PARALLEL INVESTIGATIONS: METHODS OF PROOF

1
PARALLEL INVESTIGATIONS METHODS OF PROOF
Richard N. Seaman Regional Financial Enforcement
Advisor United States Treasury Office of
Technical Assistance
2
OBJECTIVES

• Provide an overview of Financial Analysis
• Describe and discuss Indirect Methods of Proof
• Focus on the Expenditures Method of Proof

3
FINANCIAL ANALYSIS

• Use of financial information to identify and
  corroborate criminal activity where the subject
  has generated money to finance and expand illegal
  activities and enjoy lavish lifestyles and
  accumulate wealth.
• Identifies Assets for freezing and confiscation

4
FINANCIAL ANALYSIS METHODOLOGY

• Specialized financial statements showing what the
  profiled subject owns, owes, earns, and spends at
  any given point, or over a period of time
• May yield direct evidence of illegal income or
  hidden assets, or indirect evidence of illegal
  activity by showing that the subjects
  expenditures exceeded known sources of funds

5
METHODOLOGY CONTINUED

• Systematic method for collecting and analyzing
  financial data concerning the subject in order to
  create a financial profile
• Generally historical in nature
• Allows investigator to follow the money

6
PROOF

• Documenting a
• suspects receipt
• or disposition of funds.

7
TYPES OF PROOF

• Direct
• Specific Item
• Indirect
• Bank Deposits
• Net Worth
• Expenditures

8
SPECIFIC ITEM

• Uncover specific financial
  transaction involving illegal funds
• Analyze information obtained from the transaction
• Use analysis to identify parties involved
• Preferred technique easiest to prove in court
• Cannot always use this method

9
SPECIFIC ITEMS METHOD OF PROOF

• Analysis can be done from the point of payment
• Analysis can be done from point of receipt
• Choice of type of analysis usually depends on
  circumstances of investigation
• Rule of thumb Use the easiest

10
SPECIFIC ITEMS - EXAMPLE

• Payments to RNS, Inc. Amount
• From ABC Co. 12,345
• Ace LLC 56,789
• Bee Corp 98,760
• Zee Ltd 54,321
• TOTAL 222,215
• Receipts in RNS Books 156,785
• Amount not recorded 65,430

11
INDIRECT METHODS

• Useful when suspect is taking currency or other
  payments that cannot be directly traced.
• Useful when the movement of money is not
  reflected in a business books and records.

12
INDIRECT METHODS AS AN INVESTIGATIVE TOOL

• Help evaluate information from informants
• Can convince court that suspect is guilty
• Can be used to follow the money
• Identifies assets for forfeiture

13
PRINCIPLE

• Money eventually shows up directly or indirectly,
  in accounts, assets or expenditures of recipient
  of the money.

14
COMPARISON OF METHODS

• Indirect
• Overall financial condition (profile)
• Inferences of wrongdoing

• Direct
• Specific illegal or unreported transaction by
  suspect
• Actual proof of wrongdoing

15
GATHER THE NECESSARY INFORMATION
The information you gather will fall into one of
the following categories
Assets
Expenses
Income
Liabilities
16
GATHER THE NECESSARY INFORMATION
To be able to determine the unidentified income
you need the following information
The subjects known source of funds
The subjects bank deposits
The subjects cash purchases
17
SOURCES OF FINANCIAL INFORMATION

• Banks
• Public Records
• Law Enforcement Data Bases
• Commercial Data Bases
• Surveillance

• Informants
• Interviews
• Search Warrants
• Electronic Monitoring
• Undercover
• Trash
• Telephone Tolls

18
EXPENDITURES METHOD IS...

• Comparison between known

Sources of Funds Expenditures
19
GENERAL SOURCES OF FUNDS...
Salaries and Wages Rental Income
Interest/Dividends Business Profits
Pension/Annuities Funds from other known
sources
Bank statements show the amount of a subjects
deposits
20
OTHER SOURCES OF FUNDS

• Decrease in cash on hand
• Decrease in bank balance
• Sale of an asset
• Loans, gifts and inheritances, awards
• Gambling winnings

21
LOANS

• What was the purpose for the loan?
• How were the proceeds used or where were they
  deposited?
• What security, if any, was given for the loan?
• What documentation exists of the transaction and
  where?
• Who was the creditor or lender?

22
EXPENDITURES

• Asset purchases
• Personal living expenses
• rent, mortgage, utilities, food, clothing
• Insurance
• Credit Cards

23
IDENTIFICATION OF ASSETS

• Cash
• Real estate
• Business investments
• Bank account balances
• Collectibles
• Legal entities

• Automobiles
• Home furnishings
• Jewelry
• Clothing and other personal property
• Boats and airplanes, etc.

24
FOR EACH ASSET DETERMINE

• When the asset was acquired?
• From whom it was acquired?
• What did it COST ?
• How it was paid for (cash, loan)?
• What source of funds was used to acquire it?
• What documentation exists of the purchase, and
  where it is located?

25
EXPENSES

• Investments
• Gifts to others
• Travel
• Increase in bank accounts
• Increase in cash on hand
• Decrease in loan balance

26
EXPENSES - DETERMINE

• What was the amount of the expense?
• For what was it incurred?
• Who was it made to?
• Where were the funds obtained to pay the expense?
• What documentation (such as receipts, bills)
  exists and where?

27
DEFINITION OF CASH ON HAND

• Currency and coins in possession of an
  individual
• On person
• At residence or business
• Entrusted to nominee
• In safe deposit box

Does not include money deposited in a
financial institution.
28
CASH HELD BY SUBJECT OUTSIDE BANK

• Cash held or acquired from legal sources
  frequent defense to unexplained wealth
• Difficult to determine
• Use written or oral statements of the subject
  given for other purposes, i.e., in an application
  for loan
• Low earnings as shown by official or business
  records
• Bankruptcy
• Long periods of low personal spending prior to
  increase in wealth and spending

29
IMPACT OF CASH ON HAND

• Indirect methods of proof
• Based on circumstantial evidence.
• Document that suspect spent more money than he
  earned legally.
• Cash on hand can be used as a defense.
• Example Excess funds accumulated
• in prior years.

30
EXPENDITURES FORMULA

• Total expenditures
• Less Known sources of funds
• Funds from unknown sources

31
EXPENDITURES METHOD

• Asset purchases (real estate, auto, boats, home,
  business)
• Reduction of debt (loans and other liabilities)
• Other expenditures (rent, travel, phone,
  vacation)
• Total expenditures
• - Income from known sources (salary, loans, sale
  of assets, cash at beginning of period)
• Income from unknown or illegal sources

32
EXAMPLE EXPENDITURES

• Total Expenditures 250,000
• Less receipts from
• known sources 125,000
• Income from unknown or 125,000
• illegal sources

33
EXPENDITURES METHOD OF PROOFALDRICH AMES, CIA
DOUBLE AGENTApril 1985 through November
1993
Sources of Funds Expenditures CIA
Salary 340,000 Home Purchase 540,000 Home
Improvements 99,000 Furniture 7,000 1992
Jaguar 25,000 1989 Honda 19,500 Telephone
Bills 29,800 Credit Cards 455,000 Fees -
Georgetown Univ. 25,000 Stocks
Securities 165,000 Total Sources 340,000 Total
Expenditures 1,365,300 Less Known Sources
(340,000)
Funds From Unknown
Sources 1,025,300
34
COMMON PROBLEMS

• Failure to rebut prior cash hoard defense
• Failure to account for nontaxable or legal income
• Inheritances
• Gifts and loans
• Failure to establish likely source for unreported
  and/or illegal income

35
SUMMARY

• Indirect Methods are used when
• Books and records are not available and
• The suspect is accumulating assets
• Must - Conduct a complete financial
  investigation
• - Establish a firm starting point
• - Establish Cash on Hand and negate
• cash hoard defense
• - Document and reconcile all legitimate
  sources of Income
• - Prove the illegal source of income