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MODULE 7

7.00 FORENSIC ACCOUNTING AND FRAUD DETECTION

7.01 Learning Outcomes

On successful Completion of this module, students should be able to:

i. Discuss the meaning and nature of Forensic Accounting

ii. Examine the concept of Fraud and Fraudulent Practices

iii. Determine the various investigative methodologies available to Forensic Accountants and

Forensic Auditors

iv. Deconstruct Money Laundering Schemes and how to counter them

v. Evaluate the role of the Forensic Accountant as an expert witness

7.02: Accounting Systems and Fraud Detection

In accounting standards, management is responsible for the quality of financial statements and

the internal control structure of the establishment. Management is also responsible for adopting

good accounting policies and for establishing and maintaining internal control that will initiate,

record, process, and report transactions consistent with management’s assertions embodied in

the financial statements.

There are several write ups on auditor’s role in detection of fraud. ANAN Standard on Auditing

(ASA) 3 ‘The Responsibility of Auditor to suspect Fraud’ specifies that the auditor has a

responsibility to plan and perform the audit to obtain reasonable assurance about whether the

financial statements are free of material misstatement, whether caused by error or fraud. By

this, it is expected that each audit shall follow procedures designed to provide reasonable

assurance of detecting illegal acts that would have a direct and material effect on the

determination of the financial statement amounts. Sarbanes-Oxley requires that auditors attest

to management’s report regarding internal controls and procedure for financial reporting.

Remember, fraud schemes could either be fraud by the corporation or fraud against the

corporation. Fraud by corporation could be in the form of fraudulent financial reporting schemes:

(the fraud could be inclusive, that is, false entries are made in the books or exclusive, that is entries

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required for a fair presentation of the financial statement are deliberately omitted) and frauds

against the corporation could be in form of misappropriation of assets which is by far the most

common fraud against corporations.

Fraud detection is not easy. Fraud is generally concealed and, in some cases, perpetrated through

collusion. Mostly, the documents pertaining to omitted transactions are removed from the

system. Forged documents are created or legitimate documents are altered to support fake

transactions. Fraud detection techniques may not detect all frauds, but it increases the chances

that misstatements or defalcations will be discovered on timely basis.

Knowing where to look is the first step to fraud detection. Understanding the motive of the

criminal and knowing the vulnerable & porous areas where fraud is most likely to exist based on

the risk assessment; helps direct the investigator on the areas of greatest scrutiny.

Again, knowing the types of transactions that require further review as well as other considered

red flag indicators might alert the investigator to areas that will require closer look. Using specific

detection techniques, observing and inspecting, making enquiry and conducting interviews and

a holistic approach with the mind set of professional skepticism armed with better knowledge of

fraudulent schemes, may make the difference between detecting and not detecting fraud.

The procedures to bear in mind while carrying out the assignment should include

• Having attitude of professional skepticism while performing the assignment

• Consider deceptions like falsification of documents while reviewing the document

• Be quick to recognize potential red flags which are possible indicators of irregularities,

and consider whether further analysis is required. Expand document verification.

Trust but verify.

To recognize early the sign that material misstatement might have occurred is a challenge. But

the following steps will assist the investigator in identifying, evaluating and responding to the

risk of material misstatement due to fraud.

• Holding discussions among the team concerning fraud risks

• Obtaining information relevant to the identification of fraud risks

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• Assessing the identified risks, considering the internal control in place to address those

risks

• Responding to the result of the assessment Evaluating audit evidence.

In the event that the investigator believes that misstatements may be result of fraud but that the

misstatement is not material to the financial statement, the investigator should evaluate the

implications, especially if those involved are in managerial position.

An investigators ability to detect fraud may be enhanced by his understanding of the business

and the environment in which it operates. With this knowledge, the auditor may be able to

identify anomalies or potential red flags easily. „It is important to understand the business, the

control procedures in place, the budgeting process, the accounting policies, the industry, and the

general economic climate affecting the company’ Potential Red Flags and Fraud Detection

Techniques. By Will Kenyon & Patricia D. Tilton.

Certain level of risk may exist in financial statement audit. Some examples are the managerial

competence of the top hierarchy, the accounting staff, the effectiveness of the internal control,

the ability of evidence, etc, these uncertainties or risks are inherent risks, control risks or

detection risks.

Assessing the degree of risk present and identifying the areas of highest risk are critical initial

steps in detecting financial statement fraud. The investigator specifically evaluates fraud risk

factors when assessing the degree of risks. He will approach the risks assessment with a high

level of professional skepticism, setting aside any prior belief about management’s integrity.

Knowing the circumstances that can increase the likelihood of fraud as well as other risk factors

should aid in this assessment.

Professional skepticism has several aspects; keeping an open mind, developing a heightened

awareness, making a critical assessment of evidence, and seeking corroboration. The American

Institute of Certified Public Accountants, Statement of Auditing Standards (SAS), 99 postulated

that ‘the auditor should conduct the engagement with a mind-set that recognizes the possibility

that a material misstatement due to fraud could be present, regardless of any past experience

with the entity and regardless of the auditor’s belief about management’s honesty and integrity’

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Remember that fraud risk can emerge at any stage of the audit. The inspector should continue

to physically and manually review documents, data and other relevant information including

assets. He should continue to vouch, trace and perform physical observations, as observation

and inspection are standard parts of any audit work program. When performing these checks,

evidential risk factors may be highlighted. SAS 99 paragraph 68 gave such examples among them:

✓ Discrepancies in the accounting records, which may include

• Transactions that are not recorded in a complete or timely manner or improperly

recorded as to amount, accounting period, classification, or entity policy

• Unsupported or unauthorized balances or transactions

• Last minute adjustments that significantly affect financial results.

• Evidence of employee access to systems and records inconsistent with the access

necessary to perform authorized duties.

• Significant un-reconciled differences between control accounts and subsidiary

records or between physical count and the related account balance- that were not

appropriately investigated and corrected on a timely basis.

• Tips or complaints to the auditor about alleged fraud. Especially a ring member that

has been cheated out

✓ Conflicting or missing evidential matter, including;

• Missing documents

• Unavailability of other than photocopied or electronically transmitted documents

when documents in original form are expected to exist

• Significant unexplained items on reconciliations

• Unusual documentary evidence such as hand writing alterations to

documentation or handwritten documentation that is ordinarily electronically

printed.

• Inconsistent, vague, or implausible responses from management or employees

arising from inquiries or analytical procedures.

• Unusual discrepancies between the entities records and confirmation replies

• Missing inventory or physical assets of significant magnitude

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• Unavailable or missing electronic evidence inconsistent with the entity’s record

retention practices or policies.

✓ Problematic or unusual events between the auditor and the client, including:

• Denial of access to records, facilities, certain employees, customers, vendors, or

others from who audit evidence might be sought.

• Undue time pressure imposed by management to resolve complex or

contentious issues,

• Complaints by management about the conduct of the audit or management

intimidation of audit team members, particularly in connection with auditor’s

critical assessment of audit evidence or in the resolution of potential

disagreements with management.

• Unusual delays by the entity in providing requested information.

• Unwillingness to facilitate auditor’s access to key electronic files for testing by

means of computer assisted audit techniques.

• Denial of access to key information technology operations staff and facility,

including security, operations and system development personnel.

• Unwillingness to add or revise disclosures in the financial statements to make

them completer and more transparent.

Just few points to mention here when looking at discrepancies in accounting records; the

investigator should ask, is this a fake or forged document; check for its characteristics though

depending on the sophistication of the perpetrator; viz,

Font sizes or types may be inconsistent to the invoice of the vendor or customers bears no

address o Post office address only disclosed in the invoice instead of street address o There are

no invoice numbers for identification of All the invoice numbers from the customer or vendor

are serial, 1,2,3,4,5,6,7 with none skipped; etc

The presence of the above may suggest for further analysis.

But as Will Kenyon and Patricia D. Tilton in their work Potential Red Flags and Fraud Detection

Techniques put it, „The planning, testing and evaluation of audit evidence for indicia of fraud are

likely are unlikely to be successful without professional skepticism, particularly because fraud is

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a crime of deceit and because the popularly labeled potential red flags, which may appear by

hindsight as bright-red flags, are more like mere threads in their true contemporaneous context.

Nevertheless, armed with attitude, analytic techniques, an appreciation of the interpretative

challenges presented by fraud risks factors, and the benefit of experience, auditors will

continually improve the detection of fraud that materially misstates financial statements’

7.03 Fraud Auditing and Forensic Accounting

The above terms may not be clearly differentiated easily as the functions seems to overlap, and

the experts are all knowledgeable in the inter-related fields; however, some basic rudiments,

extent of coverage and methods of approach to work could be highlighted to give essence to the

above expert’s definitions.

Fraud auditing involves a specialized approach and methodology to discover and explain fraud.

To discover and trace Evidence of fraud is its primary concern, clear knowledge of the client work

or industry should not be in doubt.

The forensic accountant/ investigative accountant often gets involved when the evidence has

been discovered, or when there is high suspicion of fraud, to further check the extent of

inappropriateness. He is skilled in interviewing process, experienced, trained and knowledgeable

in the different processes of fraud investigation. He prepares reports and provides expert

testimony in courts.

Role of the Forensic Accountant in investigation– In Business and

Financial Reporting, Accounting and Auditing;

To understand the Forensic accountant’s role in deterring, detecting and investigating fraud- as

distinct from the independent auditors’ role as a financial statement examiner- we need to first

recall the differences between what auditors do and what forensic accountants do and why. In

addition, their professional worlds have changed in recent years, in ways that bear close

examination.

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According to Steven L. Skalak, the auditors’ concern is that the financial statements of an entity

be stated fairly in all material respects. Accordingly, the auditor’s responsibility is to design and

implement audit procedures of sufficient scope and depth to detect material deficiencies in

financial statements- essentially, without regard to the source or origin of the deficiency.

Auditors are charged with;

i. Making appropriate, reasonable efforts to detect material misstatements in financial

statements, and

ii. Causing management to correct material misstatements or misrepresentations

before the financial statements are shared with the user community or, alternatively,

alerting investors not to place reliance on the statements through qualification of

their professional opinion issued as part of the company’s public filings.

Even this seemingly simple statement of the auditor’s mission brings into play a series of

interrelated and complex concepts, including:

• Reasonable assurance

• Material misstatement

• Detection, as distinct from deterrence and investigation

• Expectations about the efficacy of the auditing process

The Forensic accountant has largely separate set of concerns based on a different role that calls

for different tools, different thought processes, and different attitudes. The forensic accountant’s

concern is not with reaching a general opinion on financial statements taken as a whole, derived

from reasonable efforts within a reasonable materiality boundary. Instead, the forensic

accountant’s concern is, at a much more granular level, with the detailed development of factual

information- derived from both documentary evidence and testimonial evidence. - about the

who, what, when, where, how, and why of a suspect or known impropriety. Sampling and

material concepts are generally not used in determining the scope of forensic accounting

procedures. Instead all relevant evidence is sought and examined.

Based on the investigative findings, the forensic accountant assesses and measures losses or

other forms of damage to the organization and recommends and implements corrective actions,

often including changes in accounting processes and policies and/or personal actions. In

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addition, the forensic accounting investigator takes preventive actions to eliminate recurrence

of the problem. The forensic accountant’s findings and recommendations may form the basis of

testimony in litigation proceedings or criminal actions against the perpetrators. They may also

be used in testimony to Government agencies such as the Security and Exchange Commission in

the United States or the Serious Fraud Office in the United Kingdom. Accordingly, the scope of

the investigation and the evidence gathered and documented must be capable of withstanding

challenges that may be brought by adversely affected parties or skeptical regulators.

Similarities between auditing and forensic accounting

Both rely on

• Knowledge of the industry and the company, including its business practices and

processes

• Knowledge of the generally accepted accounting principles of the jurisdiction in question

• Interpretation of business documents and records

• Independent and objectivity- perhaps the most important similarity.

• Both must function effectively in the complex and ever-changing business environment.

• Both are remarkable disciplines and are of immense service to the stakeholders in the

integrity of companies and to management.

However, they have differences namely;

• Financial auditors perform their examinations based on International Standards on

Auditing (ISA) or Generally Acceptable Auditing Standards (GAAS) but forensic accounting

investigators tackle fraudulent accounting reporting and assets misappropriation.

• Financial auditors perform audit procedures in line with assessed risk of material fraud,

forensic accountant usually are involved only when there is heightened concern that

specific irregularity exists.

• Forensic accountant checks for evidence that may assist determine the motive for the

irregularity while financial auditor check the sufficiency of evidence to enable him form

opinion on the financial records.

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• Financial auditors render opinion on the whole financial statements audited, but the

forensic auditor usually is not involved in the whole financial statement checks, but on

specific area of transaction or people, to determine whether there are perceived

problems that require further checks.

• The financial auditors’ works stand on its own and for the attention of the stakeholders,

shareholders, regulatory authorities; while the forensic investigation reports serve the

narrow or broad interests of those that engage them.

“Yet forensic accounting investigators are expected to be unbiased and objective about

the entity and the issues being investigated’. The work is used to confirm or exonerate a

suspect situation.

• Forensic accountant should check errors in execution or judgment and deliberate

misstatement, the motive for deviation from the organizations policy, while financial

auditor is focusing on the accuracy, completeness and validity of the financial records

they opine.

• Financial auditors conduct their work in the open and this is known to all personnel, but

some forensic investigations may quietly carry out the investigation and leave, others will

come and turn the system up-side-down, depending on the terms or reference.

• The financial auditors usually complete his work with the issuance of opinion on the

financial statements, but the forensic investigator is a part of larger project to evaluate

allegation. He participates in meetings and activities throughout the investigation and

after.

• The financial auditor sketch the scope of the audit based on risk factors determined after

consideration of certain factors. The forensic accountants have few predetermined

boundaries. The inquiry begins and findings start emerging, the investigation will shape

in line as things unfold.

• Staffing and executing financial audit are most often delegated to other staff. But forensic

investigator works actively throughout the investigation. Always on site to determine the

next action and flow of events. Delegating as few as possible, most senior players are

active; the haul mark being „there is no substitute to experience’.

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• Most forensic investigation works are performed in privileged environment, due to

likelihood of related litigation, but the financial auditor does not create work product with

an attorney or report findings to a lawyer.

• The auditors’ report may offer opinion as qualified, unqualified; he may issue a disclaimer

or he may resign if there are restrictions that are not acceptable to him. The forensic

investigator work with sets of scope from the client. He uses knowledge, education, skills,

experience and training in his work. Being a fact finder, he is rarely expected to issue an

opinion.

• When searching for information, the auditor request from clients or other documents

including records and other source documents. They mostly rely on information drawn

from the client’s books, their employees, third party confirmations, test of records

analysis and amount.

The forensic request on the other hands are more of discovery requests from the clients,

and even outside the office to public records, data base, e-mails, and interviews with

other people both within and outside the organization.

• Auditors interviews with personnel are straight forward and counsel often times are not

present. The forensic investigator may explain the purpose of the interview and that the

information is obtained in confidence and the extent of confidence reposed. The counsel

involved with the forensic investigator may be present, while also, the interviewee will

also have his counsel present.

• The auditor’s evidence is to support his opinion, while the forensic investigator, like the

law enforcement obtains and preserve evidence, to maintain a chain of custody, in case

of further process in litigation.

• The auditor usually pens down its opinion and may read orally when required. The

forensic investigator is usually called upon to present findings orally and they may also be

called upon to testify in the course of litigation.

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CASE: Belize (Adopted)

Belize (formerly British Honduras) is located next to southern Mexico and Guatemala by the

Caribbean Sea in Central America. English is the official language, but Spanish is also spoken.

Belize has a population of about 266,000. It has a tropical climate and is hot and humid. It is a

democracy that won its independence from England in September 1981. The legal system follows

English law. The Governor General and Prime Minister are appointed by the Queen of England.

The leader of the majority party is usually appointed Prime Minister. The Senate has 12 members

appointed by the Governor General. The House of Representatives is elected by the electorate.

There are 29 members in the House of Representatives who serve 5-years terms. Tourism is the

principal industry, followed by sugarcane, citrus, marine products, and bananas. There are good

communications, internal and external. Belize has automatic systems for direct dialing, faxes,

cellular communication, and e-mail, as well as two Internet service providers. It has both a

seaport and airport. The International Business Company Act provides for privacy. Directors and

shareholders of IBCs can remain anonymous and are not recorded other than companies’

registered offices, which may not be divulged to any authority.

Shares may be issued in bearer shares, and companies may have nominee directors. There are

no restrictions on trade. Bank secrecy is enforced by law, and bank records cannot be made

available to authorities in any jurisdiction. All normal banking services are available. A merchant

can have credit card receipts credited to IBC offshore accounts. In Belize, IBC assets cannot be

touched by any authority. Also, a -trust can be set up for nominal costs and minimal formalities

on short notice. The trust must be irrevocable to qualify as a true asset protection device. There

is no requirement for accounting reports to any agency. Claims, judgments, liens, or bankruptcy

proceedings from any country cannot be imposed upon earnings or assets of irrevocable

discretionary Belize trusts. Another vehicle is the Suisse-Belize International Investment Trust. It

operates in a manner very similar to that of a mutual fund, except with certain provisions. First,

it is private, not public. Second, instead of shares, it issues bearer unit certificates. Since secrecy

is paramount for this money, the certificates are not issued in name, but are the property of the

bearer. This allows for transferability. To safeguard against stolen bearer unit certificate, the

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account number and password are required to validate the cashing in of a certificate. The Suisse-

Belize Investment Trust operates under the Trust of Belize, 1992. There are no annual reporting

requirements on this type of offshore international investment trust. To protect the trust, a

standard form must be filled out and notarized declaring that the funds used to purchase the

bearer unit are not from criminal or illegal activities. (Source:

George Manning; FINANCIAL INVESTIGATION & FORENSIC ACCOUNTING; 2nd Edition; CRC Press

Taylor & Francis, Boca Raton, 2005)

The International Business Company Act and Suisse-Belize International Investment Trust

requirements as furniture and as vehicle in Belize appear weak, restrictive and impediment

to financial crime investigation. Discuss

7.04 Investigative methods in Forensic Accounting

There are various evidence-gathering methods in use by forensic experts during

investigations. In most cases, a combination of various evidence-gathering techniques is

required to support a report. Sometimes, the elements of inappropriateness are fraud rather

than oversight. The evidence-gathering techniques are designed to uncover these elements,

forensic experts should be careful to choose the most suitable procedure for the assignment.

The following is lifted from the „Handbook on Fraud Management & Forensic Accounting’

Publication of Association of National Accountants of Nigeria;

• Interviewing: Interviewing is an important evidence-gathering technique. It helps

obtain information, which establishes elements of a crime, provides additional

leads, get cooperation of witnesses and victims, and obtains the economic

motives behind a perpetrator.

• Vulnerability and internal control charts: Vulnerability and internal control charts

help auditor determine the best probabilities where inappropriateness is likely to

occur.

• Document examination: This technique uncovers concealment efforts of

perpetrators by manipulating source documents

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• Employee searches: This technique involves examining an employee’s desk,

locker, lunch box, etc. It is important not to violate a person’s constitutional rights

of illegal searches. Searches are legal if conducted in a proper manner and with

adequate notice. If obtained illegally, evidence can be inadmissible in court.

• Invigilation: This technique involves the close supervision of suspects during an

examination period. It can be effective in identifying who commits the fraud and

where the fraud is occurring. It is particularly useful in catching fraud that is

committed by independent suppliers, night watchmen, warehouse supervisors,

purchasing agents, and cashiers. Its drawbacks are high cost and it could cause

low employee morale.

• Observation: Observation is watching, looking, spying, or snooping to gather

evidence. These observations are sometimes recorded on various kinds of media.

This can show how the fraud is being committed.

• Undercover: Undercover operations require an agent or informant. This

technique should be used for major criminal acts, i.e., organized crime activities.

It is important that the operation remain secret. It is also very dangerous for the

undercover agent.

• Specific item: Specific item evidence is locating and identifying specific documents

and projects that show fraud has occurred. This can be with one or more

documents, i.e., altered contract, many cancelled cheques, annual allocation of

fund to never existing projects or white elephant projects.

Evidence gathering approach

There are various accounting and audit programs available for the use of the forensic

accountant, he must identify which to use and when to use them.

Remember the criminal elements will use whatever means including professionals, such as

teams of lawyers and accountants to legitimize their illegal income and to cover up their acts,

such use of professionals requires sophisticated accounting techniques to uncover their

schemes. This, is turn, requires more time, funding and personnel.

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Net-Worth Method

These methods are very powerful tools in both civil and criminal cases. They are most

appropriate when the subject’s lifestyle appears to be much higher than known or probable

sources of income. An example would be a person who owns and lives in a mansion in

Asokoro district of Abuja and drives an expensive Hummar jeep, but works at a fast food

restaurant making income close to minimum wage, or is not working at all.

Net worth method was first used in America by Internal Revenue Services in 1931. This

method is appropriate where a taxpayer accumulates vast amounts of assets. It is not useful

where the tax payer has little or no assets and spends his income on lavish living.

When Racketeer Influence Corrupt Organizations (RICO) act came in 1970 the use was

extended to it. This is not strictly an accounting method, but a proof by circumstantial or

indirect evidence. It is an attempt to establish an „opening net worth’ of the subject, which

is defined as assets less liabilities. It proves increases in net worth for each succeeding year

during the period under examination. In RICO, it is used to determine the amount of illegal

income.

Tax net worth theory

Year 1 Year 2 Assets

Assets

Less: Liabilities Less: Liabilities

Equals: Net worth Equals: Net worth

Less: Net worth year 1

Equals: Net worth Increase

Add: Nondeductible expenditure

Less: Nontaxable Income

Equals: Correct taxable Income

Less: Reported Taxable Income

Equals: Unreported Taxable Income

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RICO net worth theory

Year 1 Year 2 Assets

Assets

Less: Liabilities Less: Liabilities

Equals: Net worth Equals: Net worth

Less: Net worth year 1

Equals: Net worth Increase

Add: Personal expenses

Equals: Total Income

Less: Legal Income

Equals: Illegal Income

The American Congress, in addition to RICO Act, passed the Continuing Criminal Enterprise

(CCE) Act. This act was passed by Congress to combat drug trafficking. 21 USC 848 defines a

continuing criminal enterprise as “any person, in concert with five or more people, who

occupies a position of organizer and supervisor and who obtains substantial income or

resources”. The alternative is a defendant who derives profits or other proceeds from an

offense may be fined not more than twice the gross profits or other proceeds. The

prosecutors can therefore use the net worth method of proving illegal gains and identifying

assets for forfeiture.

This is therefore used when

i. Target acquires a large amount of assets

ii. Target spends beyond means

iii. Target is a high level drug trafficker where most, if not all, witnesses against him are

drug distributors for him

iv. Illegal income needs to be determined in order to determine the forfeiture amount.

Expenditure method is a derivation of the net worth method, and it has been in use since

1940s. Like the net worth method, the expenditure method is used to determine the amount

of unreported taxable income. This method is appropriate in cases where the tax payer does

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not accumulate assets, but spends all his income on lavish living. The expenditure method

was expanded to encompass organized crime figures. This is usually a method of proof by

circumstantial or indirect evidence. It is calculated by total expenditures, less total

nontaxable sources, to arrive at adjusted gross income. Exemptions and deductions are

subtracted to arrive at corrected taxable income. It is then compared with the reported

taxable income to arrive at any unreported taxable income.

Expenditure theory

Total Expenditure

Less: Total nontaxable sources

Equals: Adjusted gross income

Less: Standard deductions

Less: Exemptions

Equals: Correct taxable income

Less: Reported taxable income

Equals: Unreported taxable income

Just like in net worth method, expenditure method is used in RICO and other economic crime

cases. In RICO the basic objective is to determine the amount of illegal income.

The expenditure method is used in RICO when

i. Suspect does not seem to acquire assets

ii. Suspect spends beyond his means, lavish living

iii. Suspect is a high-level kingpin where most, if not all, witnesses against him are

convicted criminals.

iv. Illegal income needs to be determined in order to determine the fine or forfeiture

amount.

Detailed discussion on how to prepare and present the net worth and expenditure methods

in court, is complex and beyond the scope of this paper. Suffice it to say that the forensic

accountant should know when to use which tool.

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Tracing

Tracing is an accounting technique which involves the flow of funds. It shows the flow of

funds from bank to bank, entity to entity, person to person, or combination of each. This

technique can be used in organized crime cases or individuals. Its primary purpose is to

identify illegal funds and trace them to the beneficiary in criminal or civil cases.

It should be noted that the sources initially identified are greater than what the end

beneficiary receives. The courts have ruled that the exact amount is not necessary to

establish, but only that the end receiver received funds from an illegal source over an

established period. This technique is very useful in money laundering cases, regardless of the

illegal activity.

E.g. John Doe’s tracing schedule

Bahamas Cayman Barbados

Trans Ltd Trans ltd John Doe

Date item in out in out in out

1/6/02 Cash 2,000,000

30/6/02 Cash 1,000,000

1/7/02 Blue

Lagoon

Residence

110,000

1/10/02 Cash 5,000,000

1/3/03 Cash 10,000,000

31/3/03 TRF

Cayman

2,000,000 2,000,000

31/3/03 TRF

Barbados

2,000,000 2,000,000

Spain Switzerland

Trans Ltd Trans Ltd

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in out in out

31/3/03 TRF Spain 1,000,000 1,000,000

31/1/03 TRF

Switzerland

1,000,000 1,000,000

10/1/03 TRF

Switzerland

3,000,000 3,000,000

20/12/03 TRF

Switzerland

to Aruba

2,000,000

Aruba Jamaica

Doe NV John Doe

in Out in out

31/3/03 TRF Aruba 370,000 370,000

4/4/03 TRF

Jamaica

1,000,000 1,000,000

4/4/03 TRF Aruba 100,000 100,000

3/4/03 Boat

rep

air shop

100,000

10/4/03 Montego

Bay

Hotel

20,000

10/4/03 Gulf Oil 500

1/10/03 Cash 8,000,000

20/12/03 TRF

fro

m

2,000,000

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Switzerland

Panama

in out

31/3/03 TRF

Panama

500,000 500,000

1/12/03 TRF

Panama

3,500,000 3,500,000

TOTAL 26,000,000 14,480,000

It should be noted that the transfer from the Transshipment Ltd bank account in Switzerland

goes to the Doe NV bank in Aruba. This example shows the subject making another step in

transferring funds before they reach their final destination. Funds can go through many bank

accounts and entities before reaching their final destination.

Cheques spread

This is an accounting method that should be used when the subject uses cheques in account

operation. In forensic accounting situation, the use of cheques spreads is different from the

normal accounting practices. The forensic accountant must have the following information to

perform a cheques spread:

. Date; the date of the cheques must be recorded. The date the cheques cleared the bank in not

necessary. The main purpose is to determine the intent of the subject, which would be the date

the subject wrote the cheques.

. Payee; the name of the payee must be show. This identifies the person or entity that is supposed

to receive the funds.

. Cheque number; the cheque number identifies the instrument that is paying the payee. It is

useful in that it can identify the specific payment made. It shows in numerical order the payments

made to any individual or entity. It serves as a good reference to identify specific transactions.

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. Amount; this shows the amount of funds used or given to an individual or entity. This serves as

evidence in showing the cost of a purchase, whether as an asset, expense or reduction in a

liability.

. Bank from; the purpose of this is to show what bank account this expenditure was made from.

The subject could have more than one bank. This identifies which bank account number or a

code that identifies the bank account, which is listed elsewhere.

. Bank to; this should show the bank account where the cheque was deposited, in other words,

the ultimate payee’s bank account. This can show the specific bank account number. This field is

mostly used for payments made to other bank accounts and entities that are controlled by the

subject.

. First endorsement; the first person or entity that endorses the cheque should be shown. It is

possible and sometimes common that the person who the cheque is made payable to is not the

person or entity who receives the cheque. The cheque could be made payable to Timothy

Adamu, but the cheque goes into an account called Dantata Corporation with Timothy Adamu’s

signature. Also, someone who is not Timothy Adamu could cash the cheque. Therefore, the

person or entity that endorses the cheque can be very important.

. Second endorsement; the payee or first person receiving the cheque may give it to a second

person who will endorse the cheque. Attention should be focused upon the second

endorsement. This may be a kickback or diversion of funds. The ultimate receiver of the funds

should be fully identified regarding any relationships with the company or person providing the

funds.

Account; the purpose of this field is to group similar transactions. It can be used to group

transactions for a particular type of expenditure or for a particular purpose.

Note; this field is used to show any memos or notes on the cheque. It also can be used to record

any peculiar item on the cheque, such as different amounts between the figure amount and the

written amount.

First signatory; this field should show the person who is the primary signatory on the cheque.

This can be important in determining who has control over the bank account.

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Second signature; this field should show the second person who has cosignatory authority over

the checking account. This person has some degree of control over account.

The forensic accountant or investigator records this on a computer using a database, and then

various printouts can be produced. The above can sort the cheque spread. This will show patterns

of activities. Cheque spread also can offer more leads that will need to be further investigated.

Additionally, they provide data that will be used for the net worth or expenditure schedules.

Deposit spreads

This is an accounting method that should be used when the subject uses cheques in account

operation. The previous one deals with the disbursements from the checking account. This case

is the receipts into the checking account. The use of deposit spreads is different from other

normal accounting practices. The forensic accountant should have the following information in

a deposit spread.

Date; the date of the deposit is recorded here. The date shows the time when the funds are

received by the bank.

Source; the source shows from whom the funds were received. For cash deposits, the source

would not be known unless the subject kept other records to show who paid the funds to the

subject.

Amount; this shows the amount of funds received by the individual or entity. This amount should

show only the deposited item and not the total of all the deposited items in a deposit.

Bank; the purpose here is to show into which bank account the deposit was made. The subject

could have more than one bank account. This can be the specific bank account number or code

that identifies the bank account, which is listed elsewhere.

Account; the purpose of this field is to group similar transactions. It can be used to group

transactions for a particular type of deposit or for a specific purpose.

Reference; this field should list the number of items deposited, usually the cheque number or

draft being deposited.

Number of items; many times, deposits contain more than one deposited item. Each item in the

deposit should be recorded separately. In order to connect all items in the deposit, this field will

give the total items in the deposit. The date will be the same for each item in the deposit.

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Note; this field should be used as a memo. The memo can record what was noted on the

deposited item, or it can be used to record strange things about the item.

If the forensic accountant or investigator uses a computer, then various printouts can be

produced. The above field can sort the deposit spread. Sorting deposited items by any of the

above fields will disclose patterns and offer more leads that will need to be investigated. Deposit

spreads provide data that will be used in the net worth or expenditure schedules.

Credit card spreads

If the subject uses credit cards frequently, then credit cards spreads should be used.

Some criminals use stolen credit cards to make purchases, which are later fenced. Other criminals

use credit cards legally. In either case, credit card transactions should be analyzed. They are

critical to show the movement of the subject geographically. The forensic accountant should

prepare a credit card spread using the following fields;

Date; the date should be the date of transactions.

Vendor; the vendor is the company that sold the merchandise or provide the service to the credit

card holder. It may be a valuable witness in trial, especially if the transaction is large.

Credit card number; this field should show the credit card account number or a code that will

identify the specific credit account on a separate listing.

Amount; this field shows the amount of the charge.

Reference number; the reference number should be the charge slip number. This is found on

either the credit card statement or the charge slip

Signer; this should record the person who actually signed the charge slip. There are occasions

where more than one person can sign on a credit card. Sometimes there is no signature, but a

statement stating „on file’. For criminal cases, the on-file slip should be obtained from the vendor

to confirm that the subject signed for the purchase.

Account; the purpose of this field is to group similar transactions. It can be used to group

transactions by either type or purpose.

Note; this field is used to record any unusual characteristics of the transaction.

Access to a computer can be very helpful. The above fields can sort the credit card data. They

will show pattern in transactions and can offer leads that can be followed up. Credit cards

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transactions can be useful in showing the subject’s whereabouts overtime if he uses the credit

card a lot. The data on credit card transactions can be used on the net worth and expenditure

methods.

Gross Profit Analysis

An accounting method that is useful in cases of money laundering or skimming operations is

gross profit analysis. The subject will acquire a legitimate business. Normally, this business will

take in cash. In a skimming operation, the subject will withdraw money from the business. The

funds do not reach the business bank account, but are diverted for personal use. In a money

laundering operation, illegal funds are added to legitimate funds and put through the business

bank account.

The amount of funds that are either skimmed out or added in can be determined by finding out

the cost of the merchandise purchased and normal sales price or markup. The following steps

should be used to determine the amount of funds either skimmed out or laundered through the

business.

i. The normal markups or sales prices should be determined. If there is more than one

product with different markups, then each product markup will have to be determined.

ii. Determine the amount of merchandise purchased for each period under investigation.

Product lines should be separated according to the different markup rates.

iii. The markup rates for each product are applied to product costs. This will give the gross

proceeds that should be generated from the sales of the products.

iv. Once the gross sales have been determined for all products for the period, a comparison

is made to the funds deposited into the business bank accounts. If the sales figures are

higher than the bank deposits, then the difference indicates the amount of funds

skimmed out of the business. On the other hand, if the sales figures are lower than the

bank deposits, then this indicates the amount of funds laundered through the business.

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Bank Deposit Method

Another indirect method of determining income, whether tax or Racketeer Influenced and

Corrupt Organization (RICO), is the bank deposit method. In tax cases this is referred to as the

bank expenditure method, which more aptly applies.

The tax offices in US have used this method for many years. It is yet to be used in RICO cases,

primarily because it is not common to forensic accountants and fraud examiners. Also it requires

that the subject uses bank accounts to a great extent. This method is very useful for a subject

who operates only one business and the income seems to come from only one source. The

subject’s business is a cash type business where receipts are received in cash.

In this method the subject’s gross receipts are determined by adding total bank deposits,

business expenses paid by cash, capital items purchased in cash, personal expenses paid in cash,

and cash accumulations not deposited in any bank account. This is compared to the subject’s

gross earnings for tax purposes; and this is compared to identify income for RICO purposes. When

this method is employed, each item of income and expense must be examined as to the source

of fund and their subsequent use.

Telephone

The forensic accountant should be aware of telephone calls. Telephone calls will help identify

personal contacts and associates of the subject. Also, they identify one of the subject’s expenses.

If the subject is a heavy telephone user, then this could be a major expenditure. Law enforcement

agents will sometimes use a court-authorized wiretap or pen register. A pen register is a listing

of telephone numbers that are either received or made by the subject. A data base will be

established to identify telephone contacts.

The database should contain at least the following fields:

Date, this is the date the call is received or made.

Caller, this field should identify the person who is making the call. This could be the subject or

another person.

Receiver, this field should identify the person who receives the call. This could be the person or

another person.

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Sender number, this field should identify the telephone number of the person making the call.

This could be the subject of another person.

Receiver number, this field should identify the telephone number of the person receiving the

call. This could be the subject or another person.

Time, this field should show the time the call is either received or made.

Length, this field should show the length of the call-in minutes, as a minimum.

Telephone calls usually will not identify assets or expenses, but they can identify leads to assets

or expenses. In situations where database is well established for all telephone subscribers

including GSM, the telephone company can identify telephone subscribers. The subscribers can

later be interviewed regarding their relationships with the subject.

Flowcharts

here are many kinds of flowcharts the forensic accountant of fraud examiner can use. In many

cases, the investigator will probably use many kinds of flowcharts in the same case. The common

ones are;

BOSS CONSIGILIERI

UNDERBOSS

CAPO CAPO CAPO

SOLDIER SOLDIER SOLDIER

ASSOCIATES ASSOCIATES ASSOCIATES

Organization flowchart Source: Financial Investigation & Forensic Accounting . Manning

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a. Organizational, this flowchart identifies the chain of command or lines of

authority. In criminal organizations, this is important tool to be used during

the investigation and in court as evidence.

b. Chronological, this is a chronology of events that shows people,

transactions and dates can be very useful. Its primary purpose is to identify a

pattern. Once a pattern is established, the forensic accountant can project

future events. The best tool in this case is to use a calendar showing the

particular events.

c. Matrix, a matrix is a grid that shows relationships between a numbers of

entities. This is most commonly used with telephone numbers and physical

contacts; i.e., meetings.

1 2 3 4 5

6 7 8 9 1

2 8 9 1 2

- - - - - 6 7 8 9 5

4 3 2 1 5

6 7 8 9 1

2 3 4 5 6 TOTAL

162-6462 X 1 3 3 8 15

278-7373 3 X 1 5 8 17

389-8284 5 3 X 2 2 12

491-9195 8 2 6 X 1 17

512-5516 1 8 2 10 X 21

TOTAL 17 14 12 20 19 82

Operational, this flowchart shows the flow of operations. This kind of flow charting is used by

external auditors and various governmental auditors to examine internal control. Its purpose is

to illustrate the flow of documents through various departments within an organization. Internal

Source: Financial investigation and Forensic Accounting. Manning

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controls are compromised when an individual or department has too much involvement in the

processing of a receipt of income or payment of an expense.

SALES SHIPPING ACCOUNTS CASH

RECEIPTS RECEIVABLE

The forensic accountant should use as many of these accounting techniques as possible,

regardless of whether they are used in a trial. The cheque and deposits spreads are the basic

tools of any forensic accountant. They are the starting points of an examination and the building

blocks to reach the final summary. The credit card spread is another building block in those cases

where the subject uses them. These accounting techniques also provide leads to other financial

information and establish connections with other people and entities. The subject’s connections

are a key to any fraud case. They are the building blocks for indirect methods, e.g. net worth and

expenditure methods.

Also, remember that the forensic accounting investigator will be concerned with where the

subject gets the money, how much money did he get, what did he do with the money.

CASE STUDY: (TREASON) ALDRICH HAZEN AMES (Adapted from CIA file)

This is a celebrated Forensic Accounting Investigation work on an agent and Russian Spy (KGB).

As you read, you will notice that he left two tracks uncovered through which he was caught. (i)

he called attention to himself by his unexplained wealth and (ii) he left a wide paper trail for the

investigators to follow.

It wasn’t as if Ames was a really good spy. Everyone agreed that he was spectacularly bad, in fact.

He was lazy, drunk, careless, and indiscreet. You would think these character traits would have

caused his undoing long before they did, but these little foibles were evidently not sufficiently

outstanding at the Central Intelligent Agency, where Ames was employed, to arouse any

suspicion.

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Over an eight-year period, from 1985 to 1993, Ames received about $2.7 million in cash from the

intelligence service of the Soviet Union KGB. Ames provided information that led to the

unmasking of at least 12 Soviet citizens who were spying for the United States. Most of these

men were executed as a result. Fig. Title

It was this money that should have been Ames downfall. He was incredibly obvious in his

spending of the cash he received from the KGB. He did everything to call attention to himself, he

only omitted to wear; “Hi I am Rick, KGB mole” Ames began spying for KGB in 1985. Although

Ames held positions in CIA with tremendous access to classified material; at one point he headed

the counterintelligence operations against the KGB- and he saw his career approaching a dead

end. He married a Colombian girl, Rosario Casas Dupuy, she had expensive taste, but not much

money. Ames, a civil servant on GS14, had little enough himself and he wanted more.

Ames contacted the Russians and offered secrets they could not obtain anywhere else. The KGB

knew a good thing when they saw it and gladly met Ames demands for money. The Russians paid

their new spy over $3 million in cash. Even though Ames demanded for the money up front the

KGB refused so he was forced to accept large cash payments which he laundered himself.

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Ames knew he had to come with some explanations for the tens of thousands of dollars he was

earning and spending and he actually developed several cover-up stories mostly revolving around

his wife’s wealthy background in Colombia. Some of Ames colleagues in CIA in fact knew that

Rosario’s parents are not wealthy, but nobody cared. Ames used this story to explain his purchase

of an upscale home in Arlington, Virginia, for $540,000 in cash. He made similar allusions to

explain the 1992 Jaguar he drove to work every day, again he paid $50,000 in cash for it.

Everything Ames did with his dirty money practically screamed for attention. During an oversea

posting to Rome, he and his wife ran up phone bills of $5,000 per month, mostly for Rosario’s

calls to her family in Colombia. Together Ameses had credit card purchases as high as $30,000

monthly, and they employed a maid at their Arlington home.

Ames made $1.5 million in cash deposits to his bank account, some of which were reported on

Currency Transaction Report (CTR). Other deposits were structured to avoid the reporting

requirement. He had two accounts at Credit Suisse in Zurich, into which he deposited $25,000

per month as much as $950,000 during his tour in Rome. Wire transfers from this account

replenish his account in Virginia.

During an interview in 1993 when he was arrested, Ames acknowledged that he had not handled

the cash very well. It is rather chilling thought, but it is possible that if Ames had implemented a

money laundering plan, he might have continued his double career until retirement. But as it

was, he faced placement problem of converting large amounts of US currency. Although he made

several cash deposits over $10,000 causing CTR to be generated, many of his transactions were

conducted in amounts under reporting threshold. On August 1, 1989, Ames exchanged 28 million

Italian lire to $22,107 which he deposited into his bank account in Virginia. He made previous

deposits of $15,660 and $13,500 into the same account in February 18, 1986 and October 18,

1985 respectively.

FBI agents investigating Ames learned that he had received $150,000 in cash at a meeting with

his KGB handlers in October, 1992 and he had subsequently deposited $86,700 into his bank

account in a series of transactions under $10,000.

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As for layering Ames opened two bank accounts at Credit Suisse, a Swiss bank in Zurich. During

his station in Rome, Ames deposited $950,000 in cash. He informed the bank that the funds were

from the liquidation of property his wife’s family owned in Colombia. One of the accounts was

held by Ames as a trustee for his mother-in-law, Cecilia Dupuy de Casas.

There was layering what-so-ever between the KGB money and the purchase of the house in

Arlington, Virginia. Ames paid $540,000 cash and used $99,000 cash for renovation. He created

some documents to say that it was the mother in law that had given Ames the cash he used for

the transaction, on another occasion, he said it was the wife’s uncle in Colombia that bought the

house for Ames as a present for their son, Paul’s birthday.

Integration of the laundered funds was solely based on the „wealthy family’ cover story, which

did not hold up to casual scrutiny by the FBI, although CIA bought it for years. Ames originally

planned to create a dummy corporation in Colombia and place it in her mother-in-laws name,

which could have been used as an explanation for where she had gotten the money she was

supposedly giving him. That would have created an alibi for both the layering and integration

prospective, but Ames was either too lazy or too careless to carry it out.

During investigation of Ames, CIA assigned an untrained investigator to do the background check

on Ames alibi for the money, but the FBI, recognizing the importance of financial evidence,

assigned an accountant to the team that did the investigation. The accountant pinned down that

Ames had opened numerous bank accounts in Virginia and in Switzerland and he made deposits

shortly after each meeting with his Russian handlers, leaving a paper trail a mile wide.

The FBI agents proved the underlying activity; they showed the money was coming from form a

foreign power, namely, Russia. They also showed the activity was the reason for Ames profligate

spending and substantial net worth.

Ultimately Ames was sentences to life in prison for conspiracy, espionage and tax evasion. The

wife got 63 months for conspiracy and tax evasion.

Use the above case to discuss the merits of the financial approach on investigation. What were

the methods used by the investigators? Hence discover: (a) where did he get the money (b) how

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much money did he get (c) where is the money going (d) how was the money moving (e) was he

keeping the money or was he a conduit to someone else?

These are all questions a financial approach is intended to answer, and the answer provide

context for the investigation of the underlying criminal activity.

7.05 Theft, Embezzlement, And Money Laundering

Theft, Stealing or Larceny: wrongful taking or carrying away of another person’s property

without his consent and with intension to deprive the owner thereof the property permanently,

(animus furandi). If the intent is to return the item later, there is no larceny. In order to constitute

robbery, either force or fear must be used by the thief.

Skimming /Embezzlement: Diverting business receipts to personal use is skimming. Diverting

funds or receipts of the business by an employee is embezzlement. Cash businesses such as bars,

restaurants, filling stations, etc are susceptible to this crime.

Money laundering: This is the use of money derived from illegal activity by concealing the

identity of the individuals who obtained the money and converting it to assets that appear to

have come from legitimate source. Money laundering is a process to make dirty money appear

clean.

They all fall in the category of white-collar crime as described by Edwin H. Sutherland. The root

cause is greed and a lust for financial gain.

The first two are commonly noticed on virtually every home, office or base activities, and

perpetrators often act with less or no caution. But money laundering activities are mostly quite

technical and could magnify to a complex syndicate.

The main stages typical of money laundering are:

• Placement: this is usually the first phase: Most visible, most vulnerable. The aim is:

• To introduce proceeds into the system without attracting attention -

Disposal of proceeds

The procedures are usually depositing of proceeds in Financial Instruments,

Structuring/smurfing, buying in through travel Agencies, Insurance Policies and Property

Purchase

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• Layering: This usually second phase in money laundering and the aim is:

• Separate source from ownership

• Break Audit Trail

The procedures are usually to convert and move funds from small to large notes, Cash

exports, Cash Deposits in Foreign Banks, Complex Wire Transfers, Barter exchanges or

purchase of Antiques, Multiple Deposits, Use of Scattered Accounts, Mutual Funds, resale of

Property

• Integration: this is usually the final stage, (The Victory Stage). The aim is to enjoy the

proceeds of the crime. This is achieved through:

• Set up legitimate business through;

• Investment in other Assets

• Funding of luxurious lifestyle

• Reinvestment in Predicate Crimes

• Loans

• Gifts

• Purchase of luxurious Assets, Real Estate, etc

• Investment in Business Ventures

• Investments in Safe countries

The Main Stages of Money Laundering

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Source: United Nations office on Drugs and Crime (2017)

CASE: ORGANIZED CRIME (Adopted)

Japanese Organized Crime (YAKUZA)

It has a membership of over 110,000 in as many as 2,500 associated gangs, the Japanese Yakuza

may be the largest organized criminal group in the world. The Yakuza originated in 16th-17th

century Japan, where feudal lords-maintained stables of Samuria warriors. Stronger national

governments in Japan subsequently made many regional warriors superfluous, and they allied

themselves both with the ruling Shogunate and the dissident villages. Eventually, the vagabond

warriors became known as Yakuza, a gambling term for numbers that are worthless or losers, 8

9 3. The name evolved into an expression for „outlaws’, with a connotation of respect based on

fear. Through the next three centuries, the status of the Yakuza fluctuated, depending on the

strength of the national government.

Immediately after WWII, immense social and economic changes in Japan meant opportunity for

organized crime, particularly in black markets.

The Yakuza prospered adding pornography, narcotics, and systemic racketeering to their illicit

enterprises, while expanding into entertainment, sports, labor unions, and corporate affairs.

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Their enforcement tactics become brutal; police and media in Japan referred to Yakuza as

Boryokudan, or violet gang. Many street gangs associated with the Yakuza began to mimic

American outlaw motorcycle gangs The Hippies. Others imitate the dress and style of prohibition-

era gangsters. As interpreted by US moviemakers.

Japanese police designated seven major groups of Yakuza. The largest is Yamaguchi Gumi, with

an estimated membership of 10,000 which has a hierarchical structure resembling that of the

LCN in US. There is a single Kaicho (Chairman) who has advisors without command authority.

Wakato control several deputies, and beneath them are several lieutenants who manage many

numerous soldiers or wakai shu.

The other six major groups, with more elaborate structures, are confederations of smaller gangs

that have combined to increase their power. These alliances controlled criminal activities in

assigned territories. The most powerful and the most important rival of Yamaguchi Gumi is the

alliance known as Sumiyoshi Rengo, with an estimated strength of 8,000 to 15,000 members.

Whatever the internal arrangements of the organization, a Yakuza member’s status is determined

by his efficiency as an earner who passes profits to his higher-ups. The more elevated his position,

the more money he receives from below, although his obligations remain to those still above

him. It is a highly competitive system calculated to maintain pressures for production; Yakuza

members, particularly those in the lower echelons, are encouraged to find new enterprise with

which to satisfy the constant demand from above. Loyalty to superiors is considered paramount.

A Yakuza member who has angered his supervisor may apologize by amputating a finger or finger

joint from his own hand, then presenting it to the offended party as a gesture of sincerity.

The Yakuza groups are active in drug trafficking, primary smuggling amphetamines, from the US

into Japan. They also supply a lucrative Japanese market for firearms, which are strictly regulated

in that nation. A handgun that sells for $100 to $200 here may be worth $1,000 in Japan, and a

single round of ammunition might sell for $12 to $15.

Yakuza enforcers are sometimes used by the boards of large corporations in Japan to keep order

at open stockholders meeting, a practice known as sokaiya. Strong-arm gang members

discourage potentially embarrassing questions by stockholders. Also, the reverse occurs when a

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minority faction, perhaps affiliated with Yakuza interests, wishes to intimidate the board or

majority. Physical violence is not uncommon.

In the US, Yakuza has been mainly involved in obtaining contraband for shipment to Japan.

However, recent intelligence has shown that they are involved with factions of the LCN in East

Coast gambling operations catering to wealthy Japanese businessmen. On the West Coast, they

are involved in illegal gambling and prostitution. For at least 20 years, the Yakuza members have

invested illegally earned profits in US businesses. Recently, Yakuza interests have increased in

legitimate businesses, massage parlors, and pornography. Three Yakuza groups the Yamaguchi

Gumi, Sumiyoshi Rengo and Toa Taui Jigyo Kumiai, are currently active in southern California. In

recent years, the Yakuza has bought shares of major corporations and has started the function of

sokaiya, corporation intimidation. Also, the Yakuza has infiltrated legitimate businesses. In so

doing, it has employed business practices that American companies cannot because of fear of

being prosecuted for antitrust violations or illegal business practices. However, the Yakuza have

been getting away with this because prosecutors have not developed their cases to the extent

necessary to obtain a conviction. (Source: George Manning; FINANCIAL INVESTIGATION &

FORENSIC ACCOUNTING; 2nd Edition; CRC Press Taylor & Fraincis Boca Raton, 2005)

Discuss the structure of Yakuza and the methods it uses to launder money.

7.06 FRAUD, BUSINESS AND CORPORATE CRIME

Recently there have been high profile complex frauds involving billions of dollars globally. Since

then the question has always been; where were the auditors? Two major issues have been

highlighted in these recent cases as the major failure to discover fraud, they are; (a) complex

financial transactions and instruments, the stand of senior management, and (b) limitations and

challenges on the information that are provided for internal auditors.

After the collapse of WorldCom in the monumental accounting misdeeds, the bankruptcy

proceedings led to the development of a document known as „Thornburgh report’.

In it are highlighted several potential pitfalls that internal auditors may confront in the course of

their work. Special Investigation Committee of the board of directors of WorldCom also issued a

report on the disaster.

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Important conclusions drawn from Thornburgh Report:

• Maintain increased skepticism: this may contribute to discovering potential red flags of

fraud in earlier periods

• Be wary of certain limitations that may hinder internal auditor’s abilities, such as

management direction to focus on operational issues rather than financial matters.

• Real support from senior management, the board and the audit committee is crucial to

being effective

• Evaluate the actual financial statement fraud risk, especially in organizations that may

have an increased risk, due to the complexity and dispersed nature of the company’s

organization and financial operations.

• Strive for adequate annual internal audit planning, if the annual plan is not followed, and

determine whether this is the appropriate course of action.

• Strive for actual and active contact with audit committee rather than relying on others.

The Special Investigation Committee report gave further potential lessons these are:

a. Strive for open communication between employees and the internal audit personnel

b. Focus on substantive interaction between the internal audit personnel and external

auditor.

Mostly, courage is required in certain organizations to continue to probe some „no go areas’.

Sometimes in environment that is not transparent or when there is stiff opposition from the

management, courage may fail.

With proper training, knowledge and experience, the internal audit can have a central role in

directing the compass for fraud detection. Professional skepticism and personal courage may be

needed to establish the truth.

7.07 The Role Of Computers In Forensic Accounting

The roles of computers in forensics are inevitable due to the mass data that are often times

involved. The power of these tool kits lies in the ability to check data efficiently in large scale and

complete it 100%. There is seldom room for random sample tests in forensic as virtually all data

need to be verified. Ordinarily, it would be daunting to check mass data of say, documentary

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evidence of over 1,000,000 pages scattered all over and pin them to make forensic findings

report possible, without slips, omissions and errors.

There are many computers assisted audit techniques (CAAT) and forensic tool kits (FTK) in use

available in the market.

These computer aided kits are beneficial in several ways, among them are:

i. They are designed to use commands and procedures that are familiar with manual tests

and verifications. This will enable the user to be used to them with little training.

ii. They document works and results of procedure to enable users create appropriate

working papers of tests and results.

iii. Many of them are compatibles and convertibles into other results needed for further or

other works.

iv. Many of the results are read only generated. This enables the original evidence to be

preserved in its state, thus maintaining integrity.

v. They can work 100% data faster.

vi. The automation of the forensic work makes it faster and quicker to accomplish with great

and enhanced efficiency.

vii. Storage space is reduced on the palms. Example, 60 gigabytes hard drive can hold

equivalent of over 27 million pages

viii. Many of them will give results that are 99.99% guaranteed as correct; example, Signature

and finger/thumb prints analyzers (FTK) imaging 99%. Charred and shred paper FTK, 90%

recovery work guarantee;

These tools could either be customized or generalized tool kits and techniques. They are

generalized when they are purchased off-selves to be used by the organizations; or designed

when they are specifically modeled to suit the client’s peculiar requirements.

The methods of use and the development engineering is beyond this paper, however, suffice to

mentioned that it is only computer that an expert will used to be able to detect computer related

fraud and the critical steps to follow are;

• Outline the objectives of the assignment

• Meet client (data owner) and a programmer

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• Obtain data

• Create the input file definition of the software to the toll kit

• Check integrity of imported data

• Fully gain understanding of the data, then

• Analyze the data

7.08 The Forensic Accountant as Expert Witness

Forensic Report and Expert Testimony

a. Forensic Report

Reports are always prepared once the investigation is over. Although the attorney is responsible

for requesting a formal written report, the forensic accountant should ask beforehand whether

a written report will be required and when it’s due. Also, the forensic accountant should be

thinking about how to formulate such report. Using an organized note taking system or tape

recorder into which observations were recorded, during the investigation of the evidence can go

a long way in helping to prepare a report. A typical system in the note recording system may

involve using asterisks or other types of notations to highlight important information to be used

in the written report and opinions.

Before writing the report, the expert should compile all the data gathered during investigation

and review it to determine how the report should be organized.

The forensic accountant should clearly state his opinions regarding information uncovered during

the investigation. The attorney should indicate to the expert the facts required to develop the

burden of proof. The attorney must know and understand what the expert witness will say during

the trial, and the expert must understand how the attorney will use that testimony. It is a good

idea to communicate to the attorney anticipated rebuttals by other experts as well. The forensic

accountants report should be concise and must be based on testimony and research data from

the investigation.

The report should be clear on the following issues;

• State upfront whether the report is preliminary or final

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• Identify the formal, educational and practical experiences as well as the information

discovered in data collection that helped form the basis for the opinion

• Refer to specific testimony, documents and objects as reviewed to provide concrete

evidence for the opinions and conclusions expressed in the report. Do not rely on the

work delegated to junior partners, lest the expert be trapped on hearsay rule.

• Always reach a conclusion.

• Always date the report and state the cut-over of information and documents examined.

• State at the end of the report that the forensic accountant is willing to review future

issues and that these would be included in any additional reports requested.

• The reports which should be in the forensic expert’s letter headed paper should include

the expert’s signature and appropriate title. Title can include earned degrees,

professional rank, certifications or business job titles. An attorney may suggest alternative

ways for the forensic accountant to express a conclusion or opinion, but such suggestions

should be limited to elements of style and should not affect the content of the report.

• Detailed all schedules and documents supporting the opinion and conclusion.

Remember, credibility, good name and professional disciplines are all tools of the forensic

accountants practice. Always protect them.

According to Singleton (et al) provides further reading on making other assumptions not

considered by the expert during his investigations or allusions during cross-examination, that

was not earlier considered by the expert, making sure that all notes intended for the trial are

available, the usefulness of knowing other witnesses connected on the trial so that the expert

will not be surprised about other experts testifying or the existence of other reports.

Other pre-testimony activities encompass ensuring that any required graphic displays are ready

and available, that all important discussions with the lawyer have been held as part of the pre-

testimony meetings, and that the expert completely understands the report and all other

relevant issues in the trial, whether accounting related or not.

At pre-testimony meetings, it is often appropriate to discuss the witness’s qualifications again to

assure that they are current, to discuss the strengths and weaknesses of the case, and to discuss

and agree on which part of the expert’s reports, if not all, are to be entered into court as exhibits.

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c. Forensic accountant as an expert witness

According to Singleton (et al); „When accountants are called by the prosecution, they generally

testify about their investigative findings. When they were called by defense, they may testify

about the quality of the findings or the opinions expressed by the prosecution’s accounting

expert, in order to create doubt in the minds of jury members about the credibility or weight to

give to the prosecution’s expert’.

Qualifications

Qualifying accountants as technical experts generally is not a difficult task. Questions are posed

to them concerning their professional credentials-education, work experience, licensing or

certification, technical training courses taken, technical books and journal articles written, offices

held in professional associations, and awards and commendations received.

Defense lawyers are not prone to challenge the expertise of accountants, assuming they meet at

least minimum standards of professional competence. The question of whether being a Certified

or Chartered Accountant is sufficient to qualify one as an expert often arises. Generally, persons

may be experts in their particular field of expertise if they have sufficient experience and are

members of their associations or institutes. This situation does not mean that Certified/

Chartered accountants are automatically experts. To be considered an expert, it is helpful to have

prior experience with litigation or criminal matters. This qualification is primarily a result of the

knowledge and skills that are gained during testifying experience.

Further, it is often beneficial to have been accepted as an expert in other matters, thereby easing

current acceptance.

Often, the counsel introducing the witness will read the experts qualifications or ask specific

questions of the witness to establish his credentials. On occasion, the qualifications of the expert

witness are read directly into the court record.

Although the expert’s qualifications are not often contested, it is a distinct possibility. Over and

above being accepted by both parties, it is most important that the expert witness be accepted

by the court.

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Being a Credible Witness

To be a good witness, there are things that you should do or observe:

i. Speak up so that the judge, stenographer, opposing counsel, and all other parties

in the case can hear you,

ii. Define technical terms and put them in simple language so that the jury, judge,

and counsel can understand them. Express yourself well, using simple technical

language that the jury, judge, and attorneys can understand.

iii. In testifying, refer to the exhibit number or some other identification. When

indicating or pointing to an object in the exhibit, you should describe what you are

referring to so that the court stenographer can make an accurate and complete record

of your testimony.

iv. Take enough time in answering questions to gather your thoughts and give an

accurate and brief answer. If you are asked to give an opinion and feel that you do

not have enough facts of enough time to form an intelligent expert opinion, so inform

the court. The court is impressed with such frankness on the part of the witness.

v. Always have adequate notes available so that you can testify regarding all of the

details.

vi. Walk to the witness stand with even steps.

vii. When taking the oath, hold your right hand high with fingers straight and look at

the officer administering the oath. You repeat after him so that all the courtroom can

hear. Do not act timid.

viii. Think before you speak.

ix. When one of the counsels’ calls „objection’ or the court interrupts, stop your

answer immediately and wait until the court gives its ruling.

x. Be fair and frank

xi. If you make a mistake, or slight contradiction, admit it and correct it. Do not tie

yourself up in knots trying to cover up some slip of speech or memory.

xii. Keep your temper, be firm, but flexible.

xiii. If you cannot answer „yes’ or „no’, say so.

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xiv. If you do not know or cannot remember, say so.

xv. Avoid mannerism of speech.

xvi. “Do you want this court to understand……?” Listen closely to this question. If you

do not want the court to understand it that way, make clear what you want the court

to understand.

xvii. Never try to be a „smart’ witness.

xviii. Be brief, just answer the question and stop.

xix. During the recess, do not carry on any conversation with other witnesses or

parties to the controversy. You should stand aloof from everyone except the

attorney who retains you to testify.

xx. Wait until the entire question is asked before answering.

xxi. On cross-examination, do not look at your attorney.

xxii. Keep your hands away from your mouth or face.

xxiii. Be serious and business-like during recesses and on the witness stand.

xxiv. Stay away from opposing counsel, the defendant or plaintiff, and his or her

witnesses.

xxv. Be available and answer promptly when called to testify.

xxvi. Do not stare off into the space or at the floor or ceiling.

xxvii. Be friendly to all sides.

xxviii. Do not raise your voice in anger if the opponent’s lawyer tries to bait you.

xxix. Be honest. Do not invent. Do not inflate. Do not evade.

xxx. Dress conservatively.

xxxi. Have neatly combed hair and newly shined shoes.

xxxii. Use graphs, charts, and other visual aids if they will help to clarify a point.

xxxiii. Do not read from notes if it can be avoided. (if the expert does read from notes, the

opposition lawyer will probably demand to see them, and the expert will appear to

have rehearsed his testimony.)

xxxiv. If you have documents to introduce, have them organized so that they can be

retrieved quickly when asked to do so by the counsel for whose side you are testifying.

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Forensic/ expert witness should not do the following,

i. Don’t discuss the case in the corridors.

ii. Don’t chew gum on witness stand.

iii. Don’t memorize any of your testimony.

iv. Don’t nod or shake your head to indicate „yes’ or „no’.

v. Don’t make any public display of elation or disappointment over the outcome of the case

after the verdict has been rendered.

vi. Don’t volunteer any information.

vii. Don’t show any emotion about proceedings, such as disbelief or astonishment.

viii. Don’t allow yourself to get cut in the trap of the opposing counsel asking you to answer

a question by his „yes’ or „no’; some questions cannot be answered this way, and you

should state so to the court and ask for permission to explain your answer.

ix. Don’t get caught by snares such as “Did you ever discuss this with anyone?” Of course,

you did, and if asked, name the people, the lawyers, and the parties to the suit.

x. Avoid horseplay in corridors, don’t be noisy.

Cross-examination will be your most difficult time on the witness stand. Opposing counsel

will attempt to confuse you, discredit you, and destroy the value of your testimony.

Singleton (et al) give the following guide to experts during direct examination and cross-

examination; Judges often base their assessment of expert witnesses at least in part on how the

witnesses look. Therefore, it is important that witnesses be well groomed and neatly dressed. In

the case of an accountant, a dark suit is the expected image. This appearance may enhance the

image to psychological advantage. In the witness box, the witness should maintain a poised, alert

appearance, stand still, and be ready to take the oath. It is important to control the hands, avoid

fidgeting and maintain eye contact with the questioner.

As the judge will be taking notes, the witness should speak slowly enough to ensure that the

judge does not fall behind. The voice should be strong and directed to the questioner. The

witness should enunciate clearly.

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Several things should be avoided in giving evidence. These range from drinking alcohol

immediately before testifying or chewing bubble gum while giving evidence, to small physical

mannerism, that may affect one’s appearance.

These physical mannerisms, which might be as simple as rubbing the hands together continually,

looking down at one’s hands, continually moving in the stand, or jingling coins in a pocket, could

quickly become irritating to the judge.

Qualification and admissibility of accounting evidence

Singleton (et al) suggested that documentary accounting evidence may be presented in a court

of law in two forms: (a) primary, including original, individual accounting documents obtained

from the parties concerned or other sources, and (b) secondary, including summaries and

schedules based on the original documents. An accountant produces these secondary

documents based on an examination of the primary evidence.

Direct Examination

The purpose of direct examination is to enable counsel for the side the expert represents to draw

out the financial evidence to prove the case. Most likely, this examination will be only a

reiteration of what has been discussed previously with counsel outside the courtroom. It is still

very important, however, for the expert to refresh his memory by reference to anything he may

have read, written, or given in evidence on the case beforehand.

Direct examination is the most organized aspect of the trial; it is the stage in which the expert’s

credibility must be established with the judge. According to the concept of the primary memory

feature, people remember best what they hear first and last. This fact is often a useful idea to

employ in giving or structuring evidence.

It is necessary to be honest in answering questions. Less obvious, however, is the need to avoid

bias and prejudice when answering. The answers to all questions should be clear and concise,

and when complex terms are used, they should be clarified. Use of notes should be limited as

much as possible in order to maintain eye contact with both the judge and the rest of the court.

Accounting schedules should be described accurately and succinctly in layperson’s terms.

Schedules are by their nature concise documents and should be described in that manner. If

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opinions are given, they should be given with conviction once the appropriate ground work has

been laid.

Cross-Examination

Cross-examination is truly the highlight of the adversarial court system; it is geared to allow

counsel either to clarify or to make points at the witness’s expense.

The goals of the opposing counsel during cross-examination are three-fold. The first is to diminish

the importance of the expert testimony just presented. The second might be to have the expert

testify in support of the opposing position by providing a series of assumptions. The third is to

attack the opinion itself or to show the inadequacies of the expert work in arriving at his opinion,

thereby discrediting the opinion, the report and the witness in the eyes of the court.

The basic rules for the forensic accountant are to truthfully testify in court. His or her demeanor

should reflect professionalism. Fostering cooperation with the attorney can be greatly beneficial.

Communication between the attorney and other experts can enlighten you, as well as those

around you, on the case. The expert should expect to work long hours during the trial. Most of

the work is done outside the courtroom not in it. The expert may not go on trial on the case for

many months or years after they have worked the case. In those instances, the expert must

familiarize themselves with the case once it comes up.

CASE: CHARLES (CARLOS) PONZI

He arrived by boat in the United States in 1903. He sailed with a few hundred dollars to his name.

He gambled during the voyage and had two dollars and fifty cents left when he arrived. At first

he did not speak English, but quickly picked it up while working a variety of menial jobs. He

worked as a dishwasher for a while and was promoted to waiter. He was later fired for cheating

customers and gambling.

In 1907, Ponzi moved to Montreal, Canada, and worked as an assistant teller in the Banco Zarossi.

This bank was started by Luigi Zarossi to accommodate the growing number of Italian immigrant

arriving Montreal. At the time, banks were paying two to three percent interest on deposits.

Zarossi began paying six percent and his bank was growing rapidly.

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The high interest rate and a series of bad real estate loans put the bank in serious financial

trouble. Ponzi was finding a way to go back to the United States. He found out about the banks

problems and forged a customer’s check for $423.58. His large expenditures after the forgery

drew the attention of the authorities. When confronted by the police, he held out his hands in

the gesture of being ready to be handcuffed and said “I’m guilty”.

Ponzi spent three years in a Quebec prison for his crime. He was released in 1911 and returned

to the United States. He became involved in an immigrant smuggling scheme, was caught, and

spent another two years in prison in Atlanta, Georgia. When released, he eventually returned to

Boston, Massachusetts. He met an Italian girl, Rose Gnecco. She was captured by his charming

ways, and they were married in 1918. He continued to work at a variety of jobs. After several

months, he came up with the idea of compiling a trader’s guild directory of companies. He was

unable to make the venture work, and his first attempt at business failed.

A few weeks passed when Ponzi received a letter from a company in Spain inquiring about the

directory. Contained in the directory was a postal reply coupon. Ponzi had never seen one before

and researched the coupon. The postal reply coupon was a form of including a return envelope

with postage paid, for foreign mailings. As an example, a person in the United States could

purchase the coupon and include in a letter mailed to Europe. The coupon could then be

redeemed in Europe for their stamps to cover postage for the reply.

The rates for the coupons were originally set during the international postal union agreement in

1907. This established a set rate of exchange on postage for international mailings. The cost of

the coupons was equivalent between the currencies of the different countries. You are able to

buy the coupon at the original 1907 rate and exchange it for stamps at that rate.

After WW1, several foreign currencies were highly devalued, but the exchange rate has not

changed. Ponzi noticed that he could purchase the coupon for about a penny (US) in Europe and

cash it in the United States for about 6 cents. His first step was to exchange American currency

for a foreign currency at a good rate.

His agents in the foreign would purchase the coupons where the currencies were devalued and

send it back to Ponzi, who would then cash in the coupons. Ponzi claimed to be making an

investment return, after cost and expenses, of more than 400%.

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Ponzi began recruiting friends and associates to invest in his new venture. He offered a 50%

return in 90 days. Quickly he reduced the time for the return to 45 days. He explained that the

coupon redemption plan made these profits easy. He began the Security Exchange Company as

his business. Ponzi was a good salesman. He obtained his first investors and paid them off as

promised. As the word spread, his business grew and grew. He hired employees and paid them

commissions on the investments they brought in. By February of 1920, Ponzi had deposited

$5,290.00 in profits.

The following month he had increased the profit to about $30,000.00, and people were lined up

to invest. He sent agents out to other parts of New England. His persuasive sales pitch and the

huge profits offered gave him thousands of investors. By May, he had several hundred thousand

dollars. He deposited a lot of the money in the Hanover Trust Bank in hopes of becoming its

president. He did manage to gain a controlling interest in the bank.

By July, Ponzi had more than two million dollars. Most of his investors were so confident that

they rolled over their investment with interest, as the investments matured. Ponzi began a life

style of wealth. He purchased a huge home, brought his mother to America from Italy on a first

class passenger ocean liner, and became a local hero in the Italian community.

Although money continued to come in, his expense and lifestyle drained more than was being

received. A law suit was filed for prior debts. Although unsuccessful, the suit caused doubts and

fears in the investors. Soon there was run on the Security Exchange Company. Ponzi calmly paid

the investors that wanted out and the run ended. Business went back on the upswing after good

publicity and he was again bringing in thousands of dollars a month.

Curiosity and possibly envy drove the newspaper to assign an investigative reporter, and the

Commonwealth of Massachusetts began an investigation. He appeared to be cooperating with

the investigation and was able to delay their efforts. Ponzi had no real records of his financial

transactions.

Near the end of July, the newspaper began a series of articles questioning Ponzi’s investment

scheme, and was able to get Clarence Barron, a financial analyst and publisher of Barron’s

financial paper to look into the scheme. Barron noted that, although Ponzi promised phenomenal

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returns, he did not invest any of his money into the scheme. It was estimated that 160 million

coupons would be needed for the scheme and only about 30 thousand were in circulation.

The stories caused another panic for the investors, another run on the Security Exchange

occurred. He began paying off investors again and tried to reassure them of their investments.

Many believed him and left their money in. The newspaper reported on Ponzi’s prior criminal

record, and in August he was arrested on 86 counts of mail fraud. Many of the investors refused

to believe his guilt, either from blind faith or the inability to accept their own foolishness.

On November 30, 1920, Ponzi pleaded guilty to mail fraud and was sentenced to five years in

prison. He was released after three and a half years to face the States charges that were pending.

He was found guilty and sentenced to nine more years. Ponzi was released on parole in 1934 and

immediately deported to Italy.

(Source: George Pasco; Criminal Financial Investigations, the Use of Forensic Accounting

Techniques and Indirect

Methods of Proof; as adopted from Zuckoff, Mitchell; Ponzi’s scheme: The true story of a financial

legend, Random House:

New York, 2005)

Advance-fee-fraud (419) classical example: (Adopted)

The trial of suspected fraudster, Fred Ajudua in a Lagos court is a child’s play compared to the

mind boggling revelations in a London court about how a group of Nigerian fraudsters, in

collaboration with some Asians, looted a Brazilian bank of $242 million, into liquidation.

Here is the full story of how the biggest 419 deal in the world was clinically executed, with funds

moving across five continents. Chief Emmanuel Nwude-Odinigwe cuts no figure of a con man.

Creation mounts on his proportionately sculpted frame a cherubic face that would ease his path

into the office of a bishop, if he so desires. But Nwude has no such desire. Underlining that

innocent visage is a manipulative mind that directs Nwude’s energy into thoughts most

unchristian.

In 1994, the mind set to work on a bank heist that would put his name on the front seat of the

Advance Fee Fraud practice, popularly known as 419. By 1998 when he, together with his

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coconspirators, was done with Banco Noreste SA of Brazil, the victim bank had been swindled of

$242 million (about N33 billion). As advance fee frauds go, this took the cake and it put, as it

seemed, Nwude and his fellow fraudsters on easy street for life.

But not quite! At home, there has been no respite for Nwude since.

The NEWS, in its 8 October 2001 edition, exclusively broke the story of the scam. The story

detailed how Nwude and Ikechukwu Anajemba, now late, sold a dummy of a contract to Nelson

Sakaguchi, a top official of Banco Noroeste in charge of all its international areas. Sakaguchi was

made to believe he would benefit from a $187 million Ministry of Aviation contract which had an

overriding interest of $13.4 million. To benefit from the contract, he was told, he would need to

facilitate its execution by contributing financially.

Sakaguchi swallowed the bait and began pumping in Noroestes money, without approval from

his superior officers, into accounts designated by the conmen.

Through tales that the contract money was ready for payment and supported by fake letters

purported to have emanated from the office of the then governor of the Central Bank of Nigeria,

CBN, Chief Paul Ogwuma, Nwude and his fellow collaborators urged Sakaguchi on for more funds

and, in the process, fleeced Banco Noroeste extensively.

The huge sum involved in the Banco Noroeste saga, countless reports of similar frauds and the

dirty image they gave Nigeria, eventually spurred the President Olusegun Obasanjo

administration into taking decisive action to cage the conmen. There has also been pressure from

the American government on the president to stamp out the advance fee fraud syndrome.

Consequent upon all these, Obasanjo established an elite body, the Economic and Financial

Crimes Commission (EFCC), then headed by an assistant commissioner of police, Mr. Nuhu

Ribadu, to arrest the fraudsters for prosecution. The Commission immediately arrested

suspected fraudsters like Nwude, Adedeji Alumile a.k.a. Ade Bendel and Fred Ajudua. Amaka

Anajemba, wife of the late Ikechukwu Anajemba and sole beneficiary of the vast proceeds of his

419 loot was initially at large, far from the dragnet of the EFCC operatives.

Overseas, there was no respite for Nwude and Amaka. The American and British governments

seized some of their real properties in those countries believed to have been purchased from the

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proceeds of the Bank Noreste fraud. In London, they were being hunted by a High Court for

prosecution. Nwude, Amaka and 40 other defendants were in March, 1999 dragged to the court

by Luiz Vicente Mattos Junior, a major shareholder in Banco Noroeste, as well as by some other

majority shareholders who have been saddled with the responsibility of recovering the

outstanding $190 million that Nwude and his co-travelers in the mind-boggling scam allegedly

hauled from the bank. The remaining $50 million has been impounded from the gang in terms of

cash and assets.

The particulars of claim No HCO100699, exclusively in possession of TheNEWS, and filed by the

claimant’s lawyer, Peters & Peters of 2 Harewood Place, Hanover Square, London, have further

thrown up details of how the fraud was perpetrated, who got what and who played which role.

The fraud in the bank was uncovered in early 1998 when Mattos Junior and other majority

shareholders who held 95 per cent of Banco Noroestes shares agreed to sell off their

shareholding to Banco Santander Brazil SA, a subsidiary of Banco Santander of Spain, for over

$500 million. Prior to the conclusion of a formal agreement on the sale, the president-designate

of the proposed Santander Noroeste Group, Mr. Antonio Horta, discovered some discrepancies

in the balance sheets for offshore deposits of foreign currency. The operations of the office were

directly under Sakaguchis control. On the discrepancy, Horta demanded an explanation from one

of the banks two managers of operation and control, Mr. Jayme Margues de Souza.

The manager, in turn, requested the banks accounting manager, Mr. Pedro de Carvallo, to

investigate the discrepancies. The investigation, conducted while Sakaguchi was on vacation,

revealed how he facilitated the fraudulent misappropriation of a sum of $242 million. When he

was questioned by Margues on 11 February 1998 on this discovery, Sakaguchi merely admitted

he lost between $9 million and $12 million of the banks money by acting as a "trader." This

development led to a full-scale audit of the transaction done by Sakaguchi.

The audit was carried out by the banks audit department and its external auditors,

PricewaterhouseCoopers. But before the audit report was submitted, Mattos, Margues and other

executive officers from its internal audit and legal departments held a meeting with Sakaguchi

on 11 February 1998. At the meeting, the troubled banker admitted that he had "invested" Banco

Noroestes money in the construction of an airport in Nigeria although he refused to state the

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exact amount. But he argued before his interviewers that the investment was profitable and

would certainly deliver huge returns for the bank. He also admitted he made payments to a mee

de santo, which means a voodoo priestess, apparently for spiritual assistance on the deal he

entered into with Nwude and his collaborators.

On 12 February 1998, the preliminary report of the audit revealed the bank had been duped by

the fraudsters to the tune of $242.53 million. Sakaguchi failed to explain how the huge loss was

incurred. Under pressure, he only tendered photocopies of a number of documents, many of

which were written or signed by him. But the documents were not convincing, as they did not

explain how the money was used, the purpose of the payments and the beneficiaries.

The banks investigators have, however, been able to unravel how the fraud was perpetrated and

who its direct and secondary beneficiaries were. The funds were transferred principally through

the SWIFT electronic system.

Under this system, between early 1995 and January 1998, a total of about $242 million belonging

to Banco Noroeste was remitted from the dollar accounts in its Cayman branch in British West

Indies to persons and entities who had no proper relationship or no relationship at all with the

bank.

These persons and entities included Nwude, Anajemba, Amaka, some Indians and a string of

companies they registered mainly for the laundering of the ill-gotten money.

The script had well been rehearsed by the principal characters in the scam before Sakaguchi

visited Nigeria on a business trip in 1994. On that visit, he was introduced to a group of Nigerians

by another Nigerian, Dr. Hakim Ukeh, whom he believed was a reliable friend. Ukeh introduced

Sakaguchi to the "Deputy Governor” of the CBN in charge of foreign operations, Alhaji Mahey

Rasheed", and the "CBN Governor”, “Chief Paul Ogwuma."

But those the Brazilian met were not the real CBN officials. Anajemba posed as Rasheed while

Nwude posed as the CBN governor. Sakaguchi was also made to meet with another impostor,

Amaka, wife of Ikechukwu Anajemba, who presented herself as another CBN bigwig, a fictitious

Mrs. Agbakoba.

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Since Sakaguchi got sucked into the vortex of the illegal scheme, he became inextricably involved.

From the first payment he facilitated out of the Cayman branch in 1995, Sakaguchi intensified

the SWIFT transfers through the SWIFT system. None of the payments (transfers) reflected any

proper or actual transaction, was not authorized by the relevant officers of the bank nor was

made with the authority or knowledge of the officers of the bank, other than Sakaguchi. All of

the SWIFT transfers were disguised by false accounting entries and not entered in the banks

accounting.

In the particulars of claims before the London High Court, the claimants allege that the

defendants and Chief Anajemba, "conspired, with intent to injure the Bank, to use unlawful

means to defraud the Bank and to launder or conceal the monies fraudulently misappropriated

from the Bank".

The conspiracy defendants and Chief Anajemba were alleged to have colluded with Nelson

Sakaguchi, Naresh Anani, Shamdas Nathumal Asnani, Ishwari Asnani (wife of Shamdas), Sherina

(Hong Kong) Limited, Christian Nwude (younger brother of Emmanuel Nwude), Rosemary

Iloenyosi (younger sister of Emmanuel Nwude), Chief Festus Okonkwo, Mamelec Trading Pte Ltd

of Singapore, Doulatram and Sons (Hong Kong) Limited. The conspiracy, according to the

claimants, "consisted of an agreement, combination, arrangement, understanding or concert, or

one or more connected agreements..." to use "fraudulent representations and or other

fraudulent means to obtain payments of monies from and belonging to the Bank, to which none

of the parties to the conspiracy was entitled" and to "launder and conceal the monies

fraudulently misappropriated from the Bank." The claimants say they have been able to trace the

transfers to the defendants. They also listed some Nigerian banks involved in the interchange of

the funds, and the account numbers of the transactions.

The first defendant on the list, Macdaniels, was incorporated in England on 2 December 1994.

Chief Ezeugo Nwandu, the second defendant, signed the company’s accounts for the years ended

31 December 1997 and 1998 as its director. He is also a broker and the chief executive officer of

the General Securities & Financial Company Limited, Nigeria. Macdaniels has a US dollar account

(number 66814466) and a pound’s sterling account (number 909044440) at Barclays Bank plc,

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London. The claimants allege that a total of $8,050,000 in misappropriated funds was transferred

directly from Banco Noroeste to Macdaniels US dollar account.

The fifth defendant, Dax Petroleum Nigeria Limited, Dax PN, is a company registered in Nigeria

under company number 295887, of which the late Anajemba and his wife, the third defendant,

were directors throughout the period of the misappropriation of funds from Banco Noroeste.

Anajemba died on 5 October 1998, after which his wife became the Chief Executive Officer of

Dax PN and sole signatory of its bank accounts. Dax PN received N386, 456,248 (converted at the

rate of exchange then to approximately $4,628,218) from the money remitted from Banco

Noroeste to Macdaniels by means of a series of bankers’ drafts written to Dax PN on the Nigerian

bank accounts of the first defendant or its associated Nigerian companies, Macdaniels Limited

and General Securities.

Thus, the claimants "claim against Dax PN and/or the estate of Anajemba and/or against the third

defendant personally, in her capacity as director at the material times of Dax PN, as recipients of

$4,628,218 of misappropriated funds, by way of secondary or third level transfers.

The sixth defendant, Primole Communications Limited, is a company registered in Nigeria under

company number 296171, of which Anajemba and his wife, Amaka, were directors throughout

the period of the alleged misappropriation of funds from Banco Noroeste. Primole was said to

have received secondary transfers from the Brazilian bank to the tune of $24,005,309.

Furthermore, it received N84, 790,000 (converted at the rate of exchange then to approximately

$1,015,449 of the misappropriated funds) in secondary or third-level transfers from the money

remitted by Banco Noroeste to Macdaniels on the Nigerian bank accounts of the first defendant

or its associated Nigerian companies, Macdaniels Limited and General Securities.

Thus, the claimants "claim against Primole and/or the estate of Chief Anajemba and/or against

the third defendant personally, in her capacity as director at the material times of Primole, as

recipients of $25,020,757 of misappropriated funds.

Fynbaz Nigeria Limited, the seventh defendant, is registered in Nigeria, with Anajemba and his

wife as its directors throughout the period of the misappropriation of funds from Banco

Noroeste. After the death of Anajemba, Amaka became its chief executive officer and sole

signatory of its bank accounts. The SWIFT transfer instructions to the account of Fynbaz at

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Hillcrest Merchant Bank Ltd in Geneva (no. PO1501871) indicate that Fynbaz received $4.35

million primary transfers of misappropriated funds into its Swiss bank account. Other SWIFT

transfer instructions also indicate that Fynbaz received $3.025 million primary transfers of

misappropriated funds into various English bank accounts. Other SWIFT transfer instructions

indicate that Fynbaz sent $5.7 million primary transfers of misappropriated funds into various

Nigerian bank accounts.

On 19 January 1996, Union Trust Building Society is mentioned in the court document to have

paid $1 million to an account at HSBC by order of Fynbaz.

The claimants are accordingly claiming against Fynbaz, the estate of the late Chief Anajemba or

Amaka personally, in her capacity as director of Fynbaz, the sum of $14,103,742 in

misappropriated funds from Banco Noroeste.

Chief Anajemba was said to have maintained an account number 605600010 at Laroche & Co.

Banquiers in Switzerland. Between 11 December 1997 and 26 February 1998, he was said to have

received into this account sums totalling $4 million by way of secondary transfers from the Swiss

accounts.

Accordingly, the claimants want Amaka to pay them a total of $4,082, 975 being funds

misappropriated from the bank by her late husband but which she has now directly inherited.

Amaka herself owns an entity in Liechtenstein named Vanua Foundation. The Foundation

maintains an account number 60630027 at Laroche & Co. Banquiers.

Between 11 December 1997 and 25 February 1998, Amaka received into this account sums

totaling $3,997,500 by way of third level transfers from the account of her husband and Laroche

& Co. Banquiers account number 605600010.

Nwude was listed as having received payments of monies fraudulently misappropriated from

Banco Noroeste totaling at least $33,183,698.

On 10 July 1995 and 10 August 1995, Nwude received primary transfers of $1.27 million and $1.2

million respectively into an account in the name of Crystal Bank of Africa held at ANZ Bank,

London, (account number 664359).

Between 10 July and 16 August 1995, Nwude received further primary transfers totalling $3.39

million. Of these sums, $550,000 was paid on 16 August 1995 into an account in the name of

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Triumph Merchant Bank Limited at ANZ Bank in London for the benefit of African Shelter (account

number 654004-01) and the remainder ($2.84 million) was paid into an account in the name of

Crown Merchant Bank Limited at ANZ Bank in London (account number 27776413) for the benefit

of African Shelter Bureau Limited.

Between 22 April 1996 and 24 February 1998, he also received eight secondary transfers totalling

$8.46 million from the Landmark/ Evershine, Pentagon and Excel accounts in Switzerland into his

personal account at Banquet Leumi Le Israel number 10490.

Furthermore, on 1 February 1996, he received a secondary transfer of $400,000 from the

Landmark account into an account in the name of Globe International Holding Plc. Between 1st

October 1997 and 8 March 2000, Nwude also received payments totalling $5,518,352 from Globe

into an account in the name of Rodieem Foundation at Banque Leumi Le Israel number 222836.

Globe itself received secondary transfers totalling $4.62 million. Out of this sum, the following

payments were made to his personal account at Banquet Leumi Le Israel (number 10490): a.

$1.37 million on 1 June 1999, the day after $1,363,352 was received by Rodieem Foundation from

Globe; and b. $3.48 million on 3 April 2000, approximately three weeks after $3.47 million was

received by Rodieem Foundation from Globe.

Between 18 August 1997 and 19 November 1997, Nwude received secondary transfers totaling

$7 million from the Excel and Pentagon accounts and a third-level transfer of $3 million (derived

from the Pentagon account) from Kunzli & Seehozer account number 8585032, in total $10

million, into the account of the Ritanga Foundation at Laroche &Co. Banquiers, Basle, number

8585113.

Between 11 September 1995 and 21 February 1997, he further received third-level transfers

totalling $3,843,698 from Mr. Christian Kachi Nwude, his brother, who himself received a primary

transfer of $500,000 on 31 August 1995 and secondary transfers totalling $6,142,211, including

transfers into the account of Union Trust Building Society at London Trust Bank totalling

$2,675,000, into an account at HSBC Hong Kong account number 018 - 5 - 603511.

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Florence, Nwudes wife who is the 19th defendant, received a total of $42,426- and 8000-pounds

sterling from Nwudes account number 10490 at Bank Leumi Le Israel, Zurich ("BLLIZ) which was

one of the accounts which were recipients of the stolen funds.

Between 26 June 1995 and 10 July 1995, sums of money belonging to the Banco Noroeste totaling

$5.75 million were transferred directly to an account in the name of Payal Asnani, an Indian who

is the 36th defendant, at UCO Bank in Hong Kong, number 45039. This account at UCO Bank was

beneficially owned by Payal and her mother-in-law, Ishwari Asnani. Asnani also owns an account

in the name of Payal held at India Overseas Bank, Hong Kong, number 1034 CD.

This account, together with the aforesaid UCO Bank account, received between 7 September

1995 and 11 March 1997 sums totaling $16,488,261 in secondary transfers from the

Landmark/Evershine account. The claimants therefore want Asnani to pay them a total of

$22,238,261.

Minsk Investment Co. Ltd, the 38th defendant, was incorporated in Grand Cayman on 7

September 1976. Its corporate address is Cayman International Trust Co. Ltd, P.O. Box 30500,

George Town, Grand Cayman, British West Indies. The company holds an account number

174718 with Lloyds Bank in Zurich, which was opened on 5 October 1997. The beneficial owner

of the funds deposited in the Minsk account is Mr. Nariandas Parmanand Kirpalani, the 37th

defendant, who is an Indian national who lives at 43/45 York Terrace West, London NWI

(Registered in the name of the 38th defendant) and in Nigeria. Kirpalani, together with his wife,

Gopi, and Primeway S.A (a director of Minsk Investment Co. Ltd) are all signatories to the Minsk

account. In total, $1.35 million was paid by way of secondary transfers from the

Landmark/Evershine account to the Minsk account for the benefit of Minsk and /or Mr. Kirpalani.

Montana Trading Company Ltd, the 39th defendant, was incorporated in Grand Cayman on 24

October 1980. On 26 February 1985, an account number 175749 was opened in the name of the

Montana Trading by the 37th defendant, Kirpalani. Although the account opening forms do not

identify the beneficial owner of the assets deposited with the bank, since it was Kirpalani who

opened the account and is a signatory on the account, it is being inferred that he is the beneficial

owner of the said account.

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Between 1995 and 1997, secondary transfers totaling $300,000 were made from the

Landmark/Evershine account to the Montana account.

Furthermore, on 13 May 1997, $35,000 was the subject of a third-level transfer from a Nigerian

bank account at Bankers Trust Company in London, for Primole Communications Ltd, the sixth

defendant, to "Montana Investments".

The claimants infer that "Montana Investments" is actually Montana Trading Company Ltd, and

that Kirpalani is in fact the beneficial owner of the funds deposited in the Montana account. The

claimants are relying on the fact that Kirpalani recommended Naresh Asnani to Mr. Rolf Wasmer

of Lloyds Bank, Geneva, and provided a reference for the opening of the Landmark/Evershine

account to show that he knew of the reason why the account needed to be opened, that is to

say, the laundering of the proceeds of the fraud.

Accordingly, the claimants claim as against Naraindas Kirpalani $1.685 million by way of

secondary and third level transfers; as against Minsk Investment Co Limited, $1.35 million by way

of secondary transfers; as against Montana Trading Company Ltd, $335,000 by way of secondary

and third-level transfers.

The 42nd defendant, Sunil Sunderdas Vaswani, another Indian, was said to have on or about 11

July 1996, opened a personal account number 342692 at Citibank, Geneva, under the codename

"Sarina". On the application form, he gave his nationality as British and his address as 270A, Ajose

Adeogun Street, Victoria Island, Lagos, Nigeria. He declared himself to be the beneficial owner of

the funds in that account. His wife, Rita Vaswani, (also British but resident at the Lagos address),

was granted a general power of attorney over the account and was also a signatory thereto. In

total, $6,500,045 was paid by way of secondary transfers from the Landmark and Excel accounts

to the Sarina account for the benefit of Vaswani.

The claimants believe that Vaswani had the benefit of two further secondary transfers from the

Landmark/ Evershine account because two payments out of that account on 9 May 1995 were

made "by order of Stallion", which were likely to be on behalf of one of the Stallion Group of

Companies of which Vaswani is a principal shareholder and managing director. The first transfer

was for $244,483 in favour of General Suciere; and the second for $256,043 in favour of

Hamstang Limited. On 15 May 1997, a third-level transfer was made from CNA Internationals

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account number 34751 at UCO Bank (HK) in the sum of $99,580 to credit Vaswanis account

number 2125552 at American Express Bank, London.

CNA International was a trading partnership of Shamdas Asnani and Anita Lo, which received

secondary transfers from the Landmark/Evershine account.

Vaswani, in his defense, has admitted in an affidavit sworn to on 28 February 2003 that he

obtained all the money pleaded in the contentious transactions from Naresh Asnani, an account

holder of the Landmark and the Excel accounts, but declared that he gave naira in exchange for

them to Asnani or to third parties at Asnanis direction (in the event, to entities associated with

the 18th defendant, Nwude); to entities associated with the late Anajemba, and to the fifth and

sixth defendants.

Brecher Abram, solicitors to the Vaswanis, however, have risen in defense of their client.

The lawyers argued that their client was not categorised as a conspiracy defendant because he

was not accused of participating in any conspiracy to defraud the bank or that he laundered or

concealed money fraudulently misappropriated from the bank.

On the sum of $6.5 million involved, Mr. Vaswani, as his lawyers explained, "Gave full

consideration as a bonafide purchaser without notice of the fraudulent misappropriation of that

money from that bank together with interest and cost.

Mr. Vaswanis lawyers based their logic on the catgorisation of defendants by his accusers. That

is substantive defendants are those against whom restitution for knowing receipt is sought and

a claim for dishonest assistance in breach of trust is made. The latter group is otherwise known

as "Dishonesty claim Defendants."

The particulars of claim further state how primary transfers were made to or for the benefit of

Naresh Asnani, Shamdas Asnani, Payal Asnani, Ishwari Asnani, Chief Nwude Odinigwe, Rik

Chemicals plc ("Rik"), Mr. Kachi, Chief Festus Okonkwo, Macdaniels Limited, Chief Ezeugo Dan

Nwandu and Fynbaz Nigeria Limited. The Swiss Bank accounts were used to make secondary

transfers to, amongst others, Payal and Ishwari Asnani, Sherina, Chief Nwude Odinigwe, Globe

International Holdings SA ("Globe"), Mr Kachi, Chief Okonkwo, the sixth defendant, Mamelec

Trading Pte Limited, Doulatram HK, and to Feesok International Limited ("Feesok"), some or all

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of whom made payments to other conspiracy defendants or co-conspirators. These include some

Nigerian banks.

Of the sum transferred to England, the sum of $14.25 million was transferred to accounts in the

name of Union Trust Building Society, a Nigerian building society, held at American Express Bank

Limited and London Trust bank in London.

In respect of the Swiss Bank accounts, the Landmark/Evershine account was maintained in the

name of Naresh and Shamdas Asnani. The signatories to the Pentagon account were Naresh,

Shamdas and Payal Asnani. The signatory to the Excel account was Naresh Asnani while Shamdas

and Payal Asnani held general power of attorney in respect of that account.

The claimants were sure that almost without exception, the sum of money paid into the Swiss

bank accounts (which were closed after the fraud had ceased to operate) were monies

fraudulently misappropriated from Banco Noroeste. The amounts of the banks monies received

into the Swiss Bank accounts, and accordingly by each of Naresh Asnani, Shamdas Asnani and

Payal Asnani respectively totaled $121,987,500.

Iloenyosi purchased two properties on about 5 June 1997 on behalf of Nwude.

The properties were at 223 S Lasky Drive and 9920 Robbins Drive, Beverly Hill, California, where

the Hollywood stars also have their homes.

On about 16 May 1997, she purchased the property at 1913 Speyer Lane Redondo Beach,

California and on 29 September 1997, she purchased another at 2756 Gremercy Avenue,

Torrance, California.

Each property was purchased as nominee of Chief Anajemba. Mrs. Iloenyosi also purchased the

1913 Speye Lane property utilizing a sum of $470,000 remitted to her account at Wells Fargo,

number 0607737533 on 8 May 1997 by Campbell Tobacco Rehandling Co. Inc, a Kentucky

company from funds held on behalf of Anajemba in a dedicated bank account at Fifth Third Bank

in Louisville, Kentucky. She also purchased the 2756 Gremercy Avenue property utilizing

$447,500 remitted to the account of Warranty Escrow Co Palos Verdes Estate (a California

company) at City National Bank account number 013-018847 on 22 September 1997, and

$10,000 remitted to her account at Well Fargo Campbell Tobacco.

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On 11 September 1997 the property at 1913 Speye Lane was transferred by Mrs. Iloenyosi to

Anajemba by way of gift, and on 6 April 1998, the property at 2756 Gremercy Avenue was also

transferred by her to Anajemba, also by way of gift. After Anajemba died, the properties were

sold and the proceeds were remitted to a trust in favour of Mrs. Amaka Anajemba. The trust was

known as the Amaka Anajemba Qualified Domestic Trust. On 29 April 1998, Iloenyosi purchased

the property at 15223 South Normandie Avenue, Garden, California.

Mrs. Anajemba claims that this property was owned by Chief Anajemba at the date of his death.

Iloenyosi, because of her involvement in these transactions, is alleged by the claimants to be a

party to the scam as a conspirator.

Between 20 May 1995 and 26 January 1996, Chief Okonkwo, according to the claims, received

sums totaling $1,440,000 out of the monies fraudulently misappropriated from Banco Noroeste

on 17 July 1995, the sum of $250,000 was paid by way of primary transfers into Okonkwos

account at Halifax plc.

Staines, number 2/38266468-7 and a further primary transfer of $250,000 was paid into his

account at the London branch of a Nigerian bank. On September 1995, a further primary transfer

of $250,000 was made to Okonkwo by Feesok, a Nigerian company of which he was a director.

The payment was made by a cheque signed by him. Feesok itself received the sum of $250,000

from the Landmark/Evershine account on 24 October 1995 into its account with yet another

London branch of a Nigerian bank.

On April 1996 Feesok made a payment to Rik of $7,000 by way of cheque (number 427) in favour

of Rik and signed by Chief Okonkwo. He received further sums derived from the Swiss Bank

accounts from the sixth defendant.

Chief Okonkwo was a director of Feesok, which made payments to him and to Rik, which itself

received primary transfers.

Doulatram HK was incorporated in Hong Kong on 26 March 1958. Its directors are Anil and

Vashimal Gobindram Melvani, and it has four branches or related companies: Doulatram (Nig.)

Ltd (Nigeria), G. Doulatram & Sons (HK) Ltd (Taiwan Br), GDM Textiles Manufacturing (Nigeria)

and G Doulatram and Sons (UK) Ltd (United Kingdom).

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The company has bank accounts at the Bank of India, Hong Kong, and BNP Paribas, Port Villa,

Vanuatu, into which it received secondary transfers from the Landmark/Evershine account in the

sum of $3,545,580 in 1995 and 1996.

Further, in May 1997, third-level transfers totalling $55,000 were made to G Doulatram from the

account of a Nigerian bank in Bankers Trust London into which secondary transfers were made

from the Swiss Bank accounts. It is not clear to which branch of the company this money was

paid, but in the circumstances, the claimants, say it may be inferred that the recipient was a

branch of or an associated company to Doulatram HK. The company is therefore regarded as a

co-conspirator.

The role of some of the banks in the transfers was, surprisingly, not clearly stated. Although some

banks in Nigeria like African International Bank and Ecobank were mentioned in cross transfers,

they were not listed in the schedule on defendants. On City Express Bank which was listed as one

of the 42 defendants, the particulars of claims provided no details of its role.

Undoubtedly Amaka Anajemba was the self-confessed "Queen" of the largest Advance Fee Fraud

(419) in the world having conspired with others to commit a scam to the tune of over

$242 million in faraway Brazil. By her confession before Justice Olubunmi Oyewole of the Lagos

High Court, Ikeja, Mrs. Amaka Martina Anejemba, mother of four, was the undisputed Queen of

the scam that continues to wreak havoc to Nigeria international image and integrity.

Mrs. Amaka Anajemba (also known in the 419 world as Mrs. Rasheed Gomwalk, Rossy Ford, Olisa

Agbakoba) only bagged two-and-a-half-year prison term, she forfeited to the Federal

Government property worth N3, 185 Billion in Nigeria, Switzerland, United Kingdom and the

United States. According to the court, the value of the property forfeited is in the region of

$48,500,000. In terms of liquid cash, her two company accounts, Goodax Ventures Nigeria

Limited, Natwest England holding about $2,422,507.06 and Amaka Anajemba (Martigay),

Switzerland having a balance of about CHF 87,000 were blocked. She pleaded guilty to counts 88,

89, 90 and 91 on money laundering and refusal to make full disclosure of her assets and liabilities.

She was thus convicted on charges of "knowingly conducting a financial transaction to wit:

depositing $2.5 million with Banque La Rosche, Basle, Switzerland, with proceeds of funds

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obtained by false pretense; laundering of funds obtained through unlawful activity; failure to

make full disclosure of assets and liabilities".

7.09 Interviewing Skills for Forensic Investigations

Forensic accountants frequently are asked to help attorneys, boards of directors, management,

regulators, law enforcement and others to determine the facts surrounding complex financial

matters. In a forensic investigation, interviews are critical when determining the who, what,

when, where, how and why. A successful interview is essential when gathering facts and steering

an investigation in the right direction. This white paper will focus on the interview skills necessary

to carry out a forensic investigation.

To be successful, an interview should be thorough. It requires strategic planning, relevant

questions and an objective interviewer. Many interviews fail to gather enough information to

address the issues raised in a forensic matter because of inadequate preparation, or because

insufficient time is allowed to complete the interview. If an interview is scheduled in advance, as

many are, there is a natural tendency to schedule a set time for the initiation and completion. If

possible, sufficient time should be allowed to conduct the interview with the time of completion

left open. If a set time is established, the person interviewed may be overly focused on the ending

time, thereby inhibiting a flow of information.

Phases of Interviews and Interrogation in Forensic Accounting

1. Introductory phase: Many forensic investigations involve fraud allegations. By way of

background information, it may be helpful for the reader to understand the basic

elements of a scheme to defraud. Fraud includes misrepresentations of material fact,

knowledge of the falsity of the misrepresentation or ignorance of the truth, intent, a

victim acting on the misrepresentation and damage to the victim. It also should be

remembered that attempts to defraud can be a basis of criminal charges as well. In other

words, schemes do not have to be successful to be charged criminally. Forensic

accountants also should be familiar with some of the common motives exhibited by

persons engaging in fraudulent activities. These motives, which sometimes become

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evident during interviews, often relate to pride, envy, gluttony, lust, anger, greed or sloth,

sometimes known as the seven original sins. It also is helpful to understand the term of

art known as the "fraud triangle," which refers to the three elements that generally need

to be present for someone to be able to commit fraud, i.e. opportunity, pressure and

rationalization. To be able to commit fraud, all three of these elements of the fraud

triangle should be considered when planning for an interview.

2. Preparing for the interview: The primary purpose of most interviews is to gather evidence

through facts and other information supplied by witnesses. Interviewing is performed

throughout an investigation. With each successive interview, the interviewers should

obtain background information about the witnesses, the subject matter of the

investigation, and the potential suspects. Efforts should be made during the interviews to

identify new records and additional witnesses. A variety of interview methods will be

discussed; however, regardless of the methods used, interviews generally should strive

to answer basic questions: who, what, where, when, how and why. Depending on the

situation, there are many factors that need to be considered before undertaking an

investigation. Coordination with someone from Human Resources, Security and the

Information Technology departments typically is undertaken before the interview

process.

3. Conducting the Interview: Thought should be given to who should be present at the

interview. Depending on the type of witness or where in the investigative process, an

attorney representing the company may want to be present. Regardless, the ideal

situation would be to have two interviewers who conduct the interviews, one person at

a time. In some circumstances, only one interviewer will be present, or the person being

interviewed will be represented by an attorney or other company representative.

Effective interviews still can be conducted when there are more than two interviewers,

although this procedure may lead to confusing results and the loss of control in the

interview.

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4. Detecting Description: During the initial part of the interview, interviewers likely will ask

open and general questions to encourage an open dialogue with the witness in order to

assess a baseline of behaviour. During this process, interviewers should not stare at the

person being interviewed or call attention to a person's behaviour. Interviewers should

be observing the timing and consistency of behaviour and should note clusters of

behaviour. Caution should be exercised to avoid misinterpretations of behaviour because

of nervousness or stress that would be present in a normal interview type situation.

Interviewers should also be aware of cultural differences that may lead to a

misinterpretation of verbal and nonverbal reactions. In looking for signs of deception,

interviewers should be measuring and assessing a person against themselves. If a baseline

of verbal and nonverbal behaviour can be obtained, decisions can be made as to whether

physical reactions are signs of deception.

5. Documenting the interview: Written records of an interview should be prepared as soon

as possible following the conclusion of the interview. It should be determined if original

notes should be retained. Law-enforcement officers generally are required to retain

original notes. The notes may be requested by opposing counsel pursuant to discovery

requirements. It is recommended that narrative reports be written in third person.

A third-person account is where the interviewer is stating his or her recollection of the

events of the interview. The report should contain the date, time, location and persons

present during the interview. An interview log is a good way of recording the times of

significant events during the interview.

As an example, the interview log may record when the interview commences, times of

significant events during the interview such as breaks, telephone calls, and refreshments,

and the conclusion of the interview. Written reports should be thoroughly reviewed and

compared to the original notes.

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7.10 Review Questions

1. Accounting systems can be used to cover up fraud and other financial crimes

while at the same time, such systems can be used to facilitate fraud investigation.

Required, explain how accounting systems can aid as well as assist in addressing

financial crimes. (18 Marks)

2. Explain how fraud investigation can be conducted using Expenditure and Net

worth methods. (10 Marks)

3. Forensic Reports are expected to carry certain vital components if they are to be

effective. Required, State and analyze the basic components of forensic reports.

(15 Marks)