FLORIDA GULF COAST UNIVERSITY

ACG 4939/6935—SPECIAL TOPICS: ADVANCED FRAUD EXAMINATION

SUMMER 2005

Instructor : Carl Pacini, Ph.D., J.D., C.P.A., C.F.S.A.

Guest Instructor: Brett Hood, Special Agent, FBI

Address: College of Business10501 FGCU Blvd. S.Florida Gulf Coast UniversityFt. Myers, Fl. 33965-6565

Phone : (239) 590-7344 (Office)(239) 590-7367 (Fax)

E-mail : cpacini@fgcu.edu

Homepage: http://ruby.fgcu.edu/courses/cpacini

Lecture Notes: Summary notes of some of the classroom lectures will

be made available on Angel. Lecture summariesare not intended to be a surrogate or replacementfor the lectures themselves. The notes are merely a

toolto facilitate learning.

Office Hours : Tuesday and Wednesday 10 AM to 12 noon

Last ExamDate : To be announced

RequiredMaterials : Fraud Examination for Managers and Auditors by Jack

Robertson

Forensic & Investigative Accounting by Crumbley,Heitgert, and Smith

Contemporary Auditing: Real Issues and Cases, 5th ed., by Michael Knapp

Customized Text prepared for this course available in the bookstore.

Other Materials : Will be provided by the instructor or made available to

students or will require research by students.

YOU ARE EXPECTED TO READ AND UNDERSTAND THE CONTENTS OF THIS SYLLABUS.

Responding to E-mail: I will check my e-mail often. I will respond to course-

related questions within 24-36 hours unless I am ill orhave a family emergency. I will announce

assignment due dates in recorded lectures and course announcements.

COURSEDESCRIPTION: This course is designed to further the student’s

knowledge of conducting fraud investigations, including the use of specific detection techniques. Topics covered include acquiring fraud auditing awareness, an overview of a fraud investigation, various investigation techniques to uncover fraudulent financial reporting and misappropriation of assets, analysis of a suspect’s financial records, background, lifestyle, and financial status, asset tracing and forfeiture, reporting the results of a fraud investigation, and computer forensics.

COURSEOBJECTIVES : This course is designed to achieve the following

objectives:

1. To give students an appreciation of the scope, extent and importance of fraud investigation techniques, the appropriate mindset necessary

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to be a fraud examiner, and an overall view of a fraud investigation

2. To gain an understanding of the significance of appropriate procedures and protocol in making decisions and solving forensic accounting problems

3. To gain an appreciation of the Internet and other databases, such as Lexis-Nexis and ABI Inform;

4. To develop the ability to recognize the potential problems which may arise in a doubtful or complicated situation, and the necessity of consulting other experts

5. To develop research abilities and analytical reasoning skills

PROGRAMOUTCOMES : This course is designed to help the student achieve the

following outcomes:

1. To encourage and promote critical thinking, a skill necessary to succeed today as a forensic accountant. This means each student should be able to comprehend an unfocused set of facts, identify, and if possible, anticipate problems, and find acceptable solutions;

2. To improve the student’s oral and written communication skills. Each student should be able to locate, obtain, and organize information from both human and electronic sources. Each student will also learn to defend his or her views through written work.

CORECOMPETENCIES: In addition to the program outcomes noted above, this

course promotes the following core competencies:

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1. Acquisition of a global perspective by each student to help their future employers (or their own businesses) better compete in international and domestic markets;

2. Development of an ability to formulate decisions that integrate practical, legal and ethical considerations; and

3. Appreciation of the vagaries and uncertainties of real life business situations and the importance of life-long learning.

ATTENDANCE: It is critical that each student attend class to participate effectively in interactive learning. Each student has an unusual opportunity to listen to and interact with a seasoned FBI agent. Failure to attend class regularly may result in the loss of a full letter grade. Each student starts the course with 70 attendance points. Each student is allotted two absences (2) with no point loss. Each unexcused absence after the second absence results in a deduction of 7 points from the student’s attendance points. The instructor reserves the sole discretion to approve or excuse an absence.

GRADING : Each student starts this class with an A. It is your job to

keep it.

Two exams will be given in this course. The first exam will be a take-home test and will contain objective questions and possibly some essays. Each exam will be given to students and must be completed within the allotted time provided. I will provide detailed information on time allotments in class lectures. The second exam may be comprehensive (cover all material from the entire semester).

Undergraduate Students

Each student’s grade will be based on the following:

Exam 1 125 points

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Exam 2 125 pointsAttendance 70 points

Miniproject #1 50 pointsMiniproject #2 50 pointsHomework 80 pointsTotal Points 500 points

The grading scale for final grades is:

Grade Total Points A 460-500

A- 445-459 B+ 435-444 B 415-434

B- 395-414 C+ 385-394 C 350-384 D 300-349 F Below 300

Graduate Students

Each student’s grade will be based on the following:

Exam 1 125 pointsExam 2 125 pointsAttendance 70 pointsMiniproject #1 50 pointsMiniproject #2 50 pointsHomework 80 pointsResearch paper 100 pointsTotal 600 points

The grading scale for graduate student final grades is:

Grade Total Points A 552-600A- 534-551B+ 522-533B 498-521B- 474-497C+ 462-473C 420-461D 360-419

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F Below 360

Any grade challenge to a test, homework assignment, project or assignment of any kind must be in writing to be considered. A written grade challenge must clearly describe what is being challenged and provide a rational basis for the challenge.

Make-up exams will not be given without the instructor’s approval. If you miss an exam without a reason approved by the instructor, you may receive a “0”. The instructor’s discretion is final. If you hand in a homework assignment late, you may have points deducted from your grade.

Please bear in mind that you are responsible for all material assigned even if it is not covered in a class lecture. You are also responsible for material presented in class that is not covered in the textbook. You are also responsible for any outside reading material assigned by the instructor. Questions on outside reading material may show up on an exam.

MINIPROJECTS: Each student will complete two miniprojects. The projects may be done on an individual or team basis.A team may have no more than 3 members. Projectspecifics will be announced in class as we move through the course. The due date for each project will be announced in class. Each project must be word-processed. Handwritten work will not be accepted.

HOMEWORKASSIGNMENTS: Each student is responsible for writing answers to the

assigned homework problems. Answers will be collected by the instructor. The maximum number of points for any given assignment is 10. You may receive up to 100 points from homework assignments. Points are awarded based on a reasonable effort put forth by the student not on the correctness of answers. ALL HOMEWORK ASSIGNMENTS ARE TO BE WORD-PROCESSED IN WORD OR WORD-PERFECT. HANDWRITTEN ASSIGNMENTS WILL NOT BE ACCEPTED.

GRAD STUDENTRESEARCH PAPER: Graduate students must complete a research

paper.

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The project may be done individually or in teams not to exceed 2 people. The project should be done on the

money laundering, terrorist financing, cybercrimes, investigative fraud techniques, interviewing suspects and/or witnesses, asset tracing and forfeiture, or

someother aspect of fraud examination.

SCHEDULE OFASSIGNMENTS:

PROBLEMS

Unit 1Robertson: Ch. 6—Fraud Awareness Auditing Case Studies(pp. 179-218) Nos. 1 and 2

Outside reading: Albrecht, W.S., C. Albrecht and C. Albrecht. 2004. Fraud and corporate executives: Agency, stewardship, and broken trust. Journal of Forensic Accounting V (1): 109-130 (on website at http://ruby.fgcu.edu/courses/cpacini under Supplemental Materials).

Unit 2Custom Text: Ch. 14—A Framework for Investigating (pp. 403-447)

Robertson: Ch. 7—Overview of Internal Control (pp. 231-259)

Cases in Contemporary AuditingCase 3.2—Howard Street Jewelers 1, 2, 3

Case 3.3—Saks Fifth Avenue 1, 2, 3

Unit 3Crumbley, Heitger, and Smith: Ch. 4—Detecting Fraud in Financial Reporting (pp. 4-1 to 4-31) #s 3,5,8,20,

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21,22,25,28,34

Robertson: Ch. 8—Cash Collections and Receivables (pp. 261-306)

Case in Contemporary Auditing : Case 3.5—Goodner Bros. 1, 2, 3

The homework problems in Crumbley et al. and the case are separate homework assignments.

Outside readings: Wells, J.J. 2001. Irrational ratios. Journal of Accountancy 192 (2): 80-3.

Grove, H. and T. Cook. 2004. Lessons for auditors: Quantitative and qualitative red flags. Journal of Forensic Accounting V (1): 131-146.

Both readings are available at http://ruby.fgcu.edu/courses/cpacini under Supplemental Materials. Unit 4Crumbley, Heitger, and Smith: Ch. 5—Employee Fraud:Misappropriation of Assets (pp.5-1 to 5-34) 3,6,10,11,

12,15,16,30

Robertson: Ch. 9—Cash Disbursements and Payables (pp. 315-352)

Cases in Contemporary Auditing : Case 3.1—Trolley Dodgers #s1, 2,3

Case 3.6—Troberg Stores 1, 2, 3, 4

See syllabus appendix for additional homework problems.

The homework problems in the Crumbley book, both cases in Contemporary Auditing, and the appendix problems are separate homework assignments. Hence, this unit contains 5 homework assignments.

EXAM 1—take-home exam on all material in units 1-4.

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Unit 5Crumbley, Heitger, and Smith: Ch. 6—Indirect Methods of Reconstructing Income (pp. 6-1 to 6-21)

#s 1,8,9,10,12,22

For additional materials on the three methods of reconstructing income go to:

Net worth analysis method http://www.usdoj.gov/tax/readingroom/crimpdf/taxc31.pdf

Expenditures methodhttp://www.usdoj.gov/tax/readingroom/crimpdf/inst20.pdf

Bank deposits methodhttp://www.usdoj.gov/tax/readingroom/crimpdf/taxc33.pdf

You have three additional homework problems in the syllabus appendix involving application of the three methods to a specific case. The problems in the Crumbley book and the three in the syllabus appendix are separate homework assignments.

Unit 6Asset Tracing and Asset Forfeiture

In addition to the lecture, please do the following readings:

Wright, R. 2002. The hiding of wealth: The implications for the prevention and control of crime and the protection of economic stability. Journal of Financial Crime 9 (3): 239-243.

Barnett, T. 2001. Legal fiction and forfeiture: An historical analysis of the civil asset forfeiture reform act. Duquesne University Law Review 40: 77-97.

Harshman, E., M. Islam, C.A. Nelson, and H. Ordower. 2002. Micro- and macro-economic effects: Secreting assets to evade non-business obligations and responsibilities. Journal of Financial Crime 10 (2): 166-183.

Stotland, G. and K. McGarr. 2003. Investigating offshore financial services in family law cases. American Journal of Family Law 17 (2): 100-107.

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All readings available at http://ruby.fgcu.edu/courses/cpacini under Supplemental Materials.

Unit 7Manning: Ch. 22—Reports and Case Files (pp. 349-369)

No homework assignment for this unit.

Unit 8Interviewing Suspects and Witnesses

In addition to the lecture, please do the following readings:

Vrij, A., K. Edward, K. Roberts, and R. Bull. 2000. Detecting deceit via analysis of verbal and nonverbal behavior. Journal of Nonverbal Behavior24: 239-263.

Avitabile, L, and B. Kleimer. 2003. How to assess credibility when conducting workplace investigations. Management Research News 26: 219-226.

Vrij, A., G. Semin, and R. Bull. 1996. Insight into behavior displayed during deception. Human Communication Research 22: 544-562.

Vrij, A., L. Akehurst and P. Morris. 1997. Individual differences in hand movements during deception. Journal of Nonverbal Behavior 21: 87-102.

Mann, S., A. Vrij, and R. Bull. 2002. Suspects, lies, and videotape: An analysis of authentic high-stake liars. Law and Human Behavior 26 (3): 365-376.

Homework: prepare a summary of each article. Each summary counts as one homework assignment. A summary should be 1-3 pages.

Articles available at ruby.fgcu.edu/courses/cpacini.

Unit 9Crumbley, Heitger, and Smith: Ch. 12—Internet Forensics Analysis: Profiling the Cybercriminal (pp. 12-1 to 12-24)

#s4,10,17,18,20,22,24,27,28,30

Also, please do the following readings:

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Barbin, D. 2002. Computer forensics emerges as an integral component of an enterprise information assurance program. Information Systems Control Journal 3: 25-27.

Patzakis, J. 2001. Computer forensics from cottage industry to standard practice. Information Systems Control Journal 2: 25-7.

Hoskinson, C. and J. Sleezer. 2002. Data hiding. Information Systems Control Journal 3: 28-32.

Luehlfing, M., C. Daily, T. Phillips, and L. Smith. 2003. Cyber crimes, intrusion, detection, and computer forensics. Internal Auditing 18: 9-13.

Articles available at http://ruby.fgcu.edu/courses/cpacini.

Unit 10Crumbley, Heitger, and Smith: Ch. 13—Cybercrime Management: Legal Issues (pp. 13-1 to 13-26)

1,2,8,10,12,15,17

Unit 11Robertson: Ch. 15—Analysis of Digit and Number Patterns (pp. 497-520)

Please read the following articles:Durtschi, C., W. Hillison, and C. Pacini. 2004. The Effective Use of Benford’s Law to Assist in Detecting Fraud in Accounting Data. Journal of Forensic Accounting V (2): 17-34.

Lanza, R. 2000. Using Digital Analysis to Detect Fraud. Journal of Forensic Accounting I (2): 291-296.

Articles available at ruby.fgcu.edu/courses/cpacini under Supplemental Materials.

There is no homework assignment for this unit.

The instructor retains the discretion to change the syllabus as circumstances warrant.

EXAM 2—on units 5-11 or the last unit covered

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ETHICS : Ethics have become an extremely important topic intoday’s environment. An accountant’s only product is his/her service which is measured by his/her integrity and professionalism. It is expected that no academic dishonesty will occur. Cheating on any assignment will be pursued according to the appropriate procedures outlined in the Student Conduct Code. Cheating includes plagiarism on any of the assigned projects.

All students are expected to demonstrate honesty intheir academic pursuits. The university policies regarding issues of honesty can be found under the Student Code of Conduct on page 11, and under Policies and Procedures on pages 18-24 of the Student Guidebook. All students are expected to study this document which outlines their responsibilities and consequences for violations of the policy.

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ACG 4939/6935—ADVANCED FRAUD EXAMINATIONAPPENDIX A

HOMEWORK PROBLEMS

Unit 1

Robertson Text: Chapter 6—Fraud Awareness Auditing

Homework Problems

FRAUD CASE STUDY NO. 1: THE TANKIn accordance with the directions of the H2O-Pure Management Board, eight new accountants have been hired. Two – Bradford (Brad) B. Brown and Timothy (Tim) T. Smith – are temporarily assigned to the performance of proactive fraud-specific examinations. Brad and Tim were both outside hires, have had no prior experience in fraud-specific examinations, and know little about H2O-Pure, but they have attended several fraud-specific training courses and have been given considerable discretional authority to perform the roles assigned to them.

They decided to begin their job assignments with the primary objective of searching for evidence of fraud as well as learning about the inner workings of H2O-Pure. In what was intended to be primarily a learning experience, they selected 10 payments for plant maintenance during the prior six months. They had no reason to believe that payment transaction numbers 8, 9, and 10 would involve the fraud that they were looking for.

Tim and Brad performed the following customary audit verifications. They examined the requisition that originated transaction number 8. It requested the contract for the maintenance on the water tank atop building number 12, and was issued by the Plant Maintenance Department. The work required to be performed was:

1. Drain 5,000-gallon water tank atop Building 12.

2. Scrape and clean interior surfaces of tank.

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3. Repair and rehabilitate interior surfaces as may be necessary. Apply one coat of rust proofing Z-25 Primer to all interior surfaces. Coat all interior surfaces of tank with Z-26 Sealant (a high-quality elasto-meric waterproofing material).

4. Paint outside surface of the tank. H2O-Pure Corporation will provide the paint.

5. Refill tank with 5,000 gallons of water.

6. Perform and complete all work during plant vacation shutdown period August 1-14.

7. Estimated cost: $5,500.

The two accountants noted that the requisition was properly signed by Mr. Blake, the building manager, and countersigned by Mr. Henry Ford, the Plant Maintenance Department Director. Mr. Blake was interviewed and confirmed that the renovation was needed, and in fact was long overdue. They examined the contract issued to the Aztec Company by the purchasing department, requiring the renovation of the building 12 water tank. Work requirements were exactly the same as those listed in the requisition, as shown above. The two accountants then examined the procedure for selecting the Aztec Company to perform the required work. Aztec had competed for the contract and had submitted the low bid of $5,000. Six other companies had submitted bids of 5,400, $5,500, $6,000, $6,300, $6,500, and $7,000.

Tim and Brad examined the receiving report attesting that the services had been satisfactorily delivered in accordance with the H2O-Pure contract. Mr. Blake had personally signed the report. As a result of their examination, as described above, Tim and Brad had confirmed that the water tank project had been fully performed to the satisfaction of the H2O-Pure Corporation. Assuming that they had exhausted the possibilities for fraud, Tim and Brad closed the file on transaction number 8 with a finding of “no fraud,” and proceeded to examine transaction No. 9.

Requirements:Do you agree with Tim and Brad? If you think Tim and Brad could have done more, take a few moments to think and jot down what additional examinationprocedures you would have recommended, and – for each recommendation – indicate the purpose or objective of the procedure recommended. In other words, write “I would do this (specify what) and this (specify what) to determine some condition (specify what).” A two or three sentence answer is not adequate.

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FRAUD CASE STUDY NO. 2: THE OTHER TANKTim and Brad, the H20-Pure accountants, prepared to examine transaction number 9, selected at random for examination. However, they had a problem in that the five days they had been given to perform proactive fraud-specific examinations was about to run out. They decided to expedite their activities. It was Tim who suggested that they skip the time-consuming examination of documentation supporting transaction number 9 and perform a quick examination to determine if the work was actually done properly. In other words, they decided to search for defective delivery fraud.

Transaction number 9 was very similar to transaction number 8. It involved a payment of $6,000 to the Anderson Company for the rehabilitation of the water tank atop building number 17. The Anderson invoice was examined and it was noted that the company had performed services on the building 17 tank that were very similar to those that had been required on the building 12 tank. Both accountants agreed to limit their examination to a determination of whether or not the rehabilitation services had actually been performed satisfactorily and agreed that an inspection of the tank was in order.

Neither Brad nor Tim felt competent to inspect the tank. An engineer who was employed in the H20-Pure product design department was competent to do the task required, and he agreed to help them. They all went to Building 17, where the engineer took an elevator to the roof, climbed the tank side ladder, and flipped the top hatch cover aside. He then reached into the water that filled the tank, to examine the side surfaces.

When he returned to the ground, he reported to Tim and Brad. “No problem boys. The rehabilitation was not only done, it was done well. The side surfaces are smooth as silk, indicating a good job of scraping the old surface, and the waterproof coating has been very nicely applied, and is adhering nicely. The contractor has every reason to take pride in his work.”

With this news, Tim and Brad closed the file on transaction number 9 with a notation “no fraud detected.” They were satisfied that the H20-Pure Corporation had received fair value for the $6,000 payment they made. They prepared to examine transaction number 10.

RequirementsReview the facts presented and speculate on whether Tim and Brad acted properly. If you disagree, speculate on what additional work they might have performed, given the time constraints they were operating under. Keep in mind that we are not looking for an exhaustive examination.

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Unit 4

Crumbley, Heitger, and Smith: Ch. 5—Employee Fraud: Misappropriation of Assets

Robertson: Ch. 9—Cash Disbursements and Payables

Homework Problems

Some homework problems are listed in the Schedule of Assignments in the syllabus but you also may do the problems below (each problem counts as one homework assignment):

Unit 4 – Problem 1

(Bank transfer schedule; kiting) The LMN Company maintains three bank accounts: City Bank-Regular, City Bank – Payroll, and Metro Bank – Special. Your analysis of cash disbursements records for the period June 23 to July 6 reveals the following bank transfers:

Check No. Date of Check Bank Drawn On

Payee Amount

2476 June 23 Regular Payroll $100,0002890 June 25 Regular Payroll 200,0003140 June 28 Regular Special 100,000A1006 June 29 Special Payroll 50,000A1245 June 30 Special Regular 25,0003402 June 30 Regular Special 125,000

You determine the following facts about each of the first five checks: (1) the date of the cash disbursements journal entry is the same as the date of the check, (2) the payee receives the check two days later, (3) the payee records and deposits

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the check on the day it is received, and (4) it takes five days for a deposited check to clear banking channels and be paid by the bank on which it is drawn. Check 3402 was not recorded as a disbursement until July 1. This check was picked up by the payee on the date it was issued, and it was included in the payee’s after-hours bank deposit on June 30.

Requireda. What are the purposes of the audit of bank transfers?b. Prepare a bank transfer schedule as of June 30.c. Prepare separate adjusting entries for any checks that require adjustment.d. In the reconciliation for the three bank accounts, indicate the check numbers that should appear as (1) an outstanding check or (2) a deposit in transit.e. Which check(s) may be indicative of kiting?

Unit 4 – Problem 2

(Proof of cash) The following information was obtained in an audit of the cash account of Tuck Company as of December 31, 20X0. Assume that the CPA is satisfied as to the validity of the cash book, the bank statements, and the returned checks, except as noted.

1. The bookkeeper’s bank reconciliation at November 30, 20X0.

Balance per bank statement $19,400Add deposit in transit 1,100 Total $20,500Less: Outstanding checks#2540 $140 1501 750 1503 480 1504 800 1505 30 $ 2,300Balance per books $ 18,200

2. A summary of the bank statement for December 20X0.

Balance brought forward $ 19,400Deposits 148,700

$168,000Charges 132,500Balance, December 31, 20X0 $ 35,600

3. A summary of the cash book for December 20X0, before adjustments.

Balance forward $ 18,200Receipts $149,690

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$167,890Disbursements $124,885Balance, December 31, 20X0 $ 43,005

4. Included with the canceled checks returned with the December bank statement were the following:

Number Date of Check Amount of Check Comment1501 November 28,

20X0$75.00 This check was in

payment of an invoice for $750 and was recorded in the cash book as $750.

1503 November 28, 20X0

$580 This check was in payment of an invoice for $580 and was recorded in the cash book as $580.

1523 December 5, 20X0

$150 Examination of this check revealed that it was unsigned. A discussion with the client disclosed that it had been mailed inadvertently before it was signed.

The check was endorsed and deposited by the payee and processed by the bank even though it was a legal nullity. The check was recorded in the cash disbursements.

1528 December 12, 20X0

$800 This check replaced 1504 that

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was returned by the payee because it was mutilated. Check 1504 was not canceled on the books.

- December 19, 20X0

$200 This was a counter check drawn at the bank by the president of the company as a cash advance for travel expense. The president overlooked informing the bookkeeper about the check.

- December 20, 20X0

$300 The drawer of this check was the Tucker Company.

1535 December 20, 20X0

$350 This check had been labeled NSF and returned to the payee because the bank had erroneously believed that the check was drawn by the Tuck Company. Subsequently, the payee was advised to redeposit the check.

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1575 January 5, 20X1 $10,000 This check was given to the payee on December 30, 19X0, as a postdated check with the understanding that it would not be deposited until January 5. The check was not recorded on the books in December.

5. The Tuck Company discounted its own 60-day note for $9,000 with the bank on December 20X0. The discount rate was 6%. The bookkeeper recorded the proceeds as a cash receipt at the face value of the note.

6. The bookkeeper records customers’ dishonored checks as a reduction of cash receipts. When the dishonored checks are redeposited, they are recorded as a regular cash receipt. Two NSF checks for $180 and $220 were returned by the bank during December. The $180 check was redeposited, but the $220 check was still on hand at December 31. Cancellations of Tuck Company checks are recorded by a reduction of cash disbursements.

7. December bank charges were $20. In addition, a $10 service charge was made in December for the collection of a foreign draft in November. These charges were not recorded on the books.

8. Check 2540 listed in the November outstanding checks was drawn three years ago. Because the payee cannot be located, the president of Tuck Company agreed to the CPA’s suggestion that the check be written back into the accounts by a journal entry.

9. Outstanding checks at December 31, 20X0 totaled $4,000 excluding checks 2540 and 1504.

10. The bank had recorded a deposit of $2,400 on January 2, 20X1. The bookkeeper had recorded this deposit on the books on December 31, 20X0, and then mailed the deposit to the bank.

Required: Prepare a four-column reconciliation (“proof of cash”) of the cash receipts and cash disbursements recorded on the bank statement and on the company’s books for the month of December 20X0.

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Unit 5

Crumbley, Heitger, and Smith: Ch. 6—Indirect Methods of Reconstructing Income

Homework Problems

Some problems are listed in the syllabus but you also have the option of doing the problems below as well:

1. Given the following scenario and facts, compute the subject’s funds from unknown sources using the net worth method of proof.

Scenario

Richard Ross operates a flower shop downtown. It is alleged that this business is a front for his bookmaking and loan sharking activities.

Facts

a. You find a financial statement signed by Ross and dated December 31, 1998. The statement indicates that Ross had $1,000 cash on hand.

b. Ross has a checking account that he opened on June 1, 1998. His balance as of December 31, 1998, was $4,000. During 1999, Ross made total cash deposits of $30,000 and withdrawals of $25,000. His balance as of December 31, 1999 was $9,000. During 2000, Ross made total cash deposits of $25,000 and withdrawals of $32,000. His balance as December 31, 2000 was $2,000.

c. A search of your county real estate records shows that Ross purchased his present home in 1998 for $130,000 and that he obtained a $100,000 mortgage. Real estate taxes on the property amounted to $1,500 for each of the years 1999 and 2000. Contact with the lending institution shows that Ross made monthly payments of $1,000 to the lending institution during the subject years.

The mortgage balances are as follows:

12/31/98 $98,000

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12/31/99 $96,500 12/31/00 $94,500

Interest payments are as follows:

1999 $10,500 2000 $10,000

d. Ross bought a new car in April 1998. He paid $25,000 cash.

e. City records indicate that Ross applied for a building permit in 1999 for the construction of a swimming pool in his backyard. Contact with the pool construction company reveals that Ross paid $20,000 for the pool. He made a $10,000 cash downpayment and received an interest-free loan from the pool company for the remaining $10,000. The pool was completed in June 1999. Ross made monthly payments of $500 to the pool company. The loan balance on December 31, 1999 was $7,000 and December 31, 2000 the loan balance was $1,000.

f. An informant stated that since 1998, Ross had maintained a $1,500 a month apartment for his girlfriend, Mary Perry. The informant’s information was verified as being accurate.

g. During your investigation, you find that on February 28, 1999 Ross purchased a Rolex watch for $25,100 cash and on December 23, 2000 he paid $15,000 cash for a ring.

h. During an interview with Ms. Perry, she told you that in addition to the apartment, Ross provided her with a new car that he leased on January 1, 1999. Contact with the auto leading company revealed that Ross made lease payments of $300 per month during 1999 and 2000.

i. Information obtained from a local boat company shows that Ross purchased a boat on June 4, 2000 for $24,000.

j. The county judgment index shows that Ross borrowed $5,000 from a local finance company in 1997. He has never made any repayments.

k. Records of the local travel agency disclosed that Ross took Mary Perry on a vacation to the Orient in 2000. It cost $12,000.

l. You interviewed Ross and he showed you the books and records for his flower shop that indicated that he had a net profit of

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$40,000 in 1999 and $45,000 in 2000. During the interview Ross stated cash on hand in 1999 and 2000 was zero.

2. Given the scenario and facts listed in problem 1, compute the subject’s funds from unknown sources using the expenditures method.

3. Given the scenario and facts listed in problem 1, compute the subject’s funds from unknown sources using the bank deposit method.

Unit 6

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Asset Tracing and Asset Forfeiture

Homework Problems(Each problem set counts as one homework assignment)

Unit 6 –Homework – Problem Set 1

1. A tax haven is a country whose laws, regulations, traditions, and treaty arrangements make it possible for a person to reduce his overall tax burden. Secrecy is basically supplied by way of:

A. The Bank Secrecy ActB. Domestic bank secrecy lawsC. Blocking statuesD. Both B. & C.

2. What entity maintains a list of “non-cooperative” countries – those countries that have detrimental rules and practices which obstruct international efforts to curtail money laundering?

A. Federal Bureau of InvestigationB. Central Intelligence AgencyC. Financial Action Task ForceD. Internal Revenue Service

3. There are four categories of tax havens: “no tax,” “no tax on foreign income,” “low tax,” and _______.

A. High taxB. Special taxC. No tax on domestic incomeD. None of the above

4. U.S. authorities do not have to obtain a court order in the Caymans to look at banking or corporate records, they need only show that the information being sought is for a criminal investigation.

A. TrueB. False

5. The United Kingdom offers opportunities for asset hiders.

A. TrueB. False

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6. Which of the following is an advantage for people wishing to hide assets in the United Kingdom?

A. The United Kingdom does not currently have an equivalent of the Currency Transaction ReportB. British bankers will not ask for a Social Security numberC. Taxes are not withheld on the interest they pay on non-residential accountsD. All of the above

7. Obtaining a Swiss bank account is still the best way to hide assets.

A. TrueB. False

8. Under Luxembourg law, a depositor cannot waive banking secrecy even if he wants to.

A. TrueB. False

9. Which of the following is a step in locating off-shore assets?

A. Determine if subject traveled overseasB. Locate the subject’s travel agencyC. Identify the means employed to move cash off-shoreD. All of the aboveE. None of the above

10. Which of the following is NOT a method used to move funds off-shore?

A. Wire transfersB. Professional intermediariesC. Personal checksD. All of the above

11. Of the many different methods used to smuggle currency, which of the following is the most preferred by asset hiders?

A. By airB. By landC. By waterD. By mail

12. Smuggling currency by water is not a preferred method because it may require the use of third parties AND the currency is not easy to conceal.

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A. TrueB. False

13. Which of the following are specialized bank accounts, in connection with wire transfer services, that invite misuse by sophisticated and professional money launderers?

A. Basic checking accountsB. Threshold accountsC. Cupo accountsD. Both B. & C.E. None of the above

14. Even though a paper trail is left, hiders occasionally deposit personal checks made out to themselves in overseas accounts.

A. TrueB. False

15. Which of the following methods are used to bring money back into the U.S. after it has been successfully laundered?

A. Physical transportationB. Fictitious loansC. Fictitious feesD. Cashier’s checks and wire transfersE. All of the above

Unit 6 – Homework Problem Set 2

1. Criminal forfeiture is allowed if the property in question has been used in the commission of a crime. If the property was used to violate a civil law, then civil forfeiture would be the applicable remedy.

A. TrueB. False

2. In order for property to be considered “to facilitate” a violation, it has to:A. Contribute to the concealment of illegal activityB. Contribute to the possession of illegal goodsC. Contribute to the receipt of illegal goodsD. Any of the above

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3. Under what doctrine does the government have the right to seize the proceeds of an illegal activity even though it interferes with the owner’s constitutional right of ownership?

A. English lawB. Relation backC. Common lawD. Both B. & C.

4. Title 18, U.S. code §982 renders property forfeitable if it is involved in which of the following crimes:

A. Money launderingB. Wire fraudC. Computer fraudD. Major fraud against the United StatesE. All of the above

5. The government may NOT seize property before judgment in a civil forfeiture case.

A. TrueB. False

6. The government can seize property under the following methods EXCEPT?

A. Initiating a forfeiture procedure under the Federal Rules of Criminal ProcedureB. Beginning a summary or administrative procedure under federal customs lawsC. Seizing the property if it is in the possession of a known felonD. None of the above

7. Which law passed in 2001 expands the government’s ability to seize assets related to money laundering crimes?

A. Gramm-Leach-Bliley ActB. Bank Secrecy actC. USA PATRIOT ActD. None of the above

8. Which of the following questions is the fraud examiner LEAST likely to be asked regarding a forfeiture case he or she wants prosecuted?

A. What evidence makes this property forfeitable?B. How should the property be seized?C. How much of the property would you like from the settlement?

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D. What is the value of the property, and where is it now?

9. Generally, property that is subject to forfeiture falls into one of three general categories. Which of the following is NOT one of those categories?

A. It is contrabandB. It is derived from the proceeds of certain illegal activityC. It is owned by the convicted defendant

10 Which of the following is NOT a method that may be used to prevent the disposable of property prior to judgment?

A. InsuranceB. Pre-judgment AttachmentC. SequestrationD. Notice of Lis Pendens

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1.

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