Money Laundering vs. Hidden Assets

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Oct 20, 2013 (4 years and 2 months ago)

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March 28, 2013

Money Laundering vs. Hidden Assets


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






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Interplay Between Money Laundering

and Hidden Assets

3

Hidden
Assets

Money Laundering


Definition of and Background of Money
Laundering



Globally, money laundering is estimated to be between $500 billion to a
trillion annually
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ACFE Fraud Manual defines money laundering as:


the disguising of the existence, nature, source, ownership, location,
and disposition of property derived from criminal activity





Black’s 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. DEP’T OF THE TREASURY, PROPOSEDADDENDUM TO AICPA AUDIT RISK ALERT: SECURITIES
INDUSTRY DEVELOPMENTS

MONEY 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







15

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”.


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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

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








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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 don’t 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 don’t 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 man’s asset is another’s 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

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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



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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, driver’s 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 3
rd

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

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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 person’s 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






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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





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Money Laundering vs. Hidden Assets

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Questions?

Money Laundering vs. Hidden Assets


32

Todd Sigler Bio


Summary of Experience


Todd Sigler is a Manager in McGladrey’s 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



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.



Phone:

213.330.4634


Email:

todd.sigler

@mcgladrey.com


Money Laundering vs. Hidden Assets

Presenter Contact Information:


Todd Sigler

McGladrey LLC

515 S. Flower St., 41
st

floor

Los Angeles, CA 90071

Email: todd.sigler@mcgladrey.com

Phone: 213.330.4634






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