Fraud Tip Friday: Hidden Assets and Illegal Payments

Background

Hidden assets are assets not properly disclosed in normal situations. People have always hidden their wealth or ill-gotten gains for a variety of reasons.  Although not discussed herein, remember money laundering  (a process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source) is a common technique used by criminals and others to hide their ill-gotten gains.

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Stuffed animals, loose bricks in basement walls, mattresses, caves, hollow tree trunks, holes in the ground, safe deposit boxes, and some of the craziest places imaginable have provided hiding spots.  Today, hiding assets may be a much more sophisticated endeavor, often involving investments, banks, and overseas financial transactions. Investigators should consider using a defined process or approach to pursue matters that involve a search for hidden assets, ill-gotten gains, and illegal payments. This writing outlines a suggested approach (see diagram below) and focuses on building a financial profile for an individual, but can be used with some modification for an organization too!

 

 

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Building a Financial Profile

When conducting a search for hidden assets, ill-gotten gains, or illegal payments, the investigator should establish a financial profile for the target(s). The financial profile is essentially a financial statement with some modifications and additions. It shows what the target earns, owns, owes, and spends at any given point, or over a period of time; it reflects the subject’s income, expenses, assets, and liabilities. That is, it shows the target’s financial condition.

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The target’s financial profile usually contains information that can identify the movement of cash or other assets of value. The financial profile usually indicate where the source(s) of the target’s income and where it is going  or expenses.

The financial profile can serve various purposes. It can be used to establish the level of criminality, to build evidence to support litigation, to identify fund transfers between entities, and so on.

Approaches

The investigator can establish a target’s financial profile directly or indirectly (circumstantially).

A direct approach employs direct evidence demonstrating a target’s financial standing and profile. That is, it uses the target’s financial records (general ledgers, tax returns, bank statements, credit card statements, and other financial transactions processed by third parties) to determine the subject’s financial condition. Note: if a target is uncooperative, some of the financial records more likely than not will require a subpoena, so please check with your legal counsel.

When tracing financial transactions using a direct method, the investigator uses the information in the target’s financial records to establish the financial profile, which is then used to identify the target’s accounts, assets, and expenditures. And once these items are identified, he obtains and uses them to trace back the source of funds in each.

Said differently, under the direct approach, the investigator traces funds the target used to purchase assets or make deposits back to his source.

In some matters, direct evidence demonstrating a target’s financial standing and profile may not be available to the investigator.  In such cases, the investigator can use an indirect method, utilizing circumstantial evidence to analyze the target’s financial information. Indirect methods analyze the relationship between a target’s receipt and subsequent disposition of funds.

The indirect approach can reveal that a target has more money available than can be accounted for from legitimate sources. In addition, evidence that the target lives beyond his/her means and, therefore, must have had unexplained income, could be admissible in court. Such evidence can also be used to corroborate the testimony of co-conspirators as circumstantial evidence of the underlying offense or as evidence to impeach testimony that denies the offense.

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Where to Begin?

Consider first examining tax returns and related documents to look for possible clues as to the possible existence of hidden assets. The return can provide a roadmap to the discovery of income earning assets and asset sales. The return should also tell you the source of income, whether its interest, dividends, rental income, and a gain or loss from the sale of a stock. Each page of the tax return should be carefully examined for information – Caution: sometimes tax returns are not complete and accurate!

Other clues could come from looking at:

  • Cancelled checks, and who the check was payable;
  • Insurance policies, to see what assets are insured, or are no longer insured;
  • Search in the County records for property deeds and records – look for quit claim deeds, which is a legal instrument that is used to transfer interest in real property possibly to a family member or friend to be hidden;
  • By examining pension, profit-sharing, custodial accounts, credit cards, loans, leases, and other obligations (mobile phone accounts, country club dues, vacation clubs, etc.), for transfers, pre/over payments, or other odd activity; and
  • If a there is a business or a number of businesses, remember that cash can be skimmed and used for salaries to phantom employees or payments to bogus vendors.
  • Bribery

    Bribery and other forms of corruption are especially likely to involve some type of hidden assets, as they can help disguise illegal payments.  When planning your next Anti-bribery and Corruption (ABAC) risk assessment, review, internal audit, or due diligence, consider adding asset sales and purchase transactions to the work plan. These transactions are likely to be scrutinized by U.S. regulators if your organization ever comes under scrutiny. Moreover, from an internal perspective, they present an opportunity to examine your business under other-than-ordinary-course-of-business circumstances.

    Underground economic activity exists for four key reasons: to escape taxation and regulation, and to further criminal conduct and corruption!

    Also, when speaking with my good friend Tom Fox, he reminded me that properly designed internal controls around the treasury and accounts payable functions are critical.  Why?  They help ensure that payments are being made to legitimate third parties and not an anonymous or shell corporation that could be used as a source for making illegal payments.

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    Closing

    Those hiding assets are more likely than not trying to escape something or do something illegal (e.g. regulation, a decision, a pending decision, or pay a bribe) and look for vehicles with the following key characteristics to hide or conceal assets:

    • Liquidity
    • Lack of traceability
    • Security
    • Accessibility

    I welcome your thoughts, comments, and suggestions.

    Best,

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     Jonathan T. Marks, CPA, CFF, CFE

    Attribution:
    ACFE
    FCPA Blog