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Money Laundering vs. Hidden Assets
March 28, 2013
Money Laundering vs. Hidden Assets: Agenda
Program Agenda
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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
Hidden
Assets
Money Laundering
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Definition of and Background of Money
Laundering
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Globally, money laundering is estimated to be between $500 billion to a
trillion annually1
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
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Evolution in the Statutes Surrounding Money
Laundering
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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
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Evolution in the Statutes Surrounding Money
Laundering
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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
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Money Laundering Suppression Act (1994)
Required each Money Services Business (MSB) to be registered by an owner or
controlling person of the MSB
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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
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Evolution in the Statues Surrounding Money
Laundering: 2001-2004
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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
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Evolution in the Statues Surrounding Money
Laundering: 2001-2004
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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
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SOURCE for history: Financial Crimes Enforcement Network:
http://www.fincen.gov/news_room/aml_history.html
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The Criminal Nature of Money Laundering
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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.
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Money Laundering Methodologies and Vehicles
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The three steps involved with money laundering:
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Placement: Cash currency to business based institution, such as a
bank
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Layering: money moved between institutions (layers of institutions)
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Integration: Integrate into legitimate business
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Money Laundering Mechanisms
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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.
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Money Laundering Mechanisms (continued)
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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.
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Money Laundering Mechanisms (continued)
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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)
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The greedier the launderer, the easier it is to spot
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So Who Launders Money in 2012?
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College Students
Personal Assistants
Mortgage Brokers
Investment Managers
Corporate Executives
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Computer Based and Statistical Methods for
Detecting and Combating Money Laundering
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”.
Cluster analysis
Requires substantial amounts of data that can be grouped categorically.
Inductive algorithms
Algorithms that generate decision trees based on historical outcomes.
Neural networks
An AI technique that mimics the human brain by learning from and
storing inputs and outputs. Can be used with continuous/categorical
variables and non-linear and collinear data.
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
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Hidden Assets
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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):
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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
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Assets Hidden Overseas
Hidden Assets Out of State or Overseas
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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
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Hidden Assets to Avoid Paying a Jury Verdict
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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.
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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
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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
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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
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Hidden Assets, Hidden Liabilities
Case Example: Hidden Liabilities
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One man’s asset is another’s liability
Post-closing earn out dispute for a light manufacturing company
Liabilities allegedly understated
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Hidden Assets on the Balance Sheet
Case Example: Balance Sheet Fraud
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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
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Disparity in control
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Secretiveness
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Unprecedented actions
Large purchases or gifts
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Numerous money transfers
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Transfer of title of property or possessions
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Creation of multiple companies or companies with similar names
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Indicators of Hidden Assets
Potential Red Flags (continued):
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Withdrawn court filings
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New financial planners or advisors
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Not introducing a spouse to work colleagues
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Lifestyle not matching resources
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Overseas trips to known tax havens
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Finding Hidden Assets
Tips to uncover or trace hidden assets:
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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
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Use data from 3rd party, uninterested sources when possible:
Bank records – statements, wire transfer confirmations, canceled checks
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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):
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Storage units or safety deposits boxes:
May be hiding jewelry, heirlooms, other items of value
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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
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Finding Hidden Assets
Available Resources to uncover hidden assets:
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CLEAR Database (Consolidated Lead Evaluation and Reporting)
 Investigative platform designed for professionals who need
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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
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Finding Hidden Assets
Available resources continued:
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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
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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
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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
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Association of Certified Fraud Examiners (AFCE)
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Private Investigator
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Money Laundering vs. Hidden Assets
Questions?
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Money Laundering vs. Hidden Assets
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
Phone:
213.330.4634
Email:
todd.sigler
@mcgladrey.com
•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.
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Money Laundering vs. Hidden Assets
Presenter Contact Information:
Todd Sigler
McGladrey LLC
515 S. Flower St., 41st floor
Los Angeles, CA 90071
Email: todd.sigler@mcgladrey.com
Phone: 213.330.4634
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