Second Edition Criminal Financial Investigations The Use of Forensic Accounting Techniques and Indirect Methods of Proof Gregory A Pasco Second Edition Criminal Financial Investigations The Use of Forensic Accounting Techniques and Indirect Methods of Proof Second Edition Criminal Financial Investigations The Use of Forensic Accounting Techniques and Indirect Methods of Proof Gregory A Pasco Boca Raton London New York CRC Press is an imprint of the Taylor & Francis Group, an informa business CRC Press Taylor & Francis Group 6000 Broken Sound Parkway NW, Suite 300 Boca Raton, FL 33487-2742 © 2013 by Taylor & Francis Group, LLC CRC Press is an imprint of Taylor & Francis Group, an Informa business No claim to original U.S Government works Version Date: 20120713 International Standard Book Number-13: 978-1-4665-6264-6 (eBook - PDF) This book contains information obtained from authentic and highly regarded sources Reasonable efforts have been made to publish reliable data and information, but the author and publisher cannot assume responsibility for the validity of all materials or the consequences of their use The authors and publishers have attempted to trace the copyright holders of all material reproduced in this publication and apologize to copyright holders if permission to publish in this form has not been obtained If any copyright material has not been acknowledged please write and let us know so we may rectify in any future reprint Except as permitted under U.S Copyright Law, no part of this book may be reprinted, reproduced, transmitted, or utilized in any form by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying, microfilming, and recording, or in any information storage or retrieval system, without written permission from the publishers For permission to photocopy or use material electronically from this work, please access www.copyright com (http://www.copyright.com/) or contact the Copyright Clearance Center, Inc (CCC), 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400 CCC is a not-for-profit organization that provides licenses and registration for a variety of users For organizations that have been granted a photocopy license by the CCC, a separate system of payment has been arranged Trademark Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Visit the Taylor & Francis Web site at http://www.taylorandfrancis.com and the CRC Press Web site at http://www.crcpress.com To my wife and family for their support, encouragement, and patience To the administrative staff and faculty at Colorado Technical University, Sioux Falls, South Dakota, for the opportunity and assistance in completing this book Contents Foreword Preface About the Author xiii xv xvii Introduction What Is Forensic Accounting? Criminological Theories Motive Opportunity Financial Crimes Legal Requirements 2 The Financial Disciplines General Business Operations Providing Goods Providing Services Providing Ideas Record Retention Basic Accounting Books and Records Basic Tax Law Regulatory Agencies 9 10 10 11 12 13 15 16 Characteristics of Financial Crimes 19 Spending Saving The Structure Conspiracy Fraud 20 21 21 22 25 Categories of Theft 29 Theft Burglary 30 30 vii viii Contents Larceny Robbery Embezzlement Swindle Schemes 31 31 31 31 39 The Paper Trail 45 What Is the “Paper Trail?” What Does the Paper Trail Look Like? Check Registers Stocks and Bonds Real Property Vehicles Other Assets Jewelry Furs and Clothing Collectibles Antiques Philately Numismatics Artwork Liabilities 45 46 46 47 48 50 51 52 52 52 53 53 53 54 55 Collecting and Preserving Evidence 57 Interviewing 58 Gathering Documentary Evidence 63 Documentation Relevance Materiality Competency 63 64 65 65 Gathering Evidence through Observation 83 Observation Surveillance Moving Surveillance Electronic Surveillance and Monitoring Telephonic Intercepts Undercover Operations and Body Wires Search and Seizure Reasonable or Unreasonable 83 84 87 89 89 90 92 93 Preparation for Trial 247 likely that the defense will This gives the defense the opportunity to challenge the investigator’s impartiality and competence The expert witness will be given sufficient time to review the investigative report and ask any questions pertinent to the computations If the expert is uncomfortable with any of the deductions drawn by the investigator or the prosecutor, these areas will be modified or corrected to the satisfaction of the expert witness The expert witness will be responsible for providing an easily­ understood explanation of the evidence that shows the culpability of the defendants The pretrial interview will cover both the direct testimony on the case and evidence, as well as an anticipated or “mock” cross-examination to ensure that the case is solid and ready for trial Usually, an expert witness will provide a written summary of his or her qualifications to the court and the defense Both the judge and the defense may ask any questions as to the expert’s qualifications when he or she is offered as an expert in the trial At this point, the case is ready for trial Coordinating and accommodating the witnesses needs to be handled pleasantly and efficiently Out-of-town witnesses need to be provided with rooms and meal expenses, and the prosecution needs to ensure that enough witnesses are available so as not to delay the trial Often a witness coordinator will assist in facilitating this aspect of the trial The Trial The standard procedures for criminal cases are followed from the filing of motions to the turning over of the case to the jury A few items are unique in the presentation of indirect methods of proof cases The prosecution will usually file a motion to have the witnesses excluded from the courtroom until after they have testified This is to prevent the testimony of one witness from having an effect on the testimony of another The prosecutor will ask for an exception to this motion for the case agent and the expert summary witness, if one is used The prosecutor will request that the case agent be present throughout the trial at counsel’s table to assist in the presentation The expert summary witness must be present in the courtroom throughout the trial (usually in the spectator area) The expert will prepare his or her own schedules and computations based on the evidence as it is introduced and accepted by the court These are the schedules that the expert will use in providing the summary of the case testimony To ensure a complete and accurate summation, the expert must be present during the entire trial The expert summary witness will also note the evidence accepted by the court independently to support his or her ­testimony at the end of the case presentation 248 Criminal Financial Investigations During the trial, the investigator should follow the questioning of each witness, using the pretrial interview fact sheet, to ensure that all of the documents and testimony is obtained before the witness is excused Another option is to use a copy of the list of witnesses and exhibits, and to check off the documents as they are offered and accepted into evidence The investigator should also note any questions that the prosecutor should ask before closing the witness’ testimony and assure the prosecutor that all of the exhibits needed were introduced Special attention should be given to the testimony of the witnesses on cross-examination The investigator should offer suggestions for redirect questioning and be able to locate any of the exhibits the prosecutor requests for redirect questioning The same procedures are followed throughout the case in chief and become very important for cross-examination during the presentation of the defense case Due to the complex nature of a financial case and the volume of witnesses and exhibits, these trials often take weeks or months to complete The work of the prosecution team does not end when the court is adjourned for the day The team meets after court to review and analyze what occurred during the day and plan the strategy for the following day Each evening is similar to the halftime break in a football game; adjustments are made to facilitate the case presentation The prosecutor, investigator, and the expert witness are all involved in analyzing the daily results and progress of the criminal case If an additional witness is identified and needed, the investigator must obtain that witness’ accessibility to appear in court in the evening, during breaks, or get assistance in locating and subpoenaing the witness After the defense has presented its case and rested, the prosecution will call any rebuttal witnesses to negate information or claims made by the defense during its presentation The trial plan for this phase of the trial is usually prepared during the defense’s presentation and solidified in the evening conferences Again, if new witnesses are needed for rebuttal, they must be located and served a subpoena to appear If time is available (­lunchtime, evenings­, and weekends), the same steps are followed that were used in ­preparing the initial set of witnesses Once the case presentation is complete, the jury will retire for deliberation The prosecution will have custody and control of the evidence admitted for the case, and the prosecution team will be required to provide any of the evidence the jury asks for to assist them in their deliberations The next step is to anxiously await the jury’s decision Standard procedures are followed after a conviction The evidence is turned over to the court, the witnesses are paid and released from the subpoenas, and the sentencing process begins The judge will request a presentence report from the probation department Probation will interview both sides in the case The report will then be filed with the court 20 Innovative Applications New areas have emerged in which the use of indirect methods of proof in the investigation of financial activities have gained prominence The worldwide expansion of international white collar crimes, corporate manipulations, and the global concerns relating to terrorism has shown the need for competent criminal financial investigators The size and scope of white collar financial crimes, such as the Bernie Madoff case, the “oil for food” scandal, the recent corruption discovered in several government agencies and subsidized companies, and the money flow supporting terrorist organizations around the world, have pushed financial investigating to the forefront of most law enforcement and security agencies Corporate fraud has resulted in the inflation of consumer goods and a reduction in product quality Investment and consumer fraud has eaten away at retirement investments, adversely affected public costs for insurance, and raised consumer fears on advertising veracity and product safety Financial fraud through charitable and business entities has been found to support and pay for terrorist activities that include training and recruitment In many of these cases relatively new laws have been written to recover as much as possible of the ill-gotten gains from major financial fraud schemes In addition, being able to follow the money and stop its flow to terrorist organizations has been a major tool used by governments in the War on Terror This chapter will show how the use of indirect methods of proof and forensic accounting techniques can be applied to counter at least the financial harm from these emerging areas of fraud and corruption The three primary applications are forfeiture, money laundering, and the freezing of currency being used and directed toward terrorist operations Forfeiture Forfeiture statutes are divided between civil and criminal litigation Civil forfeiture is used to take property used in the commission of a crime or acquired from the commission of a crime For example, if a person uses their car to commit a burglary and to remove the stolen property, then it can be seized and forfeited through civil litigation Criminal forfeiture is brought about by a governing authority against property as a punishment for 249 250 Criminal Financial Investigations criminal behavior In either instance, indirect methods of proof and forensic accounting techniques are a valuable tool in identifying and quantifying the property to be forfeited These methods are most often used in criminal forfeitures when substitute asset provisions have been codified in the respective laws Substitute asset provisions allow for the government to trace illegally obtained funds over time, and seize and forfeit assets that have been obtained with the money that can be tied to the illegal activity The concept applied is that illegally obtained or unreported income keeps its original nature no matter how many times it is used to acquire new items of value If $100,000.00 is taken through fraud and used to purchase gold coins, and the coins are sold to purchase a yacht, the $100,000.00 yacht becomes the result of the initial fraud and is subject to forfeiture Tracing the funds, or following the money, is achieved through the application of indirect methods and forensic accounting investigative techniques As examples: The financial investigation of a health care provider discloses that false claims have been filed and paid over a 3-year period The false claims resulted in a minimum harm of $1.2 million (minimum harm determined by the indirect method of proof on the business operation) The illegally obtained funds were used by the two owners of the business to buy some new equipment for the business and the rest split between the two for the purchase of personal assets The illegal proceeds were traced by following the money by preparing net worth computations on the two owners The net worth computations revealed that $500,000.00 went to each of the two owners Their shares of the false claim proceeds were used to purchase two new vehicles each, gold coins, jewelry and other personal items, as well as $120,000.00 in new business assets The financial investigation now becomes the starting point from which the money can be followed to see where it is currently Personal and business assets are often in a state of change or transition Older assets are sold or traded in to acquire newer assets to keep the items up to date or to add new items to one’s inventory of lifestyle improvements Since the false claim proceeds came in the form of checks to the business, the checks were cashed or deposited to bank accounts, and the funds used by the two owners Each owner reported legitimate income The substitute provision would then allow for the forfeiture of assets that were acquired with the fraudulent receipts If these assets are still in the possession of the two owners, they could be subject to forfeiture If they have subsequently been converted to new or different assets, the substitute provisions would allow the government to file the forfeiture against the Innovative Applications 251 new assets The logic behind the statutory provisions is that none of the new assets could have been acquired from any legitimate income and therefore the perpetrator is not entitled to keep the assets If  any assets were acquired over the amount of legitimate income, these assets could be subject to forfeiture since the only source for the additional funds would be the false claims income The vehicles, coins, and jewelry could be subject to the forfeiture proceedings if it could be shown that the funds used to acquire these assets had to have been generated by the false-claim fraud scheme The investigation of an individual reveals that through corporate embezzlement, the individual stole $480,000.00 over years The embezzlement is discovered years after it occurred and is successfully prosecuted The embezzler has used the proceeds to enhance his lifestyle Any assets that have been identified through the financial investigation as being purchased with the proceeds are then traced to the current holdings of the perpetrator By following the money through various asset conversions, it was shown that the bulk of the embezzled funds were eventually used to purchase a duplex in Florida that was used as a winter home Under the substitute asset provisions of the forfeiture law, the Florida property would be subject to forfeiture proceedings In this case, if the known amount of the financial crime was less than the cost of the substituted asset (the Florida property), the property could still be seized, forfeited, and then sold to obtain the amount of money decided upon by the court Depending on the statutory provisions, either part or all of the funds used in the acquisition of a substitute asset may need to be shown as generated from the illegal acts or fraud committed The respective statutes will also define the criminal violations necessary as a precursor to the initiation of the forfeiture action Money Laundering The term money laundering applies to the attempt to change the appearance of funds from an illegal action to that of legitimate financial gains This can apply to the proceeds from any financial fraud, any illegal source of funds, or just the failure to report legitimate income for the purpose of facilitating tax fraud Money laundering can be done in a variety of ways Offshore bank fronts, dummy corporations, and intricate banking transfers and manipulations have all been used to try to give illegal funds a legitimate appearance, to conceal the nature of the funds from taxable to nontaxable sources, or to hide 252 Criminal Financial Investigations the true origin of the funds Indirect methods of proof and forensic accounting techniques can help the investigator to follow the money backward in time to discover its true nature or forward to identify the persons involved in facilitating the money laundering scheme If someone has made the decision to violate laws for personal gain and taken the time to develop, implement, and maintain an elaborate fraud scheme or criminal enterprise, it only stands to reason that they will want to maximize their gains and have it appear to have been generated from honest hard work or good fortune If the scheme has operated for any period of time, the individual will have enjoyed a rising level of status in the community and will whatever is necessary to avoid having the new social and financial status tainted by fraud and deceit Since most fraud schemes are relatively intricate, the major fraud artist spends the majority of his time keeping the scheme concealed and running smoothly Due to this fact, those conducting major fraud schemes and multi­ million dollar tax schemes not have the time or expertise to formulate an adequate money laundering scheme with which to conceal their gains This has resulted in the birth of a new criminal industry: money laundering A  new criminal element skilled in financial record keeping, and national and international financial regulation have set up shop to accommodate drug cartels, organized criminal enterprises, and the larger financial and tax fraud perpetrators For a fee ranging between 2% to 10% of the money laundered, they transform the nature and character of the monies made through these activities The small time or financial crime beginner or the individual tax evader does not have the contacts, business acumen, or resources to employ a professional money launderer Although the fraud scheme being perpetrated may involve substantial amounts of money, it would pale in comparison to cases such as Bernie Madoff, the major drug cartels, organized crime, and international corporate fraud That does not stop them from taking various steps to conceal the true nature of their receipts or to rely on the hope that their scheme will go unnoticed This does not preclude the investigator from pursuing money laundering charges in conjunction with the primary charges for the financial crime The subject must however meet all the element provisions of the money laundering statute The definition of money laundering is relatively short and simple: Any actions that are designed to hide or alter the nature, origin, ownership, or control of money to avoid reporting requirements under laws or regulations; or to conceal the fact that the money was obtained by unlawful means How these violations look when being performed by the financial criminal? Several methods have been used to attempt to achieve this goal To hide or alter the money, an individual may divert the funds to an offshore bank or company, and withdraw the money in the form of loans on which no Innovative Applications 253 actual repayments are made An individual may also open a bank account in a false name or use a nominee (an account opened in the name of a relative or acquaintance over which they have full control) The money is thereby concealed as to true ownership and monies taken back out are altered to look like a gift or personal loan, which also falsifies the origin of the funds A fictitious business may be created through which the monies are put in and subsequently funneled back to the individual This may also be done to give illegally obtained funds the appearance of being acquired through legitimate business dealings Most governments regulate the movement of currency to monitor and control the distribution of their currency In the United States, currency transaction reports (CTRs) are required to be filed by financial institutions for cash transactions in excess of $10,000.00 Also, U.S Customs requires that anyone carrying more than $3,000.00 in currency declare the money on their Customs declaration prior to traveling outside of the country Violation of either of these requirements can be considered a criminal violation and prosecuted under money laundering statutes Failing to report currency being taken outside of U.S borders facilitates the use of offshore banking and corporate fraud schemes The funds are moved offshore, given the appearance of legitimate financial transactions and then brought back in for use by the violating parties The amounts of currency involved in major illegal activities are great Drug cartels and organized criminal enterprises amass billions of dollars in U.S currency each year The criminal activities deal primarily in cash to keep from generating more of a paper trail, and their customers and victims use cash to conceal their involvement in criminal behavior To move these amounts of currency, these groups will most often use professional money laundering operations and cooperative employees of legitimate international banking institutions Violators of these money laundering provisions may be caught in the act by Customs or Coast Guard personnel In many cases however, the violations will be discovered through financial investigation of those involved when the money is returned to the United States and put to use on lavish lifestyles The financial investigator must keep in mind that risking prosecution and incarceration to gain millions of dollars is of no value if the perpetrator cannot use and enjoy the fruits of the crime The indirect methods of proof help the investigator to identify not only the illegal or unreported monies being received but also to identify those involved in laundering the money Once a laundering enterprise is identified, it opens a whole field of new investigations by identifying the customers and clientele of the money launderers So as not to be misunderstood, not all offshore financial institutions are involved in money laundering Many major banks have international offices to accommodate an expanding global economy The use of sham-type offshore financial institutions is patterned to look like a legitimate institution, 254 Criminal Financial Investigations and investigative steps are needed to determine their legitimacy Fictitious offshore financial institutions are also used to perpetrate fraud against investors and customers by offering interest rates and benefits that sound too good to be true; and they are too good to be true The manipulation of currency within the national borders is also a problem for enforcement and taxing authorities Those involved in individual fraud schemes, tax fraud, or at the localized levels of organized criminal activities need to try to hide and conceal the nature, origin, and ownership of their cash as well Cash transactions by individuals in excess of $10,000.00 are rare within current banking operations, and stand out to bank employees When the legislation for currency reporting was enacted, criminals were quick to adapt A flurry of activity began in which multiple deposits of less than $10,000.00 were made This was either done by one individual going to the one bank several times a day or to several bank branches on the same day, or by having several individuals go to the bank with single deposits under the $10,000.00 reporting limit This operation became known as “smurfing.” The laws were modified to include multiple transactions that totaled more than the dollar limit within a short period of time One early case involved a drug dealer at the “street” level who wanted to buy a small apartment complex for $297,000.00 This individual went to his bank three times a day for 11 consecutive days depositing $9,000.00 at each visit The laundering case was established and the no-down-payment purchase of $297,000.00 was a major asset in the indirect method of proof Another rather innovative scheme was set up by a major independent jeweler His scheme was to have the individual give him the money He would then give the customer jewelry valued at the amount of 10% less the amount of money to be laundered (his commission for laundering) The individual and his wife or girlfriend would wear the jewelry and travel to Germany where he had an associate who would buy back the jewelry and allow the customer to deposit the funds in a foreign account Gold coins have also been used to take money outside the country American gold coins (valued at bullion market prices) would be taken outside the country and the Customs declaration would show no currency over $3,000.00 under the guise that the “face value” of the coins would only be $1.00 per coin and they had less than 3,000 of them Under this thinking, 100 gold dollars could be sold overseas for more than $100,000.00 Examples of attempts to conceal the origin of the money would include the case of an individual who created a dummy corporation He included the corporation as one of his suppliers for accounting purposes and made regular payments to the corporation as part of his skimming operation He kept the amounts regular to avoid suspicion When he wanted to take the money for his personal use, he would issue a loan from the corporation to himself and use the money for his personal benefit This not only helped him to evade the payment Innovative Applications 255 of taxes on his business (increasing reported expenses to the dummy corporation) but also allowed him to conceal the skimmed funds Another example was a bank investment officer who handled the sale of certificates of deposit to the bank customers She would issue new certificates to the customers she thought would not withdraw from or cash their certificates Rather than make the redeposit she would keep the money for herself She would then transfer the money to an out-of-state account in her deceased sister’s name Money laundering can also be done by taking illegal receipts and running them through as income from a business Many criminal organizations will purchase businesses that deal primarily with cash customers such as bars, restaurants, grocery stores, and service businesses They will then make deposits into the business checking accounts and record the deposits as legitimate income The case of the bank that was requiring kickbacks on high risk loans from their customers comes to mind In that case the monies were reported by one of the coconspirators as income from his restaurant (the restaurant operated at a sufficient loss each year to keep the funds from being taxed) This concealed the true nature and origin of the money and was only uncovered and quantified when the indirect methods and forensic accounting techniques were employed As examples: Information has been received that three individuals are living lavish lifestyles with no apparent means of support The net worth method reveals that each of these individuals has unexplained income of more than $1 million for each of the past years Further investigation establishes illegal narcotics trafficking as the likely source of the unreported illegal income The income reported by these three is shown as consulting fees totaling $30,000.00 per month going to each of them The consulting fees come from ABC Financial, a Panamanian corporation The investigation reveals that ABC Financial was incorporated in Panama years ago and that the same three individuals are the officers for the corporation The company has no actual customers and only the three employees The money laundering occurs with the deposit of illegal funds (narcotics sales receipts) into the account of ABC Financial and again as the funds are paid to the three individuals as consulting fees In addition to the money laundering charges, the unreported narcotics trafficking income (the amount over and above the $360,000.00 per year) can be proven through the use of indirect methods and used for prosecution of tax evasion charges This also opens up the potential for the pursuit of seizure and forfeiture of the illegal proceeds from the narcotics trafficking operation, and may identify other players in the narcotics ring 256 Criminal Financial Investigations An individual operates an air charter service His business records indicate that he makes about $120,000.00 a year hauling freight and passengers between Florida and countries in or bordering the Caribbean An indirect method of proof shows that he has more than $300,000.00 in net worth increases each year Further investigation shows that none of the customers identified in his business records exist The cargo manifests indicate that he makes deliveries to foreign countries, but only transports passengers on return flights Federal aviation records show that he makes flights three times a week The investigation then reveals that he has bank accounts in four countries that not have extensive financial banking regulations The result of the investigation is that he is transporting currency out of the country and depositing it to various accounts held by drug dealers, fraud artists, tax evaders, and others He receives a 5% fee for laundering the funds Since the bulk of his income is from cargo (the few passenger fees are accurately reported), the amounts determined by the indirect method can be used to extrapolate the amounts of laundered funds (5% of the understated income each year) Financial Investigating and Counterterrorism The increase in terrorist actions around the world in the past two decades has raised concerns by governments in how to address the problem and maintain security for their people A major factor in the capabilities, recruitment, and longevity of terrorist organizations is the flow of money needed to finance and sustain the terrorist groups Several steps have been taken to cut off the funding to these organizations To recruit members to a terrorist organization, the organization has to maintain a steady flow of propaganda to keep their message in the minds of the people This can be accomplished through radical speech by charismatic individuals, keeping a media staff at work publishing its propaganda in print or through the Internet, and by conducting dramatic attacks that will whet the appetite of the news media and be televised and talked about around the world Once individuals are recruited, they require resources to reinforce their conversion The recruits need to be removed from the general population to insure that they not lose their enthusiasm and resolve They also need to be fed, clothed, housed and supported at least as well, and usually better, than the lives they left behind The last major task is to train them for their acts of violence and equip them to carry out their attacks Terrorist organizations also need a safe haven in which to formulate their plans and house their operational structure This is achieved by acting as “hired guns” for rogue nations that either cannot carry out the offensive Innovative Applications 257 attacks against a perceived enemy or that want to retain anonymity from the attacks and have plausible deniability diplomatically in the world community A more frightening new development has been the alliance of terrorist organizations with major international drug cartels around the world This alliance stems from the common goal of wanting governments to have to deal with a constant state of chaos, and to be viewed as weak and incapable of protecting their populations Terrorist actions by narcotics cartels have been constantly increasing in an attempt to secure and expand their operations and to allow them to function without impediment from enforcement agencies The constant fighting and bloodshed in Afghanistan has been primarily fueled by the drug production that has been a mainstay of their economy When you analyze the financial aspects of the tragedy that occurred in the United States on September 11, 2001, the cost for this devastating attack seems minimal Investigation has shown that the cost to place, train, and support the terrorists for 18 months was less than $500,000.00 However, the costs to al-Qaeda for training and recruitment are substantially more The funding used to sustain and grow these terrorist organizations is generated from a wide variety of sources As touched on earlier, some governments are willing to pay terrorist groups to conduct acts of terrorism covertly on their behalf against a common enemy Narcoterrorists fund terrorist actions to insulate themselves against government interference with their illegal activities and to intimidate the people in their areas of operation The terrorists themselves will use organized crime tactics such as kidnapping, arson, and extortion to finance their operations There are also several more subtle ways in which funds are funneled into terrorist organizations Terrorists have become more sophisticated and use sham charities, humanitarian organizations, and corporations to generate profits and solicit contributions Sometimes they will disguise their cause and receive funds from legitimate charities without revealing the true use of the funds to the donor They will also create or use existing ethnic, religious, or racial organizations to further their terrorist activities Because of these innovations, it has become more important for enforcement and regulatory agencies to be able to utilize sophisticated forensic accounting techniques to turn off the flow of money to terrorist groups In response to the increasing threat of terrorism around the world, many governments have taken steps to provide the means of freezing and confiscating funds that are directed to these radical organizations Steps have also been taken to penalize legitimate financial institutions for the lack of due ­diligence in dealing with substantial monetary transactions The problem lies in being able to determine intent on the part of the contributing party and being able to quantify the amounts that were sent or intended to be sent to terrorist organizations Although the indirect methods of proof were originally designed to identify tax fraud schemes, they were subsequently 258 Criminal Financial Investigations adapted to assist in the prosecution and punishment of those involved in financial crimes Now they are not only available but also extremely valuable in the area of counterterrorism Following the money is essential in cutting off the financial resources of terrorist groups and can help identify those who are sympathetic to their causes Most of the books written on terrorism, counterterrorism, and homeland security point out the great need to stop the flow of money to terrorist organizations but fail to address what tools, methods, and practices can be used to accomplish this goal The Middle Eastern subbanking system referred to as the Hawala is often talked about as an undetectable means for the transfer of funds without a paper trail This would be true if the investigator was limited to direct evidence of financial dealings An example of this system would appear like this: An individual in Tehran has $10,000.00 they want to send to Boston They would contact a member of the Hawala and give them the money This member would contact another member in Boston to distribute the funds from their holdings that are already in the country This member would have people in Boston wanting to transfer funds back to Tehran Both members (Boston and Tehran) would only keep their records until the amounts balanced If further transactions occurred a new accounting would begin In reality, the only paper trail would be an accounting of receivables and payables As you can see, money is never moved outside of the two cities This might appear as a foolproof way to defeat banking, finance, and cash reporting laws and regulations Terrorist organizations need large amounts of money to keep their groups functioning, and they need additional large amounts to acquire weapons, equipment, and supplies Even under the most idealistic circumstances and if any individual had the extraordinary means needed, individuals that are willing to violate and circumvent the laws are not going to have enough trust in their associates not to keep a record of all of their receivables and payables There is no honor among crooks In addition, the money is of no use unless it can be used to purchase items and pay bills Since terrorists not exist in a cloistered environment, they need to make their acquisitions from businesses not owned and operated in the terrorist camp This is where the forensic accounting techniques come into play Legitimate businesses, even when they dabble in illegality, will still create the same type of falsification of their records to cover the transactions These methods can trace the funding forward and back to identify the players involved in the support group for the terrorist organization Although the investigations will most likely carry a heavy cost in time and manpower, the results can more than make up for the intensive amount of work applied As radical groups and organizations become more sophisticated, the ability­ to monitor and analyze financial transactions become of greater importance Crimes of all sorts, financial or otherwise, are done with the Innovative Applications 259 purpose of gaining more power and control In the case of terrorism, part of the quest for power is hoped to be achieved through the dissolution of the existing authority of government so as to be able to take that authority for themselves Every criminal investigator and financial analyst should be familiar with the methodology and understand the benefits of indirect methods of proof FORENSICS AND CRIMINAL JUSTICE Second Edition Criminal Financial Investigations The Use of Forensic Accounting Techniques and Indirect Methods of Proof Understanding the financial motivations behind white collar crime is often the key to the apprehension and successful prosecution of these individuals Now in its second edition, Criminal Financial Investigations: The Use of Forensic Accounting Techniques and Indirect Methods of Proof provides direct instruction on the “how to” aspects of criminal financial investigations, taking readers through the different approaches used in gathering evidence and demonstrating how to present circumstantial evidence to a judge or jury in a simple and convincing manner Simplifying how the financial pieces fit together, this text: • Presents the logic and reasoning involved in constructing a financial criminal investigation • Describes the requirements for legal acceptance of forensic accounting investigations • Includes relevant examples of the step-by-step processes involved in financial investigations • Explores the pitfalls—and how to avoid them—in financial investigating • Contains two investigations with step-by-step procedures from initial inquiry to case completion—for use as term or topical assignments or to promote class discussion New Chapters in the Second Edition: • What Is a Financial Investigation? • Indirect Methods in Tax Investigations • Unique Aspects of Criminal Tax Investigations • Innovative Applications Written by a former Special Agent with the Criminal Investigation Division of the U.S Internal Revenue Service, this volume sets out a successful methodology enabling readers to identify, pursue, and successfully prosecute financial white collar crime K15970 an informa business www.taylorandfrancisgroup.com 6000 Broken Sound Parkway, NW Suite 300, Boca Raton, FL 33487 711 Third Avenue New York, NY 10017 Park Square, Milton Park Abingdon, Oxon OX14 4RN, UK w w w c rc p r e s s c o m ... Edition Criminal Financial Investigations The Use of Forensic Accounting Techniques and Indirect Methods of Proof Second Edition Criminal Financial Investigations The Use of Forensic Accounting Techniques. .. determine the profitability of criminal activities and the beneficiaries of the illegal gains The methodology of general criminal forensics and forensic accounting is the same Criminological Theories... Investigation of these criminal activities must constantly adapt to deter, enforce, and prosecute them Forensic accounting is the means for investigation and prosecution of these crimes What Is Forensic Accounting?