
Expenses
Credit card payments $ 2,540
Living expenses 18,725
Total 21,265
Difference $ 13,985
Exhibit 4: Funds From Unknown Sources--Asset Method
Total increase in net worth $ 54,925
Increase attributed to known sources (13,985)
Funds from unknown sources $ 40,940
Exhibit 5: Expenditures Method
Expenditures
- Known source of funds
= Funds trom unknown sources
Exhibit 6: Funds From Unknown Sources--Expenditures Method
Year two
Application of funds (expenses):
Increase in bank balance $ 3,000
Purchase of stocks 4,000
Down payment on house 0
Automobile payments--old and new 5,425
Purchase of boat 23,500
Mortgage payments 19,000
Payoff of former house 0
Credit card payments 2,540
Other expenses 18,725
Total $ 76,190
Less: Known sources of funds:
Cash on hand $ 0
Salary 28,250
Commission 7,000
Sale of house 0
Total $ 35,250
Funds from unknown or illegal sources $ 40,940
Exhibit 7: Bank Deposits Method
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
Exhibit 8: Funds From Unknown Sources--Bank Deposits Method
Year two
Total deposits: $ 58,470
Redeposits 250
Net deposits $ 58,220
Outlays:
Purchase of stocks 4,000
Down payment on house 0
Mortgage payment 19,000
Payoff of former house 0
Car payment 5,425
Boat purchase 23,500
Credit card payments 2,540
Other expenses 18,725
Total 73,190
Less:
Net bank disbursements * 55,220
Equals:
Cash expenditures 17,970
Plus:
Cash expenditures 17,970
Equals:
Total receipts (income) $ 76,190
Less:
Cash on hand 0
Salary 28,250
Commission 7,000
Sale of house 0
Total funds from known sources $ 35,250
Funds from unknown sources $ 40,940
* Net disbursements:
Net bank deposits $ 58,220
Plus: Beginning balance 3,500
Equals: Net bank funds available 61,720
Less: Ending balance 6,500
Equals: Net bank disbursements $ 55,220
QUOTE: "The income tax law is a lot of bunk bunk, bunker large storage bin. bunk forage forage, usually ensilage stored in a large storage bunk and made available to cattle or other livestock along a face of the storage. . The government can't collect legal taxes from illegal money" --Attributed to Al Capone Al Capone was convicted on felony felony (fĕl`ənē), any grave crime, in contrast to a misdemeanor, that is so declared in statute or was so considered in common law. income tax evasion The process whereby a person, through commission of Fraud, unlawfully pays less tax than the law mandates. Tax evasion is a criminal offense under federal and state statutes. A person who is convicted is subject to a prison sentence, a fine, or both. for the years 1925-1929 and misdemeanor failure to file income tax returns for 1928-1929. He was acquitted on conspiracy to violate probation laws from 1922-1931. For more on Capone's trial, go to www.chigagohs.org. AICPA AICPA See American Institute of Certified Public Accountants (AICPA). RESOURCES Books CPA's Handbook of Fraud and Commercial Crime Prevention (# 056504) Financial Reporting Fraud: A Practical Guide to Detection and Internal Control (# 029879) CPE (Customer Premises Equipment) Communications equipment that resides on the customer's premises. CPE - Customer Premises Equipment Introduction to Fraud Examination and Criminal Behavior (# 730275) Identifying Fraudulent Financial Transactions (# 730244) Finding the Truth: Effective Tehniques for Interview and Communication (# 730164) To order, go to www.cpa2biz biz n. Informal Business. biz Noun Informal business Noun 1. .com. AICPA's Antifraud Initiatives Antifraud and Corporate Responsibility Resource Center, www.aicpa.org/antifraud/homepage/htm. * SAS (1) (SAS Institute Inc., Cary, NC, www.sas.com) A software company that specializes in data warehousing and decision support software based on the SAS System. Founded in 1976, SAS is one of the world's largest privately held software companies. See SAS System. no. 99 information, * Management Antifraud Programs and Controls (SAS no. 99 exhibit). * Fraud Specialist Competency Model. * Free corporate fraud prevention training and CPE. * Academia outreach and assistance. * Other antifraud activities. JOSEPH T. WELLS, CPA, CFE CFE Conventional Forces in Europe (treaty) CFE Cash Flow to Equity (finance/accounting) CFE Comisión Federal de Electricidad (México) CFE Certified Fraud Examiner , is founder and chairman of the Association of Certified Fraud Examiners Established in 1988 the Association of Certified Fraud Examiners is the professional organization that governs professional fraud examiners. Its activities include producing fraud information, tools and training. and professor of fraud examination at the University of Texas at Austin “University of Texas” redirects here. For other system schools, see University of Texas System. The University of Texas at Austin (often referred to as The University of Texas, UT Austin, UT, or Texas . Mr. Wells won the Lawler Award for the best JofA article in 2000 and 2002 and has been inducted into the Journal of Accountancy Hall of Fame. His e-mail address See Internet address. e-mail address - electronic mail address is joe@cfenet.com. |
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