MAKING CRIME PAY€¦ · TCB Note (2,584,650) Net Worth ($449,650) And a more accurate picture of...

MAKING CRIME PAY: HOW TO LOCATE HIDDEN ASSETS

(NO. 98-5403)

Beginning the Investigation

III. BEGINNING THE INVESTIGATION How does an investigation into a person’s assets get started? More importantly, perhaps, is why is an asset investigation started? It may begin as simply as someone being owed money, but the debtor indicates that he doesn’t have the money to pay. That might indeed be true except that it is found that the debtor continues to live well beyond his apparent means or his spending habits remain unchanged. Investigations may also commence to corroborate criminal activity. Locating hidden assets can also be the result of the dissolution of a business or marital relationship where the assets are required to be divided up evenly—except that one of the parties might not be truthful in listing all of their assets. So, how do you know if everything is listed as it should? Usually there are indicators that a person or entity has more than they claim. The two most identifying indicators are lifestyle indicators and financial analysis. Not only are lifestyle indicators and financial analysis perhaps the two biggest indicators that assets aren’t being declared, but they may be the only indicators that something is amiss. The following case, which continues throughout this text, illustrates how fraudsters hide their assets.

The U.S. v. Charles Kallestad case is an excellent illustration of how assets are hidden. Charles Kallestad was once very wealthy by most people’s standards. Before Kallestad suffered a series of financial woes, he lived in luxury. At one time, he owned a helicopter, a private jet, and 20 luxury automobiles including Rolls Royces, Porsches, Mercedes, a Lexus, and a Ferrari. He owned an estate on the Pacific Ocean, in which the swimming pool meandered into the living room. He also owned a 15-acre compound in Austin, Texas that included a 10-car garage. His other properties consisted of real estate in Minnesota, California, Colorado, and Texas. And these were the assets that were not hidden. Kallestad began his ascent to financial success in the basement of his father’s dental office in Minnesota. Fourteen years after he and his brother started a lucrative medical test kit company, they sold the business for $100 million. The money realized on the sale, reportedly at $6.2 million, turned Kallestad into a multimillionaire, allowing him to retire at the age of 46 and live the life of a country gentleman. Bad investments and bad judgment, however, took away the financial empire that he spent years building. Although he was a wealthy man, in 1987, Kallestad renewed a $3,000,000 unsecured loan from a local Austin bank. The bank was happy to extend the loan to Kallestad because he had paid back previous loans at that same bank. With the banking industry in chaos due to the savings and loan scandals of the 1980s, however, the bank required collateral. Kallestad obliged and although he did not provide enough collateral to cover the loan, he provided enough collateral to satisfy the bank. A year later, the bank required more collateral and the loan was renewed for another year.

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When Kallestad asked for yet another renewal, the bank started showing concern because they did not have enough collateral for the loan, which was now required. Although some of the loan had been paid down due to the sale of one of his homes, the loan still exceeded $2 million. Perhaps even more than the lack of collateral, the bank had become concerned because of the trouble they were having getting information from Kallestad. It seemed that Kallestad lived everywhere during this time—Santa Barbara, San Diego, Austin—but the bank could never get in touch with him. Because of his past payment history, however, the bank gave Kallestad an extension for yet another year using his existing assets as collateral for the remaining balance of the loan. To continue to service the loan, the bank required Kallestad to provide financial statements. In September 1987, Kallestad provided financial statements indicating a net worth of $9.2 million. On December 1, 1988, he provided financial information stating that his net worth was $4.9 million. Six-months later, he told the bank that his net worth was $2.6 million. Kallestad also gave the bank an expected cash flow statement of revenues he expected to receive during 1989. Although he indicated to the bank that the expected cash flows might not be realized in 1989 (other than his salary), he, nevertheless, indicated their expected in-flow. His finances were broken down as follows:

Financial Statements Charles Kallestad

09/30/87 09/30/88* 12/31/88 06/09/89Current Assets Cash $50,000 $25,000 $50,000 $15,000Long-Term Receivables N/R NDC 250,000 0 250,000 250,000 N/R Ensun 200,000 0 200,000 200,000 N/R Ramsey 945,000 N/R Fairbanks Lot 525,000Long Term Investments Real Property Minneapolis home 95,000 0 0 0 Minnesota home 147,000 0 0 0 Thief Rivers 100,000 50,000 100,000 80,000 Land 640 acres 256,000 0 0 0 Land 1134 acres 450,000 25,000 0 0 Land 160 acres 64,000 0 64,000 50,000 Land 640 acres - Plummer 192,000 0 192,000 150,000 Santa Barbara property 4,500,000 2,600,000 3,000,000 0 High Road property 1,250,000 650,000 850,000 700,000 6 Acres St Ed 125,000 30,000 125,000 100,000 Lockhart Ranch 780,000 260,000 780,000 0Stock Research Biogenics 198,500 0 0 0 Other stock 958,534 150,283 200,000 200,000Other Investments Oil Wells 413,000 0 413,000 413,000 I-35 Partnerships 415,000 0 0 386,000 Tax Shelters 1,228,500 0 1,350,000 350,000

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Personal Property Miscellaneous 850,000 150,000 850,000 750,000 Autos & Trucks 375,000 75,000 175,000 100,000Total Assets $12,897,534 $4,015,283 $8,599,000 $5,214,000Liabilities Current Liabilities TCB Note 83,000Notes Payable TCB Note $2,950,000 3,150,000 3,077,163 2,584,650 Property - 640 acres 125,000 Property - 1134 acres 180,000 Property - MN property 24,000 Property - Santa Barbara 420,500 374,000 541,000 0 Charlyn Cook 250,000 Other Liabilities Lawsuit - Chapman Energy 7,000 Total Liabilities 3,675,500 3,888,000 3,618,163 2,584,650Net Worth $9,222,034 $127,283 $4,980,837 $2,629,350* Financial statement given to ex-wife’s lawyer. Source: Trial Exhibits, Unites States vs. Charles O. Kallestad

Cash Flow Statement*

Charles O. Kallestad As of 6/09/89

Expected 1989

Wages Salary – First Fidelity Acceptance Corporation $150,000

Income Producing Ventures Tres Investments 39,000 I-35 Investments 386,000 TM Leasing 60,000

Notes Receivable NDC 250,000 Ensun note 120,000

Other 25,000 Less: living expenses (24,000) Expected Cash Flow $1,006,000

* Kallestad provided these figures to the bank but also indicated that $855,000 was contingent on the sale of certain assets and he could only receive $24,000. Source: Trial Exhibits, United States of America vs. Charles O. Kallestad.

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An analysis of the numbers given to the bank would certainly cause concern to potential users of the financial statements. Assuming the numbers are correct, Kallestad’s net worth dropped more than $2 million in six months. The financial statements are not audited so the user would be relying heavily on the reputation of the maker. The cash flow statement indicates that he is capable of earning income, assuming that he is providing accurate figures. Given that the bank was having trouble locating Kallestad and he kept giving different addresses, a red flag probably should have been raised on the salary alone. Of interest, however, is that while he was painting a rosy financial picture to the bank, he painted a different picture to his ex-wife, who was seeking past due alimony payments as well as an increase in alimony. In September 1988, he declared a net worth of $127,283 to his ex-wife’s attorney—this after declaring a net worth of over $9 million the previous year. By the end of 1988, he declared a net worth of $4.9 million, but several months later, after his second divorce in March 1989, he declared a net worth of $1.46 million. And then three months later in June 1989, he told the bank that his net worth was $2.6 million. In the financial statements that he gave to the bank, he listed investments that turned out to be worthless, but on the other hand did not list assets that had value. This is where Kallestad got into serious trouble with the bank, his ex-wife, and the law. Making false statements to a bank is a felony and punishable with fines and prison. A more accurate picture of the assets represented to the bank in the 6/09/89 financial statement (excluding the assets he hid from the bank) would look more like:

Estimated Financial Statements Charles Kallestad 06/09/89

Current Assets Cash $15,000

Receivables Sale of Santa Barbara property 945,000 Sale of Fairbanks property 525,000

Long Term Investments High Point property 600,000

Personal Property Autos & Trucks 50,000

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Liabilities

TCB Note (2,584,650) Net Worth ($449,650)

And a more accurate picture of his cash flow was:

Estimated Cash Flow Statement*

Charles O. Kallestad

1989 Wages Salary—First Fidelity Acceptance Corporation $0

Income Producing Ventures Tres Investments 0 I-35 Investments 0 TM Leasing 12,000 Oil Well 12

Notes Receivable NDC 0 Ensun note 0

Less: living expenses (24,000)

Expected cash flow ($11,988)

* Source: Witness Testimony, United States of America vs. Charles O. Kallestad

With all the problems the bank had with Kallestad, however, they finally decided against renewing his loan one more time and expected payment in full by January 1990. When the loan came due, Kallestad did not have the money to pay it back, and he found himself in default with the bank. Knowing that the bank would want to recover their loss from assets he owned, he turned to hiding assets—assets he knew the bank was unaware of. So his plight became one of how good he was at hiding assets versus how good the bank was at locating them. The story continues periodically throughout the course.

Lifestyle Indicators

A person’s lifestyle, like Kallestad’s, can be a symptom of hiding wealth. Lifestyle indicators suggest that the subject is living beyond his apparent means and thus probably has hidden income or sources of

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income. Knowing that, the fraud examiner uses these indicators to prove that the subject’s income cannot possibly pay for his lifestyle or spending habits. The fraud examiner should strive to identify the subject’s lifestyle and compare it to his source of income. Although, individually, the following may not be an indicator of hiding assets, the combination of several of these factors in comparison with the subject’s income (or lack thereof) should lead the fraud examiner into looking further into the person’s financial situation.

Personal Characteristics

• Known to carry large amounts of cash • Designer clothes • Jewelry • Club memberships • Fitness clubs/spas

Lodging

• Expensive housing • Furnishings • Art • Vacation homes

Transportation

• Luxury or exotic cars • Numerous vehicles • Late model vehicles

Leisure Activities

• Expensive vacations • Cruises • Trips to exotic locations • Boats • Planes • Collections

Financial Analysis

Another good indicator that assets might be hidden is to analyze financial information—either personal or business—to identify inappropriate activity. The numbers are a good indication of where the money is coming from (income) and where it is going (expenses). Financial statement analysis further points out

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changes in financial status and unexplained changes can mean that fraud is occurring. The three most common analyses performed for fraud detection in financial statements are:

• Vertical analysis • Horizontal analysis • Ratio analysis

Vertical Analysis

Vertical analysis is a technique for analyzing the relationships between the items on an income statement, balance sheet, or statement of cash flows by expressing components as percentages. In the vertical analysis of an income statement, net sales is assigned 100 percent; on a balance sheet, total assets or liabilities and equity are assigned 100 percent. All other items are expressed as a percentage of these two numbers: net sales on the income statement and total assets on the balance sheet.

EXAMPLE

Balance Sheet Vertical Analysis

(in 000’s) Year 1 Year 2 Year 3

Assets Cash $1,767 0.12% $1,046 0.11% $339 0.01%Deposits with Clearing Org’s 25 0.00% 25 0.00% 25 0.00%Rec. from Brokers 60 0.00% 1,084 0.11% 2,192 0.08%Rec. from Customers 40,523 2.65% 21,073 2.23% 16,163 0.60%Securities Purch-Resell Agmt 1,323,340 86.63% 738,924 78.10% 2,252,555 84.03%Accrued Interest 433 0.03% 1,257 0.13% 7,375 0.28%Securities Purch-At Market 161,484 10.57% 182,674 19.31% 402,004 15.00%Due From Parent 0 0.00% 0 0.00% 0 0.00%Other 0 0.00% 0.00% 0.00%Total Assets $1,527,632 100.00% $946,083 100.00% $2,680,653 100.00%

Liabilities and Equity S/T Bank Loans $57,282 3.75% $80,350 8.49% $91,832 3.43%Payable to Brokers 478 0.03% 3,624 0.38% 4,815 0.18%Payable to Customers 4,047 0.26% 1,426 0.15% 3,683 0.14%Securities Sold-Resell Agmt 1,323,340 86.63% 738,924 78.10% 2,457,555 91.68%Accrued Expenses 796 0.05% 596 0.06% 927 0.03%A/P to Parent & Affiliates 127,604 8.35% 95,861 10.13% 92,183 3.44%Total Liabilities 1,513,547 99.08% 920,781 97.33% 2,650,995 98.89%

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Common Stock 1 0.00% 1 0.00% 1 0.00%Add’l Contrib. Capital 4,160 0.27% 4,160 0.44% 4,160 0.16%Retained Earnings 9,924 0.65% 21,141 2.23% 25,497 0.95%Total Liabilities and Equity $1,527,632 100.00% $946,083 100.00% $2,680,653 100.00%

Income Statement Vertical Analysis

For January 1–December 31 Year 1 Year 2 Year 3

Security Income $64,857 39.65% $27,415 14.48% $6,080 2.90%Other Income (29,550) -18.07% 29,040 15.33% 28,112 13.42%Interest Income 128,250 78.41% 132,939 70.19% 175,262 83.68%Total Income $163,557 100.00% $189,394 100.00% $209,454 100.00%

Bond Process Exp. $6,621 4.05% $9,711 5.13% $9,153 4.37%Officer Salaries 801 0.49% 1,806 0.95% 2,846 1.36%Other Salaries 407 0.25% 500 0.26% 714 0.34%Sales Commission 439 0.27% 580 0.31% 477 0.23%Other Expenses 980 0.60% 1,141 0.60% 7,706 3.68%Interest Expense 128,250 78.41% 132,939 70.19% 166,203 79.35%Total Expenses $137,498 84.07% $146,677 77.45% $187,099 89.33%Net Income $26,059 15.93% $42,717 22.55% $22,355 10.67%

Horizontal Analysis

Horizontal analysis is a technique for analyzing the percentage change in individual financial statement items, from one year to the next. The first year in the analysis is considered the base year, and the changes in the subsequent year are computed as a percentage of the base year. If more than two years are presented, the changes in each year are computed as a percentage of the preceding year. Like vertical analysis, this technique will not work for small, immaterial frauds.

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EXAMPLE

Balance Sheet Horizontal Analysis

(in 000’s) Year 1 Year 2 % Change Year 3 % Change

Assets Cash $1,767 $1,046 -40.80% $339 -67.59%Deposits with Clearing Org’s 25 25 0.00% 25 0.00%Rec. from Brokers 60 1,084 1706.67% 2,192 102.21%Rec. from Customers 40,523 21,073 -48.00% 16,163 -23.30%Securities Purchased -Resell Agmt 1,323,340 738,924 -44.16% 2,252,555 204.84%Accrued Interest 433 1,257 190.30% 7,375 486.71%Securities Purchased-At Market 161,484 182,674 13.12% 402,004 120.07%Due From Parent 0 0 0.00% 0 0.00%Other 0 0 0.00% 0 0.00% Total Assets $1,527,632 $946,083 -38.07% $2,680,653 183.34%

Liabilities and Equity S/T Bank Loans $57,282 $80,350 40.27% $91,832 14.29%Payable to Brokers 478 3,624 658.16% 4,815 32.86%Payable to Customers 4,047 1,426 -64.76% 3,683 158.27%Securities Sold-Resell Agreement 1,323,340 738,924 -44.16% 2,457,555 232.59%Accrued Expenses 796 596 -25.13% 927 55.54%A/P to Parent & Affiliates 127,604 95,861 -24.88% 92,183 -3.84% Total Liabilities 1,513,547 920,781 -39.16% 2,650,995 187.91%

Common Stock 1 1 0.00% 1 0.00%Add’l Contrib. Capital 4,160 4,160 0.00% 4,160 0.00%Retained Earnings 9,924 21,141 113.03% 25,497 20.60% Total Liabilities and Equity $1,527,632 $946,083 -38.07% $2,680,653 183.34%

Ratio Analysis

Ratio analysis can be helpful in detecting potential errors and other irregularities between two different financial statements. The quick ratio and current ratio assess the liquidity of the financial statement being analyzed. Accounts receivable and inventory turnover ratios assess the operational efficiency. Other ratios include the debt-to-equity ratio, which is an indicator of the solvency, and the profit margin, return on assets, return on equity, and earnings per share ratios, which assess the profitability.

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Unexplained changes in the ratios should signal to the fraud examiner that fraud might exist in the books. Often, criminals attempting to disguise the transfer of illicit funds to business records resort to financial statement fraud. Typically, a fraudster who is attempting to disguise the transfer of illicit funds to a business will overstate assets and revenues or will understate expenses and liabilities to cover the unaccounted for influx of cash. Likewise, if the fraudster is trying to increase the apparent prosperity of the organization, he may overstate assets and revenues or understate liabilities and expenses. In cases where the fraudster desires to hide assets, however, the opposite might be true (i.e., revenues and assets are understated, or liabilities and expenses are overstated).

Financial Ratios

Year 1 Year 2 Year 3 Debt: Equity Ratio 107.4581 36.3916 89.3855 Return on Equity 2.1691 0.8135

Profiles

The examiner begins by profiling the subject. Profiling helps organize and view the information retrieved and helps with investigation. Two types of profiles will be discussed:

• Personal profile – Financial profile – Behavioral profile

• Business profile

The personal profiles are useful when trying to prove illegal payments were received or when trying to find the hidden assets of an individual. Conversely, the business profile begins the process of proving illegal payments or attempts to hide assets from the point of payment or transfer.

The Personal Profile

In searching for hidden assets, one of the early steps is to build a personal profile. The personal profile consists of two parts: the financial profile and the behavioral profile. The financial profile is essentially a financial statement with some modifications and additions. It shows what the subject earns, owns, owes, and spends at any given point, or over a period of time. The behavioral profile reveals his lifestyle habits—what is important to him that would cause the fraudster to turn to accumulating illicit income. The personal profile will be used later in financial analysis to identify non-reported sources of income.

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The Financial Profile The first step in developing the personal profile is to prepare a financial profile of the suspect. The profile might yield direct evidence of illegal income or hidden assets, or circumstantial evidence thereof, by showing that the suspect’s expenditures exceeded known sources of income. The financial profile is best at revealing transactions of significant amounts, such as large deposits or expenditures. It will not catch smaller currency transactions, particularly if these were for concealed activities, consumables, or unusual one-time expenses, such as medical bills. The financial profile will identify most illicit funds that are deposited to accounts or expended in significant amounts. It will not catch relatively small currency transactions, particularly if they were for concealed activities, consumables, or for unusual one-time expenses such as medical bills. Determine the target’s assets, liabilities, income, and expenses from the following sources:

• Interviews – The target – Associates

• Non-public records – Documents from financial sources (e.g., accountant, banker) – Bank account records – Mortgage and loan files – Credit card records – Tax returns

• Public records – Business filings – Real estate filings – Court records

PREPARING THE FINANCIAL PROFILE

Here is a step-by-step guide on how to prepare the financial profile. STEP 1: IDENTIFY ASSETS

Begin by identifying all the subject’s significant assets. Assets consist of cash-on-hand or anything of value that can be converted into cash. Cash-on-hand is comprised of coin and currency (bills, Federal Reserve notes) in the subject’s possession. “In the subject’s possession” is defined as: on the subject’s person, in the subject’s residence or another

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place, in a nominee’s hands, or in a safe deposit box. Money held in a financial institution account is not considered cash on hand. Assets include information about the subject’s:

• Bank accounts and other financial accounts • Real property records (residence and other property) • Vehicles, boats, aircraft, etc. • Substantial personal property (e.g., jewelry, artwork, etc.) • Stocks and bonds • Mutual funds • Closely held businesses • Rental and investment properties • Private business investments (e.g., limited partnership shares, etc.) • Whole life insurance • Cash “hoard”

STEP 2: IDENTIFY SIGNIFICANT LIABILITIES

Next, identify all of the subject’s significant liabilities. A liability is an obligation, or debt, arising from an oral or written promise to pay, and it includes the following items:

• Mortgages • Loans • Credit card accounts • Installment loan payments • Other debts

STEP 3: IDENTIFY INCOME SOURCES

Identify all of the subject’s income sources during the relevant period. Income includes money, or other things of value, received in exchange for services or goods. Income is always listed separately from assets. Loan proceeds are not included with income but are treated as an asset that is offset by a corresponding liability. Income sources include:

• Salary • Spouse’s income • Investment and interest income • Loan proceeds • Side income (e.g., consulting fees) • Financial gifts from relatives • Inheritance

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STEP 4: IDENTIFY EXPENSES

Identify all significant expenses incurred by the subject during the relevant period. An expense is defined as any payment for consumables, for personal or business reasons, over the relevant time period. Expenses are not included with the subject’s liabilities. Expenses include the following items:

• Living expenses • Travel and entertainment • Hobbies and collectibles • Alimony

STEP 5: ANALYZE INFORMATION DEVELOPED

Analyze the information you have collected by using the following charts.

The Financial Profile TYPICAL ASSETS For each significant asset, determine:

Residence Real estate Bank accounts Stocks and bonds Automobiles Insurance Cash on hand

Jewelry Clothing Collectibles Pensions Home furnishings Boats

—When was it acquired and from whom? —How much did it cost? —How was it paid for (currency, check, cashier’s check)? —What source of funds was used to acquire it? —What documentation exists for the purchase and where is it?

TYPICAL LIABILITIES For each significant liability, determine:

Mortgage(s) Other loans Lines of credit Credit cards Installment purchases Accounts payable Taxes and other bills Alimony and child support

—What was the original amount of the liability? —What is the present balance due? —When was the liability incurred? —What was the purpose for the loan or debt? —How were the proceeds used and where were they

deposited? —What security (collateral), if any, was given for the debt? —What documentation exists for the transaction and where is

it? —Was the debt written off as a bad loan for tax purposes? —Who was the creditor or lender?

TYPICAL SOURCES OF FUNDS

For each source of funds, determine:

Salary Gifts Rental income

Insurance proceeds Commissions

—What was the total amount during a given period? —What was the source? —How was it paid for (currency, check, other means)?

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Dividends Interest Sale of assets

and fees Awards Inheritances Disability payments

—When were the funds received? —Where was it deposited? —How was it spent? —What documentation exists (e.g., W-2 or 1099 forms) and

where is it?

TYPICAL EXPENDITURES For each major expenditure item, determine:

Rent and mortgage Health costs Interest on loans Credit cards Car payments Travel

Clothing Utilities Food Insurance

—What was the total amount spent? —How was it paid for? —Where were the funds obtained to pay the expense? —What documentation exists and where is it? —When was the payment made?

Sources of Information for the Financial Profile To perform each of these steps, the examiner must obtain information from the following sources:

• Interviews • Public records • Non-public records

INTERVIEWS

Interviews can be one of the most important steps in developing a personal profile. The information obtained can lead the fraud examiner to areas previously unknown or confirm information already known. The interview can lead to documents or people that could be important to the case. Interviews should be conducted with the following:

• The subject • Personal associates of the subject (spouses, friends, relatives) • Business associates of the subject (co-workers, former employers, attorneys, accountants,

bankers) INTERVIEWS WITH THE SUBJECT

Always request an interview with the subject of the investigation and a separate interview with the subject’s spouse. Pin down the subject’s income, assets, and accounts. If the subject claims to have legitimate sources for large amounts of currency, determine the following:

• What was the source of the cash? • What was the amount of cash on hand at the starting point of the investigation, at the end of

each year thereafter, and on the date of the interview? • Where was the cash kept?

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• Why was the cash not deposited in a financial institution or invested? • Who knew about the cash? • What records of the cash exist? • What were the denominations? • When and for what was any of the cash spent? • Will the subject consent to an inventory of the remaining cash during the interview? If not, why

not? If the subject does consent to an inventory, the cash should be counted at least twice in the presence of another examiner. A list of serial and series numbers also should be made.

If the subject claims that large amounts of cash are due to loan proceeds, ask:

• Who was the lender? • When was the loan made? • What was the amount of the loan? • What was the purpose of the loan? • Was the loan repaid? • How was the loan documented?

The fraud examiner should also ask for personal information such as:

• Birth date, place of birth, parents’ names • Names of spouse and children • Names of former spouses, dates of divorce, when, and where • Residences—current and former • Phone numbers • Education • Military service • Criminal convictions • Bankruptcies • Banking information: name of bank, type of accounts, safe-deposit box

INTERVIEWS WITH KNOWN ASSOCIATES

Asset hiders often boast to their close associates about their new wealth or entertain them with the fruits of their illicit activities. Casual remarks made by a subject to a colleague, which were then repeated to an examiner, have undone more than one subject, even when intensive audits failed. No single third-party witness is likely to possess all of the information needed by the examiner, but a complete picture can be assembled from bits and pieces provided by a number of such sources.

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PUBLIC RECORDS

Public records are another avenue to search for information regarding a suspect’s holdings. Public records are documents that a governmental agency is required by law to keep or documents necessary to discharge the duties imposed by law. Public records, which are available to anyone who wishes to use them, can be useful for a number of reasons. They can supply invaluable background information on employees, suspects, and witnesses. Public records can be used to corroborate or refute witness statements, they can help investigators track the flow of stolen cash or other assets, and they can be extremely important in a company’s efforts to recover losses. The most useful public records will likely include:

• Business filings • Real estate filings • Criminal, civil, and bankruptcy court records

NON-PUBLIC RECORDS

Non-public records are also used to develop the financial profile of the suspect. These records include bank records, credit card records, credit reports, and telephone records to name a few. Because companies investigating fraud do not have an absolute right to see these personal records, however, such information might be difficult or impossible to obtain unless they are voluntarily turned over or a subpoena is issued. Some of the most valuable personal records include:

• Banking records • Tax returns and related documents • Credit reporting agency records • Telephone records • Credit card account records

The Behavioral Profile The second step in developing the personal profile is to prepare a behavioral profile of the suspect. The behavioral profile complements the financial profile. While the financial profile works best for large transactions, the behavioral profile is best at identifying smaller activities and smaller currency transactions. The behavior profile reveals the personal habits of the subject that might lead to identifying hidden wealth or assets: where he or she travels, what type of expenditures they make (e.g., primarily cash or credit card), associates, girl or boyfriends, pertinent habits, interests (e.g., sailing, art collecting, etc.), and addictions. Additionally, information gathered for the behavioral profile might

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provide a possible motive for the crime—such as large debts. It can also indicate the existence of illicit income. For example, if the suspect spent significant amounts of cash, and had no corresponding cash withdrawals from his disclosed bank accounts or no admitted sources of cash income, he must have other undisclosed sources of income.

EXAMPLE

A behavioral profile reveals that Subject A spent significant amounts of cash but had no corresponding cash withdrawals from any known bank accounts. Subject A disclosed no sources of cash income. The examiner may presume that Subject A must have other, undisclosed sources of income.

Information for the behavioral profile is gathered primarily from interviews with the subject, his associates, and observation. During the course of conducting interviews relating to the subject, be alert for signs indicating that the subject has:

• A drug and/or alcohol addiction • A gambling habit • Loan shark or other private debts • A girlfriend or boyfriend supported by the subject • Extraordinary medical expenses • Significant, regular cash expenses for entertainment and/or travel

In building a behavioral profile, the motivation for hiding assets should be assessed. The following questions should be asked:

• Is the need a long- or short-term need? • Does the subject buy assets or spend the money he or she has? • Is the subject preparing for a divorce, planning to file bankruptcy, or retirement?

Business Profile

As with the personal profile, a fraud examination into a business or organization begins with the business profile. The business profile identifies prospective witnesses, relevant documents, and suspicious transactions. The business profile should contain information about the subject’s:

• Organization and structure • Personnel • Money flow patterns • Location of bank accounts • Financial condition • Record-keeping system

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MAKING CRIME PAY€¦ · TCB Note (2,584,650) Net Worth ($449,650) And a more accurate picture of...

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