March 28, 2013

Money Laundering vs. Hidden Assets

Money Laundering vs. Hidden Assets: Agenda

Program Agenda Introduction Background on money laundering Evolution of laws and statues Description of money laundering Methodologies for exposing money laundering Background on hidden assets Methodologies for hiding assets Case studies Red Flags How to search for hidden assets Resources Questions

2

Interplay Between Money Laundering and Hidden Assets

3

Hidden Assets

Money Laundering

Definition of and Background of Money Laundering

Globally, money laundering is estimated to be between $500 billion to a trillion annually1

ACFE Fraud Manual defines money laundering as:“the disguising of the existence, nature, source, ownership, location,

and disposition of property derived from criminal activity”

Black’s Law Dictionary defines money laundering as: “the act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced”

1 SOURCE. FIN. CRIMES ENFORCEMENT NETWORK, U.S. DEP’T OF THE TREASURY, PROPOSEDADDENDUM TO AICPA AUDIT RISK ALERT: SECURITIES INDUSTRY DEVELOPMENTS—MONEY LAUNDERING RISK AND RELATED REGULATORY DEVELOPMENTS

4

Evolution in the Statutes Surrounding Money Laundering

Bank Secrecy Act 1970 Required banks to (1) report cash transactions over $10,000 using the

Currency Transaction Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions

Money Laundering Control Act (1986) Established money laundering as a federal crime Directed banks to establish and maintain procedures to ensure and monitor

compliance with the reporting and recordkeeping requirements of the BSA Anti Drug Abuse Act of 1986

Expanded the definition of financial institution to include businesses such as car dealers and real estate closing personnel and required them to file reports on large currency transactions

Required the verification of identity of purchasers of monetary instruments over $3,000

5

Evolution in the Statutes Surrounding Money Laundering

Annunzio-Wylie Anti-Money Laundering Act (1992) Required Suspicious Activity Reports and eliminated previously used Criminal

Referral Forms Required verification and recordkeeping for wire transfers

Money Laundering Suppression Act (1994) Required each Money Services Business (MSB) to be registered by an owner or

controlling person of the MSB

Money Laundering and Financial Crimes Strategy Act (1998) Created the High Intensity Money Laundering and Related Financial Crime Area

(HIFCA) Task Forces to concentrate law enforcement efforts at the federal, state and local levels in zones where money laundering is prevalent

6

Evolution in the Statues Surrounding Money Laundering: 2001-2004

PATRIOT Act (October 26, 2001) Criminalized the financing of terrorism and augmented the existing BSA

framework Banks required to establish AML and customer identification programs SARs for broker-dealers Prohibited financial institutions from engaging in business with foreign shell

banks Non financial businesses required to file currency transaction reports Government has greater power to obtain information from financial institutions Facilitated records access and required banks to respond to regulatory requests

for information within 120 hours

7

Evolution in the Statues Surrounding Money Laundering: 2001-2004

Intelligence Reform & Terrorism Prevention Act of 2004 Amended the BSA to require the Secretary of the Treasury to prescribe

regulations requiring certain financial institutions to report cross-border electronic transmittals of funds, if the Secretary determines that such reporting is "reasonably necessary" to aid in the fight against money laundering and terrorist financing

SOURCE for history: Financial Crimes Enforcement Network: http://www.fincen.gov/news_room/aml_history.html

8

The Criminal Nature of Money Laundering

Hidden assets can be derived from both legal and illegal activities, but money laundering is derived only from illicit and illegal activities.

Due to the illegal nature of the proceeds, they need to be hidden or shielded from law enforcement as part of the process to make them legally accessible.

9

Money Laundering Methodologies and Vehicles

The three steps involved with money laundering:

Placement: Cash currency to business based institution, such as a bank

Layering: money moved between institutions (layers of institutions)

Integration: Integrate into legitimate business

10

Money Laundering Mechanisms

Money laundering techniques: Casinos: Chips are purchased with cash, then after time passes

(weeks or several months) the chips are converted to cash. This scheme usually can involve various individuals.

Life Insurance: The lump sum purchase of an insurance policy, only to be redeemed several months or years later after paying any fees for early withdrawal or cancelation fees. The result is a clean check from an insurance company

“Smurfing” - Couriers or “smurfs” are used to make multiple transactions at banks, breaking large amounts of cash into small. The transactions often involve cash for cashiers checks in small denominations.

Gift Cards: Gifts cards are loaded with cash in countries outside the United States, then used as debit cards in the U.S.

11

Money Laundering Mechanisms (continued)

Money laundering techniques (continued): Real Estate: A shell company is established in a foreign country

(British Virgin Islands). The company purchases real estate in multiple parts of the world under fake names or shell names. These transactions will assist in the layering phase of money laundering.

Securities: Simultaneous “puts” and “calls” on the same stock. The broker will pay out the winning transaction, and destroys the losing transaction. There may not be any profit made from these investments, but they return ‘clean’ money.

12

Money Laundering Mechanisms (continued)

Money laundering techniques (continued): Legitimate Business Ownership: ‘Dirty” money is combined with

clean money. These amounts are added to the ‘top-line’, and reported as taxable income. Works well in cash intensive businesses, such as bars or restaurants Overstate reported revenues (income sheet laundering) Overstatement of reported expenses Deposit cash and write checks in excess of reported revenues

and expenses (balance sheet laundering)

The greedier the launderer, the easier it is to spot

13

So Who Launders Money in 2012?

College Students Personal Assistants Mortgage Brokers Investment Managers Corporate Executives

14

Computer Based and Statistical Methods for Detecting and Combating Money Laundering

15

Technique Description Linear regression Most basic approach. Predicts values by describing the linear

relationship between a dependent variable and one or more independent variables.

Logistic regression Involves categorical variables such as “yes/no” or “male/female”.

Cluster analysis Requires substantial amounts of data that can be grouped categorically.

Inductive algorithms Algorithms that generate decision trees based on historical outcomes.

Neural networks An AI technique that mimics the human brain by learning from and storing inputs and outputs. Can be used with continuous/categorical variables and non-linear and collinear data.

Fuzzy logic A theory that allows incomplete information to be processed and conclusions derived.

Genetic algorithms Algorithms based on evolutionary rules used to solve optimization tasks.

SOURCE: Tracking Dirty Proceeds: Exploring Data Mining Technologies As Tools To Investigate Money Laundering, R. C. Watkins, K. M. Reynolds, R. F. DeMara, M. Georgiopoulos, A. J. Gonzalez, and R. Eaglin

Hidden Assets

Basic definition: Assets not shown on a balance sheet

Typical methods: Overseas accounts Shell companies Use of an alias

Bank accounts or companies listed under different names Real estate

Undisclosed property, rental units - local or overseas Valuable purchases or possessions

Art, antiques, vehicles, etc Possible transfer of title Items such as art and antiques can have hidden value

16

Hidden Assets

Typical Methods (continued):

Bank transfers Disbursement amongst accounts in an attempt to hide assets

Relatives or close friends An individual may try to temporarily store assets with a safe

source, knowing they will be able to recover them later

17

Assets Hidden Overseas

Hidden Assets Out of State or Overseas

IMF study states $25 Trillion stashed overseas Assets are hidden out of state or overseas for many of the reasons previously

listed (Tax evasion, bankruptcy, divorce, etc) Offshore Asset Protection Trusts

Some jurisdictions don’t recognize fraudulent transfers Almost impossible to collect against

Second passports

18

Hidden Assets to Avoid Paying a Jury Verdict

The jury awarded the Plaintiff an eight figure judgment for patent infringement.

The Defendant was a closely held business, with base operations over seas.

On the night before the case went to the jury, Defendants transferred virtually all liquid assets held in the United States into accounts outside the United States. This was done in a effort to hide assets.

The Plaintiffs had to file suit to obtain recovery After two years of litigation, where a private investigator was hired to

find assets, the parties settled. The settlement was for significantly less than the award.

Jury awards don’t guarantee recovery, and when dealing with companies that have base operations over seas, it is wise to strategize about recovery of hidden assets prior to that becoming an issue.

19

Hidden Assets in Family Law

How Common? Forbes study from 2007 survey of 433 people with net worth between $1 million

to over $10 million 56% of women had hidden assets 36% of men had hidden assets

Common techniques in marital dissolution cases: CASH! Trusts Gifts/ endowments Unknown bank accounts, large purchases Overseas accounts A cooperative boss/co-conspirator

A spouse could request that their bonus be held until after the divorce is finalized

20

Hidden Assets in a Divorce Proceeding

Case Study: Hidden assets in marital dissolution Wealthy spouses: securities, real estate and business investments. Assets both inside and outside the United States Both spouses disclosed assets known to each other, such as securities

held, retirement accounts, bank accounts, business investments and real estate holdings.

One spouse had wealthy parents who supported his lifestyle in America and abroad, as well as assisted with his business endeavors.

This spouse did not disclose income from business proceeds outside the United States and did not disclose income received from parents.

CA divorce precedent allows for 100% recovery of hidden and unreported assets in divorce Rossi v. Rossi, 2001

21

Hidden Assets, Hidden Liabilities

Case Example: Hidden Liabilities

One man’s asset is another’s liability Post-closing earn out dispute for a light manufacturing company Liabilities allegedly understated

22

Hidden Assets on the Balance Sheet

Case Example: Balance Sheet Fraud

Another post closing dispute Regional tire company sold to a multi-national company Original owners kept on for transition Sales and profitability missed expectations Balance sheet was found to be misstated

23

Indicators of Hidden Assets

Potential Red Flags

Disparity in control

Secretiveness

Unprecedented actions Large purchases or gifts

Numerous money transfers

Transfer of title of property or possessions

Creation of multiple companies or companies with similar names

24

Indicators of Hidden Assets

Potential Red Flags (continued):

Withdrawn court filings

New financial planners or advisors

Not introducing a spouse to work colleagues

Lifestyle not matching resources

Overseas trips to known tax havens

25

Finding Hidden Assets

Tips to uncover or trace hidden assets:

Start with the basics from the personal or company search: Name, current address, SSN, employment history, driver’s license history Use that information to dig deeper – for example, if a tie to a new location

is discovered, use the search tools to focus on records in that area ; if a person filed for a business license, but has not disclosed a business of that type, it may be an area to investigate

Use data from 3rd party, uninterested sources when possible: Bank records – statements, wire transfer confirmations, canceled checks

Payroll slips: If accessible, may show deposits into unlisted bank accounts or retirement

accounts

26

Finding Hidden Assets

Tips to uncover or trace hidden assets (continued):

Storage units or safety deposits boxes: May be hiding jewelry, heirlooms, other items of value

A person’s lifestyle can tell a lot: Hobbies and interests may highlight areas to investigate Travel patterns may point in the direction of hidden accounts or properties Unprecedented behavior may be a red flag

27

Finding Hidden Assets

Available Resources to uncover hidden assets:

CLEAR Database (Consolidated Lead Evaluation and Reporting)

Investigative platform designed for professionals who need information about people and companies

Locate people, assets, businesses, affiliations, and other crucial facts such as connections among individuals, incidents, activities, and locations

Acquired by Thomson Reuters

LexisNexis comprehensive collection of public records and time-saving

research tools

28

Finding Hidden Assets

Available resources continued:

District Civil Records (most court records are public information): Cases involving divorce, debts, judgments, damages, accidents,

business disputes, etc These can show assets and financial information, business

partners, and other useful information

County Assumed Name records: Alias names and DBA (doing business as) May help uncover businesses or business partners

County Tax Assessor

29

Finding Hidden Assets

Available resources continued: UCC Financial Statements

Provides public notice of a security interest in a specific collateral Information can be discovered by reviewing recent loan details

Various online search sites to find information such as investments, lawsuits, property ownership, liens, licensing information, biographical information: www.knowx.com www.iqdata.com www.dnb.com

Association of Certified Fraud Examiners (AFCE)

Private Investigator

30

Money Laundering vs. Hidden Assets

31

Questions?

Money Laundering vs. Hidden Assets

32

Todd Sigler Bio

Summary of Experience

Todd Sigler is a Manager in McGladrey’s litigation consulting and financial forensics practice. He has provided clients with litigation consulting and forensic accounting services for ten years, and has extensive experience planning and executing engagements relating to fraud investigations, contract disputes, construction claims, partnership disputes, royalty inspections, and asset tracing.

He previously worked for two international consulting firms, and began his career in the Financial Advisory Services group at Deloitte & Touche.

Qualifications

• Certified Public Accountant, State of California• Admitted to the Bar, State of California• Association of Certified Fraud Examiners, Member• American Institute of Certified Public Accountants, Member and Certified in Financial Forensics

Representative Engagements

• Prepared a damage analysis in a dispute between a multi-jurisdictional government entity and a member city.

• Provided forensic accounting analysis to defend a claim of fraud in a post-acquisition earn out dispute.

• Conducted royalty inspections in the high tech, telecommunications, and entertainment industries.

Phone:213.330.4634

Email:todd.sigler@mcgladrey.com

Money Laundering vs. Hidden Assets

Presenter Contact Information:

Todd SiglerMcGladrey LLC515 S. Flower St., 41st floorLos Angeles, CA 90071Email: todd.sigler@mcgladrey.comPhone: 213.330.4634

33