Tag Archives: concealing assets

Basic Cash Concealment Strategies

One of the topics in which readers of this blog have expressed consistent interest over the years regards the many strategies of cash asset concealment employed by fraudsters; especially by embezzlers of relatively small sums from employers, who seem particularly creative at such manipulations.  Regardless of the method used to hide ill-gotten assets, one fact remains constant; proceeds from illicit activities must be disguised in some way to avoid being discovered. Those the ACFE dubs ‘asset hiders’ have developed many sophisticated techniques for working the system and accomplishing the goal of concealing their gains; in attempting to track down and recover secret stores of cash, the fraud examiner is presented with a true challenge, and the first step in meeting this challenge is to understand how asset hiders work. This post will concentrate on the concealment of raw cash.

There are three primary ways to hide cash assets. They are:

— Currency hoards;
— Cashier’s checks and traveler’s checks;
— Deposits to financial institutions.

The most basic method for hiding cash is the currency hoard, in which a person simply stores cash in a hidden location, usually in his or her home or on her property. This is the proverbial ‘cash under the mattress’ technique. In a typical home, hiding places for currency or other valuables can range from the obvious to the ingenious.

For example, precious metals and jewelry can easily be hidden in a layer of cooking grease at the bottom of a pot. The space beneath the bottom drawer of bureaus, chests, and cabinets is also a commonly used hiding place. Loose bricks in the wall or fireplace can disguise small spaces for hiding things. A more complex scheme is to build a false ceiling below the original ceiling and then use the space between the two as a hiding place.

Another place to hoard currency is in furniture. The hollow spaces of upholstered furniture make these pieces a good hiding place. Many people find false bottoms in drawers or inside stereo speakers useful places for hiding cash.

The basic structure of the home itself provides many opportunities for creating hiding places. One of the most common spots for hiding objects is in the walls. Cunning hiders may construct false walls in closets or pantries, or they may build large cavities into a wall, which is then covered with a mirror or a painting. Installing false light switch plates and electrical outlets provides easy access to spaces between walls and generally appear quite normal, although amateurs often leave tell-tale marks on the plate screws. These marks often provide searchers with signs of tampering and can lead to the discovery of a cache. An even simpler method is to hide currency inside the electrical boxes behind real electrical plates. If a larger space is needed, hiders sometimes remove the box from the wall and build a shelf below it. Significant amounts of currency can be hidden in these spaces. Currency hoards can also be hidden above ceiling light boxes in the space below the attic.

The plumbing system provides other natural hiding places. For example, many bathrooms have access holes under the sink, which are usually covered with a removable chrome disk. These access holes are designed so a cleaning ‘snake’ can be inserted into the main drain when the lines are clogged. This space is easily utilized as a hiding space. Floor drains are also used for hiding currency. Excellent hiding places can be created by installing false pipes that appear to be part of the home’s plumbing. Some individuals hide objects and money in shower curtain rods. Other places frequently used for hiding are air ducts, doors, and stairways. Heating and cooling system ducts are generally easy to access and have plenty of empty space. Hollow core doors are easily rigged for hiding. The top surface of the door can simply be cut away, allowing access to the natural secret compartment inside. Enclosed staircases have dead space underneath that is accessible. If the staircase is not enclosed, there may be usable space for small objects behind each of the risers. Stairs can be hinged, creating a hidden compartment underneath.

Cashier’s and traveler’s checks are another method used to hide assets. These instruments are useful for several reasons:

–They allow asset hiders to easily disguise their financial dealings from asset seekers like law enforcement, CFEs and forensic accountants;
–They help disguise the asset hider’s financial dealings and reduce the amount of currency physically carried;
–Cashier’s checks or traveler’s checks in denominations of less than $10,000 are negotiable financial instruments that can be exchanged almost any place in the world.

Whilst efforts to control the use of wire transfers for money laundering have traditionally been focused on banks, examiners also need to be aware that there are non-bank money transmitters that fraudsters often use to conceal cash assets.  These non-bank transmitters specialize in money transfers for individuals rather than businesses. In addition to other services, most non-bank transmitters sell money orders and traveler’s checks. These companies range from large international enterprises like Western Union to small mom-and-pop neighborhood check cashing businesses.

There are several reasons fraudsters like using non-bank transmitters. First, non-bank transmitters allow individuals to cash personal checks or wire money to family members nationally or in other countries. Check cashing companies and other sellers of money orders, such as convenience stores and grocery stores, provide a much-needed service to people without bank accounts. Second, non-bank transmitters allow individuals to obtain many individual traveler’s checks and money orders in amounts less than $10,000 each. Most states regulate check cashing and the sale of money orders with licensing and bonding requirements. The Money Laundering Suppression Act of 1994 required all money transmitters to register with the U.S. Department of Treasury. Furthermore, like other financial institutions, these businesses are required to file currency transaction reports (CTRs) for transactions of $10,000 or more in currency and coins, and they are required to file Suspicious Activity Reports (SARs) with the Treasury Department for certain classes of suspect transactions.

Check cashing companies have been known to receive illegally earned or stolen currency and use it to cash legitimate checks for their customers, thus avoiding CTRs or to structure transmittals by issuing multiple traveler’s checks and money orders for less than $10,000 each. Third, the transactions of non-bank transmitters will not trigger a mechanism for identifying unreported cash. Although money transmitters are classified as financial institutions, they are not depository institutions but operate through accounts with commercial banks. And, unlike bank accounts, which contain copies of deposits and canceled checks used in locating assets, non-bank money transmitters do not maintain copies of deposits and canceled checks. Unless the money order or traveler’s check appears in the financial records of the asset hider, it will likely go undetected since there is no place for the investigator to begin a search. However, once a money order or traveler’s check has been specifically identified, it can be traced back like any other financial instrument.

Banks and other financial institutions are frequently utilized by secrecy seekers as vehicles for hiding or disguising currency. The methods used may be as simple as renting a safe-deposit box and storing currency or valuables inside.  Searching the safe-deposit box of a suspected embezzler for evidence is not easily accomplished. It requires a court order. But; even if access to the box is denied, the investigator in a hidden asset case can often make educated guesses as to the contents by observing the movements of the hider. For instance, if the subject makes a visit to her safe-deposit box after attending an antique jewelry collector’s exposition, the examiner could surmise a collection of jewelry items is stored therein. Trips made to a safe-deposit box before foreign travel may indicate that the hider is moving money from his or her native country to a foreign location.

The banking system is, without question, the most important vehicle of both lawful and unlawful financial transactions. While most bankers are not active participants in asset hiding, it can be extremely difficult to distinguish between legitimate transactions and those conducted by secrecy seekers. Some bankers even prefer to close their eyes to the sources of their deposits and, in doing so, knowingly accept tainted funds. It’s important to understand how secrecy seekers use bank deposits and funds transfers to hide assets.  For the examiner, it’s important to know that most large banks have computer programs that can retrieve a specific wire transfer record. Many medium-sized banks cannot electronically retrieve specific wire data more than a month old, and some banks would have to search manually for records. However, even small banks usually send their international money transfers through one of the large Money Center banks, thus creating a record. Many large banks have enhanced their record-keeping systems to assure themselves and bank regulators that they are in full compliance with the Bank Secrecy Act. Some institutions have systems that monitor the wire transfer activity of certain accounts and generate periodic reports highlighting the consolidation of incoming wires followed by an outgoing wire transfer. Most of these systems are designed to monitor only customer accounts and do not record funds transfer services provided for non-depositors for which the bank serves only as an intermediary.

To conduct a successful wire transfer search, the examiner should have as much information as possible relating to the transfer in question when contacting the appropriate entity. Having the following information on hand will help make the search much more efficient:

— Date of transfer
— Amount of transfer
— Names of sending and receiving institutions
— Routing numbers of sending and receiving institutions
— Identity of sender and designated receiver
— Input sequence and/or output sequence

While most banks do not actively participate in fraudulent transfers, some signs for the examiner that could indicate collusion between a bank and its customer are:
— Allowing clients whose funds are not of foreign origin to make investments limited to foreigners;
— Acting without power of attorney to allow clients to manage investments or to transmit funds
on behalf of foreign-registered companies or local companies acting as laundries;
— Participating in sequential transactions that fall under the government reporting thresholds;
–Allowing telephone transfers of funds without written authorization and failing to keep a record of such transfers;
— Entering false foreign account number designations with regard to wire transfers.

It’s Not Just About Tax Avoidance

off-shoring

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The ACFE tells us that countries in virtually all parts of the world, but especially those located in the Caribbean and South Pacific, are commonly regarded as tax havens.  A tax haven is a country whose laws, regulations, traditions, and treaty arrangements make it possible for a person to reduce his or her overall tax burden. Secrecy is basically supplied by such countries in two ways.

1) Domestic bank secrecy laws: Laws which bar insight by outsiders;2) Blocking statutes: Statutes which effectively prevent the disclosure, copying, inspection, or removal of documents located in the host country in compliance with orders issued by foreign authorities.

Moreover, in many countries, legal depositions may not be taken on national territory in connection with judicial proceedings being undertaken abroad. Many countries, such as the United Kingdom, France, South Africa, Germany, Australia, Norway, and Canada have comprehensive statutes to guard their sovereignty from the extraterritorial reach of foreign authorities. Although these countries are not generally thought of as tax havens they have laws which can be used by the asset hider. In addition to asset hiding, some foreign countries have a legal, banking, or economic climate that provides an excellent site for laundering money. Historically, places such as Panama, the Cayman Islands, the Bahamas, Switzerland, and the Netherlands Antilles have been associated with hidden bank accounts, fictitious corporations, and money laundering.

The most popular off-shore jurisdictions in the news recently are:

–Switzerland
–Panama
–Cayman Islands
–Netherlands Antilles

Countries like Panama with relatively small, open economies have often embraced the financial secrecy business as a way of promoting economic development. With some notable exceptions, these countries are geographically isolated with a narrow production concentrated on a few major commodities, usually for export. This tends to make them vulnerable to adverse climatic conditions and international market development. It also limits their ability to produce an adequate domestic market, invest in an infrastructure, attract foreign direct investment, and gain access to a diversified mix of importers and exporters.

It’s important for CFE’s to understand the general concept of a financial center with regard to financial havens.  Financial centers are of two types:

–A functional center is defined as country where transactions are actually undertaken and the value added is created in the design and delivery of financial services. Examples of functional centers include New York, London, Singapore, Bahrain, and Hong Kong.
–A booking center is defined as a country where transactions are recorded but the value added involved is actually created elsewhere. Examples in this category include Panama, the Bahamas, Cayman Islands, Seychelles, and Vanuatu.

Accordingly, the ACFE classifies the tax havens of the world into four broad categories:

No Tax Havens – these countries have no income, capital gains or wealth taxes. It’s legal to incorporate and/or form a trust. The governments of these countries do earn revenue from corporate registration fees, annual fees and a charge on the value of corporate shares. Examples of “no tax” havens are the Bahamas, Bermuda, the Cayman Islands, Nauru, the Turks, Caicos and Vanuatu.

No Tax on Foreign Income Havens – These countries impose income taxes, but only on locally derived income. Any income earned from foreign sources that involves no local business activity (apart from simple housekeeping and bookkeeping matters) is exempt from taxation. There are two types of “no tax on foreign income” havens. Those that:

–allow corporations to conduct both internal and external business, taxing only the income from internal sources;
–require a decision at the time of incorporation as to whether the company will conduct local business or will act only as a foreign corporation. If the company elects the latter option, it will be exempt from taxation. If it chooses to conduct local business, it incurs the appropriate tax liabilities. Examples are Panama, Liberia, Jersey, Guernsey, the Isle of Man, Gibraltar, Costa Rica and Hong Kong.

Low Tax Havens – These are countries that impose some income tax on company income, wherever it is earned. However, most have double taxation agreements with “high tax” countries. This agreement can reduce the withholding tax on the income derived from a high tax country by local corporations. Examples of “low tax” havens are Cypress, the British Virgin Islands and the Netherlands Antilles.

Special Tax Havens – Special tax havens are countries that impose all or most of the usual taxes, but either allow concessions to certain types of companies, or allow specialized types of corporate organizations such as the flexible corporate arrangements offered by Liechtenstein. Tax havens offering special privileges for holding companies are Liechtenstein, Luxembourg, the Netherlands and Austria.

Understanding the role of tax havens, involves distinguishing between two basic sources of income:

–Return on labor
–Return on capital

The return on labor refers to earnings from salary, wages, and professional services – your work. Return on capital describes the return from investments such as dividends from shares of stocks; interest on bank deposits, loans or bonds; rental income; and royalties on patents. Placing “return on capital” income in certain tax havens can benefit the secrecy seeker. By forming a corporation or trust in a tax haven this income may become tax-free or be taxed at such a low rate that the taxation is hardly noticeable.

In the case of Panama, for example, off-shore banking and incorporation are a major source of revenue. It’s also a good country for laundering drug money through its banks. It was reported by the financial trade press some years ago that at one time $200-$300 million a month was laundered through Panamanian banks. Panama is one of the most effective off-shore havens for money-launderers, offering tremendous secrecy. As the Panama papers seem to bear out, its banking haven business has always been regarded as supplemental to its status as a tax haven.

Before asset hiders and money launderers can utilize off-shore secrecy havens, they must first establish secret off-shore bank accounts. The off-shore account provides asset protection because the existence of such an account will not readily be known by someone seeking to collect against assets. Foreign banks, regulated by their own authorities, are under no obligation to inform the fraudster’s home country bank examiners of the ownership of the accounts they hold. Even if the existence of an off-shore account does come to light, judgments from home country courts are generally invalid in foreign countries, so creditors normally have to get a judgment in the country where the account is located. This allows time for the individual to fight the action or, unless the court immediately issues an order prohibiting the transfer of assets, simply move the assets out of the account.

So why do fraudsters and others secretly move money off-shore?  Not just tax avoidance. There are many additional benefits of doing so, extending well beyond simple tax avoidance:

–Off-shore bank accounts allow an individual to invest in foreign stocks and mutual funds that are not registered with home country government agencies;
–In some instances, off-shore bank accounts offer more flexible customer options than home country accounts;
–The account can be used to profit from currency fluctuations, buy stocks from mutual funds, purchase foreign real estate, and earn the high interest rates available in many foreign countries;
–Foreign accounts are used to trade precious metals and other assets through the banking system;
–For U.S. citizens, off-shore banking income is not presently considered “subpart F income” on U.S. tax returns. The profits accumulate in the off-shore bank and are compounded free of U.S. taxes;
–Most off-shore banks allow transactions to be conducted by mail, fax, or telex.

Keeping money in off-shore bank accounts is generally considered to be a safe move. On the rare occasion when a bank fails, in most developed countries the major banks in the country will take over its business to ensure that depositors do not lose any money. Some countries even have stronger capital requirements for banks than the United States.

The off-shore financial safe haven sector constantly evolves and adds more attractive customer services over time, just like every other dynamic market place that wants to retain and grow its customer base.  To effectively investigate the role off-shoring plays in many high profile frauds, CFE’s need to realize that tax avoidance is often just the tip of the concealment iceberg.

Piercing the Corporate Veil

fishing-for-money-thumbI received an e-mail late last week from an occasional  reader of this blog requesting help with a possible fraud examination;  I referred her to another of our members for a detailed consultation.  It seems she and one of her close relatives were cheated by an individual seeking to deflect responsibility for his personal actions to the corporation by which he is employed and, of which, he is  also a  present owner; my correspondent believes he acted on his own and is merely hiding behind the corporation (which, incidentally, owns the bulk of his assets) and wants a fraud examiner to prove it.

Given the fact that the U.S. legal system  recognizes that corporations have a separate existence from their shareholders (owners) and are treated as individuals under the law, it can sometimes be sticky to distinguish where an owner’s personal actions end and the corporation’s begin.  There are two common ways for a fraudster to use the existence  of a relationship with a corporation  to avoid the victim’s efforts to recover a claim for money damages against him…argue, as in our correspondent’s case, that the corporation and not the shareholder committed the transgression, and therefore the shareholder’s personnel assets and property should not be used to satisfy any judgment for the offense or argue (what our correspondent also fears) that the fraudster/shareholder’s property is held in the name of the corporation , and therefore, he has no personal assets that can be used to satisfy a judgment against him.

The first argument reflects the doctrine that shareholder’s are not personally liable  for the debts or liabilities of the corporation except to the limited extent of the value of their equity capital at risk should the corporation cease operation with a loss.  But, there are exceptions to this; if the shareholder/owner also controls the corporation and personally acts wrongfully, s/he may still be liable for personal misconduct and the corporation may be jointly and severally  liable with him.  Whether the wrongful conduct was that of the corporation or that of the fraudster shareholder is usually a question of fact for the jury to decide.  Even when a corporation, as apparently in this case,  shields the fraudster or his property, the wrongdoer and his property can be reached if the victim can convince the court to disregard the corporation or to regard it merely as the fraudster’s alter ego…the court may do so if the victim can prove that the corporation is merely a sham whose sole purpose is to help the fraudster avoid liability for his conduct; this is called piercing the corporate veil.

While there is no hard and fast test to determine whether a given corporation is a sham,  ACFE studies indicate that courts look at a variety of factors to determine whether to pierce the corporate veil:

–does the plaintiff   exercise sole or ultimate control over the activities of the corporation;
–does the corporation’s charter describe the approved activities of the corporation with some specificity, or is it left largely to the discretion of the fraudster;
–does the corporation fail to hold directors and shareholder’s meetings, record minutes of those meetings, and otherwise observe the formalities of corporate existence;
–is the corporation so under-capitalized as to raise a question as to its viability as a separate entity;
–are the corporation’s  finances so intertwined or identifiable with those of the fraudster as to raise questions about its separate existence;
–does the corporation own property which does not seem to reasonably related to its activities, particularly as described in its charter;
–does the plaintiff use the corporation’s property as if it were her own, personal assets, including but not limited to whether she uses them for purposes not within the corporation’s approved activities.

As described to me by my correspondent,  the questionable character of the arms length relationship between the subject of her requested fraud examination and his employing corporation could be grounds for a court decision to pierce the veil.  In that case, the court would be justified in ruling that the corporation should be regarded as an alter ego of the fraudster and that the fraudster and his corporation are one and the same person  for purposes of determining liability or levering on assets to satisfy a possible money judgment.