Tracing and Recovering Fraud Losses

Transcription

1 Tracing and Recovering Fraud Losses Using Financial Records to Locate Hidden Assets 2018 Association of Certified Fraud Examiners, Inc.

2 Introduction Types of financial records that might be valuable to a fraud examination Obtaining financial records Financial account information to request Reviewing financial records Using financial records to locate assets 2018 Association of Certified Fraud Examiners, Inc. 2 of 27

3 Types of Financial Records Account-opening documents Intra-bank transfer records Electronic payment records Accounting records Exchange instruments 2018 Association of Certified Fraud Examiners, Inc. 3 of 27

4 Types of Financial Records Tax-related documents Form W-2 Form 1040 Schedule A Itemized Deductions from Income Schedule B Interest and Dividend Income Schedule C Profit or Loss from Business Schedule D Capital Gains and Losses Schedule E Supplemental Income and Loss 2018 Association of Certified Fraud Examiners, Inc. 4 of 27

5 Types of Financial Records Form 5500 Account statements Negotiated checks Deposit tickets Stock brokerage records 2018 Association of Certified Fraud Examiners, Inc. 5 of 27

6 Types of Financial Records Loan records Wire transfer records Mortgage loan files Credit card records Prepaid access card records 2018 Association of Certified Fraud Examiners, Inc. 6 of 27

7 Types of Financial Records Safe deposit box records Financial intelligence unit (FIU) documents and reports Currency Transaction Reports (CTRs) Suspicious Activity Reports (SARs) Foreign Bank and Financial Account Reports (FBARs) Currency or Monetary Instrument Reports (CMIRs) IRS/FinCEN Form Association of Certified Fraud Examiners, Inc. 7 of 27

8 Types of Financial Records Purchase and sale documents SEC filings Investment information 2018 Association of Certified Fraud Examiners, Inc. 8 of 27

9 Obtaining Financial Records Financial records are not available to the public and might be difficult to obtain. Methods for obtaining financial records: The customer s consent Subpoenas or other legal processes Search warrants Demand as a condition of continued business Audit clause rights 2018 Association of Certified Fraud Examiners, Inc. 9 of 27

10 Financial Account Information to Request When gathering financial account file information, request: The account holder s identification information Letters authorizing the opening of the account, if applicable References Signature cards 2018 Association of Certified Fraud Examiners, Inc. 10 of 27

11 Financial Account Information to Request When gathering account statement information, request information pertaining to the: Deposits Checks Memo items Wire transfers Internal transfers 2018 Association of Certified Fraud Examiners, Inc. 11 of 27

12 Reviewing Financial Records Once you begin collecting financial records, start reviewing them for leads, patterns, unusual transactions, or red flags Association of Certified Fraud Examiners, Inc. 12 of 27

13 Using Financial Records to Locate Assets Use financial records to: Develop a financial profile. Develop a behavioral profile. Trace assets using direct and indirect methods. Analyze the information to locate hidden assets Association of Certified Fraud Examiners, Inc. 13 of 27

14 Develop a Financial Profile of the Subject Step 1: Identify assets. Step 2: Identify significant liabilities. Step 3: Identify income sources. Step 4: Identify expenses. Step 5: Calculate the subject s net worth Association of Certified Fraud Examiners, Inc. 14 of 27

15 Step 1: Identify Assets Cash on hand Bank accounts Investments Real property Vehicles Boats Aircraft Typical Assets Insurance Annuities Business interests Jewelry Clothing Collectibles Home furnishings 2018 Association of Certified Fraud Examiners, Inc. 15 of 27

16 Step 1: Identify Assets For each asset, determine: When was it acquired, and from whom? How much did it cost? How was it paid for (currency, check, cashier s check)? What source of funds was used to acquire it? What documentation exists for the purchase, and where is it? 2018 Association of Certified Fraud Examiners, Inc. 16 of 27

17 Step 2: Identify Significant Liabilities Typical Liabilities Mortgage(s) Other loans Lines of credit Credit cards Installment purchases Accounts payable Taxes and other bills Alimony and child support 2018 Association of Certified Fraud Examiners, Inc. 17 of 27

18 Step 2: Identify Significant Liabilities For each liability, determine: What was the original amount of the liability? What is the present balance due? When was the liability incurred? What was the purpose for the loan? How were the proceeds used, and where were they deposited? What collateral, if any, was given for the debt? What documentation exists, and where is it? Was the debt written off as a bad loan for tax purposes? Who was the creditor or lender? 2018 Association of Certified Fraud Examiners, Inc. 18 of 27

19 Step 3: Identify Income Sources Salary Spouse s income Investment and interest income Sale of assets Loan proceeds Typical Income Sources Commissions and fees Gifts Inheritances Insurance proceeds Disability payments 2018 Association of Certified Fraud Examiners, Inc. 19 of 27

20 Step 3: Identify Income Sources For each income source, determine: What was the total amount during a given period? What was the source? Where was it deposited? How was it spent? How was it paid for (currency, check, or other means)? When were the funds received? What documentation exists (e.g., W-2 or 1099 form), and where is it? 2018 Association of Certified Fraud Examiners, Inc. 20 of 27

21 Step 4: Identify Expenses Typical Expenditures Living expenses Travel and Rent entertainment Utilities Hobbies and Food collectibles Health costs Alimony Clothing Insurance 2018 Association of Certified Fraud Examiners, Inc. 21 of 27

22 Step 4: Identify Expenses For each expenditure, determine: What was the total amount spent? How was it paid for? Where were the funds obtained to pay the expense? What documentation exists, and where is it? When was the payment made? 2018 Association of Certified Fraud Examiners, Inc. 22 of 27

23 Step 5: Calculate Net Worth Net worth = assets liabilities 2018 Association of Certified Fraud Examiners, Inc. 23 of 27

24 Develop a Behavioral Profile for the Subject The behavioral profile comprises outside pieces of information that can support estimates and fill in information gaps. The behavioral profile contains information about the suspect s personal characteristics Association of Certified Fraud Examiners, Inc. 24 of 27

25 Develop a Behavioral Profile for the Subject 2018 Association of Certified Fraud Examiners, Inc. 25 of 27

26 Two Approaches to Tracing Assets Direct approach: The examiner traces funds the subject used to purchase assets or make deposits back to their source. Indirect approach: Indirect methods analyze the relationship between a suspect s receipt and subsequent disposition of funds Association of Certified Fraud Examiners, Inc. 26 of 27

27 Analyze Information to Locate Assets Look for unexplained changes in the subject s income, expenses, lifestyle, and behavior to determine whether the subject has hidden assets. Methods: The asset method The sources and application of funds (expenditures) method The bank deposit analysis 2018 Association of Certified Fraud Examiners, Inc. 27 of 27

28 Asset Method Method of proving unreported income circumstantially Involves showing that the subject s assets for a given period exceed those that can be accounted for from known or admitted sources of income 2018 Association of Certified Fraud Examiners, Inc. 28 of 27

29 Asset Method Special considerations Need 2+ periods (years) of data, preferably starting when the scheme began Value everything at cost (not fair market value) Cash on hand: currency in possession Legitimate sources of funds estimated generously Expenses estimated conservatively 2018 Association of Certified Fraud Examiners, Inc. 29 of 27

30 Asset Method Formula Assets Liabilities = Net worth Prior year s net worth = Net worth increase (decrease) + Known expenses = Total net worth increase Funds from known sources = Funds from unknown sources 2018 Association of Certified Fraud Examiners, Inc. 30 of 27

31 Base Year Year One Year Two Assets $55,000 $168,000 $198,500 Liabilities (42,750) (105,275) (80,850) = Net worth 12,250 62, ,650 Prior year s net worth 12,250 67,725 = Increase in net worth 50,475 54,925 + Known expenses 18,700 21,265 = Total net worth increase 69,175 76,190 Funds from known sources 28,725 35,250 = Funds from unknown sources $40,450 $40, Association of Certified Fraud Examiners, Inc. 31 of 27

32 The Sources and Applications of Funds (Expenditures) Method Compares known expenditures and known sources of funds during one period Expenditures Method Formula Expenditures (application of funds) Funds from known sources = Funds from unknown sources 2018 Association of Certified Fraud Examiners, Inc. 32 of 27

33 The Sources and Applications of Funds (Expenditures) Method Year One Year Two Expenditures $110,175 $76,190 Funds from known sources 69,725 35,250 = Funds from unknown sources $40,450 $40, Association of Certified Fraud Examiners, Inc. 33 of 27

34 The Sources and Applications of Funds (Expenditures) Method Expenditures Cash on hand increases Bank accounts increase Assets increase Liabilities decrease Personal living expenses Other cash expenditures Sources of Funds Cash on hand decreases Bank accounts decrease Assets decrease (e.g., sales) Liabilities increase Gifts or inheritances Salaries or business profits Other known sources of income 2018 Association of Certified Fraud Examiners, Inc. 34 of 27

35 Bank Deposit Analysis Variation of expenditures method Deposits compared to legitimate income Considerations Only actual deposits (and cash on hand) Transfers and redeposits must be considered Cash expenditures = total outlay of funds net bank disbursements 2018 Association of Certified Fraud Examiners, Inc. 35 of 27

36 Bank Deposit Method Formula Total deposits to all accounts Transfers and redeposits = Net deposits to all accounts + Cash expenditures = Total receipts from all sources - Funds from known expenses = Funds from unknown sources 2018 Association of Certified Fraud Examiners, Inc. 36 of 27

37 Bank Deposit Analysis Year One Year Two Total deposits to all accounts $62,520 $58,470 Transfers and redeposits = Net deposits to all accounts 62,420 58,220 + Cash expenditures 47,755 17,970 = Total receipts from all sources 110,175 76,190 Funds from known sources 69,725 35,250 = Funds from unknown sources $40,450 $40, Association of Certified Fraud Examiners, Inc. 37 of 27