Financial Investigations

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FINANCIAL
INVESTIGATIONS.
A FINANCIAL
APPROACH TO
DETECTING
AND
RESOLVING
CRIMES.
FINANCIAL
INVESTIGATIONS
A FINANCIAL
APPROACH TO
DETECTING
AND
RESOLVING
CRIMES
DEPOSITORY
AIG 1 9 1933
UNIVERSITY OF ILLINOIS
AT URBANA -CHAMPAIGN
For sale by the U.S. Government Printing Office

Superintendent of Documents, Mail Stop: SSOP, Washington, DC 20402-9328
9
ISBN 0-16-041830-5
Department of the Treasury
Internal Revenue Service
Publication 1714 (6-93)
Catalog Number 15271 F
І.
TT 22.44 /2
1714
Acknowledgements
The men and women of Internal Revenue Service Criminal
Investigation are proud to present this course to the colleges, uni
versities and students who have expressed an interest in learning
ore about financial investigations .
The purpose of this course is twofold: first, to encourage
young men and women to consider law enforcement as an enrich
ing career and second, to bring to the reader's attention the seri
ous and sometimes evil crimes that are motivated by money and
greed.
We would like to thank the Internal Revenue Service Special
Agents who instructed the pilot courses at the colleges and uni
versities. We would also like to thank the colleges and universi
ties that allowed the Internal Revenue Service Criminal
Investigation to offer this new course at their institutions.
A special note of thanks goes to the National Association of
Certified Fraud Examiners, and their Chairman, Joseph T. Wells,
for their contributions to the text.
The following Internal Revenue Service Criminal
Investigation Employees were involved in the research, develop
ment, writing, editing and publishing of the text:
Don Vogel Cathy Pledger

Robert Pledger Rich Tucker
Bob Wilson Richard Ruffin
John Imhoff Mike Spang

Robert Diffenderfer Arnie Sitzmann
Ross Sutton Diane Svoboda
Elliott Lieb Diane Evans
Ed Federico Patricia Reid
Douglas Gastorf Sue Roderick
Paul Whitmore Dennis Madden
Bill O'Connor Vince Williams

............
Table of Contents
Chapter 1 : Why Financial Investigation? 1

Chapter 2 : Laws Related to Financial Crimes 13
Chapter 3: Evidence 37
Chapter 4: Sources of Information 63
Chapter 5: Financial Institutions as Sources of Information 83
Chapter 6: Tracing the Movement of Money through a Business 125
Chapter 7: Tracing Funds Using the Direct Method of Proof 179
Chapter 8: Tracing Funds Using Indirect Methods of Proof 193
Chapter 9: Planning, Conducting and Recording an Interview 227
Chapter 10: Investigative Techniques 263
Chapter 11 : Money Laundering and Forfeitures 295
Responses to End -of-Chapter Questions 327
Glossary 354
Appendix A : Selected Sources of Information 369
Appendix B : Federal Reserve Districts
ABA Prefix Numbers of Cities and States 389
Index 391
CHAPTER ]1
Why Financial Investigation ?

arly criminologists categorized criminal activ
E ity into two large groupings : crimes against
people and crimes against property. Since the
victims of crimes were either people (murder, robbery) or property
(burglary, arson) it was natural to list criminal activity by victim.
But today, criminal activities have evolved beyond merely
“ against people” and “ against property.” Criminal activity can
now be classified by motivation factors: passion or greed. This
textbook deals with crimes related to the latter, crimes motivated
by money .
With this new view of crime comes the need for a new
approach to dealing with criminal activity , the financial inves
tigative approach . Gone are the days when the headlines read
“ James Gang Robs Bank . ” Today we are more likely to see a
headline that reads “ International Bank Implicated In Money
Laundering Scheme.” A special type of investigator is needed to
deal with these crimes. This investigator must be able to use the
investigative techniques of the past in combination with a new set
of techniques. These new techniques focus on financial dealings.
Throughout this textbook , you will learn about the techniques
used by the financial investigator. But first, you will be provided
with an introduction to the financial investigative approach. This
chapter begins with a review of some of the more sensational
headlines of the time. It will become clear that a new approach to
criminal investigation is needed . You will then be provided with a
general overview of the financial investigative approach and we
will look into the types of crime where the approach is applicable.
2 CHAPTER 1
The knowledges and skills required of aa financial investigator will

be identified and then the chapter concludes with aa look at
Federal government agencies that employ financial investigators .
After studying Chapter 1 , you should be able to :
• State why there is a need for a new investigative approach .
• Provide a general overview of the financial investigative
process .
Identify the skills required of a financial investigator.

Today, the overwhelming majority of crimes committed in
America are motivated by money. Criminal activity is directed
toward making money in a way fashioned not to get caught .
Although this is not a revolutionary concept to the experienced
law enforcement officer, the importance of this fact is commonly
disregarded . In today's law enforcement, a new investigative
approach is emphasized along with a new type of investigator.
This approach and this type of investigator are the focus of this
chapter and this text.
A New Investigative Approach

It seems that we cannot pick up a newspaper, listen to a radio, or
watch television without learning about some crime that has been
alleged or committed. Crime is page-one news . It seems to be
everywhere. Let's recall some of the major headlines and sensa
tional stories that appeared in the news in the late 1980s and
early 1990s . For example:
• Ten -term Congressman Mario Biaggi was sentenced to
eight years in prison and fined $ 242,000 for 15 felony convictions
ranging from racketeering to obstruction of justice and bribery.
Biaggi was involved in the Wedtech scandal. Wedtech paid mil
lions of dollars in bribes to public officials to obtain no-bid fed
eral contracts .
• Hotel queen Leona Helmsley was convicted of tax evasion

and sentenced to four years in prison. It seems she and her hus
WHY FINANCIAL INVESTIGATION ? 3
band avoided paying more than $ 1.7 million in federal and state
taxes from 1983 through 1985 .
• Ivan Boesky was sentenced to three years in prison and
paid $ 100 million in fines for insider trading.
• Michael Milken, king of the junk bond, was indicted on 98
counts involving racketeering, insider trading, and assorted secu
rities fraud. He pleaded guilty to six counts and the government
dropped all other charges. Milken was sentenced to 10 years in
prison and agreed to pay $600 million in penalties .
• Operation Ill Wind, an investigation into Pentagon procure
ment fraud, impacted individuals as well as corporations. Among
the casualties of the probe were Unisys Corporation and Melvyn
Paisley. Unisys agreed to pay $ 190 million in fines for having
bribed its way to hundreds of millions of dollars worth of defense
contracts. Paisley, a former assistant secretary of the Navy, admit
ted he sold his influence for bribes and leaked secret government
information to defense firms bidding on weapons contracts .
• The savings and loan scandal rocked America. The col
lapse of the Lincoln Savings and Loan Association alone will cost
the American taxpayers $2.6 billion.
The list could go on and on ! And what do all of the crimes
described above have in common ? Money! It seems like most of
today's criminal activity either involves money or money is its
main motivator. And many of the crimes depicted by today's
headlines are crimes that cannot be solved solely by the use of
traditional investigative techniques.
In the past, police relied on investigative tools such as crime
scene analysis, physical evidence, fingerprint identification, eye
witness accounts, informants, and confessions of the offender to
supply the understandable proof of the crime . These general
investigative techniques work best in situations where a crime
has been committed and then law enforcement tries to find the
criminal. However, will these tools work when the criminal is
known and authorities begin an investigation to prove the crime?
4 CHAPTER 1
For example:
Organized crime legends like Al Capone, Lucky Luciano,
John Gotti, and Frank Balestrieri operated for years with relative
impunity. How does law enforcement prove criminal activity when
informants are killed , eye witnesses threatened, and confessions
are nonexistent?
CAD
otse
Infamous mobster Al Capone • Money launderers, tax evaders, and crooked politicians are
wasn't easy to catch. But when for the most part respected pillars of society. How does law enforce
IRS Special Agents, who are ment investigate the criminal activities of people like former Vice
trained accountants, stepped in
and charged him with tax eva President Spiro Agnew and rock and roll legend Chuck Berry ?
sion, this crime czar's career These are people whose power rivals that of law enforcement itself.
came to an end. Proof that some
times only the accountant can To answer these questions, it is necessary to go beyond the
apprehend the criminal. mere inclusion of aa few new tools in law enforcement's investiga
tive arsenal. A brand new approach is called for in light of the
evolution of crime in America, a financial investigative
approach. The growth of money-motivated crimes mandates the
need for financial investigations . The future success of law
enforcement is contingent upon its ability to conduct financial
investigations in conjunction with general criminal investigations.
What's Involved in the Financial Investigative Approach?

The major goal of aa financial investigator is to identify and docu
ment specific events involving the movement of money during the
course of a crime. Suppose an accountant is suspected of embez
zling money from her employer. A financial investigator would
determine what accounts she is taking the money from , when she
took it, and where she is putting it. If the investigator is able to
identify these events and link them together, he or she will have
the basis of proof indicating the commission of a crime. If the
events cannot be identified and linked together, the investigation
may support the determination to discontinue further inquiry into
the matter.
Financial investigations by their very nature are record inten
sive; specifically, records pointing to the movement of money.
Stored at
or retrieved
from
someplace
Given to
Purchase Movement
or received
or sale of of
money
from
something someone
Into or out
... of a
financial
institution
Bank account information (checking and savings account

records), motor vehicle registrations (title, place of purchase, and
lien-holder records), and real estate files (records showing mort
gages and deeds records) are documents or records commonly
found in this type of investigation . However, records such as com
puter disks, utility bills, divorce decrees, and credit card carbons
can play important roles in financial investigations. Any record
that pertains to or shows the paper trail of events is important to a
financial investigation .
Crimes with a Financial Aspect

Now that you have a general understanding of what's involved in
the financial investigative approach , let's identify some criminal
activities where the application of the approach would be appro
priate. The list below identifies and describes some crimes that
are financial in nature .
• Fraud. Fraud is a generic term embracing all the ways one

а
person can falsely represent a fact to another in order to induce

that person to surrender something of value. Former television
evangelist and PTL leader, Jim Bakker, was convicted of defraud
ing followers by offering $ 1,000 “ partnerships” that promised a
6 CHAPTER 1
lifetime of lodging rights at his glitzy Heritage USA theme park in

Fort Mill, South Carolina. Between 1984 and 1987, 153,000 part
nerships were sold but only 258 rooms were available. It's obvi
ous that there were not enough rooms for the number of partners
that signed up. In fact, a reservations supervisor testified that in
any month during Bakker's last year at the PTL , as many as 3,700
lifetime partners were denied accommodations at the theme park.
• Tax evasion. Tax evasion occurs when a person commits
fraud in filing or paying taxes . Baseball legend Pete Rose was
convicted of tax evasion. He failed to report $354,968 worth of
income between 1984 and 1987 .
Bribery. Bribery occurs when money, goods, services, infor

mation , or anything else of value is offered with the intent to
influence the actions, opinions, or decisions of the taker. You can
be charged with bribery whether you offer the bribe or accept it.
Jimmy Hoffa was convicted of bribing a juror who served at one of
his trials.
• Embezzlement. Embezzlement occurs when a person who

has been entrusted with money or property appropriates it for his
or her own use and benefit. A former budget analyst with the U.S.
Information Agency embezzled $ 16,234 from the agency by sub
mitting bogus requests for cash advances which were supported
by fake vendor receipts he created on an office computer. That
budget analyst was in a position where he would be trusted with
the agency's money. Instead , he decided to take some of the
money for himself.
• Larceny. Larceny occurs when one person wrongfully takes

another person's money or property with the intent to appropriate,
convert, or steal it. If someone steals your car and then sells it, he
or she has committed larceny.
Forgery. Forgery occurs when a person passes a false or
worthless instrument, such as a check or counterfeit security, with
the intent to defraud or injure the recipient. An assistant book
keeper with Real Estate Magazines, Inc. was convicted of stealing
$54,000 from the company by cashing checks on which she
forged the signature.
Counterfeiting. Counterfeiting occurs when someone

copies or imitates an item without having been authorized to do so
and passes the copy off for the genuine or original item .We often
hear of counterfeit money. But the next time you buy an item of
designer clothing or pay for some prescription medication , make
sure it's the real thing!
• Blackmail. Blackmail is a demand for money or other con
siderations under threat to do bodily harm , to injure property, to
accuse of crime , or to expose disgraceful defects. Suppose a
politician has a skeleton in his closet and he'd rather keep it
there. Someone else knows the politician's secret and threatens to
tell the world unless she receives $25,000. That's blackmail.
• Extortion. Extortion occurs when one person illegally
obtains property from another by actual or threatened force, fear,
or violence, or under cover of official right. A Washington, DC tax
auditor was convicted of extortion when it was revealed that he
threatened to assess high taxes against a small Ethiopian-owned
business unless the owner gave him some money.
• Kickback. A company is awarded a contract to build aa dor
mitory on a college campus. One day the president of the college
receives aa $3,000 payment from the company. The president calls
the company's vice-president of finance, thanks him for the pay
ment, and says he's glad the two parties were able to work out a
deal— the contract for aа few $ 3,000 payments . This is an exam
ple of a kickback scheme. A kickback occurs when the person
who sells an item pays back a portion of the purchase price to the
buyer (or a public official).
Racketeering. Charges of racketeering can cover a wide
range of things, but the bottom line is that racketeering is running
an illegal business for personal profit.
• Insider trading. Insider trading occurs when a person uses
“ inside ” or advance information to trade in shares of publicly
held corporations.
• Money laundering. Money laundering is the investment or
transfer of money from racketeering, drug transactions, and other
8 CHAPTER 11
illegal sources into legitimate channels so that its original source

cannot be traced.
The crimes listed above are what we normally think of when

we hear the term " financial crime.” But financial evidence is also
used to build cases against persons suspected of kidnapping,
espionage, murder, and arson , to name a few.
Financial Investigation Skills

As you see, a financial investigator can be involved in all sorts of
criminal investigations . This investigator brings a unique set of
skills to any investigation. The successful financial investigator
draws on different aspects from many professions to blend infor
mation in ways, shapes, and forms never imagined by his or her
predecessors. Financial investigators need to be part cop, part
investigator, part accountant, part sociologist, part computer oper
ator, and part attorney in order to combat and resolve the major
crimes of today and detect the crimes of the future. The ability to
understand the interdependence between financial events and
criminal activity is the essence of a successful financial investiga
tor. Accordingly, a financial investigator needs to:
• Know the statute(s) that define the crime(s) under investi
gation
• Understand concepts relating to the collection and admissi
bility of evidence
• Locate and interpret records that contain financial informa

tion
• Trace the movement of money through a financial institu

tion
• Use accounting and auditing techniques

• Use methods of proof to link financial events together
• Conduct financial interviews, record their findings, and
summarize them in report form
• Use investigative techniques such as surveillance and

undercover operations
Each of the items listed above is a topic in this textbook .

When you complete this text, you will have a good understanding
of what's involved in conducting a financial investigation, and,
perhaps along the way, you will pick up a few financial investiga
tive skills .
Today's Financial Investigators

The emergence of law enforcement’s involvement in financial
investigations is reflected in the evolution of the Internal Revenue
Service’s Criminal Investigation Division. Created in 1919 to
investigate fraud and dishonesty among IRS employees, this
Division has grown to over 2,800 agents and is the acknowledged
leader in the fields of tax fraud and money laundering investiga
tion. The ability of the special agents to trace financial transac
tions has taken them a long way from tax returns and into the
middle of every major financial investigation in America— the
Savings and Loan Scandal, junk bond frauds, the Iran Contra
Affair, spy trials, and drug and organized crime prosecutions.
Many other federal agencies also employ financial investiga
tors. These agencies expand in size, function, and authority as laws
are developed and policies to emphasize enforcement of various
crimes are devised. In the 1930s, emphasis was on bootlegging and
the emerging Mafia . In the 1950s, organized crime's involvement
in political corruption was the issue. The 1980s targeted the “War
on Drugs.” The 1990s are faced with the Savings and Loan and
Wall Street scandals. For this reason , the size and employment
needs of the agencies fluctuate to respond to current issues. The
following is aa list of those federal agencies and their major inves
tigative authority which most commonly employ full-time financial
investigators or utilize financial techniques in its investigations.
• U.S. Customs Service. The Customs Service has come to
mean many things to many people. To the international traveler,
Customs is the men and women who examine personal luggage
10 CHAPTER 1
and facilitate the entry of passengers upon their return to the

United States. To the importer, Customs provides advice, and pro
tection and control of merchandise shipped into the country. To
the smuggler, Customs is the planes, vehicles, and vessels con
stantly monitoring the nation's perimeters to thwart attempts at
illicit entries of merchandise, including narcotics and dangerous
drugs. Within Customs, there is an increasing emphas being
placed on the investigation of schemes that defraud the U.S.
Government of rightful revenue— the illicit transportation of cur
rency, and export violations including the illegal shipment of
arms and technologies .
• U.S. Secret Service. Along with their protection services, the
Secret Service enforces the law against counterfeiting currency,
coins, or securities of the United States . The agency also enforces
the laws against fraud or forgery of government checks or bonds,
and other securities and obligations of the United States. Other
investigative responsibilities include credit and debit card fraud,
computer fraud, and electronic fund transfer fraud.
• U.S. Marshal Service. The U.S. Marshal Service provides
protection to the Federal courts, judges, jurors, and witnesses;
apprehends Federal fugitives; executes court orders; manages and
sells property seized from criminals; operates the Witness
Security Program ; and administers the National Asset Seizure and
Forfeiture Program . Deputies assigned to the forfeiture program
establish computer- assisted bookkeeping procedures and inven
tory control systems to account for receipt, storage, and disposi
tion of seized assets.
• Bureau of Alcohol, Tobacco, and Firearms. The Bureau of

Alcohol, Tobacco, and Firearms is an agency within the Treasury
Department. The agency is made up of two sections: Compliance
Operations and Law Enforcement. The Law Enforcement Section
investigates tax evasion, operations carried on without a license or
permit, and the illegal use of firearms, ammunition, and explosives.
• Office of the Inspector General. OIG agents investigate
fraud, waste, and government abuses. The agency serves as the
investigative watchdog for over fifty federal agencies. OIG agents,
by their very nature , are financially -orientated. Making sure that

government contracts, procurements, and payments are completed
as designed requires financial analysis, accounting and auditing
techniques, and the understanding of business principles.
• Federal Bureau of Investigation. The FBI has jurisdiction
over 200 types of cases including white collar crime, organized
crime, foreign counter-intelligence, political corruption, civil
rights violations, terrorism, Federal drug violations, kidnapping,
bank robbery, and interstate criminal activity.
• Internal Revenue Service. The IRS is responsible for
encouraging and achieving the highest voluntary compliance with
tax laws and regulations. In addition to investigating violations of
federal tax laws , special agents with the Internal Revenue
Service's Criminal Investigation Division investigate money laun
dering offenses and conduct asset forfeiture investigations . On
many occasions, special agents lend their expertise to multi
agency investigations .
Drug Enforcement Administration. The DEA is the lead law
enforcement agency having the responsibility of combating drug
abuse. The agency enforces federal drug control laws and concen
trates on high-level drug dealers, nationally and internationally.
• Postal Inspection Service. The United States Postal Service
enforces the laws and regulations governing the mail system
through its Inspection Service. The Inspection Service investi
gates all alleged violations of individuals suspected of mail fraud
and mail theft. The Inspection Service is also involved in investi
gations concerning child pornography and the illegal transport of
controlled substances through the mail.
• Nonfederal Agencies. State and local law enforcement
agencies are beginning to approach criminal investigations from a
financial perspective. Designations such as “ White Collar Crimes
Squad ,” “ Financial Crimes Unit ,” and “ Credit Card Fraud Team ”
are starting to join the traditional detective's classifications.
Additionally, on-the-job training of local and state officers
(including attorneys, investigators, and management officials) in
financial investigative techniques is already taking place.
12 CHAPTER 1
Summary
Today, gambling organizations, drug cartels, and “ mom and pop
grocery stores ” are at ease with the personal computer and its
capabilities . Corporate fraud, insider trading violations, and the
savings and loan scandals have been completed by the creation of
phony shell companies, ghost employees, and non-existent nomi
nees. Sophisticated money launderers, large scale robbery rings,
and embezzlement and kickback operations maintain elaborate
accounting records that often are the envy of CPAs. Big -time
crime operates as a full-time business. To resolve today's crimes
and prepare for the challenges of tomorrow, law enforcement
requires an understanding of financial information. Whether
searching for leads in society's back alleys or board room suites,
financial information is going to be discovered during the course
of a criminal investigation. Consequently, law enforcement agen
cies are seeking officers with proficiency in financial analysis .
A major challenge for financial investigators is to provide
investigative findings which present evidence of complex crimes
in simple and understandable terms which are comprehensible by
a jury. Consider the world of international high finance with its
shell corporations , universal letters of credit, offshore banks,
electronic transfers between numbered Swiss bank accounts, and
interlocking reciprocal trade arrangements. To a juror, this is
almost unfathomable. It's up to the prosecution team, of which an
investigator is part, to dissect these complex ideas and translate
them into simple thoughts that everyone can understand . It's
pretty easy to understand “ he was caught smuggling a suitcase
full of $ 100 bills out of the country .”
As you continue through this textbook, bear in mind that as
law enforcement improves its techniques for detecting, combat
ing, and resolving criminal activity, criminals will become more
sophisticated and innovative in their endeavors. You can be sure
that law enforcement practitioners will never work themselves out
of aa job .
CHAPTER 2
Laws Related to Financial Crimes

hapter 1 provided a general overview of cer
C tain crimes that are normally thought of as

financial in nature. In this chapter, we will
identify some of the federal statutes, the formal written laws, that
underlie particular financial crimes. Chapter 1 described embez
zlement as the unlawful appropriation of money or property by a
person who has been entrusted with those items. In Chapter 2,
you'll see that there are several statutes related to embezzlement.
As an investigator, you must be aware of what statute the accused
is suspected of violating.. Also, the commission of one crime could
include the violation of several different statutes. For example, if
someone is suspected of embezzlement from a bank, that person
might also be suspected of tax evasion . Both of these violations
are subjects of federal statutes .
You may be wondering why an investigator should be aware of
the statutes that are related to a suspected criminal activity. After

all, lawyers deal with things like statutes. So why does aa financial
investigator have to have knowledge of this area? Well, it's
because statutes contain the elements of a crime— those parts of
the crime that must be proven in order to gain a conviction. Once
an investigator has identified the elements of a crime, he or she
can focus evidence collection efforts on gathering relevant infor
mation to prove that the accused committed the crime in ques
tion .
After studying Chapter 2, you should be able to:
• Define or describe selected terms related to the field of law .
14 CHAPTER 2
• Identify the statute(s) related to a particular crime.

• List the elements of a particular crime.
In Chapter 1 , we stated that the successful financial investi

gator draws on knowledge from several professions. Among other
things, an investigator must be part attorney. This chapter focuses
on that part of aa financial investigator.
Terms and Concepts

Before we begin a discussion of specific laws of interest to a
financial investigator, we should review some basic concepts
related to law. First, we will answer the question “ What is law ?”
Next, different categories of law will be identified . Finally, some
concepts related to crime will be discussed .
What is Law?
If you were to ask 10 people to define “ law ,” you probably would
get 10 different answers. Someone will see “ law ” as the police
officer who hands out speeding tickets. Another person will see
“ law ” as a judge sentencing a person to prison. And another will
see “ law” as a lawyer involved in a trial. As different as the 10
responses might be, they will all have one thing in common- a
basic effort to place the affairs of society in order. And generally,
that is what law is— a formal means of social control . It is
intended to guide or direct human behavior toward ends that sat
isfy the common good . Laws embody moral principles and
express the rights and obligations that members of society hold
toward one another. They provide for individual protection and for
the common well-being.
Categories of Law
In the legal world, there are many categories of law. There is com
mon law , the system of law that originated in England and was
the body of law carried by the earliest English settlers to the
American colonies . There is case law , the practice of judges and
LAWS RELATED TO FINANCIAL CRIMES 15
lawyers looking into decisions from past cases to determine the

state of the law for the case they are currently handling. The
financial investigator is most interested in substantive law and
two other categories of law derived from it: criminal and civil law .
Each of these categories is described below.
• Substantive law . Substantive law is the body of law that
creates , discovers, and defines the rights and obligations of each
person in society. Substantive law is composed of the statutes and
ordinances enacted by federal, state, and local legislative bodies
and any regulations proclaimed thereunder, in addition to each
state and federal constitution . Case law is part of the body of sub
stantive law in the United States. Criminal and civil laws are
derived from substantive law.
• Civil law. Civil law is the body of law that deals with con
flicts and differences between individuals. These private wrong
doings are often referred to as torts. Remedies are usually in the
form of money damages or court-ordered actions to do, or refrain
from doing, certain specific things .
• Criminal law . Criminal law is that branch of the law that
deals with offenses of a public nature , that is, wrongs committed
against the state. Such laws may be imposed by federal or state
statutes and usually provide penalties, fines, and /or incarceration
for their breach.
Classifications of Crime
Crimes can be distinguished between those that are felonies and
those that are misdemeanors. A felony is a serious crime punish
able by incarceration for a period exceeding one year, a fine, and
loss of certain civil rights (right to vote and to hold public office).
Misdemeanors are crimes less serious than felonies and usually
provide for incarceration periods of less than one year. Fines also
may be imposed.
Crimes also can be classified as to those that are mala in se
and those that are mala prohibita. Crimes that are mala in se are
said to be evil or immoral in and of themselves . They are
“ offenses against human conscience.” Common crimes of this
16 CHAPTER 2
type include felonies such as murder and rape. Crimes that are
mala prohibita are offenses that are made criminal by statute but
in and of themselves are not necessarily immoral. Mala prohibita
crimes include most violations of government regulations, envi
ronmental laws, and even traffic offenses. Crimes that are mala in
se often require proof of criminal intent, or, in legal terms, mens
rea. Crimes that are mala prohibita don't usually require proof of
criminal intent .
An Introduction to Statutes and the Elements of a Crime

Suppose you're an investigator for aa federal agency and your boss
asks you to investigate a case of alleged embezzlement. “ Get right
on it, ” she says . Where do you begin? Well, before you put your
investigative skills into action, you've got to determine what
law(s) the suspect is allegedly violating. But you're an investiga
tor, not a lawyer. Why do you need to be familiar with the laws
underlying a criminal violation? Because you need to be aware of
the elements of the crime. The elements of a crime are those con
stituent parts that must be proven to sustain aa conviction; that is,
sufficient to make a prima facie case . With аa criminal violation , a
prima facie case is proven when evidence has been presented
which proves, beyond a reasonable doubt, the elements of the
crime. In Chapter 3, you'll read about collecting evidence and its
admissibility in court. For now , we will key in on two other skills
required of an investigator: interpreting the law(s) that underlie a
crime and identifying the elements of the crime. But before you
can do these two things, you must be able to locate the law(s) that
define a crime .
United States Code

In 1925, Congress authorized the preparation of the United States
Code, aa multi-volume publication of the text of statutes enacted
by Congress. The first set came out in 1926 and consisted four
volumes. As of 1988, the United States Code consists of 19 vol
umes of statutes and several supplementary texts . The United
CASE NO. 4053 - M
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BY EVADING ALCOHOL TAXES OF
ment volumes being issued during intervening years. You can
$ 3,750,000 usually find the United States Code in the reference section of
ENOUGH TO FEED THE CREWS OF
10 BATTLESHIPS any library.
OF THE UNITED STATES NAVY
AT SEA FOR The statutes are codified into 50 titles . Codification is the
ONE FULL YEAR
YOU
process of collecting and arranging laws by subject. For example,
WILL PAY FOR THIS FOOD ! Title 2 is called “ The Congress” and statutes relating to the elec
AID DEFENSE !
REAL AMERICANS tion of senators and representatives, the organization of Congress,
WILL KEEP SUGAR and the regulation of lobbying are found here. Titles may be fur
FROM BOOTLEGGERS !
...
RAW MATERIALS SECTION
HOL TAX UNIT, NEW YORK, N.Y.
ther subdivided into parts, subchapters, and /or chapters.
Financial investigations have
Suppose you're reading a legal document and you came
been the most effective method across the phrase " he was convicted of violating 26 U.S.C. §
of “following the money ” to halt 7201.” To find out what this person was convicted of, you need to
tax evasion since the United
be able to interpret what is meant by “ 26 U.S.C. § 7201. ” It's
States Congress enacted the
Revenue Act of 1913. The
easy— U.S.C. stands for United States Code, 26 is the title num
above poster, from the World ber, and 7201 is the statute reference. You locate the volume of
War II era, solicits the support the United States Code that contains Title 26, turn to the statute
of American taxpayers in com referenced by the number 7201 and find the following:
batting tax evasion.
§ 7201. Attempt to evade or defeat a tax or the payment

thereof
Any person who willfully attempts in any manner to evade or
defeat any tax imposed by this title or the payment thereofshall, in
addition to other penalties provided by law, be guilty of a felony
and, upon conviction thereof, shall be fined not more than
$ 250,000 ( $ 500,000 in the case of a corporation ) or imprisoned
not more than 5 years, or both, together with the costs of prosecu
tion.
Upon reading the statute, you determine that the person previ
ously referenced was convicted of tax evasion . But what did the
investigator who worked on the case have to prove to show that
the person committed tax evasion? In other words, what are the
elements of the crime ?
Elements of a Crime
Earlier, we stated that the elements of a crime are those con
stituent parts that must be proven to sustain aa conviction. Well, to
18 CHAPTER 2
gain a conviction for evasion of taxes, there are three elements that
must proven beyond a reasonable doubt. These elements are:
• The suspect owes additional taxes
• The suspect attempted to evade the taxes
• The suspect willfully attempted to evade the taxes
It is important that the financial investigator be able to use
the United States Code to locate statutes, however, with the com
plex way statutes are written, it is not always easy to sort out the
elements of the crime. If in doubt, discuss the elements with the
prosecuting attorney. An understanding of these elements will
enable an investigator to focus his of her evidence collection
efforts on pertinent information .
Since criminal statutes may be enacted by any level of gov
ernment— federal, state, and local— it is important to remember
that the elements of any particular crime may vary between the
three different jurisdictions. Investigators must be knowledgeable
about the statute used for criminal prosecution so that the appro
priate evidence can be collected .
The remainder of the chapter deals with statutes that are of inter
est to the financial investigator. Selected statutes from the follow
ing four United States Code titles will be discussed :
• Title 15, Commerce and Trade
• Title 18, Crimes and Criminal Procedure
• Title 26, Internal Revenue Code
• Title 31 , Money and Finance
Federal Statutes: Title 18, Crimes and Criminal Procedure

Title 18 contains federal criminal laws that range from the triv
ial— a statute barring the unauthorized use of the Smokey the
Bear emblem , to the monumental— the criminal provisions of the
Antitrust laws. Selected statutes, along with the elements of the
§ 201. Bribery of public offi crime, are listed and described on the following pages . As was
cials and witnesses
stated earlier, titles may be further subdivided into parts, sub
(6 ) Whoever
(1 ) directly or indirectly, cor
chapters, and/or chapters . Title 18 happens to be divided into
ruptly gives, offers or promises 121 chapters . The Title 18 statutes described in this text are
anything of value to any public listed according to the chapter in which they are found in the
official... or offers or promises United States Code . Keep in mind that chapters often contain
any public official... to give
anything of value to any other multiple statutes, but this text lists just selected ones. So if you
person or entity, with intent — see only one statute listed under a chapter, chances are that other
( A ) to influence any official statutes exist in the chapter, but for purposes of this text they
act; or were not selected for inclusion .
(B) to influence such public
official... to commit or aid in
committing, or collude in, or
allow, any fraud, or make
Bribery, Graft, and Conflicts of Interest
opportunity for the commission Bribes are given to influence the taker's actions, opinions, or deci
of any fraud, on the United sions. Title 18 U.S.C. § 201 makes it illegal for a public official or
States; or
a witness to accept a bribe and for a person to offer a bribe to
( C ) to induce such public offi
cial... to do or omit to do any either of these parties. Section (b)(1), the part of the statute making
act in violation of the lawful it illegal to bribe a public official, is shown on the next page.
duty or such official... The elements of the crime of bribing a public official include
shall be fined not more than the following:
three times the monetary equiv
alent of the thing of value, or • The suspect knowingly offered aa bribe to a public official
imprisoned for not more than
fifteen years, or both... • The bribe was intended to influence the public officials
performance of an official act or lawful duty
20 CHAPTER 2
$ 287. Falso, fictitious, or Claims and Services in Matters Affecting Government

§
fraudulent claims
Whoever makes or presents to any
We must protect the funds and property of our government from
person or officer in the civil... ser fraudulent claims. Suppose someone is running a scheme where
vice of the United States, or to he or she files federal income tax returns for people who do not
any department or agency exist, and then pockets the refunds. This person is filing false
thereof, any claim upon or claims against the Internal Revenue Service . Title 18 U.S.C. §
against the United States, or any
287 makes this illegal.
department or agency thereof,
knowing such claim to be false, The elements of the crime include the following:
fictitious, or fraudulent shall be
fined not more than $ 250,000,or
• The suspect made or presented a claim against the United
imprisoned not more than five States or any of its departments or agencies
years, or both .
• The suspect knew that the claim was false, fictitious, or 2
§ 371. Conspiracy to commit fraudulent

offense or to defraud the
United States
If two or more persons conspire
either to commit any offense Conspiracy
against the United States, or to Sometimes, two or more people agree to join forces and carry
defraud the United States, or any out some illegal activity. Title 18 U.S.C. § 371 protects society
agency thereof in any manner or
for any purpose, and one or more from these mutual agreements. According to the statute, the ille
of such persons do any act to gal activity only has to be conspired to, it doesn't actually need to
effect the object of theconspiracy, be accomplished . However, at least one of the co - conspirators
each shall befined not more than must have carried out one "overt act ” in furtherance of the con
$250,000 or imprisoned not
more than 5 years, or both. spiracy. The overt act need not be criminal in itself. It may be as
If, however, the offense, the com innocuous as making a phone call or writing a letter.
mission of which is the object of
the conspiracy, is a misdemeanor Conspiracy counts are favored by the prosecution because
only, the punishment for such they provide certain evidentiary and pleading advantages. If a
conspiracy shall not exceed the conspiracy is shown, the acts and statements of one co - conspira
maximum punishment provided
for such misdemeanor. tor may be admitted into evidence against all, and each co-con
spirator may be convicted for the underlying substantive offense.
A corporation cannot conspire with one of its own employees
to commit an offense since the employee and employer are legally
viewed as one . A corporation may, however, conspire with other
business entities or third parties in violation of this statute .
The elements of the crime include the following:
• The conspiracy was willfully formed
• The suspect willfully became a member of it
• At least one of the conspirators knowingly committed at

least one overt act in furtherance of the conspiracy
8471.Obligations or securities Counterfeiting and Forgery

$
of the United States
Title 18 U.S.C. § 471 deals with the issue of committing fraud by
Whoever, with intentto defraud, doing things such as forging checks and making counterfeit
falsely makes, forges, counter
feits, or alters any obligation or money.
other security of the United The elements of the crime include the following:
States, shall be fined not more
than $ 250,000 or imprisoned not • A scheme to defraud
more thanfifteen years, or both.
• The suspect willfully used a fake, forged, altered, or coun
§ 641. Public money, property terfeit U.S. obligation or security
or records
Whoever embezzles, steals, pur
loins, or knowingly converts to
his use or the use of another, or Embezzlement and Theft
without authority sells, conveys Chapter 31 of Title 18 contains several statutes rel to embez
or disposes of any record, zlement and theft. While the financial investigator will be inter
voucher, money, or thing ofvalue
of the United States or any ested in each of the statutes, only two are listed in this text.
department or agency thereof, or Theft or Embezzlement From the Government
any property made or being Title 18 U.S.C. $ 641 states that it is illegal to embezzle, steal,
made under contract for the
United States or any department illegally appropriate, or knowingly convert anything of value from
or agency thereof; or the United States government. It is also illegal to receive, con
Whoever receives, conceals , or
ceal, and retain these items .
retains the same with the intent
to convert it to his use or gain, The elements of the crime include the following:
knowing it to have been embez • Intent
zled, stolen, purloined or con
verted—
Property belonged to the United States
Shall be fined not more than
$250,000 or imprisoned not • The suspect knew that property belonged to the United
more than ten years, or both; but States
if the value of such property does
not exceed the sum of $100, he
shall be fined not more than Theft or Embezzlement by Bank Employees
$1,000 or imprisoned not more Title 18 U.S.C. $ 656 focuses on theft, embezzlement , and misap
than one year, or both.
The word " value ” means face, plication of funds by employees and officers of banks. As you can
par, or market value, or cost see from the two statutes concerning embezzlement and theft, the
price, either wholesale or retail, value of the embezzled or stolen item impacts the punishment. If
whichever is greater.
the value is less than $ 100, the fine does not exceed $ 1,000 and
22 CHAPTER 2
§ 656. Theft, embezzlement,, the prison time is less than one year. If the value is $ 100 or more,
or misapplication by bank offi- the fines and amount of prison time are much steeper.
cer or employee The elements of the crime include the following:
Whoever, being an officer, direc
tor, agent, or employee of, or • Intent
connected in any capacity with
any Federal Reserve bank ...
• The suspect is a bank employee or officer
embezzles, abstracts, purloins, or
willfully misapplies any of the • The suspect attempted to defraud the bank
moneys, funds, or credits of such
bank ... shall be fined not more
than $ 1,000,000 or imprisoned
not more than thirty years, or Extortion and Threats
both; but if the amount embez- We have to protect ourselves from being forced to do things
zled, abstracted, purloined or
against our will . Chapter 41 of Title 18 contains statutes that pro
misapplied, does not exceed
$100, he shall be fined not more
hibit the use of threats and force . Three of the statutes are listed
than $ 1,000 or imprisoned not below.
more than one year, or both.
Extortion
§ 872. Extortion by officers or Title 18 U.S.C. § 872 states that government employees and offi
employees of the United States
cers cannot use their employment status with the government to
Whoever, being an officer or
employee of the United States...
gain money or property through force or threats .
under the color or pretense of The elements of the crime include the following:
office or employment commits or • Intent
attempts an act of extortion,
shall be fined not more than
$250,000 or imprisoned not
• The suspect is an officer or employee of United States gov
ernment
more than three years, or both;
but if the amount extorted or
demanded does not exceed $100, • The suspect used his or her employment with government
he shall be fined not more than as part of the extortion scheme
$500 or imprisoned not more
than one year, or both.
• Extortion is committed or attempted
§ 873. Blackmail Blackmail

Whoever, under threat of inform- Title 18 U.S.C. § 873 prohibits the use of blackmail to keep
ing, or as a consideration for not
someone from informing of criminal violations. It also prohibits
informing, against any violation
someone from blackmailing another by threatening to expose that
of any law of the United States,
demands or receives any money person's criminal activities.
or other valuable thing, shall be
fined not more than $2,000 or
imprisoned not more than one • Intent
year, or both .
• The suspect made threats

§ 874. Kickbacks from public Kickbacks

works employees Title 18 U.S.C. § 874 prevents a worker on a governmental pro
Whoever, by force, intimidation,
or threat of procuring dismissal ject from being compelled by force, threat, intimidation, or dis
from employment... induces any missal to give up part of the compensation he or she received or
person employed in the construc- was entitled to receive.
tion, prosecution, completion or The elements of the crime include the following:
repair of any public work
financed in whole or in part by • Intent
loans or grants form the United
States, to give up any part of the • The suspect made threats
compensation to which he is
entitled under his contract of • Compensation for threats would be from loans or grants
employment, shall be fined not provided by the government
more than $ 250,000 or impris
oned not more than five years, or • Public work financed, at least partially, by the government
both.
§ 1001. False statements of

entries generally Fraud and False Statements
Whoever, in any matter within the Title 18 contains a number of related provisions which punish
jurisdiction of any department or false or fraudulent statements, made either orally or in writing, to
agency ofthe United States know
ingly and willfully falsifies, con various federal agencies and departments. The principal statute is
ceals or covers up by any trick, Title 18 U.S.C § 1001. It is most often used to prosecute false
scheme, or device a material fact, statements made to law enforcement or regulatory officials in the
or makes false, fictitious orfraud- course of an official investigation, or on applications for federal
ulent statements orrepresenta- employment , credit, visa, or passport applications, etc. This
tions, or makes or uses any false
writing or document knowing the statute also pertains to violations relating to altered or false docu
same to contain any false, ficti- ments submitted to agencies of the federal government with the
tious or fraudulent statement or intent to defraud the United States.
entry shall befined not more than
A statement is “ false” for the purposes of the statute if it was
$ 250,000 or imprisoned not more
thanfive years, or both. known to be untrue when made. A statement is ” fraudulent ” if it
was known to be untrue and was made with the intent to deceive a
government agency. The agency need not actually have been
deceived, nor must the agency have in fact relied upon the false
statement, for a violation to occur. The statement must have been
“ material,” that is, capable of influencing the agency involved.
• Willfulness
• The suspect knew that the statement was false

• One or more of the following
24 CHAPTER 2
§ 1341. Frauds and swindles - falsification or concealment of a material fact

Whoever, having devised or -
false statement
intending to devise any scheme or -
false writing or entry
artifice to defraud, or for obtain
ing money or property by means • Matter within jurisdiction of any U.S. agency
of false or fraudulent pretenses,
representations, or promises, or to
sell, dispose of, loan , exchange,
alter,give
, away, distribute, sup- Mail Fraud
ply,, orfurnish or procurefor Chapter 63 of Title 18 contains statutes relating to the commis
unlawful use any counterfeit or sion of fraud.
spurious coin, obligation, security,
or other article, or anything repre
Mail Fraud
sented to be or intimated or held
out to be such counterfeitor spuri- The mail fraud statute, Title 18 U.S.C. § 1341 , is one of the most
ous article, for the purpose of exe- common criminal fraud statutes used by the financial investigator.
cuting such scheme or artifice or This statute prevents the U.S. Postal Service from being used to
attempting to do so, places in any
post office or authorized depository carry out any scheme to defraud. The mailing itself does not need
for mail matter, any matter or to contain the false and fraudulent representations, as long as it is
thing whatever to be sent or deliv- an “ integral” part of the scheme. What is considered integral or
ered by the Postal Service, or takes incidental depends on the facts of each case; generally any mail
or received
matter therefrom , any such ing which
or thing,orknowingly
,
helps advance the scheme in any significant way will
causes to be delivered by mail be considered sufficient.
according to the direction The elements of the crime include the following:
thereon, or at the place at which
it is directed to be delivered by • Intent
the person to whom it is
addressed, any such matter or • Scheme to defraud
thing, shall be fined not more
than $ 250,000 or imprisoned not • Use of mails to further scheme
more than 5 years, or both. If the
violation affects a financial insti
tution, such person shall not be
fined more than $1,000,000 or
imprisoned more than 30 years,
or both
§ 1343. Fraud by wire, radio, Wire Fraud

or television
Title 18 U.S.C. § 1343 prevents someone from using television
Whoever, having devised or
intending to devise any scheme and radio, or phone lines (computer modems included ) to defraud
or artifice to defraud, or for the
public.
obtaining money or property... by The elements of the crime include the following:
means of wire, radio, television
communication and interstate or • Intent
foreign commerce ... shall be
• Scheme to defraud
fined not more than $ 250,000 or
imprisoned not more than 5
years, or both . If the violation • Use of interstate communications to further scheme
afj ?cts a financial institution,
such person shall not be fined Bank Fraud
r. sre than $ 1,000,000 or impris- A relatively new federal statute makes it a crime to defraud, or
oned more than 30 years, or both.
attempt to defraud, a federally chartered or insured bank .
§ 1344. Bank Fraud Previously, such offenses were prosecuted under the more generic
( a) Whoever, knowingly executes, fraud statutes, such as mail or wire fraud. As in the mail and wire
, scheme
or attempts to execute,a fraud statutes, the term “defraud ” includes any misrepresenta
or artifice -
(1 ) to defraud a financial insti tions or other conduct intended to deceive others in order to
tution; or obtain something of value. The prosecution must prove only an
( 2) to obtain any of the moneys, attempt to execute this scheme, and need not show actual loss, or
funds, credits, assets, securities or
that the victim institution was actually deceived, or that the
other property owned by or under
defendant personally benefitted from this scheme. The important
the control of, a financial institu
tion by means of false orfraudu- aspect is the attempt.
lent pretenses, representations, or The elements of the crime include the following:
promises, shall be fined not more
than $1,000,000 or imprisoned • Intent
not more than 30 years, or both.
• Scheme to defraud a financial institution
Racketeering
Chapter 95 of Title 18 contains statutes related to money launder
ing. By definition , money laundering is the process by which one
conceals the existence, illegal source, or legal application of
income and then disguises that income to make it appear legiti
mate . This is taking “dirty money ” and washing it to make it
appear “ clean ”. Through these laws, the mere moving of money
known by an individual to be the proceeds from some illegal
activity creates a substantive criminal offense separate from the
illegal activity itself. For the financial investigator, these statutes
26 CHAPTER 2
provide criminal relief in investigations that involve the move

ment of money through financial institutions when that money is
derived from an illegal activity. These money laundering statutes
have forfeiture provisions which allow for seizure and forfeiture of
money and assets that represent the proceeds of the substantive
illegal activity. (Chapter 11 of this text deals with this topic).
§ 1956. Laundering of mone- Money Laundering
tary instruments Title 18 U.S.C. § 1956 makes it aa federal crime to launder money
( a )(1 ) Whoever, knowing that the
property involved in a financial known to be the proceeds of specified unlawful activities, as
transaction represents the pro defined by federal statutes. Note that only part of the statute
ceeds of some form of unlawful [(a)( 1 )] is displayed.
activity, conducts or attempts to The elements of the crime include the following:
conduct such a financial trans
action which in fact involves the • The suspect must conduct or attempt to conduct a “ finan
proceeds of specified unlawful cial transaction ”
activity— ( A )(i) with the intent
to promote the carrying on of • The suspect must know that the property involved in the
specified unlawful activity ; or (ii)
with the intent to engage in con
transaction represents the proceeds of some form of unlaw
duct constituting a violation of ful activity
section 7201 or 7206 of the
Internal Revenue Code of 1986 ;
• The transaction must involve property which, in fact, repre
or(B) knowing that the transac- sents the proceeds of “specified unlawful activity ”
tion is designed in whole or in
part— ( i) to conceal or disguise • The suspect must engage in the transaction with either
the nature, the location , the the intent of promoting the carrying on of the “specified
sources, the ownership, or the unlawful activity ,” or
control ofthe proceeds ofspecified
unlawful activity; or (ii) to avoid the intent to engage in conduct constituting tax evasion
a transaction reporting require under Title 26 U.S.C. § 7201 or tax fraud under Title 26
ment under State or Federal law , U.S.C. § 7206 , or
...shall be sentenced to a fine of - knowledge that the purpose of the transaction , in whole
not more than $ 500,000 or twice
the value of the property involved
or in part, was either to conceal or disguise the nature,
in the transaction , whichever is location, source, ownership, or control of the proceeds of
greater, or imprisonment for not “specified unlawful activity ;” or to avoid a transaction
more than twenty years or, both . reporting requirement under State or Federal law
Transactions Involving Criminally Derived Property

Title 18 U.S.C. § 1957 states that it is unlawful to take part in, or
attempt to take part in , monetary transactions involving crimi
nally derived property that is of a value greater than $ 10,000 and
is derived from a specified unlawful activity.
§ 1957. Engaging in monetary The elements of the crime include the following:
transactions in property derived
from specified unlawful activity • The suspect must knowingly engage in aa “monetary transac
(a) Whoever, in any of the cir- tion .” A monetary transaction is any deposit, withdrawal, transfer,
cumstances set forth in subsection or exchange, in or affecting interstate or foreign commerce, of
(d) , knowingly engages or
attempts to engage in a monetary funds or a monetary instrument by, through , or to a financial insti
transaction in criminally derived tution. It excludes “ any transaction necessary to preserve a per
property that is ofa value greater son's right to representation as guaranteed by the sixth amendment
than $ 10,000 and is derived
to the Constitution”
from specified unlawful activity,
shall be punished as provided in • The value of funds or monetary instrument involved in the
subsection (b ).
(b) (1 ) Except as provided in
transaction or attempted transaction must exceed $ 10,000
paragraph ( 2 ), the punishment
for an offense under this section
• The suspect must know that the funds or monetary instru
is a fine under title 18 , United ments involved in the transaction or attempted transaction consti
States Code, or imprisonment for tute “ criminally derived property ”
not more than ten years or both.
• The property involved in the transaction must, in fact, con
stitute the proceeds of “specified unlawful activity ”
• The offense must take place in the United States, in the
special maritime and territorial jurisdiction of the United States,
or, can take place outside the U.S. if the subject is aa United States
person— as defined in Title 18 U.S.C. § 3077, except for the
class described in paragraph (2)(D) of that section
Racketeer Influenced and Corrupt Organizations

(RICO)
RICO is probably the most well known and controversial federal
statute in use today. Title 18 U.S.C. § 1961 was originally enacted
in 1970 to fight organized crime's infiltration of legitimate busi
ness. Its powerful criminal and civil provisions have been used in
a wide range of fraud cases. When applied in financial cases, the
statute outlaws, in general, the investment of ill-gotten gains in
another business enterprise, or the acquisition of an interest in an
enterprise through certain specified unlawful activities. These
unlawful activities include: illegal interstate gambling, trafficking
in illegal substances, money laundering, prostitution, and other
specific illegal activities delineated by Congress. Criminal penal
ties include stiff fines and jail terms, as well as forfeiture of all
28 CHAPTER 2
illegal proceeds or interests acquired . Civil remedies include tre

ble damages, attorney's fees, dissolution of the offending enter
prise, and other remedial measures.
RICO's complexity is due, in part, to efforts to avoid constitu
tional problems which voided attempted “ anti-racketeer” legisla
tion in the 1930s . The “ 1930 provisions” were found to be
unconstitutional because they punished the mere “ status ” of
being a gangster, rather than any particular wrongful conduct .
RICO avoids this impediment by basing its definition of “ racke
teering” and enhanced penalties on “ patterns” of conduct defined
in the statute. The most controversial aspect of RICO is its civil
provisions. Civil actions may be brought by the government or
any private party injured by a defendant's business or property.
Critics complain that private party suits have been used to reach
“ deep pocket” defendants, such as accounting firms who cannot
be characterized as racketeers, and to coerce unwanted settle
ments from blameless defendants fearful of possible treble dam
age judgments. A treble damage judgment involves the payment
of three times the amount of damages to the entity damaged by
the defendant. Supporters contend that a plaintiff cannot recover
unless he or she proves fraud or certain other identified criminal
acts. Several bills to repeal or amend RICO, particularly these
civil provisions, have been introduced in Congress in recent
years.
Federal Statutes: Title 26 , Internal Revenue Code

§ 7201. Attempt to evade or The Internal Revenue Code is the body of law which codifies all
defeat a tax or the payment federal tax laws including income, estate, gift, excise, etc. taxes.
thereof
Any person who willfully attempts
Our focus is on Chapter 75 ; Crimes , Other Offenses, and
in any manner to evade or defeat Forfeitures.
any tax imposed by this title or
the payment thereof shall, in
addition toother penalties pro- Crimes, Other Offenses, And Forfeitures
vided by law, be guilty of a The IRS is responsible for ensuring that we comply with tax laws
felony and, upon conviction
and regulations. The statutes listed below deal with tax abuse and
thereof, shall be fined not more
fraud .
than $ 250,000 $ 500,000 in the
case of a corporation ) or Tax Evasion
years, or both, together with the Most individuals and corporations are required, by law, to pay
costs of prosecution. taxes on earnings and other sources of income. Title 26 U.S.C. §
§ 7203. Willful failure to file
7201 states that it is illegal for any person to avoid paying taxes
return, supply information, or
that they, or the corporation they represent, owe.
pay tax We covered the elements of this crime earlier; however, we
Any person required under this shall revisit them here .. The elements of the crime include the fol
title to pay any estimated tax or lowing:
tax, or required by this title or by
regulations made under author- • The suspect owes additional taxes
ity thereof to make a return , keep
any records, or supply any infor- • The suspect attempted to evade the taxes
mation, who willfullyfails to pay
such estimated tax or tax, make • The suspect willfully attempted to evade the taxes
such return , keep such records, or
supply such information, at th
time or times required by law or
Failing to File, Supply Information, or Pay Tax
regulations, shall, in addition to Title 26 U.S.C. § 7203 basically states that if you are required to
other penalties provided by law , file a tax return , you must file it; if you are required to pay a tax,
be guilty of a misdemeanor and, you must pay it; and if you are required to keep records or supply
upon conviction thereof, shall be
fined not more than $25,000
information concerning taxes, you must keep the records or sup
ply the information.
( $ 100,000 in the case of a corpo
ration), or imprisoned not more If the suspect failed to file, the elements of the crime include
than 1 year, or both , together the following:
with the costs of prosecution ...
• Duty to file
• Failure to file
• Willfulness
30 CHAPTER 2
If the suspect failed to supply information, the elements of the

crime include the following:
Duty to supply information
• Failure to supply information
• Willfulness
If the suspect failed to pay taxes, the elements of the crime

include the following:
• Duty to pay
• Failure to pay
• Willfulness
§ 7206. Fraud and false state- Filing a False or Fraudulent Return

ment When you file your federal income tax form , you place your signa
Any person who— (1 ) Willfully
makes and subscribes any ture on it. In doing so, you state that the information presented on
return , statement, or other docu the form is accurate. Now, if you know that your return is not
ment, which contains or is veri- accurate, but you sign it anyway, you're filing a fraudulent return
fied by a written declaration that in violation of Title 26 U.S.C. § 7206.
is made under penalties or per
jury, and which he does not
believe to be true and correct as
to every material matter... shall
• The suspect made and subscribed under penalty of perjury
be guilty of a felony and upon • The suspect knew that the statement was false or fraudulent
conviction, shall be fined not
more than $ 250,000 ( $500,000 • Willfulness
in the case of a corporation ) or
years, or both, together with the
costs of prosecution.
Federal Statutes: Title 15, Commerce and Trade

Title 15 contains statutes related to the exchange, buying, or sell
ing of goods, productions, and properties of any kind . There are
three “acts” contained in Title 15 that are of particular interest to
the financial investigator. They are discussed below.
Securities Act of 1933

The Securities Act of 1933 (Title 15 U.S.C. § 77 et seq) provides
for registration of securities which are to be sold to the public and
for complete information as to the issuer and stock offering. A
security is aa stock , bond, note, or other document that represents
a share in a company or aa debt owed by a company or government
entity.
Securities Exchange Act of 1934

The Securities Exchange Act of 1934 ( Title 15 U.S.C. § 78 et seq)
governs the operation of stock exchanges and over-the -counter
trading. It requires, among other things, publication of informa
tion concerning stocks which are listed on these exchanges .
Title 15 contains numerous statutes which prohibit false
statements and other fraudulent activity in connection with secu
rity transactions . These laws contain civil and administrative
remedies, enforced by the Securities and Exchange Commission
(SEC), as well as criminal sanctions enforced by the Department
of Justice. Whether a particular violation is prosecuted civilly or
criminally depends in large measure on the degree of willfulness
that can be proven .
Electronic Funds Transfer Act

An electronics fund transfer is a transaction with a financial
institution by means of a computer, telephone, or electronic
instrument. The Electronic Funds Transfer Act provides aa basic
framework establishing the rights, liabilities, and responsibilities
of participants in electronic funds transfer systems . The act
addresses the provision of individual consumer rights.
32 CHAPTER 2
“ Computer crime” is a new term in law enforcement, and the

Electronic Funds Transfer Act is one of several statutes that
relates to this type of crime. In a computer crime, the computer
can be the instrument of a crime or the object of one. As an
instrument, a computer may be used to steal funds from aa bank
account. As the object of aa crime, the information contained in a
computer may be stolen, altered, or destroyed . Most computer
crimes are still prosecuted under traditional fraud, theft, and
embezzlement statutes. Generally, the elements of a computer
• Unauthorized access (or exceeding one's authority)
• An intent to defraud
• Obtaining anything of value

Federal Statutes: Title 31 , Money and Finance

§ 5313. Reports on Domestic Title 31 contains statutes governing the money and finances of the
Coins and Currency Transactions United States government. The two statutes listed below relate to
(a) When a domestic financial
institution is involved in a trans the movement of money through a financial institution.
action for the payment, receipt, Financial transactions in excess of $ 10,000 in currency must
or transfer of U.S. coins or cur- be reported on a Currency Transaction Report (CTR). Title 31
rency (or other monetary instru U.S.C. $ 5313 requires that financial institutions file this report.
ments the Secretary of the
Treasury prescribes) , in an If a person takes actions to falsely or fraudulently stop a financial
amount , denomination , or institution from filing the report with the federal government, a
amount and denomination, or violation of criminal law has occurred .
under circumstances the
Title 31 U.S.C. § 5324 makes it illegal for an individual to
Secretary prescribes by regula
tion , the institution and any
attempt to “ structure transactions” in such a way as to evade the
other participant in the transac reporting requirements of Title 31 U.S.C. § 5313. Such structur
tion the Secretary may prescribe ing would include:
shallfile a report on the transac
tion at the time and in the way breaking deposits into amounts less than $ 10,000
the Secretary prescribes ...
• withdrawing currency in amounts less than $ 10,000
§ 5324. Structuring Trans
actions to Evade Reporting • utilizing various financial documents (cashiers checks, cer
Requirement Prohibited tified checks, money orders)
No person shall for the purpose
of evading the report require
ments of section 5313 (a) with
respect to such transaction —
(1 ) cause or attempt to cause a
domestic financial institution to
fail to file a report required
under section 5313 (a );
( 2 ) cause or attempt to cause a
domestic financial institution to
file a report required under sec
tion 5313 (a) that contains a
material omission or misstate
ment of fact; or
( 3) structure or assist in struc
turing, or attempt to structure or
assist in structuring, any trans
action with one or more domestic
financial institutions.
34 CHAPTER 2
Summary
This chapter has detailed important federal statutes relating to
financial investigations. The successful financial investigator is
one who can sort out the elements of a crime from the legalese of
a statute so that he or she is in a position to gather the evidence
needed to prove a violation and sustain a conviction.
Questions and Exercises

Answer the following questions then check your responses with
those provided at the back of the book.
1. What are the differences between civil law and criminal law ?
2. What are the differences between felonies and misdemeanors ?
3. What is the difference between a crime that is “ mala pro

hibita ” and one that is “ mala in se ? ”
4. Descriptions of criminal activities are listed below. For each

description, identify all federal statutes that may have been vio
lated and the elements of the crime. Refer only to those statutes
contained in Chapter 2.
a. Jerry Wilson owns a clothing store in Chicago. He agreed to let
a drug dealer buy thousands of dollars of clothes there, using $ 10,
$20, and $50 bills that had been used to buy crack and cocaine
on the streets.
b. Troy Avery is a high - ranking civil servant employed by the

U.S. Navy. He has ties with a sports agent. One of the contractors
who works with Avery has a son who is sure to be the first player
selected in the college football draft. Avery tells this contractor
that he had better convince his son to sign with Avery's sports
agent friend or Avery will see to it that the contractor loses his
job.
36 CHAPTER 2
c . Jenny Lawrence cons unsuspecting victims into buying bogus

vacation packages by placing adds offering inexpensive vacations
in newspapers and listing an 800 number for potential victims to
call.
d . David Stevens is employed by First National Bank and Trust.

He is diverting money, via wire transfers, from the bank's general
ledger account to a personal account at another bank.
e . Linda Carson is the president of aa consulting firm that has

fallen on hard times. But Linda has some dirt on a competitor and
threatens to expose a kickback scheme that this person's com
pany is involved in unless the competitor drops its pursuit of a
contact that Linda's company is bidding on.
f. Susan Tompkins is required to pay estimated taxes four times a

year. She has missed one payment and has no intention paying
the other three.
5. Lance Gordon is aa drug trafficker. Each week, he deposits his

profits in several different banks and makes sure that each
deposit is less than $ 10,000. What statute is he violating?
CHAPTER 3
Evidence
in Chapter 2, some of the federal statutes of inter
w
est to the financial investigator were identified. A

corresponding list of the “ elements of the crime”
was provided for many of the statutes. These elements are of par
ticular importance to the investigator because they direct the
focus of the evidence gathering process. In this chapter we will
discuss various concepts related to evidence. We will look at the
differences between direct and circumstantial evidence . We will
discuss various standards of proof and see how the standard of
proof for a criminal case differs from the standards for a civil
case. Selected “rules of evidence” also will be presented. The
chapter begins with a discussion of the grand jury process, for it
a
is here that initial evidence gathering efforts help determine

whether a suspect in a criminal case goes to trial..
• Describe the grand jury process.
• Describe the “ investigative tools ” used by the grand jury.
• Define evidence.
Distinguish among the five standards of proof.

• Describe different classifications of evidence.
• Determine the admissibility of evidence by applying
selected rules of evidence.
38 CHAPTER 3
One of the major responsibilities of aa financial investigator is

to gather evidence . But there are many things the investigator
must consider in his or her quest for evidence. Does the evidence
bear directly upon a fact the prosecution wants to prove or must
inferences be made to link the evidence to a fact ? Is the person
who supplied some relevant fact able to testify to that fact or are
the communications between that person and the accused privi
leged ? This chapter provides an introduction to many concepts
surrounding the collection, strength , and admissibility of evi
dence. But before we get into aa discussion of evidence, we will
look at the grand jury process.It is here that the determination is
made to charge someone with a violation of criminal law. The evi
dence an investigator collects plays a large role in determining
whether there is sufficient cause to believe that the accused com
mitted a crime.
The Grand Jury

The American system of justice is adversarial in nature . This
means that both parties involved in the litigation (prosecution and
accused) present evidence to a third party ( judge or jury) for a
determination of who is right or wrong (guilt or innocence). This
differs dramatically from other systems of justice. For example, in
an inquisitional system, defendants are presumed guilty and the
evidence to convict them is extracted from their mouths.
One of the many legal concepts that the American colonists
brought with them from England was that an individual accused of
a high crime or major criminal violation should stand accountable
to that accusation in front of his or her peers . Under ou
Constitution , a person cannot be indicted, receive a formal written
complaint of criminal charges, without first having the facts and the
reasons leading up to and contained within the indictment reviewed
and approved by a jury of his or her peers— a grand jury.
At the federal level, a grand jury consists of 16 to 23 people
chosen from the general population in a judicial district. The jurors
investigate accusations against people and other entities. Upon a
finding of probable cause, a grand jury returns an indictment which
EVIDENCE 39
requires the accused to stand trial for a criminal violation.

Normally a grand jury “ sits, ” or deliberates, for aa period of
eighteen months to perform its function. Grand jury proceedings
are held in secrecy, and as such, only the jurors, government
attorney, witness, and stenographer are present while the jury is
in session. When the jury is deliberating or voting, no one else is
allowed in the jury room .
The role of the grand jury is that of fact finder. The jury meets
to gather information and documents, and to listen to witness tes
timony concerning alleged criminal violations. After the informa
tion, documents and testimony have been gathered, the grand
jury decides , by voting, whether or not to return a criminal
indictment. It takes 12 jurors to return an indictment, no matter
how large the jury.
Tools of the Grand Jury

To accomplish their fact finding, the grand jury has the power to
call witnesses to provide testimony, to issue orders that require
the production of records, and to impose legal sanctions to ensure
compliance with its powers. The primary investigative tool of the
grand jury is the subpoena which requires a witness to appear
before the grand jury. A subpoena can also require a witness to
produce records and documents. A subpoena details the testi
mony or records to be supplied and the place and time for the wit
ness' appearance before the grand jury. Subpoenaed witnesses
that fail to comply can be cited for contempt of court and those
that are dishonest while providing testimony may face perjury
charges. Witnesses may not have their attorneys present with
them during the grand jury proceeding, however, witnesses can
confer with their attorneys outside the grand jury proceedings
before answering questions.
Another grand jury investigative tool is the grant of immu
nity. Immunity is granted to convince or compel a witness to pro
vide testimony or produce documents. By guaranteeing that the
witness will not be prosecuted, the grand jury can obtain impor
tant information otherwise unavailable . There are two types of
immunity grants: transactional and use.
40 CHAPTER 3
Transactional Immunity
Transactional immunity completely protects the witness from
prosecution for any criminal offenses about which he or she testi
fies during the grand jury proceedings. If a witness states that she
has laundered money for a drug dealer, she cannot be charged for
the offense if she has been provided transactional immunity. This
form of immunity is rarely used.
Use Immunity
Use immunity protects witnesses from the prosecution’s “ use ” of
their testimony against them. Let's look at that same witness who
laundered drug money. If she is granted use immunity, she cannot
be prosecuted for money laundering unless the prosecuting attor
ney can develop independent information and evidence from a
completely separate source of the witness' criminal wrongdoing.
Immunity can be given either formally or informally. Formal
immunity is granted by the court. As part of a grand jury proceed
ing, the prosecuting attorney makes an application to a court (i.e.
federal judge) requesting a grant of formal immunity for the wit
ness. The court official reviews the application and bases his or
her findings on:
• The importance of the information to the success of the
investigation
• The availability of the information from other sources
• The culpability of the witness
If the court approves the application, a grant of formal immu
nity is issued to the witness.
Informal immunity is offered to grand jury witnesses by the
prosecuting attorney via issuance of a “ letter of immunity.”
Such a letter assures witnesses that their grand jury testimony
will not be used against them in any subsequent criminal legal
proceeding
Immunity is a powerful tool and the investigator and prose
cuting attorney must use it wisely. They must weigh the evidence
they will receive from a witness against that witness' criminal
wrong doings. The prosecutor will usually ask for a proffer. This
is a statement from the witness which details his involvement
EVIDENCE 41
and cannot be used against him. It is used to determine if immu

nity should be offered .
Role of the Financial Investigator

in the Grand Jury Process
Financial investigators routinely work with grand juries . They
serve subpoenas, gather information, take testimony from wit
nesses, and report their investigative findings to the grand jury.
The cloak of secrecy applies to all information gathered by the
agent during the grand jury proceedings .
The financial investigator also assists the prosecution in the
investigative decision-making process. The investigator who has
talked to witnesses and analyzed the financial information can
advise the attorney on issues such as order of witness appearance,
questions to ask the witness, and even whom to offer immunity
grants .
A major advantage in conducting financial investigations
through the grand jury process is the ability for various law
enforcement agencies to work together. Allegations of criminal
violations often impact various statutes for which numerous agen
cies hold investigative authority. Under the auspices of the grand
jury, multiple violations can be simultaneously investigated and
ultimately charged through a coordinated multi-agency effort.
One disadvantage to conducting an investigation through the
grand jury process is related to the secrecy requirements of the
grand jury. Grand jury information may not be used in non - grand
jury investigations unless a court order is obtained permitting the
release of the grand jury information. If a suspect is not indicted
by the grand jury, the grand jury's investigative findings cannot be
used in other investigative activities (i.e. intelligence sharing or
other ongoing investigations) unless so authorized by a court
order.
42 CHAPTER 3
What Is Evidence?
From the discussion on the grand jury proceeding, you can see
that the financial investigator's role as a gatherer of evidence is a
vital one . In its simplest terms, evidence is anything that can
make a person believe that a fact or proposition is true or false.
Both parties involved in a lawsuit can submit evidence to prove
their points . In aa criminal case, the prosecution must present evi
dence to prove the commission of aa crime. They do so by gather
ing information, documents , and other items that prove the
elements of a crime. The defense presents evidence to show that
allegations are invalid.
Standards of Proof
Evidence is collected to establish proof. In the world of law
enforcement, the concept of proof varies according to the situa
tion . In a criminal case, evidence must establish proof of a crime
“beyond a reasonable doubt.” In most civil cases, evidence must
be strong enough to incline a person to believe one side over the
other. Discussions concerning five standards of proof follow.
Beyond a Reasonable Doubt

A defendant charged with aa criminal violation is presumed inno
cent until proven guilty. In aa criminal proceeding, the government
bears the burden of proving that the accused is guilty of the
charges— the accused does not have to prove his or her inno
cence. To receive a guilty verdict, the government must prove
each and every element of a crime beyond aa reasonable doubt.
The concept of beyond a reasonable doubt is something that
many of us talk about and, perhaps, struggle with. We do not have
to be sitting on a jury to give our personal opinions about a case.
We can read about a case in the newspaper. Some, we can watch
levision. So, when we get ready to give our personal verdicts
of guilt or innocence, we must measure the evidence presented
and determine if the prosecution has proven its case beyond a
EVIDENCE 43
IRON TI reasonable doubt. And then we ask ourselves— “ What is meant

11- 24/12 DANA B. OR KAT
121008 PH . 46
3441 CE
by “reasonable doubt??”
SAN JOS
PAY TO
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Reasonable doubt is the degree of certainty that you have in
Sevedehurdland WARM SPRINGS OFFICE
accomplishing or transacting the more important concerns of your
WELLS FARGO BANI
46973 WARN SPRINGS BOULEVARD FREMONT, CAO
everyday life. For example, you are out for your nightly walk
MERC
121000 2101 : 326 OK24 around the neighborhood and you stop at an intersection. At the
same time, a car happens to pull up to a stop sign at the same
IRMTE
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DANA B. OR KAT
PH . 40
intersection. You and the driver make eye contact and the driver
3441 CED
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PAY TO
THE ORDER OF
BatessSutch vinced, beyond a reasonable doubt, that the car will not pull out
SucheSundhedssats i WARM SPRINGS OFFICE
and run over you.
WELLS FARGO BANK
48973 WARM SPRINGS BOULEVARD FREMONT, CA 94 €
MEMOSOS Alma We just described “reasonable doubt” in lay person's terms.
: 121000 2481: 3 26 0124 Let's see how the court defines “ reasonable doubt?” A recent
Video Spectral Comparator's are court decision (U.S. v. Sunderland) defines the concept as follows:
new technological tools used to
clarify images and differentiate A reasonable doubt, is a doubtfounded upon a consideration
inks on documents. This tech of all the evidence and must be based on reason . Beyond a
nology was used to show conclu reasonable doubt does not mean to moral certainty or
sive proof that a check originally
made payable to the IRS was
beyond a mere possible doubt or an imaginary doubt. It is
altered through the use of differ such a doubt as would deter a reasonably prudent man or
ent inks. woman from acting or deciding in the more important mat
ters involved in his or her own affairs. Doubts which are not
based upon a reasonable and careful consideration of all the
evidence, what are purely imaginary, or borne of sympathy
alone, should not be considered and should not influence
your verdict. It is only necessary that you should have cer
tainty with which you transact the more important concerns
in life. If you have that certainty, then you are convinced
beyond a reasonable doubt.
A defendant may not be convicted upon mere suspicion or

conjecture. A defendant should be acquitted if the evidence is
equally consistent with innocence as with guilt.
Preponderance of Evidence
The degree of proof required in many civil matters is a preponder
ance of evidence. Let's say you are sitting on a jury in a case
44 CHAPTER 3
involving aa lawsuit where one person is suing the other. You listen
to the evidence presented by the defendant and then you listen to
the evidence presented by the plaintiff. When it comes time to
deliberate, you find that you happen to believe the plaintiff. Both
sides presented evidence but the evidence presented by the
plaintiff made you believe that person. This is proof by prepon
derance of evidence- evidence that inclines an impartial mind
to one side rather than the other. And with preponderance of evi
dence, it is not the quantity of evidence that matters, it's the qual
ity. For example:
... when it is said that the burden rest upon either party to
establish any particular fact or proposition by preponderance
or greater weight of evidence, it is meant that the evidence
offered and introduced in support thereof to entitle said
party to a verdict, should , when fully and thoroughly con
sidered, produce the stronger impression upon the mind and
be more convincing when weighed against the evidence
introduced in opposition thereto . Such preponderances are
not always to be determined by the number of witnesses on
the respective sides, although it may be thus determined all
of the things being equal.2
Clear and Convincing Evidence

Another standard of proof used in certain civil cases where fraud
may be involved is clear and convincing evidence. This type of
proof is not proof beyond a reasonable doubt as required in a
criminal case,
but is stronger than a mere preponderance of evi
dence as normally required in a civil matter. For example:
A mere preponderance of the evidence, meaning merely the
greater weight of the evidence, is not sufficient to prove
fraud. This does not mean that you must be convinced of
fraud beyond a reasonable doubt, because this is not a crim
inal case. However, an allegation of fraud does require a
greater degree ofproof than is required in most civil cases,
and a mere preponderance of the evidence while enough to
incline the mind ofan impartial juror to one side ofthe issue
EVIDENCE 45
rather than the other, is not enough to prove fraud. Fraud

must be established by evidence which is clear, cogent, and
3
convincing.
Probable Cause
The three standards of proof just presented can be distinguished
from probable cause which serves as the basis for arrest and
search warrants . Probable cause is all the facts and circum
stances within the knowledge of an investigator about аa criminal
activity that can be considered reasonable and trustworthy. For an
arrest warrant to be issued, probable cause must be sufficient to
cause a person of reasonable caution to believe that a crime has
been committed and that the accused has committed it. To have a
search warrant issued, probable cause must be sufficient to make
a reasonable person believe that a crime has been or will be com
mitted and that the evidence sought exists in the place to be
searched. Probable cause requires more than mere suspicion or
hunches but less than a preponderance of evidence.
Suspicious Situation
At the opposite end of the spectrum from “ beyond a reasonable
doubt” in the continuum of standards of proof is the suspicious
situation. In Terry v. Ohio , 392 U.S. 1 (1968), the Supreme Court
established case law stating that police may briefly detain and
question a person for investigative purposes if there exists spe
cific “articulable suspicions.” Such a valid detainment of a sus
pect may yield evidence to effect arrest or provide evidence in
support of a crime.
Classifications of Evidence
Now that you are familiar with the standards of proof, let's look at
the types of evidence that can be presented. In legal terminology,
evidence has various classifications. Evidence may be classified
according to its proof results (direct or circumstantial) or accord
46 CHAPTER 3
ing to its source (real, documentary, or testimonial). The following

paragraphs describe the different classifications of evidence .
Evidence admitted through a process called “judicial notice” is
also discussed .
Direct Evidence
A person under investigation is suspected of accepting a $5,000
bribe. Another person states that he was with the suspect on
November 12, 1992 and saw the suspect accept the bribe. This
person has provided direct evidence of the crime. Direct evidence
is evidence to the precise point at issue.* A person is suspected of
accepting a bribe; another person says he saw the suspect accept
aa bribe. Nothing needs to be inferred or presumed.
Circumstantial Evidence
Now let's look at the same suspect, only this time let's look at
some evidence that is not directly related to the point at issue. An
investigator states that the suspect's bank statement reveals that
the suspect deposited $5,000 on November 12, 1992. Another
person testifies that on November 12, 1992, she saw the suspect
having breakfast with the person suspected of offering the bribe.
When looked at individually, neither of these pieces of evidence
prove that the suspect accepted a bribe . However, viewed
together, you get the feeling that the suspect could have accepted
the bribe at breakfast and then deposited it in his bank.
The evidence presented in the previous paragraph is circum
stantial evidence. Circumstantial evidence is evidence relating to
a series of facts other than those at issue that tend, by inference,
to establish the fact at issue.5 Circumstantial evidence proves the
existence of the fact indirectly and depends on the strength of the
inferences raised by the evidence. The use of circumstantial evi
dence is recognized by the courts as a legitimate means of proof
when it involves proving several material facts which, when con
sidered in a relationship to each other, tend to establish the exis
tence of the principle or ultimate fact.
Circumstantial evidence is the only type of evidence gener
ally available to show certain elements of a crime, such as malice,
EVIDENCE 47
willfulness, intent , or legal concepts which exist only in the mind

of the perpetrator of the deed . Accordingly, the proof of most
financial violations is based upon circumstantial evidence.
Real Evidence
Real evidence is evidence that is tangible; it can be presented to
the jury for inspection. Material objects such as knives, bullets,
guns, and jewelry are examples of real evidence.
Documentary Evidence
Documentary evidence consists of writings and documents, such
as judicial or official records, contracts, deeds, and the less for
mal writings such as letters, memorandums , books, and records of
private persons and organizations. Documentary evidence is pri
marily circumstantial in nature and must be introduced by a wit
ness who can testify to the existence and authenticity of the
evidence .
Testimonial Evidence
Testimonial evidence is evidence given by word of mouth .
Witnesses under oath and affirmation provide testimonial evi
dence . A witness is a person who can testify as to what he or she
knows from having seen, heard ,or otherwise observed .
Judicial Notice
Not everything presented during a trial must be proved. There are
matters so well known to the court that it would be a waste of time
to compel a party to offer evidence of their truth. For example, it
is aa well known fact that the formula for water is H20. There's no
reason for a lawyer to call a witness to the stand to attest to that
fact. The judge can allow the court to accept certain facts as evi
dence through a legal process known as judicial notice. However,
if there is evidence which reasonably puts a fact in dispute, judi
cial notice will not be taken .
48 CHAPTER 3
Rules of Evidence
The investigator is the one who gathers evidence during the
investigative process. For the investigator, evidence of financial
crimes includes the following:
• Admissions and confessions freely given by the suspect

• Statements made by witnesses who either observed the
criminal event or were victimized by it
Physical things which relate to the criminal activity (i.e.
books and records, currency, bank account information,
etc.)
Analysis completed by the investigator

But even the best of evidence, that which would result in
overwhelming indications of guilt, will mean nothing and will be
inadmissible at trial if the investigator ignores the rules and pro
cedures regarding the admissibility of evidence at trial . These
rules directly impact on the financial investigator during the
investigative process.
At the federal level, the rules governing criminal procedures
and evidence have been codified and represent the benchmark to
follow when gathering information during the investigative
process. The following rules are relevant to financial investiga
tions :
• Rule 401 , Relevancy and Competency

• Rule 501 , Privileged Communications
• Rule 801 , Hearsay
Rule 901( a), Chain of Custody
• Rules 1001 and 1002, Best Evidence and Requirement of
Original
EVIDENCE 49
Relevancy and Competency (Rule 401 )

To be admissible, evidence must be relevant and competent. These
terms are not synonymous. If aа fact offered in evidence relates in
some logical way to the principle fact it is considered to be rele
vant. The competency of evidence means that the fact offered into
evidence is adequately sufficient, reliable, and relevant to the case
and is presented by a qualified and capable witness.
Relevancy implies a traceable and significant connection. A
fact may not bear directly on the principle fact but it is consid
ered relevant if it constitutes one link in aa chain of evidence or if
it relates to facts that would constitute circumstantial evidence.
Some evidentiary matters that are considered relevant and there
fore admissible are:
• The motive for a crime
• The ability of the defendant to commit this specific crime

• The opportunity to commit the crime
• Threats or expressions of ill will by the suspect
• The means of committing the offense
• Physical evidence at the scene linking the accused to the
crime
• The suspect's conduct and comments at the time of arrest

• The attempt to conceal and / or destroy evidence
• Valid confessions
Evidence, even if logically relevant, may be excluded by the

Court if that evidence is likely to inflame or confuse a jury, or
consume too much time. For example, testimony as to the statisti
cal probability of guilt of the defendant, while logically relevant
when based on prior testimony, may be considered too prejudicial
and unreliable to be accepted by the Court .?
The issue of competency can relate to the witness presenting
the evidence or the evidence itself. If a person is called to testify
and does not understand the nature of the oath or is unable to nar
rate with understanding the facts that he or she is to testify to, that
50
CHAPTER 3
witness' competency will be questioned. Examples of incompetent

evidence include confessions involuntarily obtained or unsigned
carbon copies of a document which are offered into evidence with
out any explanation for the failure to produce the original.
Privileged Communications (Rule 501 )

This rule is based on the belief that it is necessary to maintain the
confidentiality of certain communications. However,it covers only
those communications that are a “ unique product” of a protective
relationship. The one to whom the information has been given
cannot divulge that information without the consent of the other
party. Some of the more prevalent claims to privileged relation
ships are:
• Attorney/Client
• Husband /Wife
Clergyman /Penitent
• Physician /Patient
• Accountant/Client
• Law Enforcement Officer/ Informant
Attorney / Client
The attorney/client privilege must be strictly adhered to .
However, this privileged relationship does not make every com
munication between a client to his attorney confidential. It
applies only to those communications meant to be confidential
and made to the attorney in his or her capacity as an attorney.
When it does apply, the privilege covers corporate as well as indi
vidual clients.
For the investigator, the attorney/client privilege does not
apply when a suspect's attorney is merely a conduit for handling
funds or is involved in something like researching or recording
the transfer of title to real estate (without consultation for legal
advice). Similarly, if the attorney is acting as an accountant or tax
return preparer, this privilege may not be applicable.
EVIDENCE 51
Husband Wife
Communications between a husband and wife, privately made,
are generally assumed to have been intended to be of aa confiden
tial nature, and therefore held to be privileged. These communi
cations remain privileged even after a marriage terminates.
However, if it is obvious from the circumstances or nature of a
communication that no confidence was intended, there is no priv
ilege. For example, communications between a husband and wife
made in the presence of aa friend are not privileged.
In addition to the confidential communication privilege, there
exists an independent privilege- a testimonial privilege. A mar
ried person may refuse to testify against his or her spouse, at least
when the latter is aa defendant in a criminal prosecution.
Clergyman / Penitent
The privilege between clergyman and penitent has been recog
nized in the Federal courts , but this privilege has not been
extended to financial matters, such as contributions made through
a clergyman.
Physician / Patient
Many state courts recognize the physician/patient privilege,
although Federal courts generally have not approved it.'
Accountant/Client
The accountant/client communication privilege is not recognized
under common or Federal law. Workpapers belonging to an
accountant are not privileged and must be produced if required.
Similarly, a suspect may be required to produce an accountants
workpapers if they are in his or her possession.
An accountant employed by an attorney, or retained by a per
son at the attorney's request to perform services essential to the
attorney/client relationship, may be covered by the attorney/client
privilege.
Law Enforcement Officer / Informant
This privilege allows law enforcement agencies to withhold from
disclosure the identity of persons who furnish information con
cerning violations of law. Unlike other privileges, it is the identity
of the informant that is privileged, not the communication.
52 CHAPTER 3
This privilege also differs from the others in that it can be

waived only by the government, whereas the others are for the
benefit of, and can be waived by, the accused individual . Where
disclosure of an informant's identity or the content of the commu
nication is relevant to a fair trial, the court may order disclosure.
If the government withholds the information, the court could dis
miss the charges.
Conversations in the known presence of third parties do not
fall within the purview of privileged communications. The pro
tected communications are those that are, in fact, intended to be
confidential. Exceptions are recognized for those situations where
third parties are indispensable to the communication itself (i.e.,
legal secretary, stenographer, or transcriber).
Hearsay (Rule 801)

Hearsay is evidence that does not come from the personal knowl
edge of the declarant but from the repetition of what the declarant
has heard others say. For example , an investigator says that the
suspect's business manager told him that checks written by the
suspect were for personal expenses, not business expenses. This
information would be considered hearsay and inadmissible in
court. The information would be admissible if the business man
ager provided the testimony.
The major reason hearsay is inadmissible is the potential
unreliability of the witness providing the hearsay.Witnesses must
tell what they themselves know, not what they have heard from
others. Testimony that merely repeats what another person said is
not admitted as evidence because of the possibility of distortion
or misunderstanding.'
The justice system recognizes that there are occasions when
exceptions to the hearsay rule must be made. From a financial
investigative standpoint, exceptions to the hearsay rule include
the following: 10
• Valid confession /tacit admission
• Prior statements
• Statement against interest

EVIDENCE 53
• Res gestae statement/excited utterance

Dying declaration
• Official records rule
Shop book rule
• Expert testimony
Valid Confession / Tacit Admission

A valid confession is a statement by the suspect acknowledging
the facts and validity of those facts upon which aa criminal convic
tion rests. Perhaps during an interview with the suspect, the sus
pect tells the investigator: “Yeah, I took the money. I got sick of
my boss living the easy life off of all the hard work that I do so I
forged his name to a couple of checks and tried to take off for
South America.” A tacit admission is less than aa full acknowledg
ment by the suspect but is a statement of facts relative to his or
her criminal activity. An investigator can offer into evidence a
valid confession or tacit admission only if it was legally obtained
during the course of an investigation.
Prior Statements
If a defendant takes the stand in his or her own defense, the pros
ecution can introduce, during cross-examination, statements
made by the defendant at prior trials or hearings. This is done to
show inconsistencies with the defendant's current testimony, or to
reflect expressed or implied charges against the defendant relat
ing to the current trial.
Statement Against Interest
A statement against interest is a prior acknowledgment of a
material fact relevant to an issue now being litigated but this prior
acknowledgment differs from what is now being claimed. For
example, in a tax evasion prosecution, evidence in the form of a
financial statement submitted for life insurance shows a defen
dant's net worth to be higher than she now claims . This prior
statement can be used as evidence against the defendant.
54 CHAPTER 3
Res Gestae Statement (Excited Utterance)

A res gestae statement is a spontaneous comment made at a
time of great emotional strain (i.e. , at the time of arrest or at the
scene of an accident) . The theory to allow this exception to the
hearsay rule is that it is very likely that a statement made at such
a time is a truthful response . For example, during a raid of a
bookmaking establishment, one of the persons in the establish
ment , upon seeing the raiding officers enter the room says: “Burn
the betting slips!” Even though the speaker is never identified
and is not available as a witness, an investigator who heard the
statement may be permitted to testify about it to prove that betting
slips existed.
Dying Declarations
Dying declarations, either orally or in writing, are presumed to be
forthright and honest statements. Since the witness is unavailable,
an exception to the hearsay rule is made and the person who
heard the dying declaration can testify to its validity.
Official Records Rule
The official records rule allows for the introduction of books ,
records, reports, and compilations kept as a regular and routine
duty by a public official. Custodians of those records, even though
they did not make the record per se, may introduce and act as
witnesses for this type of official record at trial .
Shop Book Rule
The shop book rule states that books of original entry kept in the
regular course of business can be introduced in court by the per
son who has custody of the books even though this person may
not be the person who made the original entries to the books . In
this instance, the " custodian ” must authenticate the records, tes
tify that he or she is the custodian, that the entries are original
(not copies ), and finally, that the entries were made contempora
neously with the transactions transcribed therein. For example, in
attempting to prove a sales transaction between the defendant and
Company ABC , the prosecution would call as a witness an
employee of Company ABC who would bring the business's book
keeping records to court. This employee, who is not the person
who made the original entries into the books, would prove the
EVIDENCE 55
sales transaction by showing how the funds paid to Company

ABC by the defendant were recorded in the business's bookkeep
ing system .
Expert Testimony
In cases where the subject matter is too difficult or too technical
for jurors to understand without assistance, expert testimony is
permitted.
Chain of Custody (Rule 901 (a))

This rule requires that when evidence is obtained during the
course of an investigation, it should be marked , identified, inven
toried, and preserved to maintain its original condition and to
establish a clear chain of custody until it is introduced at trial .
This rule applies to documentary evidence and any other objects
acquired by the investigator. The term “ acquired ” means that the
evidence was obtained as a result of a subpoena, search warrant,
voluntary submission, or discovery during the course of the finan
cial investigation. If gaps in possession or custody occur, the evi
dence itself may be challenged at trial on the theory that the
document or object introduced may not be the original or is not in
its original condition, and therefore is of doubtful authenticity.
For a document to be considered admissible as evidence, it
is necessary to prove that it is the same document that was
secured by the investigator and that it is in the same condition as
it was when it was secured . An investigator who obtains original
documents should immediately identify them by some type of
marking so that he or she can later testify that they are the docu
ments that were obtained and that they are in the same condition
as they were when first obtained. Markings include an investiga
tor's initials and the date the information was obtained , and
could be placed in the margin, in the corner, or in some other
inconspicuous place on the front or back of each document
secured. If circumstances dictate that such markings would ren
der the document subject to attack on the grounds that it has
been defaced or that the document is not in the same condition
as when it was obtained, the investigator may place the docu
ment into an envelope and write a description or any other iden
56 CHAPTER 3
tifying information relating to the document on the face of the

envelope.
Best Evidence and Requirement of Original

(Rules 1001 and 1002)
The Best Evidence Rule applies only to documentary evidence. It
states that the best proof of the contents of aa document is the doc
ument itself. However, if an original has been destroyed or is in
the hands of another party and it is not subject to legal process by
search warrant or subpoena, an authenticated copy of that original
may be substituted as evidence.
Facts about аa document, other than its contents, are provable
without its production. For example, the fact that aa sales contract
was made is aa fact separate from the actual terms of the contract
and may be proved by testimony alone.
Certain documents such as leases, contracts , or even letters,
which are signed in more than one copy are all considered origi
nals and any one of the copies may be produced as an original.
Production consists of either making the written document avail
able to the judge and counsel for the adversary, or having it read
aloud in open court.
All evidence falling short of the standard for best evidence is

classified as secondary evidence. Secondary evidence may be
either the testimony of witnesses or a copy of the writing. Before
secondary evidence can be admitted, there must be satisfactory
evidence showing the present or former existence of an original
document. It must be established that the original has been
destroyed, lost, stolen or otherwise unavailable. Further, it must
be established that the party offering the document into evidence
attempted all reasonable means to obtain the original . In each
case, the sufficiency of the search for the original is a matter to be
determined by the court. If a document is offered as secondary
evidence, it must be shown to be a correct copy of the original .
For federal purposes, secondary evidence may be either a
copy of the document or testimony of witnesses relating to the
contents of the document itself. For example, the testimony of an
investigator as to the contents of a sales invoice that is unavail
able would be secondary evidence. The investigator's testimony is
EVIDENCE 57
admissible even though the person who prepared the invoice is

available to testify. The Best Evidence Rule will not be invoked to
exclude oral testimony of one witness merely because another
witness could give more conclusive testimony. However, in other
jurisdictions, testimony will not be allowed to prove the contents
of a document if there exists a secondary evidence to prove its
contents. This is known as the majority rule.
If an original document is destroyed by the party attempting
to prove its contents and who is offering it for evidence, secondary
evidence will be admitted if the destruction was in the ordinary
course of business or by mistake, or even intentionally, provided
it was not done for any fraudulent purpose.
Summary
The rules of evidence and procedure establish the legal frame
work within which the financial investigator works. A full confes
sion of guilt by the suspect becomes worthless if it was illegally
obtained and therefore inadmissible in court. The investigative
process requires the gathering of information, documents, and
testimony from witnesses, victims, and subjects involved in crimi
nal activities. Though the legal statutes institute the benchmarks
of right and wrong, and the elements and degrees of proof neces
sary for criminal conviction, it is the rules of evidence and crimi
nal procedure that control both the investigative process and the
resultant judicial proceeding.
58 CHAPTER 3

1. a. How many jurors usually “ sit” on a federal grand jury ?
b. How many jurors does it take to return an indictment?
2. Differentiate between transactional immunity and use immu

nity .
3. What is evidence ?
4. What is the relationship between evidence and proof?
5. Differentiate between the following standards of proof:

“ beyond aa reasonable doubt ” and “ preponderance of evidence.”
6. You are investigating a mail fraud scheme. One of the ele

ments of the crime is the use of mails to further the scheme .
Provide an example of direct and circumstantial evidence that
you could collect to prove this element of the crime.
EVIDENCE 59
7. What is judicial notice? Provide an example.
8. When an investigator gathers evidence, why is it important

that he or she keep the terms “ relevancy ” and “ competency” in
mind ?
9. Todd White is on trial in Federal court for drug trafficking and

money laundering offenses. Read the following descriptions of
proposed testimony and, based on the privileged communications
rule, answer the following questions for each description: 1 ) Is the
testimony admissible in court ? and 2) Why or why not?
a. Todd White's wife, Kay, says that before they were married,
Todd told her that he made aa lot of money selling drugs.
1)
2)
b. While they were married , Kay White saw Todd measuring

white powder on a set of scales. She saw him put the white pow
der into bags.
1)
2)
60 CHAPTER 3
c . While they were married, Todd told Kay that the powder in the
bags was cocaine. Kay was not involved in the distribution of
drugs.
1)
2)
d . Todd's son , Joey, says his father asked him to sell some
cocaine at school .
1)
2)
e. Leon Norton , Todd's accountant says that Todd told him that
he had $25,000 in income from his auto repair business and
$250,000 in income from an inheritance.
1)
2)
EVIDENCE 61
f. Kent Parks, Todd's attorney, says that he handled a real estate

closing for aa house Todd bought. Todd paid $250,000 for the
house .
1)
2)
10. Why is hearsay evidence inadmissible?
11. What is the shop book rule ?
12. What do the terms “ best evidence” and “ secondary evi

dence ” mean to an investigator?
62 CHAPTER 3
Endnotes
1 U.S. v. Sutherland, 56-2 USTC 9651 (D.D. Colo.)
2 Wissler v. U.S. 58-1 USTC par 9414 (So. Dist. of IA)
3 Gladden v . Self, 55-1 USTC 9227 (E.D. Ark.), Add'd 224 F2d
282 (CA-8)
4 John Evarts Tracy, Handbook of the Law of Evidence,
(New York: Prentice -Hall, Inc. , 1952), p. 6
5 Handbook ofthe Law of Evidence, p . 6
6 Jack T. Wells, W. Steve Albrecht, Jack Bologna, and Gilbert
Geis, Fraud Examiner's Manual, (National Association of
Certified Fraud Examiners, 1989 ), Section 11 , p. 45
7 Fraud Examiner's Manual, Section 11 , p . 44
8 Stephen A. Saltzburg and Michael M. Martin, Federal Rules of

Evidence Manual: A Complete Guide to the Federal Rules of
Evidence, 5th Edition, Volume 1 , (Charlottesville, VA : The
Michie Company, 1990 ), .
p. 423
9 Fraud Examiner's Manual, Section 11 , p.
p 49
10 Fraud Examiner's Manual, Section 11 , pp. 49, 50

CHAPTER 44
Sources of Information
hapter 3 focused on concepts related to the
C collection and admissibility of evidence. This
chapter addresses where to look for informa
tion that may ultimately be used as evidence against, or, on the
other hand, in support of a suspect. As a financial investigation
begins, questions concerning a suspect's finances are plentiful.
Does the suspect own the home in which she lives or does she
rent? If she owns the home, how much did she pay for it and how
did she pay for it? If she rents, how much does she pay, and is she
the one who pays or does some second party pay the rent? Does
she have a criminal record? Does she own the car she drives?
How did she pay for the trip to China she took last year? It all
seems pretty simple— just ask her! Well, sometimes, if you have
a cooperative suspect, it is that simple . But how cooperative
would you be if you had the authorities investigating your
actions— especially if you had something to hide?
This chapter begins with aa discussion on selecting suspects to
target for an investigation. The decision to target a suspect is not
made lightly as both the suspect and the investigative team can be
affected by a poor decision. The remainder of the chapter and a
corresponding appendix (Appendix A) identify some of the many
sources of information of interest to an investigator. For the inves
tigator, the important thing to keep in mind is that most financial
transactions, whether lawful or unlawful, are recorded and can be
recreated if the investigator can piece together the correct “ paper
trail”. The sources listed in this chapter and Appendix A provide a
foundation for the initiation of that paper trail.
64 CHAPTER 4

• Discuss what factors influence the selection of a suspect to
target in an investigation.
• Identify appropriate sources to obtain specific information.
Analyze financial records for leads.
No matter how many computers, police cars, or Swat teams
law enforcement may possess, not one criminal will be put behind
bars unless the most precious of all commodities is available
information. Discovering, understanding, analyzing, and using
u
information is one of the keys to successful law enforcement.

When an investigator initiates an investigation, his or her knowl
edge of information sources is invaluable . This chapter and
Appendix A provide you with many sources of information of
interest to the financial investigator. These are selected sources
and by no means should the listings provided be considered
exhaustive. Remember, information is everywhere. The key is to
focus on information that will resolve the allegation.
Initial Considerations
Before listing and describing various sources of information, we
will explore some of the things that are considered when an inves
tigation is initiated. What should be considered before targeting a
suspect for investigation? How should an investigator deal with a
suspect as a source of information ? What happens when a suspect
refuses to cooperate ? Each of these issues will be addressed
below.
Selecting Who to Target for Investigation

The role of aa financial investigator is to gather evidence to sup
port, or in the alternative, dispel allegations of financial criminal
activity. Where to look and what to look for are two integral ques
tions facing every investigator. In theory, neither question is diffi
cult to answer— merely look everywhere for everything. But a
SOURCES OF INFORMATION 65
problem surfaces when reality is thrown into the equation .

Investigators cannot spend their whole careers working on only
one investigation. Resources (personnel, equipment, time, and
money) are scarce— but law enforcement's challenges are limit
less. Available resources must be used wisely. Those who deter
mine which investigations to pursue must deal with questions
like: “Are we willing to commit 100 percent of our investigative
resources for an extended period of time to investigate a high
level suspect when the probability of a conviction is only 40 per
cent? Would we be better served by dividing our work force and
investigating three mid-level suspects with a probability of 65
percent success? How about initiating 10 financial investigations
of low-level suspects with a success probability of 95 percent?”
The use of resources is only one factor to consider in deter
mining which investigations to pursue . Suspects targeted for
investigation also must be selected wisely. Determining which
suspects to target is not a simple matter. Targeting priorities are
determined through the interaction of judicial interpretation of
law and jury appeal. The decision to target an individual for crim
inal investigation is a momentous decision. Whether it is called
opening a file, numbering a case, initiating an investigation, or
information gathering, it is going to change a person's life. When
an investigator knocks on the door of aa neighbor or shows his or
her badge to a banker to ask questions about the now designated
suspect, a chain of events is put into motion that cannot be
stopped. Arguably, the worst nonphysical event that can occur to
an individual is to have the authorities accuse him or her of crim
inal activity. Possibly even worse is to have the accusation circu
lated among business associates, friends, and family.
When confronted with allegations or investigative findings,
suspects, in addition to telling the truth or lying, have suffered
heart attacks, emotional breakdowns, and committed suicide. In
1985, the United States Attorney's Office, the arm of the Federal
Government that handles criminal prosecutions, declined to pros
1
ecute 27 percent of the suspects under investigation . In other
words, in 1985 over one - fourth of the suspects investigated and
subsequently recommended for criminal prosecution at the
Federal level were in fact not prosecuted . Reputations, estab
66 CHAPTER 4
lished professions, future business and financial prospects, and

social and family relationships turn on the decision to start an
investigation. The moral of the story is that by whatever means
possible, choose suspects carefully.
The Suspect as a Source of Information

Once a suspect is targeted, the investigator must work the investi
gation effectively. He or she must identify the essence of the alle
gations and facts surrounding the crime, and address them early
on in the investigative process. For example, a bank embezzle
ment scheme would quickly take the investigator to the institu
tion's books and records. In an alleged tax evasion matter, the
person who prepared the questionable return would be inter
viewed at the onset of the investigation .
Most often , the best source of information in an investigation
is the suspect. The suspect has the answers to every allegation
and the documents to support or corroborate those answers. By
asking the suspect, the investigator may gain access to documents
that summarize the suspect's personal income and expenditures.
These documents could represent everything the investigator
needs to complete the investigation. However, the response to that
same question may vary depending on how the investigator asks
it. There is aa significant difference between asking (Would it be
possible for me to take aa look at your finance-related documents ?)
and commanding (I need to see those documents !Now!).
Law enforcement sometimes loses its objectivity when gather
ing information during the course of an investigation. It can get
demanding and “ badge heavy,” assuming the answer before a
question is asked. Particularly significant investigations or sensa
tional crimes create intense media attention and public pressure.
Sometimes, the investigator is tempted to go beyond the role of
fact finder and becomes judge, jury, and executioner. The key is
to be professional. An investigator must conduct every investiga
tion in a fair and impartial manner using, as opposed to abusing,
the tools of authority. Cooperation from witnesses and the suspect
can be obtained much easier and more quickly with a fair and
professional approach.
A suspect who says, “Get out of here! I'm not giving you any
thing. Talk to my attorney !” suggests another factor to consider

when asking the suspect for investigative information. The United
States Constitution, which establishes the ground rules for all lev
els of law enforcement, guarantees certain rights to the criminal,
whether accused or convicted . The right to be secure in one's
home, the right against self -incrimination, and the right to coun
sel are three important constitutional guarantees that directly
impact financial investigations and the request for information
from the accused.
What happens if the suspect in a financial investigation is
unknown or, if known , refuses to talk or provide records? Is the
investigation over, the matter dropped for lack of information ? No,
the search for information turns to other sources . Unlike investi
gations into crimes of passion where the only people directly
involved in the crime are the criminal and the victim, financial
crimes create “ eye witnesses to the crime” every time a financial
transaction occurs . Knowing where to find these witnesses, and
what information they possess, is a key step toward aa successful
financial investigation.
When conducting a financial investigation, there are three
things an investigator should keep in mind. They are:
• Anyone may be a source of financial information. It's pos
sible that a suspects relatives, friends, acquaintances, and busi
ness associates possess relevant documents . For example ,
ex-spouses may have kept records of bank accounts or financial
statements, friends are often given financial documents for safe
keeping, and business associates frequently compile their own
files regarding the “ suspect's ” illegal activities .
• Go to the source. In Chapter 3, the “ shop book rule” was
described. This rule of evidence identifies the “ custodian ” of
business records, that is, the individual who can introduce the
records in court. A payroll clerk who works with and has knowl
edge of the information requested from a business may not be
considered the legal custodian of those records . The legal custo
dian may be the company's comptroller or some other financial
officer. Only the proper custodian can legally provide the informa
tion to the investigator.
68 CHAPTER 4
• Have authority. Due to variations in statutory authority

relating to law enforcement's ability to acquire information, an
investigator should know , and follow, the legal requirements for
obtaining, and if needed, compelling, the production of financial
records from a custodian .
The key to any investigation is to know where to look or whom

to ask to obtain knowledge about, or information on, anything.
Sources of financial information can be obtained from :
• Public records
• Business records
• Government records
• Financial institution records

• Informants
The remainder of this chapter deals with information from

public, business, and government records. Financial institution
records are discussed in the next chapter. Using an informant as a
source of financial information is discussed in Chapter 10.
Public Records
Laws and regulations require that records of certain financial
transactions be disclosed and subject to review by anyone who
wishes to inquire. These records are known as public records and
they contain aa tremendous amount of valuable financial informa
tion . The records not only provide answers to questions such as
“ What property does the suspect own?, Where is it located? and
What did the suspect pay for it?,” they can also be used to estab
lish leads and corroborate or dispute the suspect's testimony.
Because of the wealth of information available from State,
county, and municipal records, researching public records should
be one of the first steps you take in an investigation. The secret,
of course, is knowing where to look. The following pages list and
describe various sources of public records.
Real Estate Records

Real estate records are normally maintained in the county where
the real estate itself is located. Land ownership records such as
deeds of ownership and title certificates are kept in the Register
of Deeds or Land County Office. These records identify the cur
rent and previous owners of the real estate in question .
Additionally, property tax records showing who pays the real
estate taxes on a particular piece property are on file with the Tax
Assessor's Office in the county where the land is located .
Corporate Records
All corporations must file documents in the state in which the
incorporation occurred . If the incorporation occurred in one state
and the corporation conducts business in another, it normally will
have to file documents as a “foreign corporation ” in the state in
which business is conducted . Information concerning corpora
tions varies somewhat by jurisdiction , but usually the articles of
incorporation , annual reports on franchise taxes , and in some
cases , bylaws , are available . This information can be valuable in
tracing corporate ownership. Corporation documents will reflect
names of the incorporators, the registered agent in the state (nor
mally the attorney who prepared the documents ), and the initial
board of directors and officers . In a limited number of cases ,
financial statements are filed. If a company is publicly held, its
financial statements and records of significant events must be
filed with the Securities and Exchange Commission .
Partnerships
A partnership is the association of two or more persons to carry on
as co-owners of aa business for profit.? Partnership records may or
may not be a matter of record in the state where the partnership
was formed .
In the case of aa general partnership, one in which the part
ners share in all profits and losses, there is normally no require
ment to file agreements with licensing authorities . Limited
partnerships, where a partner's liability is limited to his or her
investment, are normally filed in the state in which the limited
70 CHAPTER 4
partnership is formed . This “ Certificate of Limited Partnership,”

will usually list the general partners, limited partners, capital
contributions of the partners, agreements regarding the divisions
of profit and loss, and the powers and duties of the various part
ners .
Trusts
A trust is aa legal entity in which a certain person or entity, known
as the trustee, holds and administers property on behalf of others
(the beneficiaries). Trusts commonly are used as vehicles for land
transactions and other assets. Registration of a trust is required
by some states; however, the beneficiaries of the trust are not
always named.
Assumed Name Indexes

When a person or business conducts business in a name other
than their own (via a name, commercial name, etc.), they must
register their “ assumed or fictitious name. ” An Assumed Name
Certificate is filed in the county, city, or state where the business
was organized. Although primarily used for legitimate purposes,
the Assumed Name Certificate can be used to hide principals and
the true nature of the business .
Better Business Bureau

The local Better Business Bureau maintains information concern
ing a business for one of the following reasons:
• The Bureau received a prior request for information
• The business has volunteered information
• A complaint has been lodged against the business
Chamber of Commerce
The role of aa Chamber of Commerce is to promote the local area .
It maintains information on commercial and industrial establish
ments within its vicinity as well as information on trade and
travel. Many Chambers of Commerce publish extensive lists of

business firms within the area and this list often includes the
names of officers of the companies.
Uniform Commercial Code Filings (UCC)

Filings under the UCC are made at the state and county level and
contain information regarding chattel (non -real estate) mortgages.
The UCC filings normally record loans made to individuals or
businesses for the purchase of equipment, furniture, automobiles,
and other types of personal property.
Court Records
Transcripts and legal decisions in criminal and civil law suits are
maintained at the Clerk of Court office. There are separate offices
for the Federal, State, and local court systems. Information relat
ing to divorce decrees , bankruptcy petitions, judgments, insur
ance, and property settlements are types of public records filled
with financial information.
Other Public Records

The following financial information is maintained as a matter of
public record by State, county, and municipal government offices.
However, since no nationwide uniformity exists for retrieval, no
specific source is cited .
Mortgages and releases Conditional sales contracts
Change of name Drivers' licenses

Hunting and fishing licenses Building and other permits
Fictitious names index School and voter registration
Professional registrations State income tax returns
Personal property tax returns Real estate tax payment
Inheritance and gift tax returns Wills
Letters of administration Inventories of estates

72 CHAPTER 4
Welfare agency records Civil Service applications

Public utility records Health department records
Workmen's compensation file Births, deaths, marriages, and
divorces
Occupancy and business Auto licenses, transfers, and

privilege licenses sales of vehicles
Parole officers and probation Court records of civil and

departments' file criminal cases
Registration of noncorporate Registration of corporate

business entities entities and annual reports
Minutes of board and agency Bids, purchase orders,
proceedings contracts, and
warrants for payment
Judgments, garnishments, State Unemployment
chattel mortgages, and other Compensation records
liens
........
Business Records
Business records are another source of financial information . Every
business, large or small, legal or illegal, generates and maintains
records. The array of records available to the investigator is as var
ied as the number of businesses in existence. Because of this, only
two examples are presented in this chapter. Appendix A contains a
number of other sources of business records.
Records from the Purchase of Real Estate

Let's say you are investigating Andrew Sinclair and you want to
find out about the house in which he lives. Does he rent or own?
If he rents, who owns the house? Your investigative research
starts with the public real estate records found at the Register of
Deeds or Land County Office in the county where the house is
located. The records reveal that Mr. Sinclair owns the house and
has an outstanding mortgage held by a lending company. The
“ warranty deed ” indicates that the subject purchased the property
for $ 120,000. The “ Deed of Trust " (the mortgage document filed
with the county recorder's office) reveals that an outstanding mort
gage of $ 110,000 was obtained from ABC Mortgage Company.
You figure that Mr. Sinclair put the $ 110,000 mortgage loan
toward the house and paid off the rest with a $ 10,000 downpay
ment. You contact ABC Mortgage Company and they confirm that
the suspect has a $ 110,000 mortgage, but their information does
not tell you exactly what Mr. Sinclair did with the $ 110,000.
Mortgage loans are to be applied toward the house for which they
are granted, but since you are investigating the guy because of
some alleged shady business dealings, you decide to look further.
You look to the business records surrounding the purchase of the
house. Your investigation leads you to Mr. John Phillips, the real
estate lawyer who handled the transaction.
Most real estate transactions are handled by a disinterested
third party acting for both the seller and buyer. This third party is
usually an escrow company or a real estate attorney. The mort
gage company submits a cashier's check in the amount of the loan
to the third party who ensures that all funds received are properly
accounted for and that all disbursements are properly made in
accordance with the sales contract.
A real estate sale may involve more than just a straight sale of
the property. There are often additional fees to be paid: sales
commissions to aa real estate company, fees for appraisals, payoffs
of existing mortgages, real estate taxes due, and the third party's
service fee. Incoming monies received for the purchase may
include the buyer's earnest money (money given by the buyer to
the seller to bind the purchase agreement), downpayments, and
the amount received from the mortgage company. After costs are
allocated to the seller and buyer according to the sales contract,
the third party collects and disburses any amounts due to the
seller and buyer at the closing. Records of these financial transac
tions are business records and are retrievable by the investigator.
ABC Mortgage Company had made out the cashier's check for
the mortgage loan to John Phillips , Esquire. Contact with Mr.
74 CHAPTER 4
Phillips results in the acquisition of the document found on the

next page. This document is the closing statement for the pur
chase of the house.
Closing Statement
Due Seller Buyer Credit
Sales price $ 120,000 $ (120,000)

Earnest money down 50,000
Appraisal (800)
Real estate commissions (4,200)
Escrow fees (300) (300)
Additional downpayment 60,000
Real estate taxes due (5,000)
New mortgage $ 110,000
Balance due to OR ( from ) $ 109,700 $ 99,700
Analysis of the closing statement reveals the following:

• The seller is to collect $ 120,000 for the house from the
buyer. Of the $ 120,000, $ 10,300 is to be used to pay various fees
($800 to pay for the appraisal, $4,200 for real estate commis
sions, $300 for escrow fees, and $5,000 to pay outstanding real
estate taxes) .
• When all is said and done, the seller will leave the settle
ment with $ 109,700 ($ 120,000 minus $ 10,300).
• The buyer, Mr. Sinclair, must provide $ 120,300 at closing,
$ 120,000 to pay for the house and $300 for his share of the
escrow.
• Mr. Sinclair ends up having $ 220,000 at closing. He pro

vided $ 50,000 in earnest money, $ 60,000 in an additional down
payment, and $ 110,000 from the mortgage company.
• The earnest money ($50,000) and additional downpayment
($60,000) are applied to the purchase price of the house
($ 120,000) . This means that the buyer owes only $ 10,000
($ 120,000 minus $ 110,000) toward the house.
• $ 10,000 of the loan supplied by ABC Mortgage ($ 110,000)

will be used to cover the remaining $ 10,000 due to the seller.
$300 will be used to pay the buyer's share of the escrow . $ 99,700
($ 100,000 minus ($ 10,000 + $ 300)] remains. This money is pro
vided back to Mr. Sinclair who initially brought the $ 220,000 to
the closing. He can use the money to eventually pay off the mort
gage, invest in other properties, etc.
Through this analysis, you realize that what you had originally
thought (that the $ 110,000 mortgage was applied to the purchase
price with the remaining $ 10,000 covered by a downpayment ) is
far from true. What you discover instead, is that Mr. Sinclair
applied for and received aa $ 110,000 mortgage loan when he
really needed only $ 10,000. This discovery leads to other ques
tions: Where did Andrew Sinclair get $ 50,000 earnest money and
$60,000 for a downpayment ? Did he falsify his application for the
mortgage loan?
Your investigation into Andrew Sinclair's real estate deal may
lead you to other business records pertaining to a real estate
transaction . These records include:
• A sales contract
• Special instructions
Photocopies of instruments used to make earnest money
payments and downpayments
• Appraisals
• Receipts for currency received
Existing mortgage loan payoff calculations (most often a
statement from the existing mortgage company)
• A copy of new loan agreements, promissory notes, and
related documents
• A copy of the instrument received from the new mortgage

company who disbursed the new loan
• Copies of instruments received from buyer/seller at closing

for amounts due
76 CHAPTER 4
Copies of all checks disbursed by the escrow company/real

estate attorney at closing
• Correspondence with buyer and seller
• Broker's Worksheet, Buyer's Closing Statement, and Seller's
Closing Statement
Records from the Purchase of a vehicle

Similar to real estate information, both public and business
records exist regarding motor vehicle transactions. State and /or
county governments maintain comprehensive files listing vehicle
ownership . The vehicle's identification number (VIN) can be
cross-referenced to find the registered owner or vice versa .
Finance companies or financial institutions that have an interest
in the vehicle (lien holder) are recorded as a matter of public
record.
The financial investigation into vehicle ownership should not
stop after searching public records or lien holder information .
Business records kept by automobile dealerships often provide
detailed financial information and usually include:
• Various sales contracts /offers prepared by the salesman
during negotiations
• The final sales contract or purchase agreement
• Loan documents if the customer obtained financing through
the dealership’s credit sources
• Carbons of receipts given to the customer for amounts
received , usually denoting cash or check and the check
number
• Photocopies of the checks or other instruments received in

payment by the customer
Appraisal of trade-ins prepared by the dealership service
department
• Special instructions for registration of the vehicle
All requests for documents from an auto dealership should

include the service department records. With the advent of com
puterized systems, the service department can usually provide a
listing of all subsequent repairs and maintenance service per
formed on the vehicle at any authorized dealership. This can also
be helpful in locating a subject who may have moved out of State.
Government Records
Information relating to financial transactions is maintained by
numerous Federal, State, and local government agencies. From
“ information - gathering ” activities like the FBI's National Crime
Information Center (NCIC) to tax returns (IRS), records of finan
cial transactions are compiled, stored, and retrievable from these
sources of information. Several Federal intelligence networks are
described below. Appendix A identifies other government sources
and the information that they can provide.
National Crime Information Center (NCIC)

The National Crime Information Center is a repository of data
relating to crime and criminals gathered by local , state, and
Federal law enforcement agencies. The NCIC's computer equip
ment is located at FBI Headquarters in Washington, D.C. The
present equipment is capable of accommodating nearly 2 million
records on criminal activities. In a matter of seconds, stored infor
mation can be retrieved through equipment in the telecommuni
cations network. Connecting terminals are located throughout the
country in police departments, sheriff's offices, State Police facili
ties, and Federal law enforcement agencies. Dispatchers can
respond quickly to requests. NCIC also furnishes computerized
data in a matter of seconds to all agencies participating in the
centralized State systems . The goal of NCIC is to serve as a
national index to fifty statewide computer systems and heavily
populated metropolitan area systems.
78 CHAPTER 4
National Law Enforcement Telecommunications

System (NLETS)
NLETS is a computerized communication network linking State
and local enforcement agencies in all 50 States. It can provide
information such as criminal history, driver's licenses, and vehi
cle registration.
El Paso Intelligence Center (EPIC)

EPIC is a multi-agency operation that collects, processes, and
disseminates information on narcotics traffickers, gun smugglers,
and alien smugglers in support of ongoing field investigations.
If a suspect is or has been engaged in any of the previously
mentioned activities, it is possible that EPIC will have intelli
gence information on him or her. This information might include
the name of the individual; and his or her known activities, signif
icant events, associations among individuals or activities, aircraft
or vessels used by the subject, observations of both foreign and
domestic movements of the suspect, and his or her associates and
their aircraft or vessels. EPIC also provides the name, agency,
and telephone number of each investigator having expressed an
interest in or having data regarding a subject. EPIC records often
contain substantialfinancial information relative to the subject.
International Criminal Police Organization (Interpol)

Interpol is an international police agency with bureaus set up in
member countries . In the United States, the National Central
Bureau is under the direction and control of the Departments of
Justice and Treasury .
The U.S. National Central Bureau can assist in such things as
criminal history checks, license plate and driver's license checks,
and the location of suspects, fugitives, and witnesses .
IRS National Computer Center

The National Computer Center is located in Martinsburg, West
Virginia and it maintains the Master File, a tax record of all
known taxpayers. The Master File is designed to accumulate all
data pertaining to the tax liabilities of all taxpayers, regardless of
location. The Master File is separated into several categories. Two

of the categories are the Business Master File and the Individual
Master File .
Summary
Selecting a suspect to target for investigation is not a decision
that should be taken lightly. The probability of a conviction must
be considered as well as the availability of resources and jury
appeal. Once an investigation begins, information must be col
lected. Without information , an investigator's most valuable
resource— no criminal will ever be put behind bars. The source
of information with the most knowledge is the suspect. Some are
cooperative, others are not. But no matter what type of suspect an
investigator comes across, he or she must develop other sources
of information to verify or contradict what a suspect says. There
are all sorts of information available to an investigator, and the
good ones know how to focus on what they need and where to go
to get it.
80 CHAPTER 4

Answer the following questions using the information contained
in this chapter and Appendix A. Once you have completed the
questions, check your responses with those provided at the back
of the book .
1. Your suspect's social security number is 421-00-0123 . What

lead does that provide?
2. You are investigating Base Ball, Inc. You wonder if any com
plaints have been lodged against the company. You know that
Base Ball, Inc. does aa lot of business with a ball glove manufac
turing company in Raleigh, North Carolina. You do not know the
name of the company in Raleigh, therefore, you want to get a list
of companies in that geographic area.
a. Who would you contact regarding possible complaints against

Base Ball , Inc ?
b. Who would you contact for aa list of businesses in the Raleigh,

North Carolina area?
3. Your suspect admits to owning an American Express Card .
a. Who can provide you with information concerning the sus

pect's use of the credit card ?
b. What leads might you obtain from analyzing a suspect's credit

card activity ?
4. What factors come into play when selecting a suspect to target

for investigation ?
5. What is the best source of information concerning a suspect?

Why?
6. Your suspect recently became a naturalized American citizen.

What Federal agencies maintain information concerning aliens
and naturalized citizens?
7. You are investigating a forgery case. What Federal agency

maintains records pertaining to forgery?
8. During the course of your investigation, you come across prop

erty you think is stolen. What Federal agency maintains the
National Stolen Property Index?
82 CHAPTER 4
Endnotes
1 Compendium of Federal Justice Statistics, 1985, (U.S.
Department of Justice, Office of Justice Programs, Bureau of
Justice Statistics, NCJ- 123560, July 1990), p. 9
2 Uniform Partnership Act, Section 6
CHAPTER 5
Financial Institutionsas Sources of Information

in Chapter 4, various sources of information were
identified. Sources of public, business, and gov
ernment records were provided . This chapter
focuses oninformation that can be obtained from financial institu
tions. The chapter begins with a discussion of bank records. The
term “ bank records” refers to the records of banks, savings and
loans, credit unions, and other similar types of institutions.These
records are probably the single most important source of informa
tion available to the financial investigator. Banks handle two
basic types of transactions : account and non-account. Account
transactions involve actions such as depositing money to a sav
ings account or withdrawing money from an account via aa check .
These actions directly affect the movement of money through a
bank . Non - account transactions do not affect the flow of money
through a bank. Receiving a bank loan is an example of a non
account transaction. All sorts of paperwork accompanies account
transactions and most non-account transactions. An investigator
must be aware of what records exist and must be able to interpret
the information contained in the records.
Brokerage firms also maintain records involving financial
transactions . Not only must an investigator be aware of what
records exist, he or she must be familiar with the terminology of
the securities and commodities markets. Banks and brokerage
houses can provide a wealth of financial information, however,
there are other financial institutions that maintain records related
to financial transactions. This chapter concludes with aa look at
two of these sources : Western Union and casinos .
84 CHAPTER 5

• Describe terms related to banking and brokerage firms.
• State what records are available from banks and brokerage
houses .
Analyze bank and brokerage firm records.

• State what information is available from Western Union and
casinos.
The financial investigator's main objective is to track the

movement of money. This chapter examines the movement of
money to and through banks and brokerage houses. While many
criminal investigators view this ordeal as a “ paper chase ”, finan
cial investigators see financial institutions as road maps which
lead directly to the perpetrator and resolution of the crime. These
institutions are, in financial investigative terms, where the action
is. After all, banks, brokerage houses, and other financial institu
tions were established to monitor the movement of money.
Banks as a Source of Information

Tracking the movement of money generated by criminal activity
will normally involve tracing financial transactions to a bank and
through its system . For the financial investigator, following the
flow of transactions to and /or through a bank is comparable to any
other asset tracing procedure. The investigator is looking for the
ultimate source and disposition of funds, and one never knows
what might turn up in the search- unknown witnesses, informa
tion, and documents; or, perhaps, new suspects.
The key to following the flow of money into and out of the
banking system is an understanding of the inner workings of the
system itself. From the tiniest rural community credit union to the
international banking giants, they all take in, account for, pay out,
and record the movement of money. The inner workings of the
banking system can be divided into two types of transactions:
account transactions and non-account transactions.
FINANCIAL INSTITUTIONS AS SOURCES OF INFORMATION 85
Account Transactions
Account transactions are financial events that directly affect the
movement of money through aa bank account. In this context,
“ directly affect” means deposits to, or withdrawals from , an
account . Account transactions occur in checking, savings, and
credit union accounts. Records of account transactions are main
tained through the use of the following documents:
Signature card
• Bank statements
Deposit tickets/items
• Checks/ withdrawal items
• Credit and debit memorandums
Signature Cards- Opening an Account

The first document prepared and maintained in аa bank's system of
recordkeeping is the signature card. Every financial institution
requires that a customer (individuals, trusts, business organiza
tions, etc.) fill out a signature card when opening an account. It
indicates who owns the account and may require that the account
owner( s ) supply his or her address , occupation , employer,
date/place of birth, and social security number. When aa business
organization opens an account, corporate resolutions, and part
nership and trust agreements, if applicable, often are included as
part of the background information requested by the bank . This
type of information is kept with the signature card.
For the investigator, the signature card provides valuable
leads to other witnesses or unknown co-conspirators . Since the
card contains the signature of the account owner(s), it can serve
as a sample of the owner's handwriting.
Bank Statements Record of Transactions
Banks periodically reconcile the financial activity in each
account. A record of this reconciliation is prepared and retained
by the institution and a copy is sent to the account's owner.
Details of all financial activity affecting the account for the period
in question are shown on a bank statement. A portion of Anthony
86 CHAPTER 5
Benidect's bank statement is shown on the next page . Mr.

Benidect is a suspect in a drug trafficking investigation.
The financial investigator should retrieve all bank statements
related to the time frame under investigative consideration , keep
ing in mind that some criminal activities are well underway prior
to detection, therefore, bank statements must be retrieved for a
period of time prior to the detection of criminal activity. Through
bank statement analysis, the investigator will be able to recon
struct the financial transactions that occurred during the period of
criminal activity, and identify sources of information or investiga
tive leads to the movement of money. These sources or leads may
include:
Unusually high monthly balances in comparison to krov n

sources of income
• Unusually large deposits, deposits in round numbers, or

deposits in repeated amounts which are not attributable to
legitimate sources of income
• The timing of deposits. This is particularly important when
dates of illegal payments are known
• Checks written in unusually large amounts (in relation to
the suspect's known practices)
• A lack of account activity. This may indicate transactions
in currency or the existence of other unknown bank
accounts
Checking Account Summary National Bank of the Nation

Customer Service -Operations Center
P.O. Box 0001 , Washington, DC 20009
National Bank of the Nation
Anthony Benedict
1229 Springtide Pl, NW Statement Period
Washington, DC 20001 03 /20 /92- 04/20/92
If you have questions about your account, please call 202-555-111 or toll free 800-222-9999
Checking summary for account 097405813
Beginning balance 1,532.46 Minimum Balance 1.040.33
3 Deposit(s) totaling 10,041.94+ Average Balance 4,304.59

Interest this period 0.00+
8 Deduction(s) totalling 1,246.60

Other deductions 0.00
Service charges this period 0.00
Ending balance 10,327.80
Description of Account Transactions Date Amount Balance
Beginning balance $ 1,532.46

Cash withdrawal Trans #4552
Landmark 1 Alexandria VA 03/22 100.00 1,432.46
Check 546 03/23 67.25 1,365.21
Check 547 03/27 234.63 1,130.58
Purchase
Mobil Herndon VA 03/28 15.25 1,115.33
Cash withdrawal Trans # 0849
West Village Washington DC 03/30 75.00 1,040.33
Deposit 04/01 1,645.97+ 2,686.30
Check 548 04/01 623.34 2,062.96
Deposit 04/02 6,750.00+ 8,812.96
Check 550 04/05 118.23 8,694.73
549 04/12 12.90 8,681.83
Deposit 04/15 1,645.97+ 10,327.80
Ending Balance $ 10,327.80
88 CHAPTER 5
Deposit Slips / Deposit Items

From the bank's point of view, the deposit function is the most
important of all of the banking transactions. The majority of loans
and investments made by the institution come from the deposi
tors’ dollars. When deposits cease, the institution ceases.
From the investigator's point of view, seeing a suspicious
deposit on a bank statement does not in and of itself provide
enough detail of the financial transaction. If a deposit appears to
be suspicious, the investigator will want to examine the corre
sponding deposit slip. Upon reviewing Mr. Benidect's previously
shown bank statement, the investigator wants to further examine
the deposit made on April 2, 1992. That deposit slip is shown
below and it reveals that the deposit was comprised of $4,500 in
currency and a check for $2,250.
DEPOSIT TICKET CURRENCY

CASH 4500
Anthony Benidect COIN 15-099
LIST CHECKS SINGLY 540
1229 Springtide Place, NW 2,250–
Washington, DC 20001
Date APRIL 2 19 92 TOTAL FROM OTHER SIDE
USE OTHER SIDE FOR
DEPOSITS MAY NOT BE AVAILABLE FOR IMMEDIATE WITHDRAWAL TOTAL
6,750 ADDITIONAL LISTING
LESS CASH RECEIVED
SIGN HERE FOR CASH RECEIVED (IF REQUIRED) NET DEPOSIT
6,750
1: 0 540009911: 0974058 13.1" 9987
Upon reviewing the deposit slip, the investigator has to won

der where Anthony Benidect got $ 4,500 in cash and who wrote
the check that was deposited. Bank statements and deposit slips
do not speak for themselves; they need to be interpreted by
“financial witnesses” — the currency, checks, and other items
that comprise the deposit. By retrieving and examining the items
of deposit, the investigator may find additional leads to follow .
The original documents involved in aa deposit are not retained
by the bank. Currency is returned to circulation, checks go back
to the bank of origin, and deposits made via an electronic transfer
show up as mere bookkeeping entries. However, copies of each

deposited item, except currency, are made. The bank organizes
and maintains these copies on microfilm . By reviewing these
records, the investigator may be able to locate other witnesses.
To successfully gather information from bank deposits, the
investigator needs an understanding of the bank's system of main
tenance, organization, and retrieval of deposit information. An
overview of the system is shown on the next page and discussed
below.
Transaction entry point

A deposit enters the banking system through a transaction entry
point. There are three different types of transaction entry points:
• Teller. A teller receives deposits directly from the customer,
or through the mail or automatic teller machine (ATM ).
• Cash Services Department. High volume deposit customers
such as major retail establishments, grocery stores, or governmen
tal units make their deposits to the bank via armored cars or
delivery services. The Cash Services Department handles these
types of deposits.
• Other Internal Departments of the Bank. Deposit transac
tions can occur through intra - account activities (transfer of funds
from a savings account into the same customer's checking
account) or electronic transfers between financial institutions.
Additionally, with the advent of direct deposit, businesses and
companies can make deposit transactions into bank accounts
from their own bookkeeping departments. Such services are han
dled by different departments inside the financial institution .
The transaction entry point is vital in the investigative
process. It's even more than vital because at the point of deposit
two undeniable events occur: money is moved from somewhere by
someone and a permanent record is made.
90 CHAPTER 5
Bank Operations
Depositor
Cash and/or
Checks
Deposit Ticket
Transaction
Entry Point
Proof Department
Independent verification
of tellers's work and sorting
of items
•••••
Out Clearings On-Us
Transit Items Checks drawn on banks Checks drawn on
Internal Departments
Checks drawn on within area , usually Debits and
this bank and
out of town banks handled through deposit tickets credits
Clearinghouse
Correspondent Federal Clearinghouse Bookkeeping Department

Reserve Exchange of checks To be posted to customer's
Banks
Banks among local banks accounts
:................:
Collection ofout of
town checks received
from depositors
During the early stages of a financial investigation, books and

records usually reveal nothing out of the ordinary and bank state
ments often seem inconclusive of any wrongdoing. The informa
tion collected by the investigator is sketchy and denials by the
suspect are frequent :
“ I don't even know that guy.”
“ My firm never did business with that company.”
However, through deposit analysis, the investigator often finds:

• A photograph of the person who “ didn't even know the
guy” depositing currency into the “ guy’s” savings account.
Financial institutions have security cameras that record
teller window transactions.
• Checks from “ that firm ” going into “ that company's ”
checking account.
In certain investigations, the transaction entry point can be
critical to the investigation's success. In aa counterfeiting investi
gation, for example, intervention by law enforcement at the point
of entry is crucial. The same holds true for situations involving
buy money (narcotics cases) or marked bills (extortion or black
mail cases) . Investigators, perpetrators, and the currency in ques
tion must meet simultaneously at the transaction point of entry, in
order to successfully defeat the criminal act. The importance of
this is highlighted by the fact that all currency, once inside the
banking system, is treated alike. Once past the point of entry, it is
extremely difficult, if not entirely impossible, to reconstruct the
source of the currency.Accordingly, in these situations the finan
cial institution should be requested to separate and segregate the
currency in question before it enters any further into the banking
system .
The Proof Department

From the transaction entry point , deposits go to the Proof
Department. Here, checks are encrypted with the bank's own
numerical codes— proof numbers. Proof numbers establish the
“ location keys ” for the bank's retrieval and bookkeeping system.
Magnetic ink character recognition (MICR) encoding also occurs
in the Proof Department. An MICR number enables aa check to be
read by high speed computers during the processing and clearing
procedure . A portion of the MICR number is placed on checks
when they are initially printed. After a check is deposited, the
remainder of the MICR number is placed on the check in the
bank of deposit’s Proof Department. ( The MICR number is dis
cussed in greater detail later in this chapter.)
92 CHAPTER 5
In addition to being encoded, the check is microfilmed. In the

microfilming process, all checks shown on one deposit slip are
microfilmed consecutively before proceeding to the next group of
deposited items. The order of microfilming is generally deter
mined by the transaction entry point. For example, all of Teller
No. I's transactions are microfilmed and then all of Teller No. 2's
transactions are microfilmed, etc.
Currency is not microfilmed. Once it is inside the bank it is
counted and, after the count has been verified, it goes its own sep
arate way. Chapter 2 contains a discussion of Title 31 U.S.C. §
5313 , that states financial institutions are required to file a report
on currency transactions . One such report is the Department of
the Treasury Form 4789, Currency Transaction Report (CTR ), the
first page of which is shown on the next page. When currency in
excess of $ 10,000 is deposited, the CTR identifies the depositor
by address, social security number, and date of birth, and the
actual owner of the currency if he or she is someone other than
the depositor. The CTR also records the total amount of the trans
action, the types of bills involved in the transaction, and various
other information .
Form 4789 Currency Transaction Report

File a separate report for each transaction . ► Please type or print. OMB No. 1545-0183
(Rev. September 1991) Expires: 9-30-94
Department of the Treasury ► For Paperwork Reduction Act Notice, see page 3.
Internal Revenue Service (Complete all applicable parts — See instructions)
1 Check appropriate boxes if: a amends prior report, bo exemption limit exceeded, с suspicious transaction .
Part 1 Identity of individual who conducted this transaction with the financial institution
2 If more than one individual is involved, see instructions and check here
3 Reason items 4-15 below are not fully completed (check all applicable boxes): a Armored car service (name)
bo Mail deposit/shipment co
с Night deposit or ATM transaction d Multiple transactions (see instructions)
4 Last name 5 First name 6 Middle initial 7 Social security number
8 Address (number, street, and apt . or suite no.) 9 Occupation, profession, or business
10 City 11 State 12 ZIP code 13 Country (if not U.S.) 14 Date of birth (see instructions)
.
15 Method used to verify identity: a Describe identification >
b Issued by ► c Number ►
Part II Person (see General Instructions) on whose behalf this transaction was conducted
16 If this transaction was conducted on behalf of more than one person , see instructions and check here
17. This person is an : individual or organization 18 Iftrust, escrow , brokerage,or other 3rd party account, see instructions and check here .
19 Individual's last name or Organization's name 20 First name 21 Middle initial 22 Social security number
23 Alien identification : a Describe identification Employer identification number

b Issued by c Number
24 Address (number, street, and apt . or suite no.) 25 Occupation , profession, or business
26 City 27 State 28 ZIP code 29 Country (if not U.S.) 30 Date of birth (see instructions)
Part III Types of accounts and numbers affected by transaction (If more than one of the same type, use additional spaces provided below )
2
31 s Savings T Securities ► H CD/Money market ►

C Checking Loan o Other (specify)
Part IV Type of transaction . Check applicable boxes to describe transaction

32 E Currency exchange (currency for currency)
33 CASH IN : F CD/Money market purchased 34 CASH OUT: A CD/Money market redeemed
D Deposit H For wire transfer с Check cashed From wire transfer
G Security purchased А Receipt from abroad T Security redeemed B Shipment abroad
P Check purchased к Other (specify) ► w Withdrawal Y O Other (specify )
35 Total amount of currency transaction (in U.S. 36 Amount in Item 35 in U.S. $ 100 bills or higher 37 Date of transaction
dollar equivalent) (always round up ) (see instructions)
Cash in $ .00 Cash in $ .00
Cash out $ .00 Cash out $ .00 D Unknown
38 If other than U.S. currency is involved, please furnish the following information : a Exchange made for or from U.S. currency
b Country c Amount of currency (in U.S. dollar equivalent) $ .00
b Country c Amount of currency (in U.S. dollar equivalent) $ .00
39 If a negotiable instrument or wire transter was involved in this transaction, please furnish the following information and check this box (see instructions)
a Number of negotiable instruments involved ..... c Total amount of all negotiable instruments and all wire transfers
b Number ofwire transfers involved (in U.S. dollar equivalent) $ .00
Part V Financial institution where transaction took place
40 a Bank (enter code number from instructions here) ]
b Savings and loan association co Credit union do Securities broker/dealer e Other (specity )
41 Name of financial institution 42 Address where the transaction occurred (see instructions) 43 Employer identification number
44 City 45 State 46 ZIP code 47 MICR number Social security number
48 If this is a multiple transaction , a Number of transactions C ZIP codes

please indicate : b Number of branches
49 Signature (preparer) 50 Title 51 Date
Sign
Here 52 Type or print preparer's name 53 Approving official ( signature) 54 Date 55 Telephone number
Cat . No. 42004W

94 CHAPTER 5
Government regulations allow financial institutions to exempt

certain customers from the CTR filing requirements. High volume
cash businesses, payroll account holders, and other commercial
companies that are routinely involved in transactions which
exceed $ 10,000 may be exempt . However, the bank must main
tain aa record of these exempted customers.
When an investigator searches the bank's proof tapes (micro
film ), he or she must be particularly careful when tracing a cur
rency deposit. For example, investigative findings indicate that a
suspect received $ 18,000 in illegal payments on May 1 , 1992. A
review of the target's bank statement for that period reveals that
on May 1 , the suspect deposited only $ 9,000. By using the bank's
proof tape system, the investigator finds a deposit slip and it
shows aa $ 9,000 currency deposit. (Note that the suspect kept the
deposit under $ 10,000 so he or she would not have to file a CTR
form .) The investigator has located half of the illegal payment, but
where did the other $9,000 go? A continued search of the proof
tape locates a similar $ 9,000 currency deposit to another account
which, unknown to the investigator, is also owned to the target.
Often, this type of extended search will uncover split currency
deposits and /or multiple transactions.
From the Proof Department, deposited items take different
routes through the bank of deposit's system . The path that an item
takes is dependent upon the bank of origin’s (bank upon which
the item is drawn) relationship to the bank of deposit. Let's look at
the four paths an item of deposit may take by looking at four
items deposited into Bank A. The four types of items and their
paths are shown and described on the following pages .
Out Clearings On-Us

Transit Items Checks drawn on banks Internal Departments
Checks drawn on
Checks drawn on within area , usually Debits and
this bank and
out of town banks handled through credits
deposit tickets
Clearinghouse
.... : ......
Federal Clearinghouse Bookkeeping Department
Correspondent Reserve Exchange of checks
Banks To be posted to customer's
Banks among local banks accounts
...............:
Collection of out of
town checks received
from depositors
• Transit items. The first of our four items deposited into

Bank A is aa transit item . Transit items are checks and other items
(money orders and travelers’ checks) drawn on financial institu
tions other than the bank of deposit. In the case of a check, the
bank of deposit ships the check back to the bank of origin. The
bank of origin, in turn, normally sends the check back to the cus
tomer by including it in his or her bank statement. This happens
after the bank of deposit sends the check to an intermediary bank
that was established to assist in the clearing process.
Certain banks act as clearing houses for transit items. These
banks , known as correspondent and clearing house banks,
receive items from banks all over the country and process them
back to the bank of origin located in their particular area. Major
banks in metropolitan areas act as correspondent banks. Also, the
Federal Reserve Bank is aa clearing house bank .
Actually, there are 12 Federal Reserve Banks (and some have
branch banks) located throughout the country. The role of each is
to monitor the commercial and savings banks in its region to
ensure that they follow Federal Reserve Board regulations. Each
Federal Reserve Bank is a separate corporation , its stock owned
by commercial banks that are members of the Federal Reserve
System. The Federal Reserve System is made up of all nationally
chartered banks and any State chartered bank that is accepted for
membership
96 CHAPTER 5
Transit items are provided with proof numbers and micro

filmed by each bank they pass through during their return trip to
the bank of origin. This establishes a retrieval “ audit trail ” for
each item.
• Out clearings. The second item deposited into Bank A is an

out clearing item. An out clearing item is an item drawn on a
bank in the same geographic area as the bank of deposit. These
items are handled in the same way as transit items and, like tran
sit items, they are given proof numbers and microfilmed by each
bank they pass through on their return trip to the bank of origin.
• On-us items. The third item deposited into Bank A is an
on- us item . An on- us item is a check drawn on the bank of
deposit. Certain on-us items require special handling during the
clearing process and are sent to a particular internal department
for final processing. All on-us items eventually flow into the book
keeping department.
• Items from a bank's internal departments. The fourth
item that Bank A deals with is an item from one of its internal
deposits . This item might be a transfer between intrabank
accounts, loan proceeds, a certificate of deposit, or an electronic
transfer into an account .
Checks /Withdrawal Items

Funds normally are withdrawn from a bank account through the
issuance of aa check . Withdrawal slips and automatic teller
machines are also used to withdraw funds. The face of aa check
contains information that is of interest to an investigator. It shows
the bank of origin, date and amount of the check , name of the
payee (the entity to whom the check was made payable), and the
authorized signature of the owner of the account on which the
check is drawn. The following information also appears on the
face of aa check :
• American Banker's Association (ABA) Transit Number and

Federal Reserve Routing Code. Have you ever noticed the num
ber on the upper right side of aa check that looks something like a
fraction ? It provides several pieces of information. The numerator
contains the ABA transit number; the denominator is the bank of

origin's check routing symbol.
An ABA transit number is a two -part code assigned to banks
and savings institutions by the American Banker's Association.
The first part shows a two- or three -digit number that corresponds
to the city, state, or territory where the bank of origin is located. ( A
complete list of these two- or three-digit numbers is found in
Appendix B.) The second part of the ABA transit number identi
fies the bank itself. The ABA transit number on the check shown
below tells an investigator that the bank is located in Washington,
DC and that “099" is the code for the National Bank of the Nation.
The bank of origin’s check routing symbol is a three- or
four-digit number that provides the following three pieces of
information :
Anthony Benidect ABA transit number 548

1229 Springtide Place, NW 15-099
Washington, DC 20001 March24,992 540
Check routing symbol
Pay to the
Order of: Pete's Clothing Warehouse 63

234.63
two hundred thirty -four and

Too Dollars
Check routing symbol
1 : 0 540009911 ; 0974058 1 31
Anthon Benidect
O 548 00000 23463 ,
Bank code Account number

Pre-qualifying number Post -qualifying number
• The bank of origin's Federal Reserve district (These dis

tricts are listed in Appendix B)
• The federal reserve facility through which the check is col
lected
• The funds availability assigned to the check. Funds avail

ability is either immediate or deferred. If “ O ” is the last digit,
98 CHAPTER 5
immediate availability is indicated. A digit of 1 through 9 indi

cates a deferred payment .
• Pre-Qualifying Numbers. The portion of the MICR number

that comes printed on a check. The pre- qualifying number indi
cates bank of origin information (paying bank's number and
check routing symbol), customer account number, and the check's
number.
• Post-Qualifying Number. The portion of the MICR number

entered by the bank of deposits Proof Department. It shows the
dollar amount of the check .
When investigators request a copy of аa check, they should ask

for copies of both sides because the back side of aa check also
contains valuable information. For one thing, it will show who
endorsed the check. If the check was issued to an individual, it
should contain that person's signature; if it was issued to a busi
ness organization, it will probably contain a stamped endorse
ment. The back of aa check will also contain information related to
the movement of money. Proof numbers from all of the banks that
the check passed through will be available.
When a payee receives a check, he or she may either deposit
it or cash it. If the check is deposited, it follows the clearing
process previously discussed. Checks that are cashed are recog
nizable by teller stamps or “ cashed " codes that are encoded or
stamped on the face of the check itself. These codes can lead an
investigator to the teller who cashed the check and who therefore
needs to be interviewed about the specific transaction. A teller's
stamp or “ cashed ” code also can be aa possible link between a
specific teller and the suspect. Many times a suspect will go to
the same teller and develop a relationship with that person .
Conversations between these people may reveal leads to the
crime. Whether knowingly or unknowingly, the teller may possess
valuable information .
From an investigator's standpoint, checks are of equal or
greater importance than deposits. Checks establish a strong finan
cial link that cannot be overcome by verbal denials. Checks may
identify other bank accounts, credit cards, the purchase or loca
tion of major assets, and loan transactions which directly impact
on financial investigations. A $25 check for a utility hookup may

identify a $250,000 hidden condo.
Checks can be organized to reveal patterns of financial activ
ity through an investigative technique known as check spread
analysis . To perform check spread analysis, the investigator lists a
suspect's checks by payee . A sample check spread analysis,
using checks obtained from our suspect, Mr. Anthony Benidect, is
shown below .
Check by Payee Analysis

Date Virginia Electric Date Franklin Gardens
1/23 $ 101.79 1/3 $650
2/21 $ 121.32 2/2 $650
3/21 $92.56 3/1 $650
4/25 $87.87
5/21 $59.12 5/2 $650
6/27 $63.45 6/2 $ 650
7/22 $ 79.73 7/1 $650
8/20 $98.92 8/3 $650
9/23 $92.83 9/2 $650
10/21 $64.55 10/1 $650
11/24 $58.52
12/28 $87.62 12/2 $650
In the sample check analysis, the investigator listed all of Mr.

Benidect's checks payable to the Virginia Electric Company for
one calendar year.. From this list, the investigator is able to deter
mine that Mr. Benidect paid his electric bill every month . The
investigator then listed all checks payable to “ Franklin Garden
Apartments,” the complex where Mr. Benidect rents an apart
ment . The investigator finds that checks for rental payments are
missing for the months of April and November. The investigator
will want to find out how Mr. Benidect paid his rent for those
months. The absence of a check may indicate a currency payment
which can lead to possible undisclosed sources of illegal income.
Credit and Debit Memos - Special Transactions
Any transaction that affects an account but does not involve a
100 CHAPTER 5
deposit ticket or check withdrawal requires special handling. A

record of these “ unusual transactions” is listed on the customer's
bank statement through memorandum entries. These entries are
shown to report the movement of money that takes place without
going through the normal transaction points of entry or with
drawals through checks . Credit memos or "CM" indicate an
increase in the account funds, аa flow of funds into the account. A
debit memo or "DM” indicates a decrease in the account funds, a
flow of funds out of the account .
Credit and Debit Memos

CM (+) DM (-)
Interest earned Interest payment
Loan proceeds Loan payment
Wire transfer in Wire transfer out
Special collection of funds Check printing fees
Transfer between accounts Transfer between accounts
Electronic deposit Electronic withdrawal
Non-Account Transactions
Non-account transactions are financial transactions that occur at a
financial institution but do not flow through an account. Examples
of non-account transactions include loans; purchase or negotia
tion of cashier's checks, money orders, travelers checks; and cur
rency transactions such as exchanging currency for currency and
cashing third -party checks . For investigative purposes , wire
transfers, entries into aa safe -deposit box, and the purchase or sale
of securities are also considered non-account transactions.
Loans
Loan applications , loan repayment ledgers, and loan correspon
dence files are usually maintained by financial institutions . A
loan application usually requires a financial statement completed
by the individual requesting a loan. It represents a good “ finan
cial lead document” for the investigator. If an investigator is look
ing to identify a suspect's assets and accounts, he or she should
turn to any available loan applications , since the suspect, eager to
FINANCIAL INSTITUTIONS AS
impress the bank with his or her solvency, will identify assets and
other accounts more candidly on that document than in an inves
tigative interview. Furthermore, loan applications most often con
tain a statement that the applicant is aware, by signing the
document, that it is aa federal crime to knowingly make false state
ments when applying for aa loan.
The loan repayment schedule and correspondence files can
be used by the investigator to detect:
• Repayment methods. Lump sum, accelerated, or unusual
repayments can be traced through the bank's proof system
• Final disposition of loan proceeds. The disposition may be
within the bank (on-us items) or elsewhere . Either situation
is traceable through the bank's recordkeeping system
• Loan collateral. The security pledged for the loan, if any,
may be an unknown asset
Downpayment. The loan proceeds may have been used to

finance an asset, the downpayment for which came from
illegal funds
• Credit checks and internal memoranda. The investigations
done by the credit department to determine the risk for the
bank may lead the investigator to additional assets, loans,
bank accounts , etc.
In any case, loan information leads to other people and other

assets. For example, loan proceeds may have been deposited into
hidden accounts or these accounts may have been used to repay a
loan. Loan documents may have been co-signed by a previously
unknown associate or the suspect may have taken a loan out for
someone else. Loan repayments could be traced to previously
unknown accounts or associates. Tracing the ultimate disposition
of the loan proceeds and the ultimate source of the loan repay
ments is a vital technique for the trained investigator.
Cashier's Checks, Certified Checks, Traveler's Checks,
and Money Orders
These financial instruments require special handling by a bank
because they involve various departments inside the bank .
102 CHAPTER 5
Cashier's checks are checks drawn by the bank on its own funds
and are issued by an authorized officer of the bank . The bank
employee will ask the customer to designate a remitter (person
purchasing the check) and a payee in order to fill in these lines
on the check. A certified check is aa check where the bank guaran
tees that there are sufficient funds on deposit for that particular
check . A money order is a negotiable instrument that serves as a
substitute for a check. The money order is issued for a specific
amount of payment and the customer fills in the name of the pur
chaser and payee. The bank employee imprints only the amount
of payment. A traveler's check is an internationally redeemable
draft. It is purchased in various denominations, such as $20.00,
$50.00, and $ 100.00, and is only valid with the holder's own
endorsement against his or her original signature.
Investigative analysis of the bank checks described above
follow the “ proof process ” if they were deposited into or pur
chased by withdrawal from a known account. If these documents
were purchased with currency or checks drawn on an unknown
account, locating them is significantly more difficult. In most situ
ations, retrieval requires a hand search of each bank check writ
ten, which is a very labor intensive process. In the alternative,
interviewing bank employees in an attempt to pinpoint the transac
tion date and the amount may prove more successful. If the sus
pect goes to the same bank and uses the same bank officer or
teller to complete his or her bank transactions, these people may
be able to assist in narrowing the search for the retrieval of the
bank checks at issue .
Currency Transactions , Currency Exchanges

and the Cashing of Third-Party Checks
Documenting the movement of money involved in a pure currency
exchange is difficult. Currency -for -currency exchange transac
tions generally leave no paper trail inside the bank system unless
the amount exceeds the $ 10,000 and then a CTR must be filed .
The best source of information is the testimonial recollections of
bank personnel.
A third-party check is a check that the payee endorses to
another party. It can be traced by the bank's “proof system ” if
the third party is a legitimate entity. Financial institutions rou
tinely require two forms of identification to cash a check, but if

the check is made payable to a fictitious third party and is
cashed using false identification , the proof system is unworkable.
When this situation occurs, the only alternative is to contact the
entity who originated the check.
Wire Transfers , Electronic Transfers
There is nothing mysterious about aa wire transfer. Records detail
ing both ends of the transaction should be available either from
the bank of origin or destination, or both . Out-of-the -country (off
shore) wire transfers can create a retrieval problem depending on
the country involved . Various "haven countries” are known to
offer a legal and /or economic climate for laundering money or
hiding illegally gotten profits. These are often located in the
Caribbean and other areas, and restrict dissemination of this type
of financial information. When money is moved by a wire transfer
and neither the source of the funds nor the date of the transfer is
known, retrieval of any identifying information is very difficult.
Safe-Deposit Boxes
Financial institutions rent or lease storage facilities in secured
areas of the bank to its customers. The safe-deposit box rental
agreement indicates the date the box was first rented and the
identity of the renter, however, bank records will not reveal the
contents of the box. An entry log maintained by the bank shows
the date and times of visits to the box and also reports the identity
of the visitor. This information may have significant investigatory
importance. For example, records of entry into aa safe-deposit box
can corroborate testimony relating to the receipt of illegal cur
rency or the proceeds from illegal activities.
Bank Credit Cards
Since many banks offer credit cards to their customers, charge
slips and repayment information relating to these cards might be
available . The financial investigator may find leads to purchases
of jewelry, cars, furs, etc. through these records.
104 CHAPTER 5
Questions about Bank Records

Before discussing other types of financial institutions as sources
of information, the following two items concerning the retrieval of
financial records should be addressed:
How easy is it for an investigator obtain to financial records

from a financial institution?
As was stated in Chapter 4, the most knowledgeable source of
financial information are the suspects targeted for investigation.
Just as they have the answers to questions relating to guilt or
innocence, they also have custody of financial records of impor
tance to the investigator. Suspects are the customers of banks, the
applicants for loans, and the purchasers of the securities .
Therefore, they possess the original records relating to the money
movement. By asking for these records, the investigator can gain
access to this otherwise restricted information .
Financial institutions restrict access to records of money
movement. The Bank Secrecy Act and the Right To Financial
Privacy Provisions of Federal law restrict open dissemination of
financial information to law enforcement. Accordingly, without
the individual customer's permission , banks are forbidden to pro
vide financial records to anyone, except when they are legally
compelled to do so. Banks are also required to notify the customer
of any request unless legally told not to. Such legal compulsion
can take the form of subpoenas, summonses, or court orders.

While financial institutions cannot provide documents or
access to information in the customer's account, except in accor
dance with the law , they can notify the Government of the exis
tence of relevant information in those records. The law states,
“ nothing in this chapter shall preclude any financial institution,
or any officer, employee, or agent of a financial institution from
notifying a Government authority that such institution or officer,
employee, or agent has information which may be relevant to a
possible violation of any statute or regulation .”
In other words, if a financial institution has information or a
belief that information exists relating to a violation of aa Federal
statute or regulation, they can contact the Government (or agency
charged with responsibility for compliance) and tell them that
such information exists . It is up to the Federal agency to go
through the hoops to get the proper authority for dissemination of

the records.
How long is a financial institution required to maintain cus

tomer records?
The Bank Secrecy Act requires financial institutions to keep
certain records of customer transactions. United States Treasury
Regulations implementing the Bank Secrecy Act provide, in part,
that an original, microfilm , or other copy or reproduction of most
checking account deposits and savings accounts records must be
retained for 5 years. The records must include the following:
• Signature card
• Statements, ledger cards, or other records disclosing all
deposits and withdrawals
• Copies of both sides of customer checks, bank draft money
orders, and cashier's checks drawn on the bank or issued
and payable by it
In addition, banks must retain, for a 2-year period, all records
necessary to:
• Reconstruct a customer's checking account. These records

must include copies of customers' deposit tickets.
• Trace and supply a description of aa check deposited to a
customer's checking account.
The requirements listed above apply only to checks and

deposits in excess of $ 100. Most banks, however, find it cheaper
to microfilm all such records including checks and deposits of
less than $ 100 rather than sort their records . The Bank Secrecy
Act also requires financial institutions to retain a record of any
extension of credit over $5,000 as well as every transfer of more
than $ 10,000 outside the United States .
106 CHAPTER 5
Brokerage Firms as a Source of Information

To analyze stock accounts, an investigator must possess a knowl
edge of the different types of brokerage transactions and terminol
ogy related to the field. There are two basic types of brokerage
markets : securities and commodities . The securities market
involves buying and selling of stocks and bonds. The commodi
ties market involves buying and selling of produced goods, such
as grain, livestock, gold, or timber. Both markets operate under
similar structures, but the terminologies may differ somewhat.
Fundamentals of Securities
People who own stock own part of the corporation issuing the
stock . A person's ownership is represented by the number of
shares that he or she owns. The shares are a claim on the corpora
tion's assets and earnings. A bond is any interest bearing or dis
counted government or corporate security that obligates the issuer
to pay the bondholder a specified sum of money, usually at spe
cific intervals, and to repay the amount of the loan at maturity.
Stocks
When a corporation is formed, capital stock may be issued .
Capital stock is stock that is authorized by the company's charter
and represents ownership of the corporation . Each stockholder is
entitled to a stock certificate showing ownership of a specified
number of shares of stock in the corporation. There are two prin
cipal classes of stock, common and preferred. Common stock are
units of ownership that allow the owner to receive dividends on
his or her holdings . A dividend is a distribution of earnings .
Preferred stock is so called because of the preferences granted to
its owners . One preference concerns dividends. If a corporation
declares dividends, the preferred stockholders will receive their
dividend before common stockholders. Preferred stock does not
ordinarily carry voting rights . If a corporation is authorized to
issue only one class of stock, it is common stock that is autho
rized. The number of shares authorized by a company's charter
can be changed by formal approval of the stockholders.
Shares issued and subsequently reacquired by the corporation
through purchase or donation are referred to as treasury stock.

Treasury stock cannot be voted and it pays or accrues no divi
dends. The number of shares of stock that a corporation has out
standing will always equal the number of shares issued, less the
number of shares of treasury stock.
If aa stockholder desires to buy more stock, it is not necessary
to obtain the permission of the corporation . The stockholder
acquires it privately or by purchase in the open market.
Conversely, if aa stockholder desires to sell shares, he or she can
not demand that the corporation buy back the stock. Instead, the
stockholder is free to seek a buyer for the stock either in the open
market or by private sale.
After the sale terms have been agreed upon, the mechanics
are simple. The seller signs his or her name on the back of the
stock certificate and delivers it to the buyer or the buyer's broker.
A record of all outstanding stock certificates is kept by the corpo
ration or by its duly appointed transfer agent, usually a commer
cial bank appointed by the corporation. The transfer agent
records the names and addresses of the stockholders and the
number of shares owned by each. After determining that an old
stock certificate is in proper form for transfer, the transfer agent
issues a new certificate to the new owner. Most companies have a
registrar whose duty is to double check the actions of the transfer
agent to prevent improper issue of stock or fraudulent transfer.
Dividends
A corporation may pay a dividend in cash, stock, or property.
When cash dividends are paid, the company or its dividend dis
bursing agent (usually a bank), sends checks to all stockholders
whose names appear on the books of the company. When cash
dividends are distributed they are paid in terms of so much per
share .
Some companies, in order to conserve cash, pay a dividend in
their own stock. A stock dividend is usually stated as a percent
age of the outstanding shares, up to aa maximum of 25 percent.
When a corporation pays a property dividend it is usually in
the form of stock of another corporation which has been acquired
for investment or some other purpose.
108 CHAPTER 5
Bonds
When a corporation or governmental unit wishes to borrow money
for some period, usually for more than 55 years, it will sell a bond
issue. Each bond is generally of $ 1,000 denomination and the
certificate issued serves as evidence of a loan from the bond
holder to the corporation or governmental unit. A bond pays a
stated rate of interest and matures on a stated date. On that date,
a fixed sum of money will be repaid to the bondholder.
Bondholders do not have corporate ownership privileges as stock
holders do .
There are several different types of bonds . Some are
described below.
Corporate Bond. A corporate bond is issued by private cor

porations such as railroads, public utilities, and industrial corpo
rations . They are registered bonds , that is , they are bonds
registered in the name of the holder on the books of the issuer or
the issuer's registrar and can be transferred to another owner only
when endorsed by the registered owner.
• Municipal Bond. A municipal bond is an obligation of a
state, county, municipality or any agency thereof. By statute, all
municipal bonds issued after July 1 , 1983 , are registered . The
interest accrued on a municipal bond is free from Federal taxes .
• U.S. Government Obligations:
T -Bills: Short - term Treasury Bills. T - Bills are short term securities with maturi
T -Notes: Intermediate ties of one year or less (13 weeks , 26 weeks , and 52
T -Bonds: Long -Term weeks). They do not pay a fixed rate of interest and they are
issued, and subsequently traded, at a discount from face
value. No certificate is issued; the purchase and payment
are strictly accounting entries. T - Bills are issued in mini
mum denominations of $ 10,000 with $5,000 increments.
Treasury Notes. T -Notes are intermediate securities with
maturities from one to ten years and are issued in denomi
nations ranging from $ 1,000 to $ 1 million, or more. They
carry a fixed interest rate and are issued and traded at face
value or at a percentage of their face value.
Treasury Bonds. T -Bonds are long-term bonds with maturi

ties of 10 years or longer (usually 25-40 years) . They carry a fixed
interest rate and are issued and traded as a percentage of their
face value. Minimum denomination is $ 1,000.
Not only are there different types of bonds, there are also the
following classifications:
Registered Bond. The name of the owner of a registered
bond appears on the bond certificate. The owner's name is also
recorded on the proper corporate records (usually maintained by
a registrar and /or transfer agent). Interest on the bond is paid by
check directly to the registered holder. While a registered bond
possesses limited negotiability, it has the advantage of protecting
the owner in the event of its loss .
• Coupon Bond. A coupon bond has coupons attached to the

bond certificate, one coupon for each interest payment due during
the life of the bond. The interest is payable to whoever turns in
the coupon, whether or not that person initially bought the bond.
The holder of the coupons is the bond's legal owner, hence the
term “bearer bond. ”'
• Registered Coupon Bond. With a registered coupon bond,

the name of the owner appears on records maintained by a regis
trar and/or transfer agent. The interest coupons attached to the
bond certificate do not contain the name of the owner and are
payable to the bearer. Registered coupon bonds are registered for
the principal only, not for interest.
Organized Securities Exchanges

Securities exchanges or stock exchanges neither buy nor sell
securities themselves. An exchange functions as a central mar
ketplace and provides facilities for executing orders. Member
brokers representing buyers and sellers carry out these transac
tions .
The two major exchanges are the New York Stock Exchange
(NYSE) and the American Stock Exchange (AMEX), both located
in New York City. While there are approximately a dozen addi
tional regional exchanges (Midwest, Pacific Coast, Philadelphia
110 CHAPTER 5
Baltimore Washington, etc.), the NYSE and AMEX together han

dle more than 90 percent of the trading done through organized
exchanges.
If a security is to be traded on an exchange, the issue must be
approved for listing by that exchange. Securities traded on the
NYSE or AMEX may also be listed and traded on a regional
exchange, however, no security is listed on both the NYSE and
AMEX .
Over-the-counter Market
The over -the -counter securities market handles most of the secu
rities transactions that take place in the United States. In fact, its
operations are so extensive that the easiest way to describe it is to
indicate what it does not do in securities transactions. The over
the-counter market does not handle the purchase or sale of secu
rities that are listed on securities exchanges , but it handles
everything else in the way of securities transactions. Thus, securi
ties not listed on a securities exchange are " unlisted,” that is,
traded over-the-counter.
Many different types of securities are traded over-the- counter.
They include the following:
• Bank stocks
• Insurance company stocks

• U.S. Government securities
Municipal bonds
Open -end investment company shares (mutual funds)
• Most corporate bonds
• Stocks of a large number of industrial and utility corpora
tions, including nearly all new issues
• Securities of many foreign corporations
The over-the -counter market is not located in any one central
place . Rather, it consists of thousands of securities houses
located in hundreds of different cities and towns all over the
United States . These securities houses are called brokers or
dealers and are engaged in buying and selling securities usually

for their own account .
Ownership of Securities
There are two principal ways securities are held, in the name of
the account holder or in street name. In the first instance, the
securities owned simply reflect the name of the customer who
maintains the account. When securities are held in a street name,
they are registered in the name of the broker.
Fundamentals of Commodities
Where the stock market is involved with the buying and selling of
shares in corporations , the commodities market is generally
involved with buying and selling commonly accepted quantities
of marketable materials. Things sold on the commodities market
include soy beans , wheat, corn, pork bellies , rice, gold, silver,
and many more too numerous to mention . In the commodities
market, the basic instrument of exchange is called the futures
contract. A futures contract is a legally binding commitment to
make delivery (sell) or take delivery (buy) of a given quantity and
quality of a commodity at a contracted price and date. Virtually
every type of marketable item is sold on the commodities market.
Organized Commodity Exchanges

In general, futures contracts are bought and sold on commodities
exchanges . Commodities exchanges are similar to stock
exchanges in that they function as central marketplaces and pro
vide facilities for executing buy and sell orders. Two major com
modities exchanges are the Chicago Board of Trade and the
Chicago Mercantile Exchange . Other U.S. commodities
exchanges are located in New York, Minneapolis, and Kansas
City. The exchanges do not enter into the trading of contracts or
establishment of contract prices.
Actual trading of futures contracts is done “ on the floor” of
the exchange by exchange members . There are specific rules gov
erning the trading of futures. All contracts are standardized
reg ing size, date, and delivery terms. Basically, the price of
the contract is the sole variable, and this is negotiated at the
exchange. Buying or selling a futures contract does not mean that
112 CHAPTER 5
an investor necessarily accepts or makes delivery of the actual

commodity (although legally obligated to do so) . The primary
means of fulfilling one's obligation under the contract is to enter
into an offsetting contract. This legally cancels the outstanding
obligation.
Available Documentation
A broker is an agent who handles the public's orders to buy and
sell securities and commodities, usually for a commission. A bro
ker may be a corporation, partnership, or individual and is often a
member of a stock exchange or a member of a stock exchange
securities firm . A registered representative, also known as a secu
rities salesperson, account executive, or just plain broker, person
ally places customers' orders and maintains their accounts . While
commonly referred to as a broker, a registered representative is
usually an employee of a brokerage firm rather than a member.
The broker or brokerage firm can furnish virtually all source
documents relating to securities and/or commodities account
activity. The principal documents available are:
• An application for an account. This document is prepared

by the customer when opening of an account. It includes personal
data and some financial information such as bank reference,
credit checks performed, etc.
• Customer account cards. This card is kept in the broker's

personal files for reference. The broker records all transactions
conducted for the customer on this card. A sample card is shown
on the next page .
Client Anthony Benidect Account number 40-3801

Home address 1229 Springtide Place, NW Home telephone ( 202) 555-7896
Washington, DC 20001
Business address 94 West Avenue Business telephone (703) 555-3654
Sterling, VA 22170
Investment objective Growth
Special interests None
Description Bought Sold Approximate
Date #Share Price Date #Share Price Profit Loss
Kingman 6/4 10 22 % 6/20 10 174 $ 54

11
6/17 12 23 24
11
8/1 20 17 %
Dane Ind . 10/2 40 163 10/15 40 23 2 $280
Kingman 10/4 6 197
Bremer Co. 11/7 22 2034
Signature card. A signature card shows who has authority

to conduct transactions on the account.
• Securities receipts. These receipts are issued to a customer

when he or she delivers securities to the broker for sale.
• Cash receipts. These receipts are issued to a customer

when he or she delivers currency to the broker.
• Confirmation slips. Confirmation slips are issued to a cus
tomer to show the type of transaction (buy or sell) and the amount
involved in the transaction.
• Securities delivered receipt. This receipt is signed by the
customer when a securities purchase is actually delivered to the
customer.
• Brokerage account statement. The brokerage account

st ement is usually issued on a monthly basis and provides infor
mation on all transactions conducted during the period. It lists all
purchases and sales, the name of the security, the number of
114 CHAPTER 5
units, the amount per unit, the total amount of the transaction, the
account balance, payments received from the customer, disburse
ments to the customer (usually with the check number issued),
and the customer's position ( securities that are held by the bro
kerage firm for the customer) . A sample statement is shown
below.
Roberts and Company Incorporated Member New York Stock Exchange - American Stock Exchange
1485 I Street, NW , Washington, DC 20006
( 202) 555-4500
Entry Bought or Sold or Price or Entry Amount Amount
Date Received Delivered Description Description Debited Credited
02/12 100 Overton Airlines Sec Rec
02/12 100 Overton Airlines 95 $936.30
02/14 100 Polk Corp. 41 5 % $ 4,098.20
02/15 Funds Cash Dsb $ 5,034.50
02/15 100 Weber Corp. 36 % $3,624.60
02/15 100 Weber Corp. Sec Rec
02/15 100 Dare, Inc. Sec Rec
02/23 100 Dare , Inc. 84 34 $8,412.50
02/28 Closing Balance $ 12,037.10
Position
None
Mr. Anthony Benidect 02/28/92 40-3801 1
1229 Springtide Place, NW Period Ending Account Page

Washington, DC 20001 Number
When a subject purchases stock, he or she usually has the

option of taking "delivery" of the certificates from the broker or
leaving them in the broker's custody for possible future sale. A
person active in trading usually keeps all stock with his or her
broker. If the customer takes delivery of the certificates, the num
ber of shares would be noted in the "sold or delivered” column,
and the "date" column would show the date of delivery. The
same holds true if a customer delivers stock certificates to the
broker for sale, except the number of shares would be placed the
"bought or received ” column.
Other Financial Institutions

Banks and brokerage firms are not the only financial institutions
where financial transactions occur. Let's take a look at two other
types of financial institutions and see what information they can
provide to the financial investigator.
Western Union
A financial transaction conducted with a Western Union money
order creates the following three documents:
• The original application prepared by the purchaser or sender
• The original request for payment prepared by the recipient of
the funds
• The bank draft drawn by Western Union payable to the person

receiving the money
The canceled drafts, after clearing through banking channels,
are united with the original telegram applications and sent to the
St. Louis, Missouri office for storage under the jurisdiction of the
money order auditor. These records (except for money orders over
$ 1,000) are destroyed after three years.
Casinos
Casino operations maintain extensive financial information con
cerning the movement of money. Their records represent a blend
of information , bank account statements, credit card and loan
applications , and hotel/room service documentation . Since the
casino industry is Government regulated, currency movements in
excess of $ 10,000 (purchase of chips or redemption of winnings)
must be reported to the U.S. Treasury Department via a Currency
Transaction Report by Casinos, Form 8362. A sample Form 8362
is found on the next page .
116 CHAPTER 5
62
831992)
Fo(Rev.rm May Currency Transaction Report by Casinos
OMB No. 1545-0906
File a separate Form 8362 for each transaction . Please type or print.
Department of the Treasury
Internal Revenue Service (Complete all applicable parts — see instructions)
Partl Individual orOrganization for Whom This Transaction Was Completed
Individual's last name First name Middle initial Social security number
:
Organization's name Employer identification number (EIN ) Passport number Country
Address (number, street, and apt. or suite no .) Occupation, profession, or business Alien registration number Country
City State ZIP code Country (if not U.S.) Driver's license (number and state)
Part II Identity of Individual Conducting the Transaction (Complete only if an agent conducts a transaction
for the person in Part 1)
Last name First name Middle initial Social security number
:
Address (number, street, and apt. or suite no.) Passport number Country Alien registration number Country
City State ZIP code Country (if not U.S.) Driver's license (number and state)
Part III Patron's Account or Receipt Number

Part IV Description ofTransaction
If more space is needed, attach a separate schedule and check this box .
1 Type of transaction . Check the applicable boxes to describe transaction .

a Currency exchange (currency for currency)
b CASH IN :
(1 ) Deposit (front and safekeeping) ( 3) Check purchased (see item 6 below ) (5) Collection on account
( 2) O Chips purchased (4) Wire transfer of funds (6) Other cash in
C CASH OUT: (specify)
(1 ) O Withdrawal of deposit ( front and safekeeping) ( 3) Chips redeemed (5 ) Other cash out
( 2) O Check cashed ( see item 6 below ) ( 4) O Credit advance (specity)
2 Total amount of currency transaction (in 3 Amount in item 2 in $ 100 bills or higher 4 Date of transaction (month , day, and year)
U.S. dollars)
$ .00 $ .00
5 If other than U.S. currency is involved , please furnish the following information :
Currency name Country Total amount of each foreign currency (in U.S. dollars)
$ .00
6If a check was involved in this transaction, please furnish the following information (see instructions):
Date of check Amount of check (in U.S. dollars) Payee of check
$ .00
Maker of check Drawee bank and city
Part V Casino Reporting the Financial Transaction

Name Employer identification number (EIN)
Address (number, street, and apt. or suite no .) where transaction occurred
City State ZIP code
Sign (Casino employee who handled the transaction ) (Title ) (Date )

Here
(Casino official reviewing and approving the Form 8362) (Title ) (Date)
For Paperwork Reduction Act Notice, see back of form . Cat. No. 622912 Form 8362 (Rev. 5-92)
Summary
This chapter describes the types of financial information available
from banks, brokerage houses, casinos, and Western Union. The
key is to know what information is available and how to interpret
it. Seemingly insignificant details, such as charges for interest on
a bank statement , have resulted in resolving major financial
crimes. Securities held in a “street name” have lead to the dis
covery of information that has put criminals behind bars. High
rollers at “ the tables ” have been defeated by financial documents
revealing their activities. Tracing financial records to and through
financial institutions is much more than a mere paper chase .
Whether it is a check, aa wire transfer, a deposit, a sale of a stock
or bond, a purchase of aа marketable security, the movement of
money and the paper trail which it leaves behind is, for the finan
cial investigator, “ where the action is” and the road map of crimi
nal activity.
118 CHAPTER 5

1. What information does the following check provide?
Allison Henderson 874

923 Prospect Lane 68-999
561
June 8:8 1992

Rockville, Maryland 20854
Pay to the
Orderof: Hankinson's Automotive 475,00
‫و‬
Four hundred and seventy - five) and 100too Dollar
Tune - up Allison Henderson '

1: 0 56 10999.11 0849311211 0874 0000047 5000 ,
2. Why is check spread analysis a useful investigative tool?
3. What information surrounding a safe- deposit box is useful in a

financial investigation ?
4. For aa checking account , what records are banks required to

retain for 5 years?
5. Why is it difficult to trace a currency -for-currency transaction?
6. What must an investigator do to gain access to a suspect's

bank records ?
7. What are “ haven countries ” and what role do they play in

financial investigations ?
8. Why is a loan application a good source of financial informa

tion ?
9. What financial information is available from the following:
a. Western Union
b. A casino
10. Distinguish between the following:
a. Securities and commodities

120 CHAPTER 5
b . Stock and bond
c. Common stock and preferred stock
d. Transfer agent and registrar
e. Corporate bond and municipal bond
f. Treasury bill and treasury bond
g. Securities held in owner's name and securities held in street

name
11. Analyze the following three bank statements and identify four
things an investigator will want to follow up on .
Checking Account Summary Conewango Bank

Account Number 65432198
David Davids
8 Mockingbird Lane Statement Period
Herndon, Virginia 22070 05 /01/92- 05/31/92
Beginning Balance $2,145.98

Transaction Date Amount Balance
Check 176 05/02 745.00 1,400.98

Deposit 05/02 1,534.56+ 2,935.54
Check 177 05/09 57.23 2,878.31
Check 178 05/13 152.61 2,725.70
Deposit 05/15 1,534.56+ 4,260.26
Check 179 05/22 19.56 4,240.70
Check 180 05/25 198.21 4,042.49
Check 181 05/28 234.34 3,808.15
Ending Balance $3,808.15

David Davids
Herndon, Virginia 22070 06 /01 /92- 06/30/92
Beginning Balance $ 3,808.15

Check 182 06/02 745.00 3,063.15
Deposit 06/02 1,534.56+ 4,597.71
Check 183 06/06 2,000.00 2,597.71
Deposit 06/10 5,000.00+ 7,597.71
Deposit 06/15 1,534.56+ 9,132.27
Check 184 06/20 22.03 9,110.24
Check 185 06/23 189.13 8,921.11
Check 186 06/29 429.84 8,491.27
122 CHAPTER 5

David Davids
Herndon , Virginia 22070 07/ 1 /92-07 /31 /92
Beginning Balance $8,491.27

Deposit 07/01 1,534.56+ 10,025.83

Check 187 07/04 5,000.00 5,025.83
Check 188 07/14 54.11 4,971.72
Check 189 07/14 156.21 4,815.51
Deposit 07/15 1,534.56+ 6,350.07
Check 190 07/20 22.46 6,327.61
Check 191 07/28 141.69 6,185.92
Check 192 07/30 533.37 5,652.55
a.
b.
C.
d.
12. Why would you be suspicious if you located the following

deposit slips?
DEPOSIT TICKET
CASH
CURRENCY
7500 00
COIN 2-999
Larry Fox LIST CHECKS SINGLY 710
12 Mountain Drive
Barrington , Illinois 60005
1992 000
Date
July 14
DEPOSITS MAY NOT BE AVAILABLE FOR IMMEDIATE WITHDRAWAL
TOTAL FROM OTHER SIDE
TOTAL
7,500 00 USE OTHER SIDE FOR
ADDITIONAL LISTING
LESS CASH RECEIVED

7,500 0
Bank of the Loop
1: 0 7 100999.11 08921740611 1212
DEPOSIT TICKET
CASH CURRENCY 6,000 00
COIN 2-001
Larry Fox 710
LIST CHECKS SINGLY
12 Mountain Drive
Barrington, Illinois 60005
19 92 TOTAL FROM OTHER SIDE OOO

Date July14
DEPOSITS MAY NOTVE AVAILABLE FOR IMMEDIATE WITHDRAWAL TOTAL
6,000.00
USE OTHER SIDE FOR
ADDITIONAL LISTING
LESS CASH RECEIVED

6,000 00
White Sox Bank
1: 0 7 10000111 : 04252980 7.1 7212

124 CHAPTER 5
13. Interpret the following brokerage account statement.

Henry and Sons, Inc. Member New York Stock Exchange— Washington Stock Exchange
920 H Street , NW , Washington, DC 20006
(202) 555-9700
Entry Bought or Sold or Price or Entry Amount Amount
Date Received Delivered Description Description Debited Credited
07/18 250 Lakewood, Inc. 512 $ 1,375.00
07/22 1000 K Engines Sec Rec
07/22 100 Lake /wood, Inc 6 $ 600.00
07/22 100 Smith, Inc. 17 38 $ 1,737.50
07/24 50 Lakewood . Inc. 6% $ 1,031.25
07/30 200 Warren Inc. 10 $ 2,000.00
07/31 Closing Balance $5,112.50 $ 1,631.25

Position
None
Nancy Garrity 7/31/92 72-8072 1

25 Chelsea Lane, N.E. Period Ending Account Page
Washington, D.C. 20007 Number
Endnotes
1 United States Code , Title 12 , Section 3403 (c ) , “ Right to
Financial Privacy Act,” (Washington, DC : U.S. Government
Printing Office, Superintendent of Documents)
2 United States Code, Title 31 , Section 103.31 through 103.37,
inclusive, as stated in Title 12, Section 1829b, (Washington,
DC : U.S. Government Printing Office, Superintendent of
Documents)
CHAPTER 6
Tracing the MovementofMoney through a Business

|hapter 5 dealt with tracing the movement of
money through financial institutions . In this
C chapter, you'll see how an investigator traces
the movement of money through a business. This skill requires an
understanding of business organizations and a working knowledge
of the principles of accounting. The proprietorship, partnership,
and corporation are the predominate forms of business organiza
tion found in the American economy. The composition and funda
mentals of each will be addressed in this chapter.
Accounting is the language of business. It reports, classifies,
and summarizes the effects of financial transactions upon a busi
ness. From the writing of aa check for the purchase of raw materi
als, to the receipt of currency for the sale of aa finished product,
accounting maintains a record of all business financial events.
Illegal events such as embezzlement, insider trading, tax evasion
and money laundering can often be detected through the analysis
of accounting records . Accordingly, a familiarity with business
books and records, accounting systems and methods, financial
reports, and auditing techniques becomes important to the finan
cial investigator.
After studying Chapter 6, you should be able to :
• Describe the basic forms of business organization.
• Explain why a knowledge of accounting is important to the
financial investigator.
• Define or describe basic accounting terms.
126 CHAPTER 6
• Journalize transactions.
• Post journal entries to a general ledger.

Prepare a balance sheet and an income statement.
The discussion in Chapter 5 focused on tracing the movement
of money to and through financial institutions. The focus of this
chapter is tracing the movement of money through the financial
records maintained by a business . But before we get into that, a
discussion on the different types of business organizations is nec
essary. It is important that the financial investigator be aware of
the " form ” of the business organization he or she is investigating.
A business organization's form can be manipulated to conceal
true ownership or financial interest, or to hide illegal activities.
Also, the type and complexity of aa business's accounting system
can be affected by the business's form of organization.
Types of Business Organizations

Consider the different types of businesses that make up today's
economy: fast food restaurants, gas stations, video stores, hospi
tals, construction companies, government agencies, etc. There are
literally hundreds of thousands of businesses. Luckily, for both
the accountant and the financial investigator, there are not hun
dreds of thousands of different types of recordkeeping and organi
zation systems . Standards for recordkeeping have been
established and our legal system recognizes the following three
primary types of business organizations:
• Proprietorship
• Partnership
Corporation
Proprietorship
Generally speaking, a proprietorship (also known as the single or
sole proprietorship) is a business owned by one person who is
TRACING THE MOVEMENT OF MONEY THROUGH A BUSINESS 127
usually both the manager and the owner. Historically, proprietor

ships have been small scale or localized operations , however,
there is no legal or theoretical limit to the scope, complexity, or
size of this type of operation.
A proprietorship is the most common form of business opera
tion and, as such, it is the most frequent type of business the
financial investigator will encounter. Anyone who enters into a
business without designating an organizational type is considered
a sole proprietor. There are no special legal requirements to be
met in starting a proprietorship .
The sole proprietor has the advantage of making all decisions
and collecting all profits, but he or she also shoulders all respon
sibilities and suffers all losses .
Partnership
In order to become successful, a business may require more
resources than are available to a single person. Specific knowl
edge, skills, or management capabilities may be required that one
person alone cannot supply. In these situations, and in many oth
ers, two or more people combine assets and skills and become
joint owners in a single business- a partnership. A partner can
be a person, another partnership, or a corporation and, like a pro
prietorship, there are no special legal requirements to be met in
starting a partnership.
Partnerships have been in existence for a long time. The
English common law of partnership, from which the American
system is derived, began as Roman law. The Uniform Partnership
Act (UPA) codified the majority of the common-law rules relating
to partnership actions and is acknowledged as the controlling
document for partnership activity. Section 6 of the UPA defines a
partnership as “ an association of two or more persons to carry on
1
as co-owners of a business for profit.”? Because partners are co
owners, each :
• Has a right to share in the business profits (and losses)

• Has aа voice in management affairs
• Is a co-owner of the partnership property
128 CHAPTER 6
Since a partnership involves two or more persons, it requires

more structure than a proprietorship. A partnership agreement is
essential, although it is not a legal requirement. This agreement
will prevent (hopefully) future misunderstandings. An agreement
of this type, generally known as the Articles of Partnership (see
page 129), contains all the terms pertinent to the formation, oper
ation, and dissolution of the partnership, including:
• The names of the partners and the partnership
• The name, location, and type of business to be conducted
• The effective date of the agreement and the agreement's
expiration date, if any
• An agreement as to the value of the assets to be contributed
to the partnership by each partner
• The duties and rights of each partner, and the manner in
which each partner shares profits, losses, and responsibili
ties
• The salary to be paid to each partner and the provisions for

terminating the partnership
Additional factors pertinent to a partnership include:
• The fiduciary relationship between each partner. Each
partner must maintain the highest standards of trust, good faith
and integrity when dealing with his or her partners or acting on
behalf of the partnership.
• Agency relationship. According to law , each partner is an
agent for all other partners. This means that in transactions with
others, the partnership is liable for the actions of aa partner.
• Terminating the partnership. Ending a partnership is com
posed of two steps: dissolution and winding up. Dissolution sets
the procedure into motion by announcing the partnership’s inten
tions to close out business . Winding up is the actual settling,
dividing, and terminating the partnership.
Articles of Partnership
THIS CONTRACT, made and entered into on the fifth day of December, 1989, by and between Paul E.
Blake and Richard T. Nelson, both of Billings, Montana.
WITNESSETH : That the said parties have this day formed a partnership for the purpose of
engaging in and conducting a wholesale automotive supply business in the city of Billings under the
following stipulations, which are a part of this contract:
FIRST:The said partnership is to continue for a term of ten years from January 1 , 1990.
SECOND: The business is to be conducted under the firm name of Blake & Nelson at 159 West
Gilbert Street, Billings, Montana 59101 .
THIRD: The investments are as follows: Paul E. Blake , cash , $ 60,000; Richard T. Nelson,
cash, $ 60,000. These invested assets are partnership property in which the equity of each partner is the
same.
FOURTH : Each partner is to devote his entire time and attention to the business and to engage in
no other business enterprise without the written consent of the other partner.
FIFTH : During the operation of this partnership, neither partner is to become surety or bondsman
for anyone without the written consent of the other partner.
SIXTH: Each partner is to receive an annual salary as follows: Paul E. Blake, $27,200.00;
Richard T.Nelson, $26,000.00. One twelfth of the annual salary is payable in cash on the last business
day of each month. At the end of each annual fiscal period, the net income or the net loss shown by the
income statement, after the salaries of the two partners have been allowed, is to be shared as follows:
Paul E. Blake, 60 percent; Richard T. Nelson, 40 percent.
SEVENTH: Neither partner is to withdraw assets in excess of his salary, any part of the assets
invested, or assets in anticipation of net income to be earned, without the written consent of the
other partner.
EIGHT: In case of the death or the legal disability of either partner, the other partner is to
continue the operations of the business until the close of the annual fiscal period on the following
December 31. At that time, the continuing partner is to be given an option to buy the interest of the
deceased or incapacitated partner at not more than 10 percent above the value of the deceased or
incapacitated partner's proprietary interest as shown by the balance of his capital account after the
books are closed on December 31. It is agreed that this purchase price is to be paid one half in cash
and the balance in four equal installments payable quarterly.
NINTH: At the conclusion of this contract, unless it is mutually agreed to continue the operation
of the business under a new contract, the assets of the partnership, after the liabilities are paid, are to
be divided in proportion to the net credit to each partner's capital account on that date.
IN WITNESS WHEREOF , the parties aforesaid have hereunto set their hands and affixed their
seals on the day and year above written .
" Paul E. Blake (seal
Richard T. Nelson ( Seal)
130 CHAPTER 6
Corporation
Corporations are quite different from proprietorships and partner
ships for a number of reasons. Among them are:
Legal entity. A corporation is a legal entity and may come
into existence only by the sanction of aa state.
• An entity distinct from its owners. A corporation is aa legal
entity in and of itself, separate and distinct from its owners. It's
owners are stockholders. Whereas partners and sole proprietors
are personally responsible for their debts, stockholders are not
personally responsible for aa corporation's debts.
• Continuous existence. A corporation has a continuous exis
tence independent of the existences of its members. Partnerships
and proprietorships have limited lives .
Because a corporation is a separate legal entity, it must seek
approval to operate . Permission is granted by either State or
Federal authorities after review of the requesting organization's
Articles of Incorporation .
A corporation's Articles of Incorporation (see page 131 ) con
tains several pieces of information of interest to the financial
investigator. Items of interest include the following:
• The name and purpose of the corporation and the location
of the corporation's main office
• The date of the incorporation, the name of the state where
incorporated , and the names and addresses of the incorpo
rators
• The amount and kinds of capital stock that are authorized

for the corporation , and the number of shares into which
the ownership may be divided
• The amount of capital with which the corporation will begin
operations
The Articles of Incorporation are normally filed with the
Secretary of State in the state where the corporation is being
formed . After approval by the State or Federal authority, a certi
fied copy of the document is sent to the corporate office. This cer
Articles of Incorporation
of
SNOWMOBILE CORPORATION
FIRST: The name of the corporation is Snowmobile Corporation .
SECOND: The principal office of said corporation is located at 21014 Beckett Avenue, in the City of
Wilmington, County of New Castle, Delaware 19805 .
THIRD: The nature of the business, or objects or purposes to be transacted, promoted, or carried on,
is to engage in the business of selling snowmobiles and all business incidental to such sale.
FOURTH : The total number of shares of stock that the corporation shall have authority to issue is
Two Thousand ( 2,000) and the par value of each of such share is One Hundred Dollars ($ 100.00),
amounting in the aggregate to Two Hundred Thousand Dollars ($ 200,000 ).
FIFTH : The amount of capital with which the corporation will begin business is One Hundred
Thousand Dollars ($ 100,000 ).
SIXTH: The names and places of residence of the incorporators are as follows:
Melvin C. Dahl 1336 Vine Place, Dover, Delaware 19901
David E. Gates 2547 Trimble Avenue, Wilmington, Delaware 19808
Gordon W. Rotz 139 Beechcrest Road, Newport, Delaware 19804
SEVENTH: The corporation is to have perpetual existence.
WE, THE UNDERSIGNED, being each of the incorporators hereinbefore named for the purpose of
forming a corporation to do business both within and without the State of Delaware, under Chapter 65 of
the Revised Code of Delaware, and the acts amendatory thereof and supplemental thereto, do make this
certificate, hereby declaring and certifying that the facts herein stated are true and accordingly have
hereunto set our hands and seals this fifth day of June , 1990 .
In the presence of: Mehm Dah ( Seal)
cm Downs á Dail Gates (Seal)

Kenneth Rubin
State of Delaware ) ss .:
Gordon Raty (Seal)
County of New Castle)

BE IT REMEMBERED, that on this fifth day of June, A.D. 1990, personally came before me, Mary
D. Manning, a Notary Public for the State of Delaware, all of the parties to the foregoing certificate of
incorporation, known to me personally to be such, and severally acknowledged the said certificate to be
the act and deed of the signers respectively and that the facts therein stated are truly set forth.
GIVEN under my hand and seal of office the day and year aforesaid.
Notary Public
Many havingng
132 CHAPTER 6
tified copy is known as the Corporate Charter.

After incorporation, a corporation may hold an organizational
meeting where aa Board of Directors and /or corporate officers are
elected. Also, a set of bylaws may be adopted. The corporate
bylaws regulate the actions and affairs of the corporation .
In Chapter 5, the securities market was discussed . It is
through issuing securities that corporations obtain financing for
their operation. Investors can either purchase stock (equity secu
rities) or bonds (debt securities). An investor who purchases stock
becomes an owner of the corporation, with each share of stock
representing a valued interest. Even though stockholders are the
owners of a corporation, they normally have no direct dominion
over the management of the business . Stockholders exercise their
power indirectly through the election of the Board of Directors.
The duty of the Board of Directors is to determine corporate pol
icy and oversee the carrying out of the policy by the corporate
employees . Bondholders do not purchase an ownership interest in
the corporation, they lend money to the corporation. The corpora
tion promises to repay the bondholders what they have lent, plus
interest.
All corporate security sales are reviewed by government
authorities to protect the investing public from fraudulent offer
ings. Accordingly, corporations often provide detailed financial
information to the reviewing authorities. These authorities, which
include state incorporation departments and Federal agencies
such as Securities and Exchange Commission, have valuable
information to provide the financial investigator.
A Comparison of Business Organizations

A table that lists the advantages and disadvantages of the three
basic types of business organizations is found on the next page.
Business Organization Derivations

There are derivations of the three forms of business organiza
tions. Descriptions of some follow :
• Limited Partnership. A limited partnership permits partners
to limit their risk of loss on their investment to the amount of their
A comparison of three types of business organizations

Sole Proprietorship General Partnership Corporation
Advantages Advantages Advantages
Ownership of all profits Larger capital resources than sole Limited liability of stockholders
proprietorship
Ease of organization Better credit standing than Very large capital resources
single individual
Freedom of action More managerial talent than Ease of transfer of ownership
single individual
Minimum of legal restrictions Few legal restrictions Long or perpetual life
Maximum personal incentive High degree of personal incentive Ease of expansion
No tax on the business entity No tax on the business entity Legal entity distinct from others
Ease of dissolution Ease of dissolution Some Federal tax incentives
Disadvantages Disadvantages Disadvantages
Unlimited liability for Unlimited liability for Tax on business income

business debts business debts
Limited capital resources Existence ends with death or Extensive legal restrictions
withdrawal of any partner and regulations
Business ends with the death of Restricted transfer of organization Expenses of incorporation
the proprietor ownership
Possibly limited personal incentive
investment. Their risk is similar to the limited liability of aa stock

holder. A limited partnership agreement must be in writing and
there must be at least one general partner who assumes unlimited
liability. Limited partners may not participate in the management
of the firm , although they may meet from time to time to vote on
general policies of operation . This form of organization is popular
in oil well drilling, cattle feeding, and real estate businesses.
• Cooperative. A cooperative is a corporation in which prof
its are distributed to shareholders not in proportion to the number
of shares each owns, but in proportion to the amount of business
each shareholder does with the cooperative. Unlike normal corpo
rations which generally allow one vote per share, each member of
a cooperative has only one vote.
134 CHAPTER 6
• Mutual Company. A mutual company is a type of corpora

tion that has no stockholders . It is common in the fields of life
insurance and savings, and is owned by its customers (policy
holders or depositors) who, depending on the provisions of the
1
charter, may or may not have the right to vote for the directors. If
any profits are distributed, they are paid out according to the size
of the policy or the size of the deposit.
• Shell Corporation. A shell corporation is one that has no
assets or liabilities. It simply has a charter to do business. The
attraction of aa shell corporation is confidentiality. An application
to do business may take weeks to approve and the names of per
sons on the charter are subject to review ; however, the names of
subsequent stockholders and directors are not identified on pub
lic records.
• Joint Stock Company. A joint stock company is an unincor

porated association that closely resembles a corporation , but for
most purposes, it is treated like a partnership.
• Joint Venture. A joint venture, which is sometimes called a
joint adventure or joint enterprise, is a partnership created for a
limited purpose or duration .
Syndicate. A syndicate, also known as an investment
group, is a group of investors usually involved in aa specific enter
prise (i.e. financing a real estate development).
After identifying the type of business organization, the next
step for the investigator is to analyze financial transactions effect
ing the organization itself. Through such analysis the movement
of money, from both legal and illegal activities, can be systemati
cally detected.
What is Accounting?
ac' count-ing \ e' kaunt-ij \n. 1. The system of recording and sum
marizing business and financial transactions in books and analyz
ing, verifying, and reporting the results.?
Archaeologists have traced accounting's roots back more than

3,000 years. Clay and stone tablets which contain a recorded his
tory of ancient financial transactions have been found in various
locations around the world . During the reign of the Roman
Empire , sophisticated accounting methods were developed to
record military records and maintenance of other monetary data.
Other cultures also used accounting methods and systems,
Chinese dynasties preserved tax information, Middle Eastern cul
tures kept census records , and American Indians used an
accounting system to identify the accumulation of possessions (by
notches on sticks or the number of beads on a string ).
Accounting evolved slowly until commerce achieved a degree
of complexity which necessitated a more sophisticated system of
recording financial transactions. Could IBM or Apple Computer
keep a record of its customer warranties on clay and stone
tablets ? Could the Federal Government maintain its payroll
records for its civil and military personnel by placing notches on
sticks? Of course not ! Ever since Europe's Industrial Revolution
established the foundation for the current climate of business and
finance, the need for recording, summarizing, and verifying finan
cial information has become paramount. Today, accounting estab
lishes , in monetary terms , the framework for a business- a
framework for evaluating the efficiency of aa business's operations,
for recording a history of aa business's failures and accomplish
ments, and for projecting a business's future.
The American Institute of Accountants defines accounting as
“ the art of recording, classifying, and summarizing, in a signifi
cant manner and in terms of money, transactions and events
which are , in part at least, of aa financial character and interpret
ing the results thereof." 3 Accordingly, the cornerstone of account
ing is the classification of “ pieces of paper" (invoices, sales
receipts, payroll records, etc.) involving financial transactions. To
the financial investigator, these “ pieces of paper” represent valu
able information about monetary events.
Since the function of accounting is to record and summarize
the accumulation, spending, and/or transportation of money by an
individual or organization, a financial investigator should be con
versant in fundamental accounting principles and understand the
136 CHAPTER 6
role of an accountant in the business organization. Since financial

information is the key to unlocking the hidden answers to the rid
dles encountered in an investigation, accounting becomes, for the
financial investigator, the key to reading the map of unknown
events which leads to resolving a crime.
Accounting Systems
Businesses produce goods and provide services to be bought and
sold . It makes sense that the exchange of goods and services can
be observed and measured. Accounting is the language of busi
ness because it objectively measures and records the business
exchanges that occur throughout society.
For accounting purposes, a transaction is the exchange of
goods and services and begins with recording, in dollars and
cents, what is received and what is paid out. All businesses use
some system of accounting, from the sole proprietor who runs his
or her business out of a checkbook to General Motors which
employs hundreds of accountants to keep its books . Everyone
who is faced with earning a living needs to keep track of what
they earn. That is what accounting is about.
The ultimate objective of accounting is to show, in a summary
form , the results of a business's transactions. In order to achieve
this goal , two systems of accounting have been developed.
Single-Entry Bookkeeping
The single -entry bookkeeping system has been used for most of
accounting's 3,000 -year history. It is the simplest form of noting
and recording a financial transaction. In this system, financial
transactions from all source documents are chronologically
recorded in one place, usually in columnar form . A checking
account register, an example of which is shown on the next page,
is a type of single-entry bookkeeping system.
TRACING THEMOVEMENT OF MONEY THROUGH ABUSINESS 137
Double-Entry Bookkeeping
For most businesses, recording single transactions in chronologi
cal order in a checkbook register is not a sufficient way to track
their business affairs. Let's say you are a business owner and you
want to know how much you paid your employees in 1991. Your
Record all charges or credits that affect your account

Fee Deposit/ Credit
Number Date Description of Transaction Payment /Debit ✓
(If Any)
Balance
(-) T
(-) (+) $
813 9/12 Jales Cafe 19 43 79312

250
1
5/12 Deposit -RM ,,Inc. 250- 1043 12
83 29
814 5/13 Walker Ridge 83 29 95983
72 91
815 5/13 Kilroy's Deli 7291 886 92
84 26
5/13 Deposit - Sam Jones 84 26 971 18
293 80
816 5113 Sally Torrence 293 80 677 38
Remember to record automatic payments /deposits on date authorized
accountant would have to pull out the checkbook register related

to 1991, find each transaction related to paying each employee,
and total them. Wouldn't it be easier to record all the payroll pay
ments in one place rather than have them scattered throughout a
checkbook register?
Since it is easier to look at the summary of a group of transac
tions, an accountant must have a means of compressing similar
transactions. The device employed for this purpose is called an
account. Typically, accounts are established to record the move
ment of cash into and out of the business , the payments of
expenses, the purchase of assets, and the equity of the owner. A
business may have many different types of accounts: payroll, sales,
cash, office furniture, and insurance expenses to name just a few .
In a double-entry bookkeeping system, a single transaction
always affects two or more accounts. Let's say your business pur
chases a new desk and pays $200 cash for it. Two accounts are
affected , cash and office furniture. You have increased the
138 CHAPTER 6
amount of furniture your business has, but, at the same time, the
amount of cash available has decreased. The double-entry book
keeping system allows this financial transaction to be recorded in
the two accounts it affects, thereby showing the full effect of the
financial transaction on the business .
Comparison of Accounting Systems

Single-Entry Double-Entry
Transactions are recorded by one Two or more entries are required to
entry into business records record transactions into business
records
Relatively simple form Relatively complex form

of bookkeeping of bookkeeping
Transactions are not classified Transactions are classified
according to type according to type
May not show full effect of Shows full effect of transactions
transaction on business on the business
....
Methods of Accounting
Within the double -entry bookkeeping system there are two recog
nized methods or ways of recording transactions , cash and
accrual.
Cash Basis
With this method, business receipts (revenue) are recorded when
cash is received and business expenditures (expenses) are
recorded when cash is paid out.
The pivotal words are “received” and “ paid out” . In other
words, only when the business has physically received the cash
(i.e. currency, check), as opposed to a promise to pay, or has actu
ally paid the expense— does the business record the transaction.
For example, aa business orders $ 500 worth of computer paper for
delivery in December, however, it does not pay for the paper until
January. When using a cash basis method of recording transac
tions, the $500 would be recorded as an expense when paid in
January. Professionals such as doctors and lawyers usually main

tain their accounting records on a cash basis .
Accrual Basis
With this method, business revenues are recorded when earned
(regardless of when collected) and expenses are recorded when
incurred (regardless of when cash was disbursed ). Let's look at that
same $ 500 purchase of computer paper described above. The $ 500
would be recorded as an expense when incurred (or committed for)
in December if the accrual basis of accounting is used. Most busi
nesses maintain their accounting records on an accrual basis.
Hybrid Method
A method of accounting that combines the features of both the
cash and accrual methods is called the hybrid method . It is per
missible to use the hybrid method when it is consistently applied
and clearly reflects income . This method is most commonly used
in small businesses where the “ timing ” between the incurring of
expenses and the paying of expenses is usually of short duration
and when “ income” is reported on the cash basis. If there is no
material distortion of the matching of business income and
expenses , a hybrid method may be used.
A Comparison of the Accounting Methods

The table below provides a comparison of the three types of
accounting
Comparison of Accounting Methods
Cash Accrual Hybrid
Receipts are recorded when they Receipts are recorded when they Receipts are reported via
are received are earned the cash method
Expenses are recorded when they Expenses are recorded when they Expenses are reported via the
are paid are incurred accrual method
Transactions are recorded when Transactions are recorded when No material distortion of income
they are entered into the they are entered into the and expenses
business's books business's books
Matches income and expenses Matches income and expenses
140 CHAPTER 6
The Fundamental Accounting Equation

Matching a business's income and expenses is the important
function of accounting. This matching concept is based on the
principle that every item of value in a business is owned or
claimed by someone. This concept may be expressed by the fol
lowing equation:
Items of Value = Claims
• Items of Value. The various things owned by aa business are

called assets. Examples of assets include cash, supplies, machin
ery, furniture , fixtures , land , and other tangible objects .
Additionally, there are assets which are not tangible items. These
types of assets include the right to collect money from others,
patents, investments, and goodwill (the dollar value assigned to a
business's managerial skills and reputation ). To be considered an
asset, an item must meet the following two requirements:
– It must be owned by the business
- It must have monetary value
• Claims. There are two types of claims against assets:
– Claims of the owner
- Claims of the creditors
The claims of the owner are called Capital Account Equity or

Owner's Net Worth . In a proprietorship, all owner equity belongs
to the sole proprietor. In a partnership, the share of owner equity
belonging to each partner is designated in the Articles of
Partnership. In a corporation, the claims of the owner are called
corporate net worth. Corporate net worth is divided into two sep
arate accounts. One account is called the “ Retained Earnings” or
“Surplus Account,” and it records profits or losses. The second
account is called “ The Capital Stock Account,” and it represents
shareholder investment.
The claims of the creditors are called liabilities. These claims
may be made by suppliers, banks, mortgage holders, and bond
holders .
=
The equation “ Items of Value = Claims” can now be con
verted to the fundamental accounting equation shown below :
Assets = Liabilities + Owner's Equity
A =L + OE
You may also see the equation as :

A = L + C (Capital)
Although business transactions effect different components of
the equation, the total assets must always equal the total claims
(liabilities and owner's equity). Therefore, if the equation is to be
maintained , it is impossible to change a single item without
changing another. For example, when an asset is increased, a cor
responding adjustment must be made in the equation or it will not
balance; either another asset must be decreased, or a liability or
owner's equity account must be increased.
Business Financial Statements

Business owners, potential investors, and creditors need some
type of summary or report that describes the financial condition of
a business during a specific period of operation. Also, they need
to know whether or not the business is making or losing money.
Accounting records provide the information that creates these
types of financial reports. One of the important functions of an
accountant is to summarize transaction entries and prepare the
financial reports for aa business. These reports are called Balance
Sheets and Income Statements and they represent the summary of
financial activity entered into by aa business during an identified
period of time.
Balance Sheet
The Balance Sheet, often called the Statement of Financial
Condition or Statement of Financial Position, depicts the assets,
liabilities, and owner's equity of a business organization at a spe
cific point in time. It is called a balance sheet because, upon its
142 CHAPTER 6
completion, it must be in balance. In other words, the total value

of the business's assets must equal the total value of the liabilities
plus owner's equity- a reference back to the fundamental
accounting equation, A = L + OE.
=
A balance sheet is prepared at the close of business of the

last day of the accounting period. It identifies the business by
name, sets out the fact that it is a balance sheet, and gives the
date of the statement. The date assigned to a balance sheet does
not cover a period of time, but rather represents a moment in
time. One prepared on Tuesday the 12th will differ from one pre
pared on Monday the 11th and Wednesday the 13th. A balance
sheet presents a picture of the business's financial position, as if
frozen for a split second, on the statement date.
Balance sheets are usually formatted in one of two ways. The
account form lists liabilities and owner's equity to the right of
assets. The report form lists liabilities and owner's equity below
the assets . A balance sheet in account form is shown below; one
in a report format is shown on the next page.
Account Form
123 Company
Balance Sheet
December 31 , 1991
Current Assets Current Liabilities
Cash $ 130,000 Accounts payable $ 270,000

Accounts receivable 486,000 Accrued expenses 117,000
Inventory 602,000 Income tax payble 30,000
Pre-paid expenses 90,000 Notes payable 320,000
Total current assets $ 1,308,000 Total current liabilities $737,000
Fixed Assets Long-Term Liabilities

Machinery 364,000 Payables 500,000
Equipment 116,000 Total liabilities $ 1,237,000
Furniture 300,000
Total fixed assets $ 780,000 Owner's Equity
Paid -in capital $ 701,000
Retained earnings 150,000
Total equity $ 851,000
Total Assets $2,088,000 Total Liabilites and Equity $ 2,088,000
Report Form
123 Company
Balance Sheet
December 31 , 1991
Assets
Current Assets
Cash $ 130,000
Accounts receivable 486,000
Inventory 602,000
Pre -paid expenses 90,000
Total current assets $ 1,308,000
Fixed Assets
Machinery $ 364,000
Equipment 116,000
Furniture 300,000
Total fixed assets $ 780,000
Total assets $ 2,088,00
Liabilities
Current Liabilities
Accounts payable $ 270,000

Accrued expenses 117,000
Income tax payable 30,000
Notes payable 320,000
Total current liabilities $ 737,000
Long-Term Liabilities
Payables $ 500,000
Total long-term liabilities $500,000
Total liabilities $ 1,237,000
Owner's Equity
Paid-in capital $ 701,000
Retained earnings 150,000
Total equity $ 851,000
Total liabilities and equity $ 2,088,000
144 CHAPTER 6
Each separate asset, liability, and owner's equity entry shown

on the balance sheet represents an account. The balance sheet
does not report the flow of funds into and out of the accounts dur
ing the accounting period. Only each account's ending balance as
of the statement date is shown .
Look back at the two balance sheets shown above. Note that
both classify and organize the individual accounts listed. Under
the category “ Current Assets,” you find the following accounts:
cash, accounts receivable, inventory, and pre-paid expenses. The
categories shown on the preceding balance sheets often appear on
a balance sheet and do so in the order presented. Keep in mind
that not all balance sheets require all of the categories listed, and
some may require others not shown . A discussion of the different
categories follows.
Current Assets
This class of assets includes cash and any other asset that could
be converted to cash within one accounting cycle or balance sheet
period (normally one year) . Current assets should be listed
according to their degree of liquidity (likelihood of being con
verted to cash ). Examples of current assets include:
• Cash- The bills and coins in the business as well as the
money on deposit in savings and checking accounts.
• Notes Receivable— A formal written promise by a debtor
to pay a specified amount of money, usually with interest, at a def
inite time .
• Accounts Receivable— Claims against customers arising

from the sale of merchandise or services on credit.
• Allowance for Bad Debt- An estimated amount of
accounts receivable which will probably be uncollectible due to
nonpayment by a customer. This account is normally shown as a
reduction to current assets . The balance in this account is
deducted from the original receivable balance in the asset
account.
• Merchandise Inventory— Goods purchased or produced for

the purpose of sale to customers.
• Pre -Paid Expenses— Expenses paid in advance, such as

rent and insurance .
Fixed Assets
This class of assets , sometimes called Property, Plant, and
Equipment, includes assets that are not intended for sale but are
to be used by the business over several years. Examples of fixed
assets include:
• Furniture and Fixtures— The furniture and fixtures owned

by the business.
• Allowance for Depreciation , The total amount set aside
for the decline in the useful value of the fixed assets due to wear
and tear from usage and the passage of time. This account is nor
mally shown as a reduction to fixed assets. The balance in this
account is deducted from the original cost balance in the asset
account.
• Delivery Equipment— The vehicles used to get the goods

from the business to the customer.
• Building— The physical structure which houses the com

pany.
Current Liabilities
This class of liabilities includes all debts of the business that will
come due within one year of the balance sheet date. Examples of
current liabilities include:
• Notes Payable— A promissory note given by the business

to a bank, individual, or other business entity as evidence of a
debt owed for the purchase of merchandise or some other asset.
• Accounts Payable— A short -term liability usually arising
from the purchase of merchandise for credit . Unlike the note
payable, no formal written promise to pay is issued.
• Accrued Expenses Payable— Expenses which are owed
but not yet paid . A common example is salaries owed to the
employees but not paid until the end of the pay period.
146 CHAPTER 6
Long - Term Liabilities

This class of liabilities involves all debts with maturity dates
more than one year after the balance sheet date. One account that
you might find under this category is mortgage payable. This lia
bility deals with debts secured by mortgages on specific assets of
the business . Failure by the business to pay this obligation would
give the creditor a legal right to force the sale of the pledged asset
as a means of obtaining payment .
Owner's Equity
Owner's equity shows how much of a business has been “ fur
nished ” by its owner(s) . There are two basic accounts for owner's
equity. These accounts are:
• Paid-in Capital— When the owners invest their assets (i.e.
cash, property, etc.) into the business, they are contributing
capital which increases the worth of the business.
• Retained Earnings— The accumulated profits and losses of
a corporation .
Income Statement
The second accounting report that is important to a financial
investigator or anyone else interested in the financial condition of
a business organization is the Income Statement . The income
statement, also called the Profit and Loss Statement, reports rev
enue and expenses incurred by a business for a designated period
of time .
While the balance sheet reports the financial condition of a

business at a given date, the income statement reports the busi
ness's operating activities for the whole accounting period. The
income statement matches the amounts received from selling the
goods and /or services produced by the business ( income) against
all the costs and/or services (expenses) needed to operate the
business . The result of this matching process is aa financial state
ment of the business's profit or loss for the period.
Like the balance sheet, there are two general formats for an
income statement, single-step and multi-step.
Single-Step Format
In its simplest format, the single-step income statement presents
the following three items:
• Revenue for the period
• Applicable expenses
• Net income or loss (revenue minus expenses)
The following shows a single -step income statement.
ABC Company
Income Statement
For the year ended December 31 , 1991
Revenue:
Sales $ 4,212,000
Expenses
Cost of goods sold $ 2,808,000
Selling expenses 936,000
Administrative expenses 116,000
Interest expense 52,000
Income tax expense 120,000
Total expenses $4,032,000
Net Income $ 180,000
Note the heading of the income statement . Like the balance

sheet, it consists of the name of the company, the name of the
financial statement, and the date. However, unlike the balance
sheet, the income statement date is preceded by the term “for the
year, period, or month ending.” The income statement reflects a
business's net income or loss for the entire period stated in the
heading.
Multi-Step Format
Many income statement users maintain that there are a number of
significant relationships between total revenue and net income
which are not brought out in a single-step income statement. They
contend , for example, that some intermediate subtotals such as
gross profit, operating earnings, and earnings before tax are as
148 CHAPTER 6
important as total revenue, total expenses, and net income.4 They

prefer an income statement format which presents intermediate
steps, the multi-step format.
The multi-step format is designed to be read in aa stairstep
manner. Each step down is a deduction of one or more expenses.
Look at the sample income statement in multi-step format shown
on the next page. The first step down deducts the cost of goods
sold from the business's sales revenue. This deduction results in
the line entitled gross profit. This measurement is captioned
“ gross” because other expenses are yet to be deducted .
In the next step down, operating expenses (selling expenses
and administrative expenses) are deducted from the gross profit
figure. Then other expenses (i.e. taxes, interest, etc.) are also sub
tracted from the calculation to arrive at the final step down— net
income. Net income is the bottom line in the matching process
between business income and business expenses . If income
remains after the deduction of expenses a net income (profit) is
reported. Correspondingly, if the business expenses for the period
exceed the business income, a net loss is reported.
ABC Company
Income Statement
Sales revenue $ 4,212,000
Less: cost of goods sold 2,808,000
Gross profit $ 1,404,000
Less : selling expenses 936,000
Administrative expenses 116,000
Total operating expenses 1,052,000
Operating earnings $ 352,000
Less : interest expense 52,000
Earnings before tax $ 300,000
Less: Income Tax expense 120,000
Net Income $ 180,000
Recording Financial Transactions

The effect of each individual financial transaction entered into by
a business during the accounting period is eventually reflected on
a business's balance sheet and income statement. Since aa busi
ness may engage in hundreds or even thousands of transactions
daily, an accounting procedure is needed to record and classify
financial transactions in order to organize this type of financial
information inside the business's bookkeeping system. Every
check written , invoice paid, and sales receipt issued by a busi
ness represents a source document of accounting information. The
financial information from the source documents is entered into
the business's bookkeeping system through the establishment of
accounts. As was stated earlier, accounts are established to record
the movement of cash into and out of the business, the payments
of expenses, the purchase of assets, and the equity of the owner.
Chart of Accounts
The number of accounts needed by aa business will depend on its
size, nature of operations, and the extent to which management
wants detailed classification of information. To assist in tracking
its accounts, a business will create a chart of accounts. A chart of
accounts is aa listing, in sequentially numbered order, of aa busi
ness's established accounts . The chart of accounts for Ogle
Insurance Company is found on the next page.
Bookkeeping Systems and Accounts

Single-entry bookkeeping only accounts for the cash coming into
or cash going out of a business . It does not separate financial
transactions into individual accounts or attempt to balance the
effects of each transaction in the business's books and records .
In aa double-entry system of accounting, financial transactions
are recorded in a manner that balances the effect of each individ
ual transaction in the business's books and records . Under the
double- entry system, recording a financial transaction in the busi
ness's books affects two or more accounts.
150 CHAPTER6
Ogle Insurance Company

Chart of Accounts
Assets Revenue
101 Cash on Hand 301 Sales
101.5 Cash in Bank 302 Sales Returns and Allowances
102 Accounts Receivable 303 Sales Discount
105 Merchandise Inventory 311 Purchases
106 Pre-paid Insurance
117.0 Delivery Equipment Operating Expenses
117.5 Accumulated Depreciation 401 Delivery Expenses
Delivery Equipment 402 Depreciation Expenses
118.0 Office Furniture - Delivery Equipment
118.5 Accumulated Depreciation 403 Salaries Expenses
– Office Furniture 404 Payroll Expenses
119.0 Office Equipment 405 Miscellaneous Selling Expense
119.5 Accumulated Depreciation 407 Depreciation Expense
– Office Equipment – Office Furniture
120 Goodwill 408 Depreciation Expense
130 Land – Office Equipment
140 Building 409 Insurance Expense
150 Petty Cash 410 Office Supplies
412 Bad Debt Expense
Liabilities 413 Miscellaneous General Expense
201 Accounts Payable Expense
202 Salaries Payable Other Income
204 Employees' Income Tax 501 Gain on Disposal of Plant Assets
205 FICA Tax Payable 502 Interest Income
206 State Unemployment Tax Payable
207 Sales Tax Payable Other Expenses
208 Notes Payable 601 Rent Expense
209 Mortgage Payable 602 Telephone Expense
210 Loans Payable
Net Worth
251 Capital, Robert Ogle
252 Drawing, Robert Ogle
253 Profit and Loss
TRACING THEMOVEMENT OF MONEYTHROUGHA BUSINESS 151
Journals
Financial information is taken from source documents and
entered into the accounting system through a business's journals.
Journals are called the Books of Original Entry and they main
tain, in chronological order,the details of each financial transac
tion entered into by a business . In the double-entry system of
bookkeeping, each transaction affects two or more accounts and,
accordingly, two or more journal entries must be made to record
the transaction , never just one.
The example below shows how a single transaction is
recorded in a journal within aa double -entry bookkeeping system.
Three entries are needed to record the following transaction:
Company X sold $2,000 worth of merchandise to MLB
Limited. The invoice shows that MLB Limited paid $500 cash
and put the remaining $ 1,500 on account.
General Journal page J- 16
Date Ledger
1992 Accounts and Explanations Folio * Debit Credit
8/13 Cash 101 500
Accounts Receivable 102 1,500
Sales 301 2,000
Sold merchandise to MLB Limited .
*
Account number - refer to chart of accounts
Note that a description of the transaction , and the actual

increase and decrease in terms of money are recorded in the jour
nal . The dollar value of the transaction is recorded in one of two
columns in the journal. The column on the left is called the debit
column and the column on the right is called the credit column.
The terms debit (Dr.) and credit (Cr.) represent accounting
nomenclature for “ making an entry on the left side or right side of
an account,” and hold no other meanings or connotations . To
“ debit an account ” means to make an entry on the left side or in
the left column of an account. To “ credit an account ” means to
make an entry on the right side or in the right column of an
account. The accounting rules for recording the increases and
decreases resulting from financial transactions are found on the
next page .
152 CHAPTER 6
Rules for Recording

Increases and Decreases
Assets
Increases on the left Decreases on the right
(debit) (credit)
Liabilities and Owner's Equity (Capital)
Decreases on the left Increases on the right
(debit) (credit)
Revenue
Decreases on the left Increaseson the right
(debit) (credit)
Expenses
Increases on the left Decreases on the right
(debit) (credit)
Let's look back at the sample journal entries on page 151 to

see if the rules above were properly applied. The $500 cash (an
asset that increased) was debited to the “ Cash ” account and the
$ 1,500 balance, also an asset that increased, was debited to the
Accounts Receivable account . Sales , a revenue account , was
increased by the credit of $2,000.
Why is it important that a financial investigator understand
how information from source documents eventually finds its way
into a business's journals ? Journals provide the financial link
between the outside world's source documents and the business
world's accounting records . Through analysis of journal entries,
often aa determination can be made as to whether or not the busi
ness has properly recorded the financial event as shown on the
source document. This analysis can be completed by:
• Determining the accounts affected by the transaction
Determining the affect in dollar terms of the transaction on
each account
Reviewing the recorded journal entry for the correct

debit/credit entries relating to the financial transaction
Types of Journals
Special types of journals are devoted to particular kinds of busi
ness transactions . Examples of these different types of journals
are the following:
• Cash Receipts Journal. Records the dates, sources, and
amounts of money received into aa business.
• Cash Disbursements Journal. Records the dates, amounts,
and recipients of payments made by aa business.
• Sales Journal (Accounts Receivable Journal). Lists sales
invoices in date or numerical order for sales made on
credit.
• Purchases Journal (Accounts Payable Journal). Records all

acquisitions of merchandise or services purchased on
credit by the business.
• General Journal. Reflects transactions not covered by spe
cific purpose journals.It is also used to record adjustments
to the books and records.
The following pages illustrate various types of journals and

journal formats. Read each of the examples to see how various
transactions are recorded. Refer to the chart of accounts on page
150 and the rules for recording increases and decreases to jour
nals on page 152 as necessary.
154 CHAPTER 6
Cash Receipts Journal Entries

1992 Financial Transactions
7-14 Received $250 from Redbay and Co. on account .
7-18 Sold $ 175 merchandise for cash to Reed Manufacturing.
7-22 Received a $ 300 payment from Bur, Inc. for cash sale.
Cash Receipts Journal

Date Received From Folio # Debit Credit
1992
7/14 Cash 101 250.00
Accounts Receivable 102 250.00
Redbay & Co. - paid acct.

7/18 Cash 101 175.00
Sales 301 175.00
Sold merchandise to Reed Mfg.

7/22 Cash 101 300.00
Sales 301 300.00
Sold merchandise to Bur, Inc.
Cash Receipts Journal Entries

7-6 Received $ 7,800 from Pike Mfg. on account.
7-8 Sold $ 7,000 of merchandise for cash to Iron Works.
7-10 Received a $ 9,000 payment from Bates Motel for aa cash sale.
7-14 Sold $2,500 of merchandise for cash to Wilcox Motors.
7-18 Received $ 1,500 from Cloud Mfg. on account.
7-19 Cash sale to Hickory Co. for $ 2,500 .
Cash Receipts Pg. CR-3

Date Payee Cash A/R Sales
Debit Credit Credit
1992 ( 101 ) ( 102) (301)
July
6 Pike Mfg. $ 7,800.00 $ 7,800.00
8 Iron Works $ 7,000.00 $ 7,000.00
10 Bates Motel $9,000.00 $ 9,000.00
14 Wilcox Motors $2,500.00 $ 2,500.00
18 Cloud Mfg. $ 1,500.00 $ 1,500.00
19 Hickory Co. $ 2,500.00 $ 2,500.00
Cash Disbursements Journal Entries

1-25 $ 500 is paid to Sylvester Sage on account.
1-25 $75 is paid to the Telephone Company for the monthly bill.
1-27 $250 is paid to John Woods on account.
1-29 $300 is paid to Realty Management.
Cash Disbursements Journal
Date
1992 Paid to L.F. Debit Credit
1/25 Accounts Payable 201 $ 500
Cash (CK # 275 ) 101 $500
Paid to Sylvester Sage on account
1/25 Telephone Expense 602 $ 75
Cash (CK #276) 101 $75
Paid telephone bill for month
1/27 Accounts Payable 201 $250
Cash (CK #277) 101 $250
Paid to John Woods on account
1/29 Rent Expense 601 $ 300
Cash (CK # 278) 101 $ 300
Paid to Realty Management
Sales Journal Entries

1-3 Sales to XYZ Company on account = $ 1,000
1-4 Sales to 123 Company on account = $500
1-5 Sales to Bob Company on account = $250
1-6 Sales to XYZ Company on account = $1,000
1-7 Sales to 123 Company on account = $500
Sales Journal Pg. SJ - 1
Date (103) (301 )
1992 Customer Name Accounts Receivable (DR) Sales (CR)
1/3 XYZ Co. $ 1,000 $ 1,000
1/4 123 Co. 500 500
1/5 Bob Co. 250 250
1/6 XYZ Co. 1,000 1,000

1/7 123 Co. 500 500
$3,250 $3,250
156 CHAPTER 6
Purchase Journal Entries

1-1 Bought merchandise on account from wholesaler X for $250
1-2 Bought merchandise on account from vendor Y for $ 500
1-3 Bought merchandise on account from wholesaler Z for $750
1-4 Purchased merchandise on account from vendor Y for $ 500
1-4 Purchased merchandise on account from wholesaler Z for $750
Purchase Journal Pg. PJ - 1
Date
1992 Vendor Name Purchases (DR) Accounts Payable ( CR )
1/1 X Wholesaler $ 250 $ 250
1/2 Y Vendor 500 500
1/3 Z Wholesaler 750 750
1/4 Y Vendor 500 500

1/4 Z Wholesaler 750 750
The Ledger
Journalizing entries, recording each business transaction from a
source document into the journals , continues throughout the
accounting period . Because of this, financial information con
tained within the journals grows during the accounting period,
particularly in businesses that engage in a high volume of trans
actions . It would be difficult for aa business owner, accountant , or
financial investigator to analyze a journal full of financial transac
tions entered in chronological order, particularly when he or she
is searching for specific account information (i.e., “ all the rent
expense payments ” or “ all sales to a particular customer ” ). An
accounting device called a ledger is used to summarize journal
entries by specific accounts . The summary of account information
contained in ledgers is used to prepare a business's balance sheet
and income statement .
A ledger is established to accumulate all the transactions
affecting a specific account during the accounting period. For
example, all transactions affecting the “ cash account,” a busi
ness’s receipt of cash (debit) and pay outs of cash (credit)
recorded in the journals , would be summarized in the ledger
account entitled “ cash ”. At the end of the accounting period, the
balance of the ledger account (the mathematical difference
between the total debit entries and total credit entries) is used as
the basis for balance sheet and income statement reports.
A popular format for аa ledger is the “ T - account. ” A ledger
account in the T -format looks like the following:
Cash (101 )
1/4/92 900.00 1/3/92 394.00
1/7/92 1,435.00 1/8/92 13.95

1/13/92 52.43
In the T-account format, ledger entries to show increases and

decreases in different types of accounts are made as follows:
Assets Liabilities Owner's Equity
+ +
+
(Dr.) (Cr.) (Dr.)
C(
)r
. (Dr.) (Cr.)
Expenses Revenue
+
+ -
(Dr.) (Cr.) (Dr.) (Cr. )
The T -account format is very convenient for illustrative pur

poses; however, in formal accounting records, more information is
needed and the T -account is replaced by something similar to the
following:
Date Explanation Ref Debit Credit Balance

158 CHAPTER 6
The Date column shows the date of the transaction , which is

not necessarily the same date that the entry is made into the
account. The Explanation column is needed only for unusual
items- often it is not used. The Ref (Reference) column is used
to list the page number of the journal in which the transaction is
recorded . This makes it possible to trace ledger transactions back
to their source .
When financial information that has been entered into jour
nals is transferred to and entered in the appropriate ledger
account, it has gone through the process known as posting. Thus,
transactions are journalized and then posted to a ledger.Note how
the journal entries on the following page are posted to ledger
accounts .
General Journal Page J - 16

Date Ledger
1992 Accounts and Explanations Folio Debit Credit
9/1 Cash 101 60,000
Owner's Equity 251 60,000
Owner invests $60,000 cash
in business .
9/3 Cash 101 21,000
Land 130 21,000
Company purchases land for
$21,000 cash.
9/5 Building 140 36,000
Cash 101 15,000
Accounts Payable 201 21,000
Company purchases $ 36,000
building, pays $ 15,000 cash
and $ 21,000 on account
Cash ( 101 )
9/1 60,000 9/3 21,000
9/5 15,000
Owner's Equity (251 )

9/1 60,000
Land (130)
9/3 21,000
Building ( 140)
9/5 36,000
Accounts Payable (201 )

9/5 21,000
Trial Balance
If the computation of account balances has been accurate, it fol
lows that the total of the accounts with debit balances must be
equal to the total of the accounts with credit balances. This proof
is called a trial balance. A trial balance is aa two-column listing of
the names and balances of all accounts in the order in which they
appear in the ledger. The debit balances are listed in the left col
Frank’s Turkey Farm

Trial Balance
August 31 , 1992
Cash 15,278
Accounts Receivable 3,925
Land 9,998
Building 4,276
Office Equipment 1.934
Accounts Payable 11,254

Frank Lyn, Capital 24,157
35,411 35,411
160 CHAPTER 6
umn, the credit balances in the right. The trial balance is pre
pared prior to the creation of the balance sheet and income state
ment .
Keep in mind that the trial balance proves only one aspect of
the ledgers, the equality of debits and credits. It does not prove
that ledger entries are correct or accurate.
Analyzing Business Books and Records

Financial investigators rarely are asked to construct, or have a
need to reconstruct, a full set of financial books and records.
However, searching through or analyzing information in financial
records is a common investigative technique. Analysis of these
types of business records tie financial transactions to criminal
activity. There exists a ruthless logic in accounting which over
comes deceit and deception.
Analyzing accounting records is known as auditing. Audit
techniques are based on three action words— analyze, scrutinize,
and compare . They are key terms in dissecting and tracing finan
cial transactions. Investigators need to look beyond the written
figures in books and records. They need to:
• Analyze. During analysis , the accounting books and
records are broken into their component parts. For example, jour
nals are analyzed by reviewing individual entries and seeing if
they are compatible with the account to which they are charged.
• Scrutinize. Look for leads in unusual notations on docu
ments, absence of aa business purpose for a transaction , or lack of
documentation for a transaction .
• Compare. Evaluate and compare the accounting source

document to independent indicators available from sources out
side the business . Analyze for inconsistencies and out- of-the
ordinary transactions.
Money Laundering Example

Let's look at two situations to see how a financial investigator
might approach them . The first situation, which is described
below, depicts an investigation into alleged money laundering.
Information indicates that Robert Ogle has started an insur
ance business to conceal his true business— that of a money
launderer. Prior findings show that Ogle appears to have
limited financial resources and little experience in the insur
ance industry. Also, investigative research reveals that Ogle
has never before owned or operated a business, nor has he
received any training in bookkeeping or accounting. When
contacted, Ogle declined the opportunity to discuss the mat
ter but provided his business's journals and ledger accounts
to the investigator stating, “ It is all there in black and
white . ”
For the investigator's purposes, financial analysis of a money

laundering allegation could be completed through the examina
tion of every source document associated with each transaction
entered into by Ogle and his insurance company. However,
attempting to identify “ suspect transactions” from this perspec
tive is often a time consuming and labor intensive process. The
process is made even more complex when the analysis includes a
high volume of transactions over an extended period of time .
What the investigator needs to facilitate his or her analysis is a
2
“ transactional road map ,” a written record of financial events

entered into by a business— the journal.
The following page contains entries into the Ogle Insurance
Company's General Journal during January 1992. Upon scrutiny
of the entries, several seem to merit further inquiry within the
investigative context.These entries are:
• Entry (a)— The $ 10,000 investment by Ogle to start up
the business .
• Entry (b)— The ability of R. Ogle Insurance Company, a

new business, to secure a $95,000 mortgage with only a 5
percent ($5,000) down payment.
• Entry (e)— The sale of aa $ 15,000 insurance policy.
162 CHAPTER 6
• Entries (f) and (h ) — The sale of aa $ 13,000 insurance pol

icy on credit.
• Entries (g) and (k ) — The particular details of the $ 30,000

loan and subsequent repayment.
The journal entries provide information which narrows the
scope of inquiry from eleven transactions to seven “ suspect trans
actions.” However, the journal entries leave certain questions
unanswered: Who are L. Able, T. Albert, and E. Drew ?, who pro
vided the $30,000 loan? and what is meant by the 1/31 journal
description “ equally divided?”
The answers to the questions can be found in the business's
ledger accounts . By analyzing ledger accounts, the investigator
can determine the details, in terms of dollars, for every transac
tion during the accounting period for each specific account.
Ogle Insurance Company

General Journal J- 1
Date
1992 Account titles Ref. Debit Credit
(a) 1/1 Cash 101 10,000
R. Ogle, Capital 251 10,000
Investment by R. Ogle to start business
(b) 1/6 Land 130 10,000
Building 140 90,000
Cash 101 5,000
Mortgage Payable 209 95,000
Purchase of office building
(c) 1/7 Office Furniture 118 2,000

Cash 101 2,000
To record purchasing office furniture
(d) 1/9 Office Equipment 119 1,000
Accounts Payable 201 1,000
Purchasing office equipment
(e) 1/15 Cash 101 15,000
Sales 301 15,000
Record cash sales to L. Able
(f) 1/20 Accounts Receivable 102 13,000

Sales 301 13,000
Record sales on account to T. Albert
( g) 1/20 Cash 101 30,000

Notes Payable 208 30,000
To record loans to the business notes issues in exchange
(h) 1/24 Accounts Receivable 102 14,000
Sales 301 14,000
Record sales on account to E. Drew
(i) 1/29 Accounts Payable 201 500

Cash 101 500
Paid on account
(j) 1/30 Cash 101 10,000

Accounts Receivable 102 10,000
Receipt of cash on account of T. Albert
(k) 1/31 Notes Payable 208 5,000

Cash 101 5,000
Paid on note/equally divided
164 CHAPTER 6
The following illustrates, in T -account format, Ogle Insurance

Company's ledger accounts as of 1/31/92.
Cash (101 ) Accounts Receivable ( 102)
(a) 1-1-92 10,000 1-6-92 5,000 (b) (f) 1-20-92 13,000 1-30-92 10,000 (j)
(e )1-15 15,000 1-7 2,000(c) (h)1-24 14,000
(g ) 1-20 30,000 1-29 500(i) 27,000 10,000

(j) 1-30 10,000 1-31 5,000 (k ) 1-31 Bal. 17,000
65,000 12,500
1-31 Bal. 52,500
Accounts Receivable
Subsidiary Ledger
Office Furniture ( 118)
Thomas Albert
P.O. Box 123
(c) 1-7-92 2,000
N.Y. , N.Y. 001
(f) 1-20-92 13,000 1-30-92 10,000 (j)

1-31 Bal . 3,000
Office Equipment ( 119)
(d) 1-7-92 1,000
Land (130) Accounts Receivable

10,000
Subsidiary Ledger
(b) 1-6-92
Edward Drew
P.O. Box 123
N.Y. , N.Y. 002
Building (140) (h) 1-24-92 14,000

(b) 1-6-92 90,000
Accounts Payable (201 ) Notes Payable (208)

(i) 1-29-92 500 1-9-92 1,000(d) (k) 1-31-92 5.000 1-20-92 30,000 (g)
1-31-92 Bal . 500 1-31 Bal . 25,000
Mortgage Payable (209)

1-6-92 95,000 (b ) Notes Payable
Subsidiary Ledger
Henry Brown
P.0 . Box 123
R. Ogle, Capital (251 ) N.Y. , N.Y. 001
1-1-92 10,000(a) (k)1-31-92 2,500 1-20-92 15,000 (g)

1-31 Bal . 12,500
Sales (301 )
Notes Payable
Subsidiary Ledger
Dell Clark
P.O. Box 123
1-15-92 15,000 (e) N.Y. , N.Y. 002
1-20-92 13,000(f) (k) 1-31-92 2,500 1-20-92 15,000 (g)
1-24-92 14,000 (h) 1-31 Bal . 12,500
1-31 Bal. 42,000
Ledger accounts offer additional investigative information

relating to the movement of money. The posted journal transac
tions for the Ogle Insurance Company reveal:
• The business generated sales in the amount of $42,000 for
the month. However, the business incurred zero expenses for the
month. (Sales ledger)
• The identities of Thomas Albert and Edward Drew, two
individuals who purchased insurance on credit, have been deter
mined. (Accounts Receivable subsidiary ledgers 001 and 002,
respectively)
• The providers of the $ 30,000 loan, Henry Brown and Dell
Clark, have been identified (Notes Payable subsidiary ledgers
001 and 002, respectively)
166 CHAPTER6
• The mailing address for Albert, Drew, Brown and Clark has
been identified— P.O. Box 123, New York, New York .
Some specialized ledgers, called subsidiary ledgers, are

mentioned in the discussion above . These ledgers are used by
accountants to provide details about certain accounts. Business
owners need to know not only the total amount of outstanding
accounts receivables owed to the business, but also what each
individual customer owes. The same holds true for the business's
accounts payable, loans payable, and certain expense accounts.
This internal control is maintained through the use of subsidiary
ledgers where the particulars (name, address, credit limits, etc.)
of the accounts are shown .
Based upon the financial analysis of Ogle Insurance
Company's accounting books and records, various transactions
appear to be suspect. Analysis of the source documents relating
to these particular transactions will be the next investigative step.
The following illustrates, in narrative form , the source documents
pertaining to the Ogle Insurance Company financial transactions.
The letters (a, b, etc.) that precede the descriptions can be traced
back to ledger and journal entries.
a. On 1/1/92, a $ 10,000 certified check, made payable to
“ Cash ” was deposited into the Ogle Insurance Company checking
account .
b . On 1/6/92, Ogle Insurance Company completes a real

estate purchase by buying an office building. The closing state
ment, loan application, mortgage note, and repayment agreement
are maintained by the insurance company. The loan is extended
to Ogle Insurance Company and a Mr. Thomas Albert, as an indi
vidual. The total cost of the transaction is $ 100,000 with 90% of
this cost allocated to the building and 10% to the land.
c . On 1/7/92, Ogle purchases office furniture in the amount
of $2,000. Ogle Insurance pays for the furniture via a check
(#101) . The store issues a receipt for the purchase.
d. On 1/9/92, Ogle purchases office equipment in the amount
of $ 1,000 . The purchase is made on credit . The terms of the
repayment are $250 a month with the first month's payment due
30 days after purchase. The store issues a receipt and a credit

terms agreement to Ogle Insurance Company.
e. On 1/15/92, Ogle Insurance sells an insurance policy to
Lyle Able in the amount of $ 15,000. Able pays for the policy in
cash. Able is issued a receipt for his payment.
f. On 1/20/92 , Ogle Insurance sells an insurance policy to
Thomas Albert in the amount of $ 13,000. Albert promises to pay
for the policy by making a $ 10,000 payment by 1/30/92 and
$ 1,000 payments every 30 days after that. A credit agreement is
issued to Thomas Albert.
g. On 1/20/92 , two of Robert Ogle's friends each loan the

insurance company $ 15,000. Both Henry Brown and Dell Clark
provide $ 15,000 in currency. The insurance company prepares a
repayment agreement stating the terms of the repayment to be
$2,500 within 30 days and the balance repaid within one year.
Robert Ogle, Henry Brown, and Dell Clark agree to and sign the
loan note. The $30,000 in cash is deposited into the business's
checking account.
h. On 1/24/92, Ogle Insurance sells an insurance policy to
Edward Drew in the amount of $ 14,000. Edward Drew promises
to pay for the policy within 30 days. A credit agreement is issued
to Edward Drew by the insurance company .
i. On 1/29/92, Ogle Insurance check #102 is issued in the
amount of $500 to the store where their office equipment was pur
chased in partial payment of the outstanding bill.
j . On 1/30/92, cash in the amount of $ 10,000 is received by
the insurance company from Thomas Albert . This amount is
applied to his outstanding account.
k. On 1/31/92, Ogle Insurance Company checks #103 and
# 104, both in the amount of $2,500, are mailed to Henry Brown
and Dell Clark, respectively. These payments are made according
to the agreed upon terms of repayment as outlined in (g) above.
As shown through the Ogle Insurance Company example,
investigative analysis of the movement of money into and through
168 CHAPTER 6
a business is accomplished through an understanding of the

accounting principles of journal and ledger entries. With the Ogle
Insurance Company investigation, journal entries were scruti
nized to determine if any appeared suspicious or required further
inquiry. Once specific entries were selected, the ledger postings
related to them were analyzed . Finally, the documentation related
to a transaction was examined .
Political Corruption Example

Now let's see how auditing investigative techniques are used in a
case of alleged political corruption.
The contractor, Woodruff Contracting Company, writes a
check to a supplier, York Company, for “ service”, in the
amount of $ 10,000. The check was endorsed and deposited
by the York Company. In reviewing Woodruff Contracting
Company's Cash Disbursements Journal, the investigator
notices that other checks to York Company are usually in
amounts less than $1,000.
Woodruff Contracting Company

Cash Disbursements Journal
Date Vendor Amount
almololo
March
1 Tye Co. $ 6,000.00
York Co. 500.00
Mill Co. 3,500.00
York Co. 450.00
9 Smith Co. 3,250.00
10 York Co. 750.00
14 Tye Co. 5,000.00
16 Mill Co. 3,500.00
17 York Co. 10,000.00
19 York Co. 950.00
20 Miller Co. 750.00
21 See Co. 7,000.00
TRACING THE MOVEMENT OFMONEY THROUGH A BUSINESS 169
The investigator scrutinized the check and then went one step
further and compared that check to other payments made to York
Company. Something was out ofthe ordinary.
Inspection of York Company's Cash Receipts Journal shows
NO entry for the Woodruff Contracting Company payment
during the month ofMarch.
York Company
Cash Receipts Journal
Date Customer Amount
March
10 Russell Co. $ 800.00
10 Moore Manufacturing $ 500.00
12 Falls Inn $ 400.00
13 Grand Co. $910.00
14 Franklin Co. $450.00
17 Sussex Contracting $780.00
19 Campbell Co. $950.00
20 Branch, Inc. $ 700.00
22 Calhoun, Inc. $ 1,000.00
23 Adams Co. $600.00
25 Roberts Contracting $ 500.00
The investigator scrutinized York Company's Cash Receipts

Journal and compared it to what should have happened. (When
York Company receives money, normally it is recorded in the
Cash Receipts Journal).
Review of York Company's General Ledger reveals a large
debit entry to the Miscellaneous Expenses Account and a
credit to the Cash Account, both in the amount of $ 10,000
on 3/17.
170 CHAPTER 6
General Ledger
Cash 101 Misc. Expenses 800
Date Folio Debit Credit Balance Date Folio Debit Credit Balance
$82,500 $ 1,000
3/2 $ 400 82,100 3/2 $ 200 1,200
3/3 1,000 81,000 3/4 75 1,275
3/4 4,000 77,100 3/7 500 1,775
3/9 300 76,800 3/9 200 1,975
3/11 825 75,975 3/10 400 2,375
3/15 1,250 74,725 3/12 925 3,300
3/17 10,000 64,725 3/17 10,000 13,300
3/22 650 64,075 3/26 350 13,650
3/23 1.250 62,825 3/27 1,300 14,950
3/26 750 62,075 3/29 450 15,400
A canceled check, made payable to cash and noted “ Misc. Exp., ”

was located. The check was dated March 17 and was prepared by
the president of the York Company. The check was endorsed with a
stamp and the notation “CC -1-59199” was written below the
endorsement.
York Company 1308

1115 Lancaster Street 68-999
Alexandria , Virginia 22308 561
March 17 19 92
Pay to the
Order of: CASH 10,000.00
00
Ten thousand dollars and 100
Dollars
Pinkerton Bank
Misc . Exp .
1: 0 5610999.11; 08493112 11'
Bregory A.York
1308 , OOoooodo ,
COMPANY
YORK
1-CC-59199
The investigator analyzed the general ledger and then scruti

nized canceled checks for possible leads . A $ 10,000 check ,
made payable to “ Cash,” drawn on March 17, was located. It was
signed by the president of York Company, endorsed with the com
pany stamp, and the notation “ CC - 1-59199 ” appeared below the
endorsement.
The notation “ CC - 1-59199” was placed on the York
Company check by a financial institution . It indicates that
the check was used to buy Cashier's Check # 1-59199. A copy
of the Cashier's Check was obtainedfrom the financial insti
tution. It was to be paid to Bache & Co.
American Security and Trust 1-59199

Washington, DC 20001 15-999
560
March 19 1992
Remitter_G . York
Bache & Co. 10,000.00

00
Ten thousand dollars and 100
Cashier's Check
Lois E. Smith
1: 0 560099911: 08493112 111 , 000 1000000 ,
172 CHAPTER 6
The investigator scrutinized the check, saw the Cashier's

Check notation, and again scrutinized the endorsement of that
check .
An interview with a representative of Bache & Co. revealed
how they recorded the receipt of the Cashier's Check. The
check was credited to a customer's account. Bache & Co.
records disclose that the customer is Thomas Foster, a city
building inspector. Foster used the money to buy stock and
he is having it held in a “street" name (Recall from Lesson 5
that stock held in “ street" name is held in the name of the
broker or brokeragefirm , not in the name ofthe owner).
Through financial investigative techniques, the investigator
traced the movement of money from a business's books and
records through two financial institutions to the resolution of a
financial crime.
The investigator now has the documentary evidence to con
front the president of York Company. Confronted by such evi
dence, the president admits his involvement as the “ go -between ”
and confirms the political corruption scheme.
Indicators of Fraud
Fraud investigations usually are initiated when several small
events, taken together, point to a possible pattern of deception.
Within a business's accounting system, there are often physical
indicators that point to a pattern of deception. The following indi
cators may signify that financial fraud is taking place:
Maintaining two sets of books and records
• Concealment of assets
• Destruction of books and records
Large or frequent currency transactions

Payments to fictitious companies or persons
• False or altered entries and documents
• False invoices or billings

• Purchase or sale of under or over -valued assets
• Use of nominees
• Large company loans to employees or other persons

• Frequent cashing of checks received
Frequent use of cashier's checks
Using photocopies of invoices or receipts instead of origi
nal documents
• Personal expenses paid with corporate funds

• Payee names on checks left blank and inserted at a later
date
• Excessive billing discounts

• Excessive spoilage or defects
• Double payments on billings
Unnecessary use of collection accounts
• An individual negotiating checks made payable to
a corporation
• Second or third -party endorsements on corporate checks

• Excessive use of exchange checks or clearing accounts
174 CHAPTER 6
Summary
For the financial investigator, analysis of a business's journals and
ledgers and an understanding of accounting procedures can assist
in :
Identifying the movement of money during a financial

crime
Identifying the sources and /or applications of funds made

by an individual or business for a given period of time
Determining participants in specific financial transactions
Uncovering additional leads for further investigative analysis
The accounting principles and audit techniques described in
this chapter should not be considered tools to be rigidly memo
rized and applied, but rather an inventory of perspectives which
will broaden the base of knowledge for the investigator.
TRACING THE MOVEMENT OFMONEY THROUGH A BUSINESS 175

1. How do the three major forms of business organizations com
pare when it comes to being responsible for debts ? In other
words, who is responsible for the debts of a proprietorship, a part
nership, and a corporation ?
2. Why are a corporation's Articles of Incorporation and a part

nership’s Articles ofPartnership important to the financial inves
tigator?
3. Describe the terms “ liability,” “ asset,” and “ owner's equity.”
4. The balance sheet you are reviewing has coffee stains on it.
You can barely make out that the total amount of assets is
$675,325 and the owner's equity is $276,580. What is the total
amount of liabilities reported ?.
5. The objective of accounting is to show in summary form the

results of financial transactions on a business. How is this objec
tive accomplished ?
6. What does the phrase " the balance sheet represents a snap
shot of аa business's condition ” mean?
176 CHAPTER 6
7. What does the following journal entry indicate?

Cash 10,000
8. Make the appropriate ledger account entries (in T -account for

mat) that would result from the journal transaction in question 7.
9. Based on the following information , prepare a balance sheet

for Collier Company (statement date is 12/18/92).
• On 12/12/92 , the company sold 25,000 shares of stock .

Each share sold for $ 1 with the proceeds of the sale placed into
the company checking account.
• On 12/14/92 , the company purchased a machine for
$ 12,000. It paid $6,000 and financed the balance with a bank
note .
• On 12/15/92 , the company bought production materials

(inventory) for $ 40,000. It paid $ 15,000 and promised to pay the
balance in 30 days.
• On 12/16/92, the company bought a second machine for

$ 3,000 cash .
10. Journalize the entries (as they would appear in the general
journal) for the transactions listed in question 9.
11. Make the appropriate ledger account entries (in T -account for
mat) that would result from the journal transaction in question 9.
12. Based on the following information , prepare an income state

ment ( in multi - step format) for Pratt , Inc. (period ending
12/31/92 ):
• Cost of goods sold $30,000

Selling expenses $ 5,000
• Interest expense $ 10,000
• Administrative expenses $ 100,000
• Sales revenue $ 155,000
• Sales returns and allowances $ 5,000
178 CHAPTER 6
13. Why is a knowledge of accounting important to the financial

investigator?
Endnotes
1 Uniform Partnership Act, Section 6
2 Webster's New Collegiate Dictionary, (Websters New World,
1977).
3 James Edwards , Roger Hermanson , and R.F. Salamonson,

Accounting: A Programmed Text (rev ed .) , (Homewood, IL:
Richard D. Irwin, Inc. 1972), p. 47
4 Kenneth W. Perry, Accounting: An Introduction, (New York:
McGraw-Hill Book Company, 1971), p. 510
CHAPTER 7
Tracing Funds Using the Direct Method of Proof

or the financial investigator, the proof of a
financial crime is accomplished by document
ing a suspect's receipt and /or disposition of the
proceeds from an illegal activity. Proof, like evidence, can be
either direct or circumstantial. In this chapter and the next, you
will learn about methods of proof. Chapter 8 focuses on three
methods of indirect (circumstantial) proof. This chapter deals
with the specific item method, a direct method of proof. This
method of proof is the simplest method of proving that a suspect
has paid for something using illicit funds or received funds
through an illegal means. The investigator looks for specific ille
gal transactions. Nothing is implied or inferred. A direct link is
established between the suspect and aa financial transaction.
The specific item method can be used to document the move
ment of money from either the point of payment or the point of
receipt. An example of each is contained in this chapter. This
chapter also describes several schemes a business or individual
may use to cover illegal activities. Once a specific financial trans
action is discovered, the investigator needs to review the informa
tion surrounding the transaction . This chapter contains a
discussion on reviewing “ suspect payments.” The chapter con
cludes with some thoughts on using the specific item method.
Explain the concept of “ direct proof.”
• Describe various point-of-payment schemes .
180 CHAPTER 7
• Describe information surrounding “ suspect payments” that

cause an investigator to become suspicious.
The goal of aa financial investigator is to trace the movement of
money. In doing so, the investigator tries to prove that a suspect
received or tendered illegal funds. The proof can be either direct
or circumstantial . This chapter focuses on the specific item
method of tracing funds, a direct method of proof.
What is the Specific Item Method?

The specific item method is the technique most commonly used
by the financial investigator. It enables an investigator to offer
proof of a suspects receipt and/or disposition of funds from an
illegal activity. This proof, like evidence, can be categorized as
either direct or circumstantial . The proof obtained via the spe
cific item method is direct proof— proof precise to the point at
issue. This direct proof is achieved when investigative findings
identify specific financial transactions involving the suspect.
Such findings show a direct link between financial transactions
and the suspect. Direct proof reveals the suspect's personal
involvement and knowledge of the illegality of the financial
activity under investigation. With the specific item method, the
investigator tries to uncover a specific illegal or unusual finan
cial transaction and then analyze the information obtained from
the transaction to identify the parties involved. The specific item
method is the preferred technique of proving financial criminal
activity because it is the easiest to present at trial and the proof
that results from its application is the most difficult for the sus
pect to refute .
There are two sides to every financial transaction: payment
and receipt. The specific item method can be used to document
the movement of money from either side of aa transaction . Point
of-payment analysis begins at the transaction's origin— the
payor of the funds. Alternatively, point-of-receipt analysis
begins with the receiver , the recipient of the funds. Usually,
the choice of which type of analysis to use is contingent upon the
TRACING FUNDS USING THE DIRECT METHOD OF PROOF 181
circumstances of the investigation . Normally, the investigator

chooses the method which appears to be the easiest.
Example of Point-of-Payment Analysis
William Drawer, president of Leo, Inc., is suspected of purchas
ing illegal drugs. During an interview with him, he denies the
allegation and contends that he is not financially able to purchase
narcotics. The investigator reviews the books and records of Mr.
Drawer's business and compares the Cash Receipts Journal (the
journal used to record the dates, sources, and amounts of money
received into the business) to the bank statements. Everything
balances . The investigator then interviews the company book
keeper who states that all payments to Leo, Inc. are received in
the mail. The bookkeeper further states that before Mr. Drawer
sees the mail, the payments are extracted and deposited into the
bank . Next , the investigator reviews Mr. Drawer's personal
finances . That review tends to support Mr. Drawer's statement
relating to his financial inability to purchase illegal drugs.
The investigator contacts Leo, Inc.'s customers and finds that
their records balance to the receipts recorded in the Leo, Inc.'s
Cash Receipts Journal . Next , the investigator reviews the
expenses recorded in Leo, Inc.'s Cash Disbursements Journal (the
journal used to record the dates, amounts, and recipients of pay
ments made by the business). The investigator locates an entry for
a $ 1,500 check made payable to Gemini Corporation. A review of
Gemini Corporation's books reveals that they have no record of
receiving the $ 1,500 check.
The bookkeeper at Leo, Inc. locates the canceled check and
provides it to the investigator. Analysis of the check shows that it
was cashed at the bank where Mr. Drawer has his personal
account and, through analysis of handwriting exemplars, a hand
writing expert determines that Mr. Drawer, not the appropriate
person from Gemini Corporation, endorsed the check. These spe
cific items, the transaction recorded in Gemini Corporation's Cash
Disbursements Journal and the canceled check, provide the proof
the investigator needs. The investigator now has a source of funds
that Mr. Drawer could have used for the purchase of illegal drugs.
182 CHAPTER 7
Example of Point-of-Receipt Analysis

Harold O'Brien is a witness in the case against AKP Paints. A
review of his bank records reveals aa $ 2,000 check made payable
to AKP Paints. The check is notated “ supplies” and the encoding
on the bottom right corner confirms the amount paid as $2,000.
Upon review of AKP Paints's Cash Receipts Journal, the investi
gator discovers that the business recorded aa $750 payment for
supplies from Harold O'Brien . The bank statement balances to
the entry made in the journal. However, there is a discrepancy of
$ 1,250 between the amount of the check and the entry in the
Cash Receipts Journal. It is this discrepancy, this specific item,
that the financial investigator will want to trace.
The investigator reviews the back of the canceled check and
sees a “ For Deposit Only ” stamp on it, indicating that the check
was deposited into AKP Paint's corporate account . Next, the
investigator reviews the deposit slip used to deposit the check. It
reveals a split deposit transaction. Only $750 was deposited into
the account while the remaining $ 1,250 was returned in currency.
Now , the investigator can question the suspect (the person who
deposited the check) as to the disposition of the $ 1,250 in cur
rency. When confronted with the proof, the suspect confesses to
cashing the check and taking the currency for her own use.
Point-of-Payment Schemes
The specific item method often becomes difficult to use as an inves
tigative technique when tracing the flow of funds from the point of
receipt. For example, in instances where payments are received in
cash or the movement of money is not reflected in a business's
books and records, tracing from the point of receipt is difficult.
Luckily, the financial investigator has other options to use in these
instances— methods of indirect proof. Those methods are dis
cussed in Chapter 8. For now , we will concentrate on applying the
method of direct proof, the specific item method, to resolving crimi
nal financial activity from the point-of-payment approach.
Financial fraud, whether in the form of kickbacks, embezzle
ment, insider trading, or money laundering, is often discernible
through investigative analysis using a point-of-payment approach.

There are various “ point-of-payment” schemes a business may
use to cover its illegal activities. These schemes, and the inves
tigative steps used to detect them, are discussed below.
Fictitious Payable Schemes'

Within a business setting, fraudulent activity is often perfected
through the establishment of fictitious accounts payable or fraud
ulent entries in the Accounts Payable journal . Through the cre
ation of fictitious vendors and false billings, fraudulent financial
transactions can occur. Detection of these transactions can best
be accomplished by analyzing the following types of records:
Accounting Books and Records
• Cash Disbursement Journals
• Cash Receipts Journals
• Ledgers
Sales Documentation
• Purchase Orders
• Invoices
• Documentation showing receipt of goods ordered, etc.

Bank Account Information
• All records of payments : canceled checks, wire transfer

receipts, receipts for purchases of cashier's checks and
money orders, and withdrawal slips
• Check Registers
• Account Statements
The most important of the above information, and often suffi

cient in and of itself, is the bank account information . When
reviewing bank account information, the investigator should look
for the following:
184 CHAPTER 7
• Payments by check and other types of account with

drawals made payable or charged to the account on which the
illicit payments are suspected. For example, if the investigator
suspects that kickbacks were paid on sales to the Teaparty
Corporation, the search would begin with checks made payable to
“ Teaparty Corporation” and continue with the analysis of those
checks as they move through the bookkeeping system.
Payments by check for services rendered. Be sure to look
into transactions involving sales commissions and consulting fees.
These types of services do not require the delivery of goods, and
relatively little documentation, other than the check itself, is
required as a record of payment.
Atypical charges for the business. Look for out-of-the
ordinary charges relating to unusual/unnatural services that the
business is not normally involved in. For example, a video pro
duction company would not normally be involved in business
transactions with a plumbing supply company.
Ghost Employee and Payroll Kickback Schemes

Illicit funds may be generated and disguised as salary payments
to fictitious or former employees . For example, payments to cur
rent employees, in the form of bonuses or expense reimburse
ments , can be returned to the payor or passed on to another
individual . In instances where ghost employee or payroll schemes
are suspected, the following records should be obtained by the
investigator from the suspect company in order to trace the flow of
funds:
Payroll and employee lists (e.g. , time and attendance

records)
• Personnel files, employment applications, tax withholding
forms, and social security numbers
• Payroll checks
Investigative attempts to identify the ghost employee or payroll

kickback scheme can be completed through the following steps:
• Compare personnel office employee records with the pay
roll records. Discrepancies should be analyzed . Any employee
who does not have taxes withheld from his or her paycheck or
does not participate in the company's health insurance program
should be scrutinized.
• Verify the employee's claimed social security number. A

fictitious employee may be given aa social security number which
does not exist .
• Look for inflated salaries and travel expenses. An

employee's normal salary may also be inflated or, more commonly,
his or her travel and expense reimbursements may be padded to
generate illicit payments. Look for unusual disbursements from
the accounts where such checks are deposited.
Once a suspicious paycheck has been identified, the flow of
the check through the bank system can be traced by using the
applicable bank statement and the bank’s proofing system.
Overbilling Schemes
Illicit funds may be added to legitimate payments for goods or
services provided by actual suppliers , with the additional
amounts being passed on by the supplier, or returned, usually via
currency to the payor for distribution . The records required for
tracing phony payables from both the original payor and any
intermediaries (shell companies and/or straw /nominee individu
als) are available to the investigator. Important indicators of over
payment schemes are :
• Notations on invoices or other billing documents that break
out “ extra” or special charges, particularly those which require no
delivery of goods
• Discrepancies between the purchase order or invoice
amount and the amount of payment
186 CHAPTER 7
• Unusually large amounts appearing on particular bills, or

bills which break aa consistent pattern as shown on the books and
records
Offbook and Currency Schemes

Using the specific item method of tracing funds from the point of
payment becomes more complex when those payments do not go
through a business's books and records or when they are made in
currency. For example, customers of the suspect's business may
demand that their illegal payments be diverted to off -book
accounts; therefore, they will not be reflected in the suspect busi
ness's books and records. These types of transactions may be dis
covered through contact with the suspect business's competitors
or by analyzing unusual costs and expenses shown on the com
pany books which are not associated with known sales or busi
ness activity.
In most industries, there is a fixed relationship between the
cost of producing and selling a particular item and the revenues
that the item generates. In other words, the amount of raw materi
als and labor used to produce a product or perform a service usu
ally is fairly consistent. The same is normally true with respect to
utility usage, transportation cost , etc. Therefore, a significant
imbalance in these ratios indicates possible unrecorded transac
tions. For example, an investigator should be suspicious if a com
pany's records show that it ordered twice the amount of raw
materials that it usually does but did not produce twice the
amount of product.
Currency payments can be traced from the point of payment
by matching the payor's currency withdrawals to the recipient's
corresponding currency deposits, expenditures, or visits to a safe
deposit box. Another strong indicator of currency payments is the
purchase of a cashier's check or a wire transfer made payable to
the recipient at or shortly after cash withdrawals or disbursements
by the payor. Unexplained or unusual currency disbursements or
withdrawals, particularly from aa business which does not nor
mally deal in currency, may itself indicate illicit transactions.
Reviewing Suspect Payments

Tracing the flow of funds from the point of payment often involves
reviewing the “ suspect payments ” themselves. In a transaction
involving a canceled check, this would include:
• Reviewing the endorsement on the check. This endorse
ment may be a signature, but more commonly it is an endorse
ment stamp in the name of the business payee. The identity of the
endorser frequently is the corrupt recipient.
Noting the location where the check was negotiated.
When the endorsement is not obvious, the identity of the bank at
which the deposit was made becomes important. The depository
bank’s stamp will appear on the back of the check as a part of the
proofing system. Through the check’s routing symbols (ABA tran
sit number and check routing symbol), the geographical location
of the depository bank can be identified and the locale of the sus
pected recipient can be determined. This type of information can
be used to determine the location of the recipient's bank account
if it becomes necessary to analyze his or her bank records.
• Checks with a second endorsement. A check payable to a
business which is endorsed by that business and then endorsed a
second time by a specific person, thereby allowing the check to
be cashed or deposited into that person's personal account, is typ
ical of aa fictitious payable scheme. Another example would be a
check payable to a third party which is endorsed by that third
party and then endorsed over to the issuer of the check.
• Checks payable to a business which are cashed-out.

Normal business practice calls for checks to be deposited .
Usually, a “ For Deposit Only ” stamp appears on the back of
deposited checks . When checks are cashed-out at a bank instead
of deposited into an account, suspicions should arise.
• Checks which fall into unexplained patterns. Unusual or
unexplained patterns of check transactions can be an indicator of
illegal activity. For example, the discovery of a pattern of checks,
one per month, written to a particular customer, with each check's
188 CHAPTER 7
amount equaling 10% of the monthly sales made to that customer,

can indicate a potential kickback situation .
If the examination of the checks themselves do not yield any
clear and convincing patterns relating to the illegal movement of
money from the point of payment, the next step would be to com
pare the record of payment to “backup documentation” in the
business's accounting system. Particular attention should be
given to the following circumstances:
• The absence of documentation to support a particular
payment. It is suspicious when no invoice is on file for payments
to suppliers or no receipt exists to indicate that materials paid for
were actually delivered and received .
• Discrepancies between the payment information and

the backup documentation. For example, the amount of a check
payable to a supplier is different from the invoice amount, or a
check payable to a person or business is different from the person
or business identified on the invoice itself.
• Coincidences in the backup documentation . Look for
invoices from several suppliers which have different names but
share the same business address. Also look for invoices from dif
ferent companies that are signed by the same person.
• Unnumbered or sequentially unusual invoices .
Unnumbered invoices are suspicious and a situation where
invoices # 101 , #102 , and # 103 are dated 30 days apart is also
suspicious.
• Alterations or photocopies of backup documentation.
Photocopies of backup documentation may be made to conceal
alterations to the originals.
Thoughts on Using the Specific ItemMethod

When using a specific item method to trace the flow of funds from
the point of payment, it is important to remember that financial
statements and accounting records are only representations of
something that should exist in the real world. A financial state
ment for a business that reports cash of $ 5,000, means that some
where that business should have $ 5,000 in cash . And , if a
company claims an inventory of $ 10,000, that inventory should
be observable. There always is an analytical relationship between
representations in financial documents and the physical goods
and assets.?
When searching for fraud, the investigator should be inquisi
tive and challenge things that appear to be out of the ordinary or
out of sequence. If sales are rising, the cost of outbound freight
should be rising. If purchases are increasing, the cost of inbound
freight should be increasing. Every business has analytical rela
tionships that should exist. Therefore, examining financial state
ment data, including bank financial statement data, to see if it
makes sense with respect to non - financial statement data is one of
the best ways to detect fraud. Investigators who ask themselves if
reported amounts are too small, too large, too early, too late, too
often , and too rare or who look for things that are reported at odd
times, by odd people, and using odd procedures are much more
likely to detect fraud than those who view the financial statements
without any hint of skepticism.3
The embodiment of such skepticism is the specific item
method of tracing the flow of funds. It provides financial proof of
the receipt or disposition of illicit funds by the suspect under
investigation.
190 CHAPTER 7
Summary
In this chapter, you were introduced to the technique most com
monly used by the financial investigator, the specific item method
of tracing funds. The proof obtained by the application of this
method is direct proof, proof precise to the point at issue . When
investigative findings reveal specific financial transactions being
paid by or received by the suspect, direct proof of aa financial
crime is achieved. Such findings reveal a specific link between
the suspect and the transactions at issue.
The specific item method can be used to trace the movement
of money from either its point of payment or its point of receipt.In
instances when specific financial events can be identified with
particular financial crimes (i.e., insider trading, kickback pay
ments, embezzlement, etc.) the specific item method can be suc
cessfully employed as an analysis technique. This method also
can be applied when financial transactions leave an audit trail,
either in a business's accounting records or a financial institu
tion's recordkeeping system .

Answer the following questions and then check your responses
with those provided at the back of the book.
1. The specific item method is known as a “ direct method of trac

.
ing funds.” What does this mean?
2. What type of information is most useful when dealing with a

fictitious payable scheme?
3. When investigating a possible payroll kickback scheme, why

would an investigator want to look into an employee's travel
expenses?
4. Describe, by example, an overbilling scheme.
5. Tracing currency payments via the specific item method is not

an easy task. Identify two situations that may indicate currency
payments in an illicit transaction .
192 CHAPTER 7
6. What is unusual about the following information compiled from

a suspect's Cash Disbursements Journal and bank statements?
1/18/91 Paid Lopez Electronics $250
2/28/91 Paid Lopez Electronics $26.50
7. Larry's Weight Club wrote a $3,500 check to Silver Ironworks,

Inc. Silver Ironworks cashed the check. Why might an investiga
tor become suspicious of this situation?
8. List three situations involving “ backup documentation ” that

would cause an investigator to become suspicious.
..............
Endnotes
Geis , Fraud Examiner's Manual, (National Association of
Certified Fraud Examiners, 1989), Section 111 , pp. 38 - 44.
2 Fraud Examiner's Manual,Section 111 , pp. 17 and 18
3 Fraud Examiner's Manual, Section 111 , pp. 13 - 19
CHAPTER 8
Tracing Funds Using Indirect Methods of Proof

n Chapter 7, the specific item method, a direct
method of proof, was discussed . This chapter
focuses on three indirect methods of proof: net
worth analysis, the expenditures method, and the bank deposit
method . Each of these methods can be used to show that a sus
pect's expenses exceed his or her known sources of income .
However, none of them can prove where the extra income comes
from . That is why the three methods are called “ indirect methods
of proof,” for, like circumstantial evidence, inference is needed to
establish the fact at issue. And just what is that fact? It's that
somehow, the individual under investigation is receiving more
income than he or she legitimately “ earns.”
With the specific item method, an investigator searches for a
specific financial transaction to investigate. With the indirect
methods of proof, an investigator gathers all sorts of financial
information and then plugs the information into mathematical for
mulas. This chapter contains an example of aa calculation for each
indirect method of proof.
• Differentiate between direct proof and indirect proof.
• Describe what types of information are gathered through
the completion of a financial profile.
• State when it is appropriate to use an indirect method of
proof.
194 CHAPTER 8
• State the requirements of proof for each indirect method of

proof.
• Write the formula for each indirect method of proof.
• Perform net worth analysis.
• Perform expenditures analysis .
• Perform bank deposit analysis.
It is not always possible to use the specific item method when
tracing the flow of funds. For example, it is difficult to use the
specific item method when cash payments are made or the move
ment of money is not reflected in aa business's books and records.
It's hard to find a specific item to investigate when transactions
are not recorded in financial records. So, while it is not always
possible to use the specific item method, the investigator need not
worry , other methods are available, indirect methods of proof.
Through indirect or circumstantial methods, the investigator can
trace the proceeds from almost any type of illegal activity— from
fraud and corruption to tax evasion or drug dealing- all from the
point of receipt .
The indirect methods of tracing funds are based on a simple,
and almost invariably true, principle
Money, in any significant amount, will eventually show up,
directly or indirectly, in the accounts, assets, or expenditures of
the recipient.
The indirect methods of proof are most useful when the sus
pect is taking currency or other payments that cannot be directly
traced . As an investigative tool, the indirect methods can corrobo
rate testimony alleging hidden illicit payments . They not only
provide the investigator with the evidence of aa financial crime, but
provide “ leads ” pointing to further investigative inquiry as well.
TRACING FUNDS USING INDIRECT METHODS OF PROOF 195
The Financial Profile?2

The specific item method relies on a microscopic view of financial
transactions through the review of books, records, or bank accounts
of the recipient and payor of illegal funds.In contrast, the indirect
methods of proof require a macroscopic view of the financial situa
tion under investigation. Since the indirect methods of proof do not
allow the investigator to directly trace transactions, he or she must
prepare an overview of the suspect's financial condition- aa finan
cial profile. This is accomplished by uncovering what the suspect
owes, owns, earns, and spends at a given point in time or over a
given period of time. Also, it entails finding out the sources and
applications of funds used to make purchases or pay expenses. The
financial profile may uncover direct proof of illegal income or hid
den assets, or circumstantially show that the suspect's expendi
tures exceed his or her known sources of funds.
A financial profile is completed via techniques used by the
investigator during the investigative process. Of major importance
to the completion of the financial profile is a thorough interview
with the suspect.Other information can be gathered through third
party contacts and from public information sources . Financial
transactions maintained within the records of financial institutions
that the suspect deals with are important sources of information in
the completion of the financial profile. Historically, illicit funds in
any significant amount eventually pass through a suspect's account
in his or her financial institution. Such movement creates a record
that can lead to other accounts, assets, and information .
When developing aa financial profile for use with any indirect
method of proof, the analysis should mirror the suspect's method of
accounting (cash or accrual). For example, if the suspect business's
accounting system is on the accrual basis, the indirect proof analy
sis should be completed utilizing the accrual basis of accounting.
The table on the next page contains information concerning the
development of aa financial profile. The left side of the table lists
typical assets, liabilities, sources of funds, and expenditures a sus
pect may own or have. The right side lists questions the financial
investigator will want to pursue to complete a detailed financial
profile.
196 CHAPTER 8
The financial Profile
Typical assets For each significant asset, determine —

Residence Jewelry • When was it acquired and from whom?
Real estate Clothing • How much did it cost ?
Bank accounts Collectibles • How was it paid for (currency, check, cashier's check, etc.)?
Stocks and bonds Pensions • What source of funds was used to acquire it?
Automobiles Home furnishings • What documentation exists for the purchase and where is it?
Insurance Boats
Cash on hand
Typical liabilities For each significant liability, determine —
Mortgage(s) • What was the original amount of the liability?
Other loans • What is the present balance due?
Lines of credit • When was the liability incurred ?
Credit cards Installment purchases • What was the purpose for the loan or debt?
Accounts payable • How were the proceeds used and where were they deposited?
Taxes and other bills • What security ( collateral), if any, was given for the debt?
Alimony and child support • 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 Insurance proceeds • What was the total amount during a given period ?
Gifts Commissions and fees • What was the source ?
Rental income Awards • How was it paid for (currency, check, by other means)?
Dividends Inheritances • When were the funds received ?
Interest Disability payments • Where was it deposited ?
O
Sale of assets • How was it spent?

• What documentation exists (i.e., W - 2 or 1099 form ) and
where is it?
-
Typical expenditures For each major expenditure item , determine -

Rent and mortgage Clothing • What was the total amount spent?
Health costs Utilities
• How was it paid for (currency, check, credit card, etc.)?
Interest on loans Food • Where were the funds obtained to pay the expense?
Credit cards Insurance • What documentation (i.e., receipts, bills, etc.)
Car payments Travel exists and where is it ?
Travel • When was the payment made?
Net Worth Analysis

Any recipient of funds, honest citizen or suspect, has only four
possible ways of disposing of that income:
• Saving it. An individual may place income in a financial
institution or keep it in his or her possession.
• Buying assets. Individuals may expend their income on
assets .
• Paying off debts. Individuals may use income to reduce

their liabilities .
• Spending it. An individual may use his or her income to

make personal or business expenditures.
Indirect methods of proof show the relationship between a
suspect's receipt and subsequent disposition of funds. The results
of the indirect methods of proof do not identify specific financial
transactions entered into by the suspect (i.e. they cannot prove
that illicit funds were used to pay the mortgage ), however, they do
reveal that the suspect was able to partake in financial transac
tions above and beyond his or her known sources of funds .
Indirect methods of proof result in inferences— inferences that
an unknown source of funds must be present and available to the
suspect .
Net worth analysis begins with the completion of a suspect's
financial profile. Through identification of the suspect's assets ,
liabilities, income, and expenses, a net worth statement (the dif
ference between a person's assets and liabilities at a given point
in time) can be determined. Once completed, changes in the sus
pect’s net worth can be compared to his or her known income, and
differences, if any, may be inferred as coming from unknown
sources. (Note: For the purposes ofthis textbook, payments received
from legal sources will be labeled as known sources and payments
determined to be received from illegal sources will be labeled as
unknown sources.)
198 CHAPTER 8
The Net Worth Formula

The basic component in computing net worth is the establishment
of a starting point , the base year. For investigative purposes , the
base year is the year prior to the year that the alleged illegal
activity began. For example, if the investigator believes that the
suspect began embezzling money in 1991 , 1990 becomes the
base year, the point of reference for comparison to subsequent
years' net worth changes . Why does the investigator need to
establish the suspect's financial profile for 1990? Because in
1990, the suspect was living as he or she “ normally ” would
without income from the alleged embezzlement.
Once the investigator has developed financial profiles for the
base year and each of the years of alleged illegal activity, the net
worth analysis formula can be applied . The formula for computing
funds from unknown sources using the net worth method is:
Net Worth Analysis Formula
Assets
Minus: Liabilities
Equals Net worth

Minus : Prior's year's net worth
Equals Increase in net worth from previous year
Plus : Known expenses *
Equals Total net worth increase
Minus : Funds from known sources
Equals Funds from unknown sources
* For net worth purposes, the payment of an expense repre

sents the reduction of an asset. Therefore, these reductions must
be accounted for and added back into the calculation.
Performing Net Worth Analysis

The suspect, Jim Dealer, is being investigated for some alleged
illegal activity which occurred in 1991 and 1992. This means
that the investigator must develop financial profiles for the years
1990 , 1991 , and 1992. The results of the profiles are described
below and are calculated into the net worth computation on the
next page .
(a) Mr. Dealer stated that as of 12/31/90 he had $ 1,000 cash -on
hand . He had no cash-on-hand at the end of 1991 and 1992 .
(Cash-on-hand is currency in possession of the suspect.)
(b) On 12/31/90, Dealer's bank account reflected a balance of
$ 1,500. On 12/31/91, it contained $4,750 and on 12/31/92, it
contained $5,225. The account earned $250 in interest in 1991 ,
$475 in 1992. Total deposits in 1991 were $22,160, with rede
posits of $660. Total deposits in 1992 were $ 19,585, with rede
posits of $ 100.
(c) As of 12/31/90 , Dealer owned $ 1,000 worth of jewelry. In

1991 , he purchased jewelry worth $5,000, and in 1992, he
bought $6,000 more.
(d) Sometime in 1990, Dealer purchased aa boat costing $ 17,500.
He still owned the boat as of 12/31/92 .
(e) During 1992, Dealer purchased an $ 18,250 car. He paid cash.

(f) Dealer purchased aa $ 150,000 residence on 1/1/91 . He made a
cash downpayment of $50,000 and financed the balance, interest
free.
(g) As of 12/31/90 , Dealer owed $275, interest free, to a finance

company. He made no payments on this note during 1991 or
1992 .
(h) Dealer borrowed $ 3,000, interest free, from aa loan company on

6/30/91. Beginning 7/1/91, he made monthly payments of $ 100.
(i) Beginning 1/1/91 , Dealer made monthly payments of $500 per
month on his new residence. He made eleven similar payments in
1991 and twelve similar payments in 1992.
(j) Dealer paid $ 1,460 on his credit cards in 1991 and $ 3,000 on
them in 1992 .
(k) Dealer was able to document personal living expenses in

addition to those listed in ( a) through (j). In 1991, the expenses
totaled $ 11,000 , and in 1992 , they were $ 10,000.
(1) Dealer earned $ 25,200 from his job in 1991 and $22,200 in
1992 .
200 CHAPTER 8
Net Worth Analysis

Suspect , Jim Dealer
Assets Base Year Year One Year Two
( 1990) ( 1991 ) ( 1992)
Cash on hand (a) $ 1,000 0 0
Bank account balance (b) 1,500 4,750 5,225

Jewelry (c) 1,000 6,000 12,000
Boat (d) 17,500 17,500 17,500
Car (e) 0 0 18,250
Real estate (f) 0 150,000 150,000
Total Assets $ 21,000 $ 178,250 $202,975
Liabilities
Note payable - finance company (g) $ 275 $ 275 $ 275
Loan (h) 0 2,400 1,200

Mortgage on real estate (f, i) 0 94,000 88,000
Total Liabilities $ 275 $ 96,675 $ 89,475
Net Worth (assets - liabilities) $20,725 $81,575 $ 113,500

Minus: Prior year's net worth 20,725 81,575
Equals: Increase in net worth $60,850 $ 31,925
Plus : Known expenses
Credit card payments (j) $ 1,460 $ 3,000
Other personal living expenses (k) 11,000 10,000
Equals: Total net worth increase $73,310 $ 44,925
Minus: Funds from known sources
Interest on bank account (b) $ 250 $ 475
Wages (1) 25,200 22,200
Equals : Funds from unknown sources $47,860 $22,250
A review of the previous table shows that between 1990 and

1992, Jim Dealer's assets increased significantly. In 1991 , he was
able to purchase a $ 150,000 house (with a $50,000 downpay
ment) and $ 5,000 worth of jewelry. Also, his bank account
increased by $3,750. All this from a man with an income of
$25,450. Mr. Dealer's assets increased again in 1992 and, in that
ame year, he was able to decrease his liabilities.
Keys to Net Worth Analysis

From the net worth analysis done on Jim Dealer, it seems pretty
obvious that he has some other source(s) of funds that he is keep
ing quiet about . That is , if the information the investigator
obtained while doing the financial profiles is complete and accu
rate. The key to a successful net worth analysis is reliable base
year, or “ opening net worth,” information. The starting point must
include all assets and liabilities of the suspect as of that time. If
assets or liabilities are uncovered at a later date, it will cast doubt
on the entire analysis and require a complete recalculation.
An inverse relationship exists between one year and the next
in a net worth analysis. For example, an understatement of the net
worth in one year will result in an overstatement of the increase in
the net worth for the subsequent year. Conversely, an overstate
ment of the net worth in a year results in an understatement of the
increase in net worth for the subsequent year. Accordingly, the
investigator should pay special attention to the following elements
when completing a net worth analysis:
Keys to Net Worth Analysis • Determining Cash-on-Hand. When developing a financial
• Cash -on -hand profile to use with net worth analysis, possibly the most important
• Cash in banks asset to establish is “ cash - on -hand . ” For net worth purposes,
• Asset Valuation cash-on- hand represents currency in the possession of the sus
• Known Expenses pect. This does not include currency in financial institutions or
currency that is tied up in investments or other assets. Cash -on
hand is all the suspect's currency , whether on the person, under
a mattress, or buried in the backyard. The inability of the investi
gator to establish aa firm and accurate amount of cash-on-hand can
be fatal to the investigation. Suspects may try to inflate their cash
on-hand figure by saying that they have more cash-on-hand than
202 CHAPTER 8
they really do. “ I was able to buy that boat because I had $20,000
stuffed away in a cookie jar.” This alleging a “ cash hoard” is a
common defense in a net worth case .
Cash-on-hand is almost always shown by circumstantial evi
dence. The best source for determining this figure is during the
interview process with the suspect. Questions such as: “ Did you
ever have more than $ 100 in cash -on -hand ?” or, “ more than
$ 500?” or, “more than $ 1,000 ?” may result in admissions that
can be used to establish cash-on- hand at a particular time. The
location and denomination of cash -on -hand may also be useful
information to support or refute a suspect's claims. Even without
an interview or answers to the questions , an investigator can
determine a suspect's cash- on- hand . It can be determined
through analysis of previously filed financial statements, loan and
credit card applications, and other records relating to the sus
pect's financial activity.
• Cash in Banks. Most likely, the suspect will have funds
deposited in financial institutions. Since many account state
ments have cut-off dates other than the end of the net worth
analysis period, they must be reconciled to determine the bal
ances as of the end of the period. Unusual transactions (large
deposits and /or withdrawals) that occur near the end of the analy
sis period must be traced to their ultimate source or disposition.
Unusual financial transactions can affect the net worth analysis.
For example, a large withdrawal of funds that was not used to pur
chase an asset, reduce aa liability, make a personal expenditure, or
pay a business expense, must be treated as an increase in cash on
hand . Similarly, large deposits made early in the analysis year
must be scrutinized and then allocated to the appropriate net
worth year. A consistent treatment of transactions is vital to the
validity of the net worth analysis .
• Asset Valuation . All assets should be valued at cost as
opposed to fair market value . Subsequent appreciation or depre
ciation of assets is ignored for purposes of net worth analysis.
• Known Expenses. The amount of a suspect's expenditures,
his or her actual “ cost of living,” can be difficult to document.
The amount a person spends on items such as food, entertain
ment, cleaning, clothing, health and beauty aids, and sundry

items is difficult to obtain. Therefore, estimates, if used, should
be low or eliminated entirely. Any doubts should be resolved in
favor of the suspect. Assuming that the net worth will still show
substantial unexplained funds, the result will be an even more
convincing demonstration of the dependence on illegal sources .
A Court-Approved Method
Because net worth analysis provides circumstantial evidence, its
validity as a method of proving criminal activity had to be
approved by the courts . The landmark case , decided by the
Supreme Court in 1954, that established net worth analysis as
prima facia evidence of a crime was Holland v. United States,348
U.S. 121 , 75 S.St. 127. An overall description of a net worth
method is also set forth in United States v. Sorrentino , 726 F.2d
876, 879, 880 (1st Cir. 1984) and is stated in part as follows (note
that these cases relate to Federal income tax evasion, thus the ref
erences to terms relating to taxability):
“The government makes out a prima facia case under the
net worth method of proof if it establishes the defendant's
opening net worth ( computed as assets at cost basis less lia
bilities) with reasonable certainty and then shows increases
in his net worth for each year in question which, added to
his non-deductible expenditures and excluding his known
non -taxable receipts for the year, exceeded his reported tax
able income by a substantial amount. The jury may infer
that the defendant's excess increases represent unreported
taxable income if the government either shows a likely
source or negates all possible non -taxable sources; the jury
may further infer wilfulness from the fact of underreporting
coupled with the evidence of conduct by the defendant tend
ing to mislead or conceal.”
The Court established the following three requirements that

the investigator must meet in order to establish a prima facia net
worth case :
204 CHAPTER 8
• Establish aa reliable opening net worth

• Investigate all relevant leads that might show the suspects
innocence
• Establish a likely taxable source of income together with

evidence indicating an increase in net worth
How do investigators establish a prima facia net worth case?
Well, through the development of a financial profile, they can
establish аa reliable opening net worth . During this same process,
investigators can develop relevant leads indicating potential non
taxable sources of net worth increase (gifts, inheritances, insur
ance settlements, etc.). Investigators also must either prove a
likely source of taxable income for the suspect or negate all non
taxable sources of income. A “ likely source of income” does not
have to be from the suspect's principal business activity. Sources
of net worth increases could be from interest or dividend income,
gambling winnings, or from transactions involving illegal activi
ties (narcotics, embezzlement, kickbacks , or other fraudulent
activity) .
Expenditures Method
With the expenditures method, a comparison is made between the
suspect's known expenditures and known sources of funds during
a given period of time . Any excess expenditures must be the
result of income from unknown sources. The expenditures method
also can be used to compute “cash-on -hand” for the base year of
a net worth computation .
In theory, the expenditures method is closely related to net
worth analysis . They are merely accounting variations of the same
principle . Both of these indirect methods of proof look at a sus
pect's source of funds, expenditures, assets , and liabilities .
However, each method examines the items in a different way.
Let's take another look at our suspect, Jim Dealer. Through the
completion of financial profiles for the years 1990, 1991 , and
9
1992 , an investigator was able to determine that Mr. Dealer's

bank account held $ 1,500 in 1990 , $4,750 in 1991, and $5,225

in 1992. Each of these figures is used in the net worth computa
tion in the table on page 90. However, in the expenditures
method, the investigator will look at only the net effect (the differ
ence between the ending balance and beginning balance) of a
transaction ( increase of an asset or decrease in a liability). In Jim
Dealer's case , the investigator will note a $3,250 increase in
Dealer's bank account between 1990 and 1991 , and aa $475
increase between 1991 and 1992. With the expenditures method,
only the year - to -year increases or decreases in the suspect's
assets and liabilities are considered for analysis purposes. When
the suspect's assets and liabilities remain unchanged during the
period, they are not listed in the analysis.
The Expenditures Method Formula

The formula for computing funds from unknown sources using the
expenditures method is as follows:
Expenditures Method Formula
Total expenditures
Minus : Known sources of funds
The two main factors in the above formula are expenditures

and sources of funds. But the investigator also gathers information
concerning assets and liabilities . So, how does this information fit
into the formula ?
As was stated previously, the expenditures method focuses on
the net effect of aa transaction . So, if an asset or liability is
involved in a transaction, it will be classified as either an expen
diture or a source of funds— depending on its net effect ( increase
or decease). The table on the next page classifies the net effect of
different types of transactions.
206 CHAPTER 8
Expenditures Method Transaction Treatment

If during the period under analysis, the net effect of аa transaction results in
an increase or decrease for the period, this net effect is recorded as a(n):
Expenditure (Application of Funds) Source (Source of Funds)
• When cash -on -hand increases • When cash -on-hand decreases
• When bank accounts increase • When bank accounts decrease
• When assets increase • When assets decrease
• When liabilities decrease • When liabilities increase
• When personal living • When loans, gifts, or inheritances

expenses are made are received
• When cash expenditures are made • When assets are sold
• When salaries or business
profits are earned
• When other sources of
income are known
A sample expenditures computation is found on the next

page. Note that, unlike the net worth analysis computation, there
are no figures listed for the base year. And, unlike the net worth
analysis, the dollar amounts shown reflect the differences between
one year and the next, not an absolute amount.
Expenditures Computation
Year One Year Two
Application of funds
Increase in cash -on-hand $ 0 $ 1,000
Increase in cash in banks 5,000 2,500
Increase in inventory 5,000 12,500
Increase in loans and accounts receivable 1,000 3,000
Increase in furniture and fixtures 0 1,500
Increase in real estate 0 25,000
Decrease in accounts payable 500 0
Decrease in notes payable 0 5,000

Decrease in mortgage payable 13,000 0
Personal living expenses 14,000 12,300
Federal income tax 1,100 1,000
1,500 0
Gifts made
Total application of funds $ 41,000 $63,800
Minus :
Known sources of funds
Decrease in cash-on-hand $ 500 0

Decrease in securities 3,500 0
Increase in notes payable 10,000 0
Increase in mortgage payable 0 18,000

Increase in accumulated depreciation 500 1,000
Life insurance proceeds 0 8,100
Inheritance 0 5,000
Total sources of funds $ 14,500 $ 32,100
Equals: funds from unknown sources $ 26,600 $ 31,700
The difference between the amount of the suspect's expendi

tures and his or her known sources of funds is attributed to
unknown sources .
The table on page 200 contains the net worth analysis of our
suspect, Jim Dealer. The following example presents the same facts
relating to the Jim Dealer financial investigation, only this time the
expenditures method is used. The figures in the table reflect the
financial profile information found on page 199.
208 CHAPTER 8
Expenditure Analysis
Suspect , Jim Dealer
Year One Year Two
( 1991 ) (1992)
Expenditures
Increase in bank balance (b) $ 3,250 $ 475
Purchase of jewelry (c) 5,000 6,000
Downpayment on house (f) 50,000 0
Purchase of car (e) 0 18,250
Yearly mortgage payments (i) 6,000 6,000
Credit card payments (j) 1,460 3,000
Loan repayments (h) 600 1,200
Total expenditures $77,310 $ 44,925
Cash-on-hand (a) $ 1,000 $ 0

Interest on bank account (b) 250 475
Loan (h ) 3,000 0
Wages (1) 25,200 22,200

Total known sources of funds 29,450 22,675
Equals: Funds from unknown sources $ 47,860 $ 22,250
In the Jim Dealer example, both the net worth and expendi
tures methods of tracing the flow of funds resulted in identical
bottom line figures. In each case, $ 47,860 in funds from unknown
sources was discovered in 1991 and $22,250 was discovered in
1992.
As with the net worth method, there is no statutory provision
expressly authorizing the investigative use of the expenditures
analysis for criminal purposes. Accordingly, court cases have
established “ case law ” that sets forth the requirements of proof to
establish a prima facia expenditures case .3 The elements of proof
requirement for the expenditures method is identical to that of the
net worth method of proof:
TRACING FUNDS USING INDIRECT METHODSOF PROOF 209
• Establish aa firm starting point

• Establish a likely source of income
• Investigate leads which tend to establish the subject’s
innocence
... .....
Bank Deposit Method
Through bank deposit analysis, unknown sources of funds are
located through analysis of bank records and other financial
transactions entered into by the suspect. The bank deposit
method is applied in situations where assets and liabilities are
constant from year to year and indications of extravagant expendi
tures are nonexistent, but investigative findings reveal that the
suspect's known sources of income are being deposited into finan
cial institutions.
Bank Deposit Analysis Formula

The formula for computing funds from unknown sources using the
bank deposit method is:
Total deposits to all accounts
Minus : Transfers and redeposits
Equals Net deposits to all accounts
Plus: Cash expenditures
Equals Total receipts from all sources
The details of each component of the bank deposit formula

are described on the following pages.
Total Deposits to All Accounts
The bank deposit method considers all deposits made by a sus
pect, no matter what type of financial institution (banks, savings
210 CHAPTER 8
and loans, brokerage houses, credit unions, etc.) is involved. Also

included in the “ total deposits” element of the bank deposit for
mula is the amount of cash-on-hand the suspect accumulated
during the period under investigation.
A key to establishing “ total deposits” is to remember that
only funds actually deposited into an account are included. If
several checks are listed on a deposit slip and the suspect
deducts an amount to be returned to him or her in cash (a split
deposit), only the net amount of the deposit should be used in
computing total deposits.
Transfers and Redeposits
The transfer of funds between a suspect's bank accounts (i.e. , tak
ing money from a checking account and depositing it into a sav
ings account), and funds that are withdrawn and then redeposited
(i.e. , aa “ non -sufficient funds” check) must be considered in the
bank deposit formula . These represent duplicate items for analy
sis purposes and must be subtracted from total deposits to arrive
at the netdeposits to all accounts.
Cash Expenditures
Cash expenditures consist of the total outlay of funds made by the
suspect during the period in question minus net bank disburse
ments. Cash expenditures are calculated by the following formula:
Cash Expenditures Formula
Total Outlay of Funds
Minus: Net bank disbursements
Equals Cash expenditures
The suspects total outlay of funds for the period under analy
sis includes all payments in currency or by check . For analysis
purposes, there is no need to determine which part was paid by
currency and which part was paid by check. Total outlays could
include purchases of capital assets or investments, loan repay
ments, known expenses, etc.
One of the elements in the formula shown above is “ Net Bank
Disbursements .” To determine this element, a separate calcula
tion is needed . This calculation is made as follows:
Net Bank Disbursements Formula
Net deposits to all accounts

Plus : Beginning balances
Equals Net bank funds available
Minus : Ending balances
Equals Net bank disbursements
Net bank disbursements represent the maximum amount (in

dollar terms) that could have been paid by the suspect through
financial institution check withdrawals.
Funds from Known Sources
Funds from known sources include , but are not limited to:
salaries, business profits, gifts received, loans received, and
inheritances. Funds from known sources are subtracted from total
receipts to derive the funds from unknown sources .
Sample Bank Deposit Analysis

The findings below pertain to the movement of money for a sus
pect named Dan Street.
The information is used in the bank deposit computation
found on the next page.
Reference
Number Type of Transaction Amount
(1 ) Fees and commissions (known income) $ 320,000

(2) Total deposits into all accounts 400,000
(3) Transfers between accounts 70,000
(4) Known expenses 50,000
(5) Cash placed into and maintained in a 25,000
safe deposit box during the period under
investigation
(6) Deposit of proceeds from loan into 25,000
checking account
(7) Purchase of a car from the proceeds of a 20,000
cash gift
(8) Cash on hand at beginning of period 0
under investigation
(9) Net bank disbursements 40,000
212 CHAPTER 8
Bank Deposit Analysis

Suspect, Dan Street
Ref #
Total Deposits $ 400,000 (2)
Minus : Transfers between accounts 70,000 (3)
Equals : Net deposits $330,000
Plus: Cash Expenditures

Known expenses $ 50,000 (4 )
Increase in cash on hand 25,000 (5,8)
Purchase of car 20,000 (7)
Total Outlay of Funds 95,000
Minus : Net bank disbursements 40,000 ( 9)
Equals: Cash Expenditures $55,000
Equals: Total receipts $ 385,000

Fees and commissions $ 320,000 (1)
Loan proceeds 25,000 (6)
Cash gift 20,000 (7)
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Total from known sources $365,000
Equals : Funds from unknown sources $ 20,000
The example on the next page presents the information relat

ing to the Jim Dealer financial investigation in the bank deposit
method format. Again, the figures contained in the table reflect
the financial profile information found on page 199.
Bank Deposit Analysis

Suspect, Jim Dealer
1991 1992
Total deposits (b) $22,160 $ 19,585

Minus: Redeposits (b) 600 100
Equals: Net deposits $ 21,500 $ 19,485
Outlays
Jewelry purchase (c) $ 5,000 $ 6,000
Downpayment on house (f) 50,000 0
Car purchase (e) 0 18,250

Monthly mortgage payments (i) 6,000 6,000
Credit card payments (j) 1,460 3,000
Loan repayments (h) 600 1,200
Total outlays $ 74,060 $44,450
Minus : Net bank disbursements * $ 18,250 $ 19,010
Equals : Cash disbursements $55,810 $ 25,440
Plus: Cash disbursements 55,810 25,440

Equals: Total receipts $77,310 $ 44,925
Minus: Cash from known sources

1,000 0
Cash-on-hand (a)
Bank account interest (b) 250 475
Loans (h ) 3,000 0
Wages (1) 25,200 22,675

Total known sources $29,450 $22,675
Minus: Known sources 29,450 22,675

214 CHAPTER 8
*Net Bank Disbursements Computation

1991 1992
Net bank deposits $ 21,500 $ 19,485

Plus: Beginning balance 1,500 4,750
Equals : Net bank funds available $23,000 24,235
Minus : Ending balance 4,750 5,225
Equals: Net bank disbursements $ 18,250 $ 19,010
In the Jim Dealer example, all three indirect methods of proof

resulted in identical bottom line figures. In each case, $47,860 in
funds from unknown sources was discovered in 1991 and
$22,250 was discovered in 1992.
Since there is no statutory authority for using the bank
deposit method of proof, authority stems from case law . The evi
dentiary facts most often used and accepted by the courts, to
establish a prima facia bank deposit case are :
• The suspect was engaged in aa lucrative income-producing
business or profession
• The suspect made periodic deposits of funds into accounts
in his /her own name, over which he/she had exercised con
trol
• A thorough analysis of deposits was made by the investigat

ing agent in order to negate the likelihood that the deposit
came from non-taxable sources
• Unidentified deposits have the inherent appearance of

income
The principle defense in a bank deposit case is that the

deposits themselves represent non-taxable sources (i.e. other peo
ple’s money, prior accumulated funds, redeposits of cash with
drawals , or transfers of funds between accounts). This type of aa
defense can be overcome by a thorough analysis of the deposit
and withdrawal activity in the accounts under investigation.
Use of Each Indirect Method of Proof

Since there are three methods of indirect proof, an investigator
must be able to determine which method to apply to a given situa
tion. The following section explains when each indirect method of
proof is applicable .
Net Worth Analysis

Net worth analysis is often used when several of the suspects
assets and/or liabilities have changed during the period under
investigation and one of the following conditions exists:
• The suspect maintains no books and records
• The suspect's books and records are not available
• The suspect's books and records are inadequate
• The suspect withholds his or her books and records
In addition to being used as a primary method of proving income

in civil and criminal financial cases, net worth analysis can also
be used to:
• Corroborate other methods of proving income

• Verify the accuracy of known or reported income
Expenditures Method
The expenditures method is used as a primary method of estab
lishing funds from unknown sources when a specific item case
cannot be made . One of the following conditions must exist:
• The suspect maintains no books and records
• The suspect's books and records are not available
• The suspect's books and records are inadequate
• The suspect withholds his or her books and records
In cases where the suspect has several assets and liabilities
216 CHAPTER 8
whose cost basis remains the same throughout the period in

which you are interested, the expenditures method may be pre
ferred over net worth analysis because a more brief presentation
can be made in the computation. Assets and liabilities which do
not change during the period under investigation are omitted from
the expenditures statement.
Bank Deposit Method

The bank deposit method is recommended as a primary method of
proof when most of the subject's income is deposited and the sub
ject's books and records are :
• Unavailable
• Withheld
• Incomplete
The use of the bank deposit method is not limited to the
above circumstances. If the suspect's books and records appear to
be complete and accurate, the methods can be used and there is
no requirement to disprove the accuracy of the books and records
in order to do so.
Indirect Methods of Proof an Investigative Tool

Besides being used to prove income, the indirect methods of proof
can be used as an investigative tool. They can help evaluate infor
mation provided by informants and can be used to show that a
suspect warrants investigation or prosecution. At trial, an indirect
method of proof can be used to convince the jury that the suspect
is guilty. The following scenario will be used to illustrate these
usages .
An informant comes into an investigator's office and provides

information concerning Billy Bob Smith. According to the infor
mant, Billy Bob has embezzled money from the bank where he is
employed. The informant does not know how much money has been
taken, but alleges it is substantial.
An indirect method of proof can be used to evaluate the infor

mant's allegation. A net worth, expenditures, or bank deposit
computation could substantiate the informant’s allegation and
indicate Billy Bob Smith has funds in excess of his legitimate
income. This analysis would show that an investigation is war
ranted .
While conducting the investigation, indirect methods of proof
can be used as a measuring device. This investigative tool will
indicate whether aa substantial portion of the embezzled funds
have been identified . For example, suppose the investigator uses
the specific item method of proof and documents three acts of
embezzlement by Billy Bob. In each case, Billy Bob took $5,000.
However, the investigator's indirect method of proof computation
shows $75,000 of unknown income. The investigator has docu
mented only 20% of the embezzlement through the use of the spe
cific item method. The investigation should be pursued further.
Now , if the indirect method of proof computation reflected
$20,000 of unknown income instead of $75,000, the investigator
may decide to stop the investigation and present his or her find
ings to the prosecutor since it appears the major portion of the
embezzlement has been documented.
The approach described above also can be used to convince a
supervisor to allocate resources necessary to an investigation or
prosecutors to take a case to trial. While the specific item method
may document three acts of embezzlement, an indirect method of
proof may indicate $ 100,000 was received from the embezzle
ment. This may convince a prosecutor to indict a suspect. It also
may convince a jury that on three occasions Billy Bob Smith did
embezzle money from his employer.
Indirect methods of proof also are useful in money laundering
and forfeiture investigations. They can provide the information
the investigator needs to prove that an asset was purchased with
money obtained through illegal activity. Money laundering and
forfeiture investigations are discussed in Chapter 11 .
218 CHAPTER 8
Summary
Since the key to proving a financial crime often rests on a showing
of the suspect's disposition or receipt of illegal funds, the ability
to follow the flow of funds and the movement of money is of
utmost importance to a financial investigator.
The specific item method, the method of direct proof dis
cussed in Chapter 7, relies on a microscopic view of the move
ment of money through a suspect's books and records or into and
out of the suspect's bank accounts. In contrast, indirect methods
require a macroscopic view of the financial situation. To prepare
such an overview of the suspect's financial condition requires that
the investigator complete a “financial profile” or detailed finan
cial statement of what the suspect owns, owes, earns, and spends
during the particular time period under examination. The finan
cial profile identifies the assets, liabilities, expenses, and expen
ditures of the suspect. Additionally, it details the identified
sources and applications of the funds used to make the purchases
and payments. Through the use of the financial profile, financial
events can be identified which trace the movement of money by
indirect means .
Net worth analysis is one indirect method of proof. This
analysis is based on the theory that increases or decreases in a
person's or business's net worth, during a specific period, results
in the identification of unknown/illegally received funds. The net
worth formula is shown below.
Net Worth Analysis Formula

Assets
Minus : Liabilities
Equals Net worth

Minus: Prior's year's net worth
Equals Increase in net worth from previous year
Equals Total net worth increase
Expenditures analysis is aa second indirect method of tracing

the flow of funds. In the expenditures method, a comparison is
made between known expenditures and known sources of funds
during a given period of time. This analysis concludes that any
excess expenditures must result from unknown funds received by
the suspect. The expenditures formula is:
Expenditures Method Formula
Total expenditures
Bank deposit analysis is another method of tracing the receipt of

unknown funds by indirect means. Through analysis of bank
records and known sources of funds, aa determination of funds
received from unknown sources is derived . The bank deposit for
mula is shown below.

Total deposits to all accounts
Minus : Transfers and redeposits
Equals Net deposits to all accounts
Plus : Cash expenditures
Equals Total receipts from all sources
Minus : Funds from known sources
220 CHAPTER 8

1. When is it appropriate to use an indirect method of proof?
2. The base year is a key factor in the net worth computation.

Explain why.
3. In an expenditures analysis, what effect does understating the

“ known sources of funds” have on the computation?
4. Compare and contrast the net worth and expenditures methods

of tracing the flow of funds.
5. What is meant by the statement, “ the specific item method

represents a microscopic view of the movement of money, whereas
indirect methods represent a macroscopic view of financial activ
ity?”
6. When using the expenditures method, you must determine if a

transaction is an expenditure or source of funds. Review the fol
lowing list of transactions and for those that are expenditures,
place an “ E ” in the blank space that precedes the transaction ; for
those that are sources of funds, place an “ S” in the blank .
a . Suspect has a bank account balance of $ 1,300 on

January 1 , 1991 , and $ 1,600 on December 31 , 1991.
b. Suspect's mortgage decreased from $27,500 to
$ 25,200 during the year.
c . Suspect's beginning inventory was $ 52,000 and end
-
ing inventory was $ 38,000.
d. Suspect sold stock costing $ 5,000 for $ 8,000.
e. Suspect paid $ 13,250 for aa new car.
f. Suspect embezzled $ 40,000 from his employer.
g. Suspect took out a $50,000 loan to purchase aa boat.
h . Suspect donated $ 10,000 to the University of Higher
Education .
7. Given the following scenario and facts, compute the subjects

funds from unknown sources using net worth analysis.
Scenario
Richard Ross operates a flower shop downtown. It is alleged that
this business is a “front” for his bookmaking and loan sharking
activities.
Facts
a . You find a financial statement signed by Ross and dated
December 31 , 1991. The statement indicates that Ross had
$ 1,000 cash on hand.
b . Ross has a checking account which he opened on June 1 ,
1991. His balance as of December 31 , 1991 was $4,000. During
1992, Ross made total cash deposits of $30,000 and withdrawals
of $25,000. His balance as of December 31 , 1992 was $9,000.
During 1993, Ross made total cash deposits of $ 25,000 and with
drawals of $ 32,000. His balance as of December 31, 1993 was
$2,000.
c.
. A search of your county real estate records shows that Ross
purchased his present home in 1991 for $ 130,000 and that he
obtained aa $ 30,000 mortgage . Real estate taxes on the property
222 CHAPTER 8
amounted to $ 1,500 for each of the years 1992 and 1993. Contact
with the lending institution shows that Ross made monthly pay
ments of $ 1,000 to the lending institution during the subject
years . The mortgage balances are as follows :
• December 31 , 1991 $ 98,000
• December 31 , 1992 $ 96,500
• December 31 , 1993 $94,500
Interest payments are as follows:
• 1992 $ 10,500
• 1993 $ 10,000
d. Ross bought a new car in April, 1991. He paid $25,000 cash .

e. City records indicate that Ross applied for a building permit in
1992 for the construction of a swimming pool in his backyard.
Contact with the pool construction company reveals that Ross
paid $20,000 for the pool . He made aa $ 10,000 cash downpayment
and received an interest-free loan from the pool company for the
remaining $ 10,000. The pool was completed in June, 1992. Ross
made monthly payments of $500 to the pool company. The loan
balance on December 31 , 1992 was $7,000 and on December 31 ,
1993, the loan balance was $ 1,000.
f. An informant stated that since 1991 , Ross had maintained a
$ 1,500 a month apartment for his girlfriend, Becky Perry. The
informants information was verified as being accurate .
g. During your investigation, you find that on February 28, 1992,
Ross purchased a diamond ring and necklace for $25,100 cash
and on December 23,1993, he paid $ 15,900 cash for aa mink coat.
h. During an interview with Ms. Perry, she told you that in addi
tion to the apartment, Ross provided her with a new car which he
leased on January 1,1992. Contact with the auto leasing company
revealed that Ross made lease payments of $ 300 a month during
1992 and 1993 .
i . Information obtained from a local boat company shows that

Ross purchased a boat on June 4, 1993 for $24,000.
j . The county judgment index shows that Ross borrowed $ 5,000

from a local finance company in 1990. He has never made any
repayments.
k. Records of the local travel agency disclosed that Ross took his
girlfriend on a vacation to the Orient in 1993. It cost $ 12,000 .
1. You interviewed Ross and he showed you the books and
records for his flower shop which indicated that he had a net
profit of $40,000 in 1992 and $45,000 in 1993 .
Net Worth Analysis Computation

224 CHAPTER 8
8. Given the scenario and facts listed for question 7, compute

the subjects funds from unknown sources using the expenditures
method .
Expenditures Method Computation

9. Given the scenario and facts listed for question 7, compute

the subject's funds from unknown sources using the bank deposit
method .
Bank Deposit Method Computation

226 CHAPTER 8
Endnotes
Geis, Fraud Examiner's Manual, (National Association of
Certified Fraud Examiners, 1989), Section 1ll , .
p. 46.
ON
NO
2 Fraud Examiner's Manual, Section 111 , pp. 47 - 49.

-
3 U.S. v. William R. Johnson (319 U.S. 503, 63 S. Ct. 1233, 43-1

USTC 9470)
4 U.S. v.Gleckman (80 F 2d 394 (CA-8), 35-2 USTC 9645)

CHAPTER 9
Planning, Conducting, and Recording an Interview

* Talk is cheap because supply exceeds demand. ”
The above statement may be true in many situa
TE tions, but when it comes to an investigator try

ing to get answers out of a witness , the
opposite will probably happen. One of the most important skills
investigators can develop is the ability to get people to open up
and talk to them. In this chapter, you will learn about the “ art ” of
interviewing. Yes, it is an art because those who do it well are
more successful than those who shrug interviewing off as just
“ asking questions and writing down answers.”
An interview is more than just going to someone's house ,
knocking on the door, and then asking questions. It takes plan
ning. If you come across in a threatening manner or can't ade
quately explain why you need to interview a witness, you'll never
get any voluntary cooperation. If you ask complex questions or
don't allow witnesses to tell their story in their own words, you're
not going to get what it is you are after. And finally, if you cannot
adequately convey to others what you found out during the inter
view, it may as well not have taken place. The “ art ” of interview
ing consists of three phases- planning, conducting , and
recording , all of which are discussed in this chapter.
• State the purpose of aa financial interview .
• List the objectives of a financial interview .
228 CHAPTER 9
• Describe the elements that must be considered when

planning an interview .
• Describe techniques used when conducting an interview.
Identify and describe methods used to record an interview .
“ Just the facts.” Remember Sergeant Joe Friday's famous
phrase from the television show Dragnet? For years, every week
like clockwork, Joe had the uncanny ability to detect, investigate,
and resolve criminal matters in 30 minutes or less .
Television makes it look easy. Unfortunately it isn't. Detecting
and investigating a financial crime can take weeks, months, and
even years . So, while reality significantly differs from what hap
pens on television, one thing remains the same financial investi
gators, just like Joe Friday, search for facts by interviewing people.
Few skills are as important to the financial investigator as the
ability to talk to people and successfully gather information from
them. Yet, law enforcement officers are not empowered to force
people to talk to them. These powers are granted only to courts,
grand juries , and certain judicial and legislative bodies .
Consequently, investigators face the double duty of convincing
the interviewee (hereafter called the witness) to agree to be
interviewed and then getting the witness to talk after getting
inside the door.
What is an Interview?
An Interview Phone interviews. Employment interviews. Counseling interviews.
• Face-to-face Investigatory interviews. As you can see, there are many types of
• Task related purpose interviews. And though they all serve different purposes, they are
founded on the same definition : an interview is a specialized
form of oral, face-to -face communication between people that is
entered into for a specific task -related purpose associated with a
particular subject matter.
For the financial investigator, two aspects of this definition
should be noted. The first one is that an interview is aa face -to - face
communication . Not only will investigators listen to what wit
PLANNING . CONDUCTING , AND RECORDING AN INTERVIEW 229
nesses say, they will be able to see what the witnesses do. The
visual and non -verbal aspects of an interview are very important
and should not be overlooked. Secondly, the interview has a spe
cific task-related purpose . This task-related purpose is what
makes an interview different from mere conversation . A conversa
tion can take off in many directions; an interview must be focused
on relevant content.
Introduction to the Financial Interview

Before we get into a general discussion of the interview process,
we should look at some specifics of the financial interview. The
purpose of a financial interview , its objectives, and the type of
question to be asked during a financial interview are discussed
below.
Purpose and Objectives

For the financial investigator, the interview is a tool used to deter
mine what knowledge a witness has concerning an investigation.
Knowledge in this context includes information about the allega
tion or crime in question, and any relevant records in a witness's
possession . The information and documents provided to the
investigator form the basis of the witness's testimony.
A financial interview is different from a financial interroga
tion. Financial interviews are conducted to obtain information
and documentation from witnesses. Financial interrogations are
conducted with suspects and hostile witnesses to elicit confes
sions or admissions of culpability. An investigator may plan on
conducting an interview and have it turn into an interrogation.
Conversely, interrogation can commence only to discover that the
witness appears to be innocent, and with that, an interrogation
turns into an interview .
The financial interview is not something that investigators
undertake haphazardly. Prior to each interview, they must decide
what they hope to accomplish by interviewing a particular witness.
In other words, they must determine the interview's objective(s).
230 CHAPTER 9
The objectives of a financial interview are:

• To obtain information that establishes or refutes the allega
tion or crime under investigation
• To obtain leads for further development of the case
• To obtain all information and documents in the witness's
possession relative to the financial investigation
• To obtain the cooperation of the witness for any subsequent
legal proceeding
• To obtain background and personal information about the
witness and motivation for involvement in the crime
Type of Question Asked

A financial interview is a special type of investigatory interview .
During most investigations , people are interviewed to obtain their
recollections of events. For example :
“ Can you describe the person who came into the bank ? ”
“ Do you remember if anyone was with him ?”
“ What color was the car she purchased?”
Ask questions related to Financial interviews go beyond recollection questions . Like
specifics, not just general the financial investigation itself, they are concerned with specific
recollections details of financial transactions and the movement of money. For
example:
“ Why did you have this check cashed ?”
“You notarized two signatures on this document. One is the
suspect's. Who is the other individual ?”'
“ How did she pay for the car ? ”

PLANNING , CONDUCTING , AND RECORDING AN INTERVIEW 231
The Three Phases of an Interview

For any investigator, an interview is more than just asking a wit
ness some questions. Who should be interviewed ? What ques
tions should be asked? In what order should the questions be
asked? Where should the interview take place? How can the wit
ness be put at ease so that he or she cooperates? What happens to
the information collected? These are just some of the questions an
investigator must ask before, during, and after the interview .
A good interview requires aa lot of forethought, skillful execu
tion, and an ability to convey what happened during the interview
to others . The interview process is comprised of the following
three phases :
• Planning
• Conducting
• Recording
Planning an Interview
Prior to planning any interview, the investigator is usually faced
with one or more of the following conditions:
• A crime has been alleged or committed, but the facts relat
ing to the situation have not yet been established
• A complainant or victim has been identified. This could be
an individual, business, or governmental entity
• Records or documents reflecting financial transactions
relating to the suspected criminal activity have surfaced
• Rumors, innuendo, or factual information pointing to a spe
cific suspect have emerged
The investigator uses the interview to develop information
about these existing conditions. The information collected will be
used to support or dispel the allegations.
232 CHAPTER 9
Selecting Witnesses
When an investigation begins, investigators must determine who
they want to interview and in what order. Traditional criminal
cases are generally investigated by first contacting the outer cir
cle of honest, disinterested witnesses and then working inward to
the co-conspirators and ultimately to the target. Law enforcement
normally starts the interview process with the complaining wit
ness and after exhausting his or her knowledge of the facts and
reasons for suspicion, proceeds in a similar manner around the
outer circle of witnesses.
In a financial investigation this traditional sequence is often
altered. Following the movement of money dictates talking to wit
nesses that have knowledge of financial transactions .
Accordingly, the hierarchy of interviews is determined by the
degree of knowledge or participation in financial activities cre
ated by the alleged criminal event or crime at issue. For example,
in a political corruption investigation, documents showing the
movement of money from the payer of the bribe to the taker of the
bribe would be of paramount importance to the investigator.
People with documents (bankers, money couriers, business asso
ciates) would be priority contacts. In an embezzlement or tax eva
sion investigation, the key interviews would be with custodians of
accounting records and internal audit files, and tax return prepar
ers. Even in a drug case, financial transactions decide the order
of contacts for the investigator. The priority witnesses will have
records reflecting the suspect's use of proceeds from the drug
trade. While each investigation offers aa different set of interview
options and priorities, the bottom line in a financial investigation
is that every person who has documents pertaining to financial
transactions, or knowledge about them, should be interviewed.
Types of Witnesses
One of the things an investigator must consider prior to contacting
an individual for an interview is what type of witness will that
person be. Will he or she be cooperative, hostile, or have no feel
ings one way or the other? Prospective witnesses can be catego
rized into three general types :
Types of Witnesses
Neutral
This is an uninterested third party such as a custodian of public or financial

records. This person has no interest in the outcome of the investigation and
provides documents and /or unbiased information .
Friendly
A friendly witness is one who cooperates. Witnesses are friendly for aa variety
of reasons. Certain people naturally tell anybody everything. Others realize
that they stand to benefit from providing information about the suspect to
authorities. Also, many people seem to enjoy “ playing detective ” and get
caught up in the excitement of being a part of an important investigation.
Reluctant or hostile
This is an uncooperative party who is typically a friend or associate of the

suspect . This witness may also be hostile due to his or her own culpability in
the criminal activity under investigation.
Neutral and friendly witnesses usually agree to interviews

upon request. No more than proper identification and introduction
by the investigator opens the door. Interviewing hostile witnesses
often presents greater challenges . Most likely, these witnesses
will not voluntarily submit to an interview. They refuse to provide
information and documents .
Since law enforcement cannot, on its own, compel any witness
to say or do anything, investigators need assistance from the legal
system. With approval from a government attorney (i.e. city or
district attorney, or U.S. Attorney) the investigator can be issued a
document (i.e. , summons, subpoena) which commands a witness
to appear and submit to an interview . The investigator serves this
document on the witness and, if the witness disregards the docu
ment, contempt charges and incarceration possibly could result.
But even an investigative tool that can command appearance
before the investigator does not override aa witness's constitutional
guarantees. So, while aa hostile witness can be ordered to open the
door and submit to an interview, he or she cannot be compelled to
say anything incriminating.
234 CHAPTER 9
Contacting the Suspect

In Chapter 4, we stated that the suspect was a valuable source of
information. It follows then that deciding when to interview the
suspect is an important decision. Should he or she be contacted at
the start of the investigation or confronted upon its completion?
Should the investigator contact the suspect at all? The decision is
determined by the investigator and is different for each investiga
tion . Interviewing the suspect during the early stages of the inves
tigation makes good sense if it is feared that records in his or her
possession may be destroyed or an alibi may be concocted . Often,
catching the suspect off guard results in a more responsive inter
view filled with more answers and more documents . Also, early
interviews have resulted in quick confessions and /or early indica
tions of innocence .
On the other hand, delaying contact with the suspect may be
advantageous if information and documents gathered from other
witnesses can be used to refute the suspect's alibis and lies .
Additionally, confessions sometimes occur when the suspect is
confronted face to face with the evidence of guilt.
In certain situations, the suspect may not be interviewed at
all . He or she may be beyond the reach of law enforcement (i.e.
out of the country) or may be represented by an attorney who
refuses to allow his or her client to be interviewed on constitu
tional grounds.
Method of Questioning
While planning an interview, the investigator must determine the
method of questioning to use. Questioning can be organized in a
number of ways :
Chronological method. The witness is questioned about the

events in the order that they occurred from beginning to end . This
is the usual organization of questioning.
• Questioning according to documents. In this type of inter
view format a particular document ( financial statement, canceled
check, tax return ) is the focus. The witness may be the legal cus
todian of the record and have no other involvement in the investi
gation.
• Questioning according to transactions or events. The wit

ness may have sold the subject a house or delivered a package for
him or her. The questions in this situation would center on the
event and radiate from there.
During the planning phase, the investigator should prepare a

written outline that lists main topics to be covered in the inter
view. An outline allows the investigator to concentrate on impor
tant ideas and areas to be covered . However, writing down every
specific question to be asked and in a specified order should be
avoided as this has the tendency to make the investigator inflexi
ble and tied to the next question. The investigator unwittingly
becomes guided by what is written on the sheet of paper instead
of what is being said by the witness. Also, the witness may catch
a glimpse of the upcoming questions and prepare responses in
advance. The following page contains a simplified example
interview outline. The outline used for an actual interview would
be more extensive .
236 CHAPTER 9
Sample Interview Outline
Ray Austin Interview
Introduction: Identify Self

State Purpose
Background: DOB
SSN
Address
Married
Wife (Maiden Name)

Children
Source of income
Parents
Education
Military
Prior Arrest, Convictions
Assets Liabilities Cash-on-Hand
Associates: Adkins HTB Inc.
Allen Cleveland
Massey TB Trust
Massey Cemetery
Rosemary Westbury
Tony Idaho
Toni Boise
Marc Fresno
Conducting an Interview
Once an investigator is finished with the planning phase, he or
she is ready to conduct the interview. The interview itself is com
posed of three distinct parts:
• Introduction
• Body
• Close
Introduction
The introduction is critical as it sets the tone for the whole inter
view. It serves the following two purposes:
• Allows the investigator to identify himself or herself to the
witness
• Allows the investigator to state the purpose of the contact

The following shows right and wrong ways for an investigator
to introduce himself or herself.“
Wrong
“Mr. Smith, my name is John Jones and this is Mary Adams. We're with the
government. We're investigating Jim Dealer and we need to talk to you .”
Right
“Mr. Smith, my name is John Jones. I am a Special Agent with the Internal
Revenue Service's Criminal Investigation Division. This is Special Agent
Mary Adams from the Drug Enforcement Administration . We are currently
conducting an investigation involving alleged violations of money laundering
laws by Jim Dealer. May we speak to you for a few moments ? ”
The objective of the introduction is to put witnesses at ease

and to get them to agree to answer questions. However, once the
investigator identifies himself or herself, the next question nor
mally is asked by the witness.
Witness: “ Why are you contacting me? ”
Investigator: “We would like to ask some questions about your financial
dealings with Jim Dealer and his associates.”
238 CHAPTER 9
Since the investigator's goal is to put the witness in a frame

of -mind to answer questions, he or she must supply a reason
which leads the witness to perceive that he or she will benefit
from cooperating with the investigator. If the witness believes that
the investigator represents a threat, voluntary cooperation is gen
erally lost. The next page shows some right and wrong ways to
gain the cooperation of aа hesitant witness .
During the introduction, the investigator should ask general,
almost generic, questions such as name, address, telephone num
ber, and date of birth. Since many witnesses are apprehensive,
the investigator needs to be patient and avoid rushing into impor
tant questions. Through reassuring the witness that his or her
cooperation will not cause any undue hardships, inconveniences,
or embarrassment, a rapport can be established that will assist
both the witness and the investigator during the interview
process . When the introduction has been completed and the wit
ness is ready to talk, the investigator moves on to the second part
of the actual interview — the body.
Right and Wrong Ways to Gain the Cooperation of a Witness

Wrong
Witness : “ Why should I talk to you? I don't want to get involved . ”
Investigator: “You should have thought of that sooner- it's too late now.
We can talk here or we can talk downtown. It's your choice.”
Right
Witness : “ Why should I talk to you? I don't want to get involved .”
Investigator: “You certainly are not required to talk to me. I am just seeking
some information on a serious matter which may or may not
result in legal action. By speaking informally with me now, it
may save you the trouble of having to testify later, depending
on the information you have. Is that o.k.?”
or
Witness : “ I don't want to answer any questions at this time without first
talking to my lawyer."
Investigator: “ You certainly don't have to talk to me, with or without your
lawyer. Let's do it this way. Let me ask you a few questions and
if you don't want to answer them, just say so. I'm not trying to
get you into trouble, I'm just trying to do my job and get some
answers . Is that o.k.?”
The Body
The body of the interview is the fact finding part of the interview
process. Questions are asked and answers are provided . The
structure of the interview is determined by the method of ques
tioning ( chronological, by document , or by transaction or event)
which should have been pre-determined and outlined by the
investigator.
In this stage of the interview , witnesses should be allowed to
tell their story in their own words. Recognizing that a witness's
story will usually be disjointed and rambling, the investigator
must be prepared to put order to the material— find the details,
240 CHAPTER 9
focus for clarity, and ensure the accuracy. For the investigator,
conducting an interview is much more than just asking questions
and writing down answers . This process requires concentration
and active participation by the investigator if his or her objectives
are going to be achieved .
The time-honored questioning devices of who, what, where,
when, why, and how allow investigators to push witnesses for
details. Investigators should continue the questions until they are
convinced that a witness's knowledge of a topic is exhausted.
Details, details, details ! Whether recollections or records, it is the
detail provided by the witness that lays the foundation for a suc
cessful financial investigation. The following exchange between
an investigator and aa witness illustrates how to pursue the detail
in aa line of questioning .
Investigator: “ How was the kickback payment made ? ”
Witness “ At a meeting.”
Investigator: “Where did this meeting take place ?”
Witness: “ In Mr. X's office.”
Investigator: “ How many people were there?”
Witness: “ There were three of us."
Investigator: “ Who were they?”
Witness: “Mr. X , Bill Baker, and me."
Investigator: “ How was the kickback divided ?”
Witness : “ Mr X split it into three piles.”
Investigator: “ How much did each of you get ? ”
Witness : “ I don't know. Mr. X didn't count the money. He just estimated
the size of each pile.”
Investigator: “ Did you all get the same size piles ? ”
Witness : “Yes. I counted it at my office. I had just a little over

$ 100,000 .”
Investigator: “Would you say that Mr. X received about $ 100,000 also?”
Witness : “That would seem about right.”
A witness's opinion of events often clouds the facts. Although

there is nothing wrong with requesting an opinion from a witness,
the investigator, through proper questioning, needs to separate
242 CHAPTER 9
the facts (what was said) from the opinions (what was talked
about). The goal is a verbatim recollection from the witness. For
example:
Wrong
“ What did you and Jim Dealer talk about? ”
Right
“What did Jim Dealer say to you?
What did you say to him ?"
As was stated earlier, an investigator must actively participate

in the interview process. It's not as simple as ask a question, write
down a response . The investigator must constantly analyze
responses, and continually check for inconsistencies, inaccura
cies, and incompleteness . For example:
Investigator: “ How long did your meeting with Mr. Grey last?”
Witness: “ It lasted all day.”
Investigator: " What did Mr. Grey say ? ”
Witness: " Not much .”
An all day meeting with not much said should raise aa red flag
in the investigator's mind. This line of questioning needs to be
pursued.
During an interview , investigators have aa multitude of tasks to
handle simultaneously. From listening to a response and record
ing it, to formulating the next question, they have a lot to do.
There are some general “ do's and don'ts” that investigators
should consider when performing an interview . They are found on
the next page .
Interview Do's and Don'ts

• Do interviews as a team. One investigator listens and controls the ques
tioning while the second records the responses .
• Do interview witnesses individually. Attempting to interview two wit

nesses in the same room at the same time results in one of two things
one witness influences the other's responses or one witness becomes mute
thereby allowing the second witness to answer all the questions. Always
separate witnesses and conduct their interviews simultaneously.
• Do control the interview. Don't let, for example, an attorney who is present
disrupt the interview . Before beginning the interview , advise each partici
pant of their role in the process. This should help eliminate any control
problems.
• Do provide the witness with an out. If a witness has previously denied

knowledge ,or has supplied false information, there is often reluctance to
admit it. The investigator should provide this witness an “ out”. It normally
will be taken. For example:
“Mr. Smith, I know when we talked before you denied knowing Mr.
Dealer. You probably forgot about meeting him. Can we start over ? ”
Don't ask compound /complex or negatively phrased questions, (i.e. “ you

money, did you ?”). Questions should be simple, to the point,
didn't see the
and positively phrased.
• Don't make threats and avoid threatening remarks. Threats rarely work, so
overbearing tactics should be avoided. The “ good cop/bad cop ” interview
technique looks good on television but is usually inappropriate in finan
cial investigations .
As was discussed in Chapter 3 , in our legal system, docu

ments cannot speak for themselves, either figuratively or literally.
A witness must identify, explain, and introduce every financial
document to give it meaning in any legal proceeding or court
action. So what does interviewing have to do with the introduction
of documents into a legal proceeding. Plenty! Successful inter
244 CHAPTER 9
viewing creates cooperative witnesses who breathe life into finan

cial records involving the movement of money.
Technical areas such as accounting procedures or business
specialties should be covered in detail during the body of an
interview . The investigator should ask questions concerning the
document’s entries, meanings, and purposes . The investigator
should also determine the identity of the document's custodian
and solicit the authenticity of the document. Investigators should
not be afraid to ask questions and should keep that old saying,
“ There is no such thing as a stupid question ” in mind. Any ques
tion can lead to a surprising answer.
The investigator's job during the interview process is not com
plete until he or she has exhausted the witness's knowledge on
the important topics relative to the ongoing investigation .
Successful interviews obtain information and financial leads, as
opposed to solving the case. If enough interviews are conducted
and enough information is uncovered, the case will solve itself.?
The Close
After the witness has provided information, the investigator
should review the key points gathered during the body of the
interview . This process of summing up the important facts serves
the following two purposes :
• It allows the investigator to clarify the facts
• It provides an opportunity for the investigator and witness
to agree with the investigator's summation
Once the summation has been agreed on , the investigator

should ask the following three questions:8
• " Is there anything that I have forgotten to ask? "
Probably the number one reason investigators fail to get the
answers they seek is that they simply fail to ask the ques
tion. Using this “ catch -all ” question allows the witness the
opportunity to play detective.
• "Is there anyone else you think I should speak with?"

This question is designed to find more leads. If the witness
is hesitant, it's ok to say that his or her name will not be
revealed to the person (s) suggested.
• "Is there anything else that you would like to say?"
This should be the investigator's last question. It gives the
witness one final chance to say anything that he or she
wishes .
Exit gracefully, even after encounters with hostile witnesses.

Soothe the apprehensive witness by mentioning that all the infor
mation that he or she provided will be held in confidence and /or
for official purposes only. If the witness was cooperative, thank
him or her for the cooperation; if nothing was said, express regrets
and leave the door open for future contacts.
Recording an Interview
Investigators conduct interviews to obtain information and docu
ments in an attempt to resolve financial crimes. It is also neces
sary to prepare a permanent record of each interview for future
reference and use . Often in aa financial investigation , persons
interviewed become trial witnesses. The record of the financial
interview as prepared by the investigator can be used to refresh
the witness's memory and assist the witness in the identification
process relative to a financial document.
The complexity and investigative importance of an interview
determines the best method to record it. In situations where no
information is secured , a limited report or record of interview is
acceptable . However, in situations where “ case critical ques
tions” are answered, or denials are made by an important witness,
a more formal record becomes necessary. The only constraint in
the recordation process is the requirement for accuracy and com
pleteness by the investigator preparing the written summary.
When an investigator plays the role of an interviewer, he or
she must be accurate, fair and just. The prosecuting attorney
relies on the investigator's written notes taken during an inter
view. The investigator's portrayal of the interview process should
accurately and completely reflect the witness's testimony.
246 CHAPTER 9
Informal Notes
The " informal notes” taken by investigators during the
course of the interview, in conjunction with their recollections,
provide the basis for the written record . Informal notes should
contain sufficient detail to permit investigators to refresh their
memories as to what transpired during the interview . Any method
of recording the details is sufficient if it shows the date, time,
place, persons present, and what occurred . The following is an
example of the informal notes taken by Special Agent John Jones
during an interview with Richard Smith . Special Agents Jones
and Adams interviewed Smith concerning a financial transaction
(the purchase of a car) he had with the suspect, Jim Dealer.
Example of Informal Notes
Re: Jim Dealer John Jones, IRS

Mary Adams, DEA
Talked w/Richard Smith July 25, 1991
123 A. Street 10 am - 10:47am
Dealer called Smith about truck
Smith advertised. Dealer came to see truck about
12 hour after call. Test drove truck around block
then paid $ 25,000 in cash , in $ 100 bills, for truck .
1990 truck, Serial # 1173945
Memorandum
A second way to record interviews is to “ formalize ” the investiga
tor's informal notes into aa "memorandum of interview " . A mem
orandum should be prepared when details of an interview are too
numerous to be fully and properly related through informal notes.
It should state what occurred during the interview and show the
PLANNING , CONDUCTING AND
, RECORDING AN INTERVIEW 247
date, time, place, and persons present. If the person interviewed

was advised of his or her constitutional rights during the inter
view , this fact should also be noted in the memorandum . The final
typed memorandum should be prepared as soon as possible, and
promptly signed and dated by the investigators present during the
interview . The actual date of preparation should be shown at the
bottom of the memorandum. If it becomes necessary to correct or
supplement a memorandum after it has been finalized, the sup
plemental memorandum should clearly state the date and reason
for such action , and the previous memorandum should be
attached .
Handwritten notes made during an interview and used as the
basis for a more detailed memorandum may be subject to inspec
tion by a court and should be retained in the case file .
Investigators should confine memorandums to the facts developed
in the interviews and should avoid opinions, conclusions, and
other extraneous matters.
When deciding whether or not to use a memorandum as a
means of recording interview notes, an investigator should con
sider the following advantages and disadvantages:
Advantages and Disadvantages of the Memorandum
Advantages Disadvantages
Informal Does not contain the exact
words of the interviewee
Contains all pertinent testimony

obtained in the interview Since information was not
mechanically recorded, there is a
Memorandums can be prepared chance for some information to
by topic and therefore are easy be forgotten
to follow
Does not require an oath

or affirmation
An example of aa memorandum appears on the following page.

248 CHAPTER 9
Example ofMemorandum of Interview

In re : James Dealer
115 South Street
Miami , Florida
Present: Richard Smith, Witness

Special Agent, Mary Adams
Special Agent, John Jones
Place : Office of Richard Smith
117 Elm Street
North Miami, Florida
Date: July 25, 1991
Time: 10:00 a.m. to 10:47 a.m.
1. S / A Adams and I made a field call to a travel agency located at 117 Elm Street, the known employer of
Richard Smith. Records obtained from State vehicle registration files reveal that Smith transferred the title
of a truck (serial number 1173945) to Dealer in May, 1990.
2. After proper introduction and identification (by displaying our credentials and badges), I asked Mr. Smith
if he would answer a few questions about the sale of his truck. Mr. Smith agreed and when asked, stated
the following:
a. He advertised his truck for sale in a newspaper at $25,000.
b. Dealer responded to the ad and bought the truck by paying $25,000 in currency, composed of one hun
dred dollar bills .
c. The sale was completed on May 29, 1990, when the currency was exchanged for the truck and registra
tion paperwork.
3. Mr. Smith further stated that he would agree to reducing the information to a written affidavit and swear to
it's accuracy.
4. I suggested that we meet again tomorrow at his home to prepare the affidavit. Mr. Smith agreed.
5. This interview concluded at 10:47 a.m. when we left Mr. Smith's office.
I (prepared/dictated) this memorandum on July 26, 1991 , after refreshing my memory from notes made during
and immediately after the interview with Richard Smith.
John JonesSpecial Agent
I certify that this memorandum has recorded in it a summary of all pertinent matters discussed with Richard
Smith on July 25, 1991 .
Mary Adams Witness

PLANNING, CONDUCTING ,AND RECORDING AN INTERVIEW 249
Question and Answer Statement

A question and answer statement is a complete transcript of the
questions, answers, and statements made by each participant dur
ing an interview. It may be prepared from a stenographer's notes
or from a mechanical recording device. The source used to pre
pare the transcript should be preserved and associated with the
case file as it may be needed in court to establish what was said .
A question and answer statement should contain:
• When and where the testimony was obtained

• The name and address of the person giving the testimony
• The matter the testimony relates to, including the purpose of
the interview
• The name and title of the investigator asking questions and

the name and title of the person giving answers
• The names and titles of all persons present during the testi
mony and the reason for each person being present, if not obvious
• The consent of the person being interviewed to use a tape
recorder if aa mechanical recording is being made
• Information given to the person being interviewed concern
ing his or her rights to counsel and against self-incrimination, if
appropriate
• Administration of an oath if given
• Questions and answers establishing that the statement was

made freely and voluntarily, without duress, and that no promises
or commitments were made by the investigators
Signatures of the investigators who conducted the interview
and the person being interviewed
Signature and the certification of the person transcribing the
statement, showing the source of the original information used
• Information that the person being interviewed was given the
opportunity to examine the statement, correct any errors, and sign it
250 CHAPTER 9
The following is a format that can be used for question and

answer statements .
Question and Answer Statement Format
Testimony of (name, address) given at (location including address) at (time) on (date) about (subject of investigation and their address).
Present at this interview are (names and titles of all persons present).
Questions were asked by (name and title of person asking the questions) and answers given by (person being interviewed ).
This interview is being recorded, as agreed upon, by means of (method of recording).
1. Q. You were requested to appear at (location) to answer questions concerning (subject matter ). (If appropriate, advise the person
being interviewed of his or her rights to counsel, etc..)
2. Q. Please stand and raise your right hand. Do you (person being interviewed) solemnly swear that the answers you are about to give
to the questions asked will be the truth , so help you God?
3. Q. Did you sell a truck that you owned to Mr. Jim Dealer?
A. ( answer)
4. Q. How much did he pay you for the truck ?

A. ( answer)
• Note: The interview is brought to a close with the following questions.
120. Q. Have I, or has any other investigator or officer, threatened or intimidated you in any manner?
A. (answer)
121. Q. Have I, or any other investigator or officer, offered you any rewards, promises or immunity, in return for this statement ?
A. (answer)
122. Q. Have you given this statement freely and voluntarily ?

A. ( answer)
123. Q. Is there anything further you care to add for the record ?
A. ( answer)
After this statement has been transcribed, you will be given an opportunity to read it, correct any errors, and sign it.
• Note: When transcribing the statement include the following:
I have carefully read the foregoing statement consisting of page 1 to (last page number), inclusive, which is a correct transcript of my
answers to questions asked me on (date of statement) at (location where statement was given), relative to (subject of investigation and
their address). I hereby certify that the foregoing answers are true and correct, that I have made the corrections shown, have placed my
initials opposite each correction , and that I have initialed each page of the statement.
(signature of person giving statement)

Subscribed and sworn to before me at (time), on (date) at (present location ).
(signature and title of investigator)
( signature and title of witnessing investigator)
I (name of person transcribing statement), do hereby certify that I took the foregoing statement of (person giving statement) from (method
of recording) and personally transcribed it and have initialed each page.
(signature and title of transcriber)
Normally people will review and sign a question and answer

statement after it has been put in its final form . Sometimes, for
various reasons, the person may change his or her position and
refuse to sign the statement. When an investigator is faced with
such a refusal, he or she should request that the statement be
read and verified for correctness. In such situations, the following
can be inserted at the end of the statement:
This statement was read by (name) on (date) who stated

that it was true and correct, but refused to be placed under
oath or to sign it.
Just as there are advantages and disadvantages to using a

memorandum as a recording device, so there are for the use of a
question and answer statement.
Advantages and Disadvantages of the Question and Answer Statement
Reflects both questions and answers Usually contains unnecessary
material
Questions are generally asked in a Is often very long and involved

logical sequence
It is unedited; therefore, it picks up
Is difficult to dispute with claims of incorrect grammar, etc
misunderstanding
Tape recorder will pick up outside
Is preferred when the issues are noises which can disrupt recording
complicated
Unable to make voice distinction
Is useful when the person testifying
under oath is illiterate or below Mechanical failure
average intelligence (if tape recorder used)
Can be used to challenge or Can be viewed as intimidating by

discredit a witness deponent; therefore, witnesses are
often not willing to participate
252 CHAPTER 9
Affidavit
An affidavit is aa written declaration of facts made voluntarily and
confirmed by oath or affirmation . The text of an affidavit may be
prepared extemporaneously or composed by agreement between
the affiant, the person making the statement, and the investiga
tor. An affidavit can be either typed or handwritten, and prepared
either by the affiant or investigator. There are certain advantages
to allowing the affiant to compose and write an affidavit. These
advantages are :
• The affidavit will be in the affiant's own words
• The affidavit will be more credible because it is in the affi

ant's own handwriting. It would be difficult for the affiant to
later deny the affidavit was his or hers
One advantage to having the investigator prepare the affidavit
is that the investigator will ensure that only relevant information
will be covered and that the information will appear in an orderly
fashion. In cases where the affiant is unable to either read or
write, a witness other than the affiant or the investigator must read
the affidavit to the affiant before he or she signs it. The affidavit
must also be signed by both the investigator and witness.
No particular form of affidavit is required by common law. It
is customary that affidavits have a caption or title, the judicial
district in which given, the signature of the affiant, and the jurat.
A jurat is the certification on an affidavit declaring when, where,
and before whom it was sworn .
The affidavit is one of the most commonly used forms of
recording testimony. It can be used during trial to impeach aa wit
ness, refresh memory, or it can be introduced as evidence. An
affidavit should not contain hearsay or information about which
the witness has no direct knowledge. If the person being inter
viewed was advised of his or her constitutional rights, this should
be included in the affidavit.
A sample affidavit is found on the next page.
Sample Affidavit
United States of America Southern

Judicial , District of Florida
I, Richard L. Smith state that :

I reside at 123 A Street,Miami, Florida
I am currently employed as a travel agent at Miami Travel, located at 117 Elm Street, Miami, Florida. On May
28, 1990, I placed a newspaper advertisement in the Miami Herald classified ads offering my 1989 truck for
sale. I listed the asking price as $25,000. On May 29, I received a phone call from a man who said that he
read the ad and would like to see my truck. He stated that he would like to look at it that afternoon . I gave
him my address and he came over about 30 minutes later. I gave him the keys and we took аa ride around the
block. He said that he would buy the truck for $25,000. He opened the trunk of the car he was driving and
pulled out aa briefcase. We went into my house where he took $25,000 in one hundred dollar bills from the
briefcase to pay for the truck. I was surprised at being paid in currency, but the man stated that he wanted the
truck today and knew that it would take time for aa check to clear the bank, so he brought cash. I gave him the
ownership papers for the truck. I said thanks for buying the truck and gave him my business card requesting
that he give me a call if he needed any travel planning. He gave me his business card and said he was in the
import- export business. Jim went to his car and made a telephone call and a couple of minutes later two guys
arrived and one drove Jim's car while Jim drove the truck away. I have not seen or heard from Jim since that
day. On today's date, I gave Special Agent John Jones a copy of the truck registration, serial number
1173945, that I sold to Jim Dealer on May 29, 1990, and the business card I received from Jim Dealer on that
same date . I have received a receipt for both of these items from Special Agent Jones.
I have read the foregoing statement consisting of 1 page(s),and have signed it. I fully understand this state
ment and it is true, accurate, and complete to the best of my knowledge and belief.
I made this statement freely and voluntarily without any threats or rewards, or promises of reward having been
made to.me in return for it.
Richard L. Smith
(Signature of affiant)
Subscribed and sworn to me before this_29th
July , 1991,
day of_July
at_Miami, Florida
(Signature)
John Jones
(Title) Social Agart
Mary Adams
(Signature ofwiness, if any)
254 CHAPTER 9
The affidavit, like the memorandum and the question and

answer statement, has advantages and disadvantages to its use.
Prior to using an affidavit, the items listed below should be con
sidered .
Advantages and Disadvantages of an Affidavit

Preserves probable testimony Does not reflect questions asked
Frequently used in requiring May contain non - related information

testimony from : if prepared by affiant
Hostile witnesses
Witnesses who have May not contain all pertinent
changed allegiance information when prepared by affiant
May be used as grounds to May not be well written or

impeach witness clear if prepared by affiant
Usually is easier to write than

other types
Valuable in developing an
investigation
May be written or typed and

prepared on the spot
May be concise and brief
Sworn Statement
A sworn statement is, in a general sense, a declaration of matters
. may be prepared in any form and should be signed and
of fact.It
dated by the person preparing it. A sworn statement has the same
judicial bearing as an affidavit. The investigator taking the state
ment administers an oath prior to the witness signing the statement.
The following is an example of an oath that can be administered:
Do you (name ofperson giving statement) solemnly swear

that everything contained in this statement is true and
correct.
Mechanical Recordings
A mechanical recording device may be used to record statements
when aa stenographer is not readily available if all parties to the
conversation consent. A recording device also may be used in
conjunction with a stenographer, when necessary, again provided
that all parties consent. When mechanical recording devices are
used, the following guidelines are suggested:
• Identify, on tape, the individuals engaged in the conversa
tion, any other persons present, and the time, date, and location
• Immediately after the original has been made, make a copy

of the tape for use in transcribing the conversation . If the record
ing was made during an undercover operation, seal and store the
original after a transcribed copy has been made
Keep a written record of the tape's custodians and storage
arrangements from the time it was recorded to the time it is sub
mitted as evidence
• When tape recordings are going to be used in taking a con

fession , advise the suspect of his or her rights and have the sus
pect state at the start of the tape recording that he or she is aware
that aa recording is being made
• Off the record discussions between the investigator and the
suspect should not be permitted during a recorded interview and
should be kept to a minimum during a recorded interview with
anyone else
Form Letter
A form letter can be used to request information of a similar
nature from several third parties. An example of aa form letter is
found on the next page .
256 CHAPTER 9
Sample Form Letter
Prosecuting Attorney's Office

Glynn County
300 South Main Street , 4th Floor
Brunswick , GA 31523
Telephone: (912) 555-5982
June 4, 1992
Ms. Michelle Tallmadge

1111 B Street
Glynco, GA 31520
Dear Ms. Tallmadge,
This office is conducting an investigation concerning Rosemary Westbury for the years 1989, 1990, and 1991 .
Ms. Westbury is a corporate officer of Massey TB, Inc. She is also the trustee for Massey TB Trust. We have
reviewed the bank records of Massey TB, Inc., and Massey TB Trust. We found several checks made payable
to you. Please answer the questions below which relate to the checks we found. We have included copies of
the checks for your review .
Should you have any questions,please call investigator Dennis S. Paul at the telephone number listed above.
1. Did you receive checks number 1521 , 1571 , 1681 , 1952, 1991 ?
2. Did you endorse these checks ?
3. Please explain why these checks were deposited into Massey TB Trust's bank account.
4. We would like to talk to you about these checks. Please call us, or provide your daytime telephone number
so we can schedule an appointment.
Sincerely, Dennis S. Paul

PLANNING ,CONDUCTING , AND RECORDING AN INTERVIEW 257
Grand Jury Transcript

A complete grand jury transcript will contain the questions,
answers, and statements made by each participant before the
grand jury. This transcript can be used as basis for a charge of
perjury if the witness gives false information before the grand jury.
The Art of Interviewing

Through practice, an investigator can improve his or her interview
skills. But, equally important is practicing the art of critical self
analysis when dealing with others. This starts by stripping away
the prejudices and other self-imposed barriers to impartiality that
surface when communicating with people. It continues by learn
ing to converse in different styles of language. Interviewing a col
lege graduate and a fifth grade drop- out require different
communication skills. How something is said is just as important
as what is said. Everyone communicates through speech patterns
and non-spoken behavior patterns. Witnesses sense the presence
of the investigator's questions , not only with their ears, but by
watching his or her gestures, making or avoiding eye contact, and
feeling the stress in the room .
The interview process should flow naturally. The investigator
should enter into the interview with general questions in mind.
After the first question is asked, the investigator assumes a new
role— the listener. Contingent upon what is heard the investiga
tor leads the interview toward the next question and then listens.
This asking and listening process, controlled by the investigator,
continues until the objectives of the interview have been
achieved.
A successful interviewer has empathy for others. No one likes
the thought of appearing foolish. Many witnesses are actually vic
tims of fraudulent actions committed against them by the subject
of the investigation and are embarrassed about being victimized.
For example, businesses victimized by insiders are often reluc
tant to let the public know that they were vulnerable to fraud. A
business may have more than money at stake. It becomes a matter
of confidence and prestige in the public or industry's eye . An
258 CHAPTER 9
investigator who can become sensitive to a witness's situation

quickly improves his or her interviewing techniques.
Summary
The goal of an investigator is to conduct each interview in such a
manner as to gather all available information and documents per
taining to the investigation and then make a permanent record of
each witness's testimony for further reference.
The planning phase of the interview process is the foundation
of an interview. Poor planning will have the same effect on an
interview as a weak foundation has on a building. Proper plan
ning enhances the probability of a successful interview. A suc
cessful interview can create a cooperative witness who can
breathe life into financial records. It could also provide additional
leads for the investigator to solve the case.
Once the investigator has decided on who, when, where, and
how to interview the witness, the investigator should prepare a
topical outline of the questions to be asked. Just as planning is
the foundation of the interview process, the opening of an inter
view sets its tone. The body of the interview is the fact finding
part of the process. The closing summarizes the key facts and pro
vides an opportunity for the witness and the investigator to agree
with the summation.
The medium used to record an interview should be reflective
of the significance of the witness and the information and records
provided by the witness.
Interviewing is aa skill that can be developed and improved
upon through practice. Few skills are as important to the financial
investigator as the ability to talk to people and successfully gather
information from them.

with those provided on pages at the back of the book.
1. How does an interview differ from an interrogation ?
2. How do questions asked in a financial interview differ from

those asked in other types of investigative interviews?
3. What are some things an investigator should consider when

planning financial interviews during the course of an investigation ?
4. Identify and describe the three methods of questioning that

can be used in aa financial interview .
260 CHAPTER 9
5. Why is the introduction critical to a successful interview ?
6. How can an investigator gain the cooperation of aa hesitant

witness ?
7. Explain the following statement:

The interview process is more than just asking questions and
writing down responses .
8. What is wrong with the following question?

He didn't have anyone with him when he came into the bank did
he, but if he did, do you remember if the person was male or
female and can you give a description of the person?
9. What is the last question an investigator should ask during an

interview ?
10. You are preparing to record an interview and you can't

decide which method of recordation to use. You are torn between
the memorandum and the question and answer statement.
Describe the pros and cons of each.
11. What advantages are there to having a witness compose and

write his or her own affidavit ?
262 CHAPTER 9
Endnotes
1 Cal W. Downs , G. Paul Smeyak , and Ernest Martin ,
Professional Interviewing, ( New York : Harper and Row
Publishers, 1980), p . 5
2 Joseph T. Wells, W. Steve Albrecht , Jack Bologna, Gilbert

Geis , and Jack Robertson , Fraud Examiner's Manual,
(National Association of Certified Fraud Examiner's, 1989),
Section 1 ,
p. 15
3 Fraud Examiner's Manual, Section 1 , p . 14
4 Fraud Examiner's Manual, Section 1 , p. 7
5 Fraud Examiner's Manual, Section 11 , pp. 15, 16
6 Format for examples adopted from Fraud Examiner's Manual,
Section 1 , pp. 20 - 23
7 Fraud Examiner's Manual, Section 1 , p. 31
8 Fraud Examiner's Manual, Section 1 , p.
p 23, 24
CHAPTER 10
Investigative Techniques
n the previous chapter,we discussed how to plan
and conduct a financial interview . The financial
interview, if properly done, is a very valuable tool
for the investigator. In this chapter, we will explore some other
investigative techniques. We will begin with a discussion of the
search warrant for financial records: what it is, how it differs from
a “general” search warrant, and how one is issued to an investiga
tor. We will then explore the undercover operation, surveillance,
the use of informants, recovering information from trash, gather
ing information from a suspect's mail, and retrieving evidence
from a computer. We will look at how document examiners apply
forensic science techniques to aid in investigations. The chapter
concludes with an examination of aa tool called “ link analysis.”
• State the importance of obtaining a valid search warrant.
• Describe the terms “ probable cause” and “ curtilage .”
• State the purpose of an affidavit.
• List and describe the types of information required in an
affidavit for a search warrant for financial information .
• List the objectives of undercover operations.

• List the objectives of surveillance.
• Describe the different types of surveillance.
• Describe how informants contribute to an investigation.
264 CHAPTER 10
• State why recovering evidence from a suspect's trash, read

ing the covers of a suspect's mail, and retrieving evidence from a
computer are valuable investigative techniques.
• List and describe the types of analyses a document exam
iner can perform .
• Use link analysis to show relationships in an investigation.
Persons involved in criminal activities do not flaunt their
indiscretions in the faces of law enforcement officers. They try to
hide what they are doing. And some of the webs criminals weave
are very complex . Because of this, investigators rely on certain
investigative techniques to help them gather information concern
ing criminal activities . These techniques are discussed in this
chapter.
The Search Warrant

Special Agent Wilson Taggart is working on a narcotics investi
gation where Tim Anthony is the prime suspect . Taggart
receives an anonymous letter indicating that David Anthony,
Tim's father, recently paid cash for a new $ 23,000 car.
Wondering if Tim provided his father with the money, Taggart
9
“ Revenuers” executing a court decides to visit David Anthony. Taggart goes to Mr. Anthony's
authorized search warrant on house, identifies himself, and says he'd like to ask a few ques
bootleg alcohol during the tions about Tim . Mr. Anthony lets him in. Taggart asks if it is
1930's .
alright for him to take a look around and , even though Mr.
Anthony says no, Taggart acts as if he doesn't hear. Taggart
opens a briefcase that is sitting on a desk and finds that it con
tains $ 100,000. He asks Mr. Anthony where he got the money
but Mr. Anthony just shrugs his shoulders . Then Taggart spies a
checking account statement that indicates Mr. Anthony had a
balance of $ 1,494 less than a month ago. Taggart wants to know
if Mr. Anthony has other accounts, but, again, Mr. Anthony just
shrugs his shoulders . “ How did you get $23,000 to pay for aa
new car ? ” Taggart asks . “ None of your business,” Mr. Anthony
replies . “ Now, get out of here . ” When he leaves , Taggart takes
INVESTIGATIVE TECHNIQUES 265
the briefcase full of money and the checking account statement

with him.
The scenario presented above is fictitious, but suppose it
really happened. Will Special Agent Taggart be able to use what
he collected as evidence against Tim Anthony?
The answer is no. Taggart obtained the evidence without a
valid search warrant. Mr. Anthony was under the assumption that
Special Agent Taggart wanted to ask him a few questions about
his son. When he invited Special Agent Taggart in, he had no rea
son to believe that the agent was going to search the house. The
Fourth Amendment to the U.S. Constitution protects citizens
against actions such as Special Agent Taggart's. The amendment
provides that the people have the right to be “... secure in their
persons , houses , papers , and effects, against unreasonable
searches and seizures ...” If evidence is obtained by an unreason
able search and seizure, or in violation of the privileges guaran
teed by the Fourth Amendment, the evidence will be excluded
from trial. Investigators need to be aware of the importance of
obtaining a valid search warrant. Otherwise, critical evidence will
be ruled inadmissible.
What is a Search Warrant ?

A search warrant is a written order issued by a judge or magis
trate. It describes the place to be searched as well as the things to
be seized . Search warrants are usually issued for the search of a
premise, person, or vehicle. Generally, search warrants are issued
based on evidence gathered by the investigator during the con
duct of the investigation. This evidence must establish that a
crime has been or will be committed.
A specialized form of search warrant is a search warrant for
financial records. This specialized warrant directs aa law enforce
ment officer to search for financial documents or records . If
Company XYZ is a suspect in a kickback investigation, the inves
tigators probably will not be interested in searching and seizing
office equipment and personnel files. However, they will be inter
ested in obtaining the company's journals, ledgers, and other
financial records . That's what a search warrant for financial
records will allow them to do .
266 CHAPTER 10
A search warrant is usually prepared by the prosecuting attor

ney before it is submitted to a judge or magistrate. Search war
rants are usually required to be executed during daytime hours on
a given day and are executable within a 72 hour period. At the
completion of the search, aa detailed inventory of the items seized
is prepared. A copy of the search warrant and the inventory are to
be left at the place searched or with the person searched. The
investigator will then return the warrant and the inventory to the
judge or magistrate who authorized the warrant.
Probable Cause
A judge or magistrate will issue a search warrant only after a find
ing of probable cause. Probable cause is all the facts and circum
stances within the knowledge of the investigator about a criminal
activity that can be considered reasonable and trustworthy.
When developing probable cause, an investigator must keep
the following two principles in mind:
• Probable cause must be current
• Probable cause must be reasonable and trustworthy to a

degree sufficient to ensure that a reasonable person will believe
that a crime has been or will be committed and that the evidence
sought exists in the place to be searched
Probable cause may vary from investigation to investigation but
only in matters of degree. It must be present and it must be suffi
cient to enable an impartial judicial officer to issue the warrant.
The Affidavit
Judges or magistrates issue search warrants and do so only after a
finding of probable cause. To convince a judge or magistrate that
probable cause exists, an investigator prepares a sworn state
ment called an affidavit. In affidavits, investigators summarize
their expertise and the information gathered during their investi
gations . The investigator who prepares an affidavit is called the
affiant.
An affidavit for a search warrant should contain certain types
of information. Affidavits for “ general” search warrants and
search warrants for financial records should contain the following

types of information:
• Affiant's experience
• Detailed account of the criminal activity
• Description of place(s) to be searched
• Financial evidence
• Items to be seized
An affidavit for a search warrant for financial records requires

an additional type of information : conclusions based on the affi
ant's expertise.
The following paragraphs describe the types of information to
be included in a search warrant for financial records. An example
of a statement reflecting the type of information is also provided.
Affiant's experience
The affidavit should contain a sufficient amount of detail concern
ing the affiant's experience, training, and investigative background.
I am a Special Agent with the IRS, Criminal Investigation
Division, and have been so employed since March, 1977. I have
conducted or assisted in over forty investigations of alleged
criminal violations of IRS laws; of the distribution of drugs
and controlled substances; and of money laundering. For the
past 24 years, I have held the position ofIntelligence Analyst. I
have been in charge of the Division's High Level Drug Leaders
Project, Project Narcotics Currency, and Project White Collar
Currency. All of these projects analyze information relative to
the flow ofdrug proceeds throughout the State of Wisconsin.
Account of criminal activity
The affiant must detail the illegal activity that has been uncov
ered during the investigation.
In January 1992, four FBI informants who have previously
provided reliable information reported that Tom Trio was
selling cocaine in the Milwaukee area . Two of the informants
stated that Trio was selling cocaine out of his residence . One
268 CHAPTER 10
informant reported that a friend of his had seen several trash

bags of currency in Trio's house.
Description of place(s) to be searched
The affiant must show that the defendant exercises dominion and
control over the location(s) to be searched . To do this, the affiant
can cite information contained in documentation such as tele
phone and utility records . The affiant can also point to surveil
lance findings as well as information secured through interviews
from third parties.
The Milwaukee City Phone Directory lists Tom Trio's address as

102 North West Street, Milwaukee, Wisconsin.
Financial evidence
The affidavit should document major asset purchases and expen
ditures made by the defendant. It should describe any acts of
deceit or fraudulent schemes uncovered , such as the use of
aliases or the existence of any money laundering activities. Tax
information, if available, should be presented as financial evi
dence. Generally, a court order is needed before tax returns can
be released to non-IRS law enforcement personnel because of
confidentiality laws. However, tax returns can be obtained from
non-IRS sources such as an ex-spouse, bookkeeper, accountant or
return preparer, or loan documents.
Federal income tax records reveal that Tom Trio has reported a
total income of $ 54,000 during the past two years.
Items to be searched / seized
An itemized list of specific property (documents and evidence) to
be searched for and seized must be attached to the affidavit.
Search the residence located at 102 North West Street,

Milwaukee, Wisconsin and the 1990 Mercedes with VIN num
ber G1AB2323for:
U.S. currency
Cocaine
Books, records, receipts, notes, ledgers, and other papers relating

to the transportation, ordering, sale, and distribution ofcocaine
Conclusions based on the affiant's expertise

As previously indicated, what distinguishes the affidavit for a
search warrant for financial records from the affidavit for aa “ gen
eral” search warrant is the reliance on the affiant's expertise to
establish that records and other evidence will be at specific loca
tions.
Based upon my training and experience, and my participation

in other investigations involving the distribution of cocaine, I
know that:
a. drug traffickers must maintain, on hand, large amounts of

U.S. currency to maintain andfinance their ongoing narcotics
business
b. drug traffickers maintain books, records, receipts, notes,

ledgers, and other papers relating to the transportation, order
ing, sale, and distribution ofcontrolled substances
A sample affidavit for a search warrant for financial records is
shown on pages 270 through 272. Page 273 contains the search
warrant issued as a result of the affidavit.
270 CHAPTER 10
AFFIDAVIT
STATE OF WISCONSIN )
) ss
MILWAUKEE COUNTY )
John Smith, being first duly sworn on oath, here deposes and says:
1. I am a Special Agent with the IRS, Criminal Investigation Division, and have been so employed since
March, 1977. I have conducted or assisted in over forty investigations of alleged criminal violations
of IRS laws; of the distribution of drugs and controlled substances; and of money laundering. For the
past 2 1/2 years, II have held the position of Intelligence Analyst. I have been in charge of the
Division's High Level Drug Leaders Project, Project Narcotics Currency, and Project White Collar
Currency. All of these projects analyze information relative to the flow of drug proceeds throughout
the State of Wisconsin.
2. I have attended and instructed in -service training seminars which concentrated on currency report
ing statutes ( Title 31 , U.S.C.), money laundering statutes ( Title 18, U.S.C. $$ 1956, 1957) and drug
statutes ( Title 21 , U.S.C. $$ 848, 851 , 881 ). I have conducted net worth and expenditure investiga
tions and I have planned, drafted and executed both financial and traditional search warrants. I have
been qualified in the U.S. District Court as an expert in financial and money laundering investiga
tions .
3. As part of my duties, I am involved in the investigation of Tom Trio for cocaine trafficking in violation
of Title 21 of the United States Code. Special agents from the Federal Bureau of Investigation and the
Drug Enforcement Administration and officers from the City of Milwaukee Police Department have
participated in this investigation. The information in this affidavit comes from my own personal
investigation and observation, or from the information provided to me by personnel of these other
agencies.
4. In January 1992, four FBI informants who have previously provided reliable information stated that
Tom Trio was selling cocaine in the Milwaukee area . Two of the informants stated that Trio was sell
ing cocaine out of his residence. One informant reported that a friend of his had seen several trash
bags of currency in Trio's house.
5. The Milwaukee City Phone Directory lists Tom Trio's address as 102 North West Street, Milwaukee,
Wisconsin .
6. Real Estate records at the County Courthouse in Milwaukee, Wisconsin show that on August 12,
1991, Tom Trio purchased the residence at 102 North West Street from John Jakes for $ 64,000. No
mortgage documents have been located for the property.
7. In an interview with John Jakes, he stated that Trio attempted to pay cash at the time of settlement.
Jakes refused to accept payment in cash and Trio subsequently provided him with eight $ 8,000
cashier's checks .
8. Tom Trio is employed by Penders and Associates, Inc. This is his only place of employment.
9. Local income tax records reveal that Tom Trio has reported a total income of $54,000 during the past
two years .
10. On February 6, 1992 , I collected and went through the trash left for garbage collection at 102 North
West Street. The garbage included bills addressed to Tom Trio of that address, M & I Bank
envelopes, 12 money wrappers marked for $ 2,000 each, and the title to a 1990 Mercedes with VIN
number G1AB2323. The garbage also contained freezer paper cut into small squares. Special Agent
Thomas Gore of the Drug Enforcement Administration told me that such paper is commonly used to
wrap 11 ounce quantities of cocaine. The garbage also included three large plastic garbage bags that
contained fiber glass cartons. Special Agent Gore told me that cartons of that size and type commonly
contain kilograms of cocaine . The inside of the packages had a powdery residue which Special Agent
Gore tested for the presence of cocaine. The test was positive.
11. Documentation from the dealership where Tom Trio bought the 1990 Mercedes shows that he paid
$27,000 in cash for the car.
12. Between February 16 and February 24, 1992, one of the previously mentioned informants purchased
cocaine from Tom Trio three times . Each buy was a controlled buy. All three buys took place at Trio's
house. Each time, the substance purchased was tested for the presence of cocaine. Each time, the
substance tested positive.
13. Based upon my training and experience, and my participation in other investigations involving the
distribution of cocaine, I know that:
a. drug traffickers must maintain, on hand, large amounts of U.S. currency to maintain and finance
their ongoing narcotics business;
b. drug traffickers maintain books, records, receipts, notes, ledgers, and other papers relating to the
transportation, ordering, sale, and distribution of controlled substances;
c. the aforementioned books, records, receipts, notes, ledgers, etc., are commonly maintained where
drug traffickers have ready access to them, i.e., homes, offices, automobiles;
d. it is common for drug traffickers to hide contraband, proceeds from drug sales, and records of drug
transactions in secure locations for ready access;
cocaine traffickers usually keep paraphernalia for packaging, cutting, weighing, and distributing
cocaine;
f. the courts have recognized that unexplained wealth is probative evidence of crimes motivated by
greed , particularly trafficking in controlled substances.
14. Based on the information contained herein ,and my experience and training, Ihave probable cause to
believe that Tom Trio is involved in cocaine trafficking in violation of Title 21 U.S.C. $ 881 (B). The
locations to be searched and property to be seized are included on the attachment to this affidavit.
John Smith.
Special Agent
272 CHAPTER 10
Attachment
Search the residence located at 102 North West Street, Milwaukee, Wisconsin and the 1990 Mercedes
with VIN number G1AB2323 for:
U.S. currency
Cocaine
Drug paraphernalia for packaging, cutting, weighing, and distributing cocaine, including, but not
limited to, scales, freezer paper, and spoons
Books, records, receipts, notes, ledgers, and other papers relating to the transportation, ordering,
sale, and distribution of cocaine
Books, records, receipts, bank statements and records, money drafts, letters of credit,passbooks,
bank checks, and other items evidencing the obtaining, secreting, transfer, and concealment of
assets and the obtaining, secreting, transfer, concealment, and expenditure of money
Income tax returns
UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF WISCONSIN
AT LAW AND IN ADMIRALTY
UNITED STATES OF AMERICA,
Plaintiff, Warrant No. 1
VS.
SEARCH WARRANT
(21 U.S.C. $ 881 (B))
Thomas Trio
TO : ANY DEPUTY UNITED STATES MARSHAL OR OTHER FEDERAL OFFICER

An affidavit has been made before me by Special Agent John Smith of the United States Internal
Revenue Service that he has reason to believe that Tom Trio of 102 North West Street, Milwaukee
Wisconsin is involved in cocaine trafficking in violation of Title 21 U.S.C. § 881 (B). Special Agent
Smith's affidavit further states that he has reason to believe that evidence needed to support such a claim
is located at the residence of 102 North West Street. I am satisfied that there are sufficient facts and cir
cumstances to support the probable cause standard to believe that the items listed on the attachment to
this warrant are currently located at 102 North West Street in Milwaukee, Wisconsin, and that grounds
exist for the issuance of this seizure warrant as stated in the supporting Affidavit.
YOU ARE HEREBY COMMANDED to proceed to 102 North West Street to seize the items listed
or described on the attachment to this warrant within aa period of three days, serving this warrant and
seizing this property during daytime hours 8:00 a.m. to 5:00 p.m., leaving a copy of this warrant, prepar
ing aa written inventory of all the property seized, and promptly returning this warrant and bringing the
inventory before this court as required by law within ten days after seizure.
Dated at Milwaukee, Wisconsin, this Zday of March, 1992 .
Alice Miller
United States Magistrate
274 CHAPTER 10
Undercover Operations
Operation ABSCAM was an investigation into corruption among
U.S. government officials. Over the course of a year and aa half, FBI
undercover agents approached public officials thought to be
involved in political corruption and told them that oil-rich Arab
sheiks would offer money in exchange for political favors. The
agents met with the public figures and paid out considerable sums
in cash. Several public officials were indicted and convicted .
In August 1989, 46 traders from the Chicago Mercantile
Exchange and the Chicago Board of Trade were indicted on
charges ranging from defrauding customers to tax evasion to rack
eteering. The charges were the result of a two-year undercover
operation that put wired FBI undercover agents in the trading pits
at the two exchanges.
In March 1991 , law enforcement agents raided three
University of Virginia fraternity houses and arrested 12 students
for selling drugs to undercover agents. The raids came after more
than six months of investigation by federal and state officials. The
investigation involved undercover purchases of designer drugs,
LSD , cocaine, and marijuana.
What is an Undercover Operation ?

The undercover operation is something we hear about all the
time. In an undercover operation, law enforcement officers or pri
vate individuals assume an identity other than their own for the
purpose of gathering information relating to criminal violations.
Undercover operations require the highest degree of skill and
planning to be successful. Used in a timely manner and with
great care, the undercover operation can bring results to investi
gations that cannot be achieved in any other way. Used in the
wrong way or handled poorly, these operations can lead to death,
injury, serious financial liability, and agency embarrassment .
An undercover operation is frequently the only investigative
technique that can be used effectively against well-organized
criminal groups or sophisticated criminal activities. Through the
use of disguise and deceit, information is gathered directly from
those involved in the criminal offense. Take, for example, the
undercover activities of Joe Pistone . Pistone was an undercover
agent who infiltrated the Bonnano and Columbo crime families,

posing for five years (1976-1981 ) as jewel thief Donnie Brasco.
Pistone was instrumental in gaining more than 100 federal con
victions against organized crime members.?
Undercover activities can last a long or short period of time.
As was just indicated, Joe Pistone was undercover for five years.
The length of the undercover operation is contingent on the
amount of information necessary to develop a picture of the
alleged criminal activity. Situations involving organized crime fig
ures and sophisticated financial crime networks dictate lengthy
undercover operations.
At the other extreme are short-term undercover operations
called stings. The previously described drug raid at the
University of Virginia is an example of a sting operation.
Objectives of Undercover Operations

Undercover operations are accepted by the courts as a legitimate
function of public and private law enforcement personnel, pro
vided that the undercover operation is conducted in those situa
tions where sufficient probable cause exists to believe that a
crime has been or is being committed. Entrapment issues make it
essential to establish that the suspect has a pre-disposition or
prior intent to commit the crime. The only factor the government
provides is the opportunity for the suspect to commit the offense.
The courts will not allow covert operations to be conducted as
law enforcement “fishing expeditions.” Undercover operations
should be based on a written plan that details time frames and
specific objectives. Specific objectives of an undercover operation
may include :
• Observing and attending planning sessions for future viola
tions
Identifying unknown violators and developing information

related to violations currently in process
• Purchasing contraband (i.e. , drugs, firearms, counterfeit
currency)
• Identifying the fruits of a crime (illegal proceeds and profits)
276 CHAPTER 10
Developing information related to past crimes or criminal

activities
• Locating contraband or weapons

• Locating violation sites
Identifying co - conspirators and /or key witnesses
Obtaining probable cause for search and arrest warrants
Checking the reliability of informants
Corroborating a witness' statements and testimony
• Gathering information and documents relative to the crimi
nal investigation
Obtaining information and leads to purchases and expendi
tures
Surveillance
Jonathan J. Pollard was a civilian analyst for the U.S. Naval
Intelligence Center in Suitland, Maryland. In November 1985,
Pollard's supervisor, Jerry Agee, began suspecting that Pollard
was taking classified documents from his workplace and provid
ing them to a foreign government. Agee shared his suspicions
with a senior naval intelligence officer. The Naval Investigative
Service and the FBI agreed to investigate. As the investigation
progressed, the agents determined that Pollard was providing
classified information to aa foreign government. They just did not
know which one.
Eventually the investigators discovered that Pollard was pro
viding the classified information to Israel. How did they deter
mine this ? They placed a round- the -clock surveillance on
Pollard .
On November 21 , 1985, Pollard and his wife decided to make
a run for it even though they knew that were going to be followed.
Pollard felt sure he could shake the surveillance as he and his
wife drove in circles around Washington, DC . Several unmarked

FBI cars were involved in the surveillance— one car would pick
up the tail then drop it when another car became involved. Would
the Pollards lead them to the foreign government involved in the
espionage ring? Yes. The Pollards revealed the government they
were providing classified information to when they pulled up to
the Israeli embassy .
What is Surveillance ?
Surveillance is the secretive and continuous observation of persons,
places and things to obtain information concerning the identity and
activity of individuals suspected of violating criminal laws. Like
undercover operations, surveillance provides a means to obtain
information and evidence which probably would not be available by
any other means. It is aa technique that requires experience, team
work, and knowledge of the “ thing” to be surveilled.
Surveillance vans assist investi
Private citizens who form neighborhood watch groups use sur
gators while conducting moving,
stationary and electronic sur veillance to gather information. So do private companies that
veillance. Some surveillance employ security cameras. Countries use intelligence agencies to
vehicles contain hidden cam
set up surveillance operations that are a matter of national secu
eras, microphones, instamatic
cameras that zoom in on license rity.Even criminals perform surveillance on their suspects before
plates and two-way radios to committing crimes.
communicate with a command
base.
Objectives of Surveillance
The objectives of aa surveillance are to:
• Obtain evidence of аa crime
• Obtain probable cause for search and arrest warrants

• Identify co - conspirators and associates of the suspects
Apprehend violators during the commission of aa crime
• Develop investigative leads
• Provide protection and corroboration for undercover officers
• Locate persons and things
• Gather intelligence
278 CHAPTER 10
Types of Surveillance
Various types of surveillance activities are utilized by law
enforcement. They can be classified as follows :
• Stationary
• Moving
• Electronic
Stationary
Stationary surveillance is where neither the suspect or the agent
maintaining the surveillance are mobile. Sitting in an unmarked
car and watching someone's home or office is an example of sta
tionary surveillance . A common term for stationary surveillance is
stakeout. The surveillance on Jonathan Pollard began as a stake
out. But when Pollard and his wife decided to make a run for it,
the surveillance requirements changed. A moving surveillance
was needed .
Moving
A moving surveillance is one where the suspect does not remain
in one position. Following a suspect in an automobile is an exam
ple of аa moving surveillance. Following a suspect on foot or in a
boat, or watching a car from an airplane also would be considered
moving surveillances.
The risk of detection is higher in a moving surveillance than
it is in aa stakeout. Also, a moving surveillance consumes signifi
cantly more manpower. In the instance of following an automo
bile , aa minimum of three cars with radio contact would be
necessary. In most investigative situations, surveillance tech
niques mandate that it is better to lose the suspect than compro
mise the surveillance.
Electronic
The FBI agents who went undercover as traders in the pits at the
Chicago Mercantile Exchange and the Chicago Board of Trade
secretly tape recorded hundreds of incriminating conversations.
To make sure they would not lose touch with the Pollards dur
ing a moving surveillance, the FBI planted an electronic tracking
device inside the bumper of the Pollard's car.
In each of the incidents above, electronic devices were used

to assist law enforcement officers in obtaining evidence against
their suspects. Used in a secretive manner, electronic surveil
lance can be of tremendous assistance to an investigation, but it
must be used with care. Some devices available for use may
require court orders.
In the trading pit incident, at least one of the people involved
in the taped conversations knew the conversations were being
recorded . This is called consensual monitoring. At the federal
level, such monitorings are Constitutional and statutorily permis
sible; however, this investigative technique is subject to careful
regulation in order to avoid any abuse or any unwarranted inva
sion of privacy. At the state level, some states have made consen
sual monitoring illegal . Therefore, it is important for an
investigator to know the legal precedents in the state where an
investigation occurs.
Today's sophisticated electronic monitoring devices can be
concealed in virtually anything. Briefcases, light fixtures, and jog
ging suits can be used to conceal microphones and tape recording
devices. Pen registers (telephone number recording devices) can
be activated by the change in voltage and used to record the num
bers dialed on outgoing calls. Other electronic devices can make
a record of the incoming telephone calls to a suspect's number.
Informants
Larry Bullock was an Illinois State Representative who dreamed
of becoming Chicago's first black mayor. His district encom
passed McCormick Place Exposition Hall, a place that would
play an active role in the 1992 World's Fair if Chicago was
selected as the host city.
By law, a certain percentage of all public construction pro
jects had to be awarded to minority business enterprises (MBE).
Eugene Blackmon was an MBE general contractor and he was
experiencing difficulty in getting his money from another general
contractor to pay his sub-contractors . Blackmon approached
Bullock to enlist his aid in securing his money. Bullock said he
280 CHAPTER 10
could help - for a price! Bullock also promised Blackmon that he

would play a prominent role in the awarding of the World's Fair
contracts .
Blackmon did not have the money to pay Bullock. But he was
desperate to get his money, so one Friday afternoon he went to the
Office of the U.S. Attorney and told them about his encounter
with Bullock. The government and Blackmon reached an agree
ment where Blackmon would become an informant and would
meet with Bullock to discuss fixing contracts and other matters in
political corruption . In return, the government would give
Blackmon money to “ pay ” Bullock so that his contract money
would be released .
Over the next few weeks, Blackmon had a series of meetings
with Bullock and paid him thousands of dollars of FBI money.
Blackmon wore a concealed recording device to the first meeting
but something went wrong with the equipment and, instead of
recorded conversations, all the FBI got was a mess of spaghetti
tape because the tape had come off the spool . At all subsequent
meetings, Blackmon wore a recording device and had aa transmit
ting device concealed in his briefcase.
Toward the end of the investigation, Bullock and his attorney
were invited to the U.S. Attorney's Office and were treated to
selected portions of the recorded conversations . The government
offered Bullock the opportunity to cooperate with them in investi
gating political corruption. Bullock refuses, choosing rather to go
to trial. After a long trial, during which Blackmon spent a week
on the stand testifying, Bullock was found guilty of aa multitude of
offenses. He was sentenced to six years in prison.
What is an Informant ?
In the case described above, it is important to note that the role of
the informant was key in carrying out the investigation. An infor
mant is a person who has specific knowledge of a criminal event
and provides that information to a law enforcement officer.
The development of an informant to provide confidential
information is a legitimate function of investigators. If properly
developed, informants can greatly enhance an investigation.
Many criminal cases have originated from informant informa
tion. Others have been successfully completed only because an

informant supplied information that would have otherwise been
unknown. Take, for example, the case against Al Capone. Capone
was one of the United States' most notorious gangsters . You'd
think that when he eventually went to prison he would have gone
for murder or racketeering. No, Al Capone was brought down by a
mild-mannered tax investigator from the IRS. This investigator
was able to build a case against Capone when one of Capone’s
associates told IRS agents where they could seize books reflecting
Capone's income.5
Perhaps the most common reason informants supply informa
tion is because they themselves are involved in the criminal
offense and by furnishing information on the suspect they can dif
fuse suspicion from their own activities. Particularly when look
ing at jail time, individuals are willing to become informants in
order to get a reduced sentence based on their cooperation .
Many informants are motivated by revenge. They sense that
they've been wronged or taken advantage of by the suspect and
want to get even. For example, in the case of drug dealing, an
informant may furnish information on the suspect because the
suspect is aa “ business ” competitor.Other informants feel a social
responsibility to provide law enforcement their knowledge of any
criminal wrongdoing. It is critical that the investigator be able to
determine why the informant is cooperating and to use that infor
mation to properly assess how the informant and information pro
vided should be handled .
Informants can be used in surveillances, consensual monitor
ings, and as participants in undercover operations. Control is a
key element in dealing with an informant.Informants should take
directions from the investigator, not the other way around .
Without control, not only is the investigation in jeopardy, but the
investigator could be at risk . If informants are willing to violate a
basic tenet of our culture and inform on someone close to them,
consider how quickly they would be willing to blackmail agents if
they can discover some wrongdoing.
Informants can be powerful tools in a financial investigation.
However, all informant information should be corroborated
through independent verification to ensure it's accuracy.
282 CHAPTER 10
Evidence Recovered from Trash

An informant tells an investigator that Billy Greenwood is dealing
drugs. The investigator watches
Greenwood's home and observes a number of cars making
brief nighttime stops at the house. Based on the informants infor
mation and the surveillance, the investigator asks the garbage
collector for the plastic garbage bags in front of Greenwood's
house . While sifting through the garbage, the police uncover
drug-related paraphernalia, straws containing cocaine residue,
and phone bills listing calls to people with drug records. Based on
this evidence, the investigators obtain a warrant to search the
house and find cocaine and hashish. They arrest Greenwood. Can
the evidence the investigators collected from the trash be used
against Greenwood at trial ?
Yes. In May 1988, the Supreme Court ruled that police may
freely rummage through ordinary household trash left at a curb
6
side without obtaining a search warrant. This decision evolved
from the incident described above .
Investigators often find that picking up a suspect's garbage is
a useful tool for identifying leads . People often dispose of impor
tant documents and information pertaining to their criminal activ
ities when they throw out their trash. Once the trash leaves the
suspect's possession, they no longer have a reasonable expecta
tion of privacy in the contents of their trash. However, the investi
gator must be careful not to violate the suspect's curtilage.
Curtilage usually, but not always, refers to the area inside the
boundary of a person's residence or business location, which has
been marked off by any number of man-made or naturally occur
ring devices. These boundary lines include fences, sidewalks,
tree lines, and rows of shrubbery. Inside this area, a person has a
reasonable expectation of privacy based on the Fourth
Amendment to the Constitution .
Reading Mail Covers

Since letters, packages, and other documents travel through the
U.S. and other mail delivery services, a person cannot attach a
reasonable expectation of privacy to the outside of the mail itself.
Therefore, an investigator, in conjunction with the U.S. Postal
Service, can make a record of the outside of any mail . Return
addresses and postmark information can provide an excellent
source of financial leads (i.e. names of banks, credit card compa
nies, etc).
Forensic Science
Timothy Wilson Spencer was suspected of murdering aa number of
women in Richmond and Arlington, Virginia. Police had reason to
suspect Spencer but had no confession, no witnesses, and a lim
ited amount of physical evidence . Then it was found that
Spencer's DNA perfectly matched that from semen found at three
of the murder scenes . The likelihood that someone else could
have produced all three matching patterns was 1 in 135 million.
Subsequently, Spencer was found guilty on four counts of murder
and sentenced to death.?
Genetic fingerprinting played a crucial role in the case
against Spencer. Genetic fingerprinting is aa technique used in
forensic science. Forensic science is the application of scientific
techniques to legal matters, in particular to investigations of crim
inal activities . The forensic sciences have been utilized in the
investigation of violent crimes for centuries . Traditional tech
niques such as fingerprint identification , ballistics classifications,
and drug, blood, and urine analyses have served the purposes of
law enforcement successfully in the past.
Not all criminal cases evolve around forensic evidence like
fingerprint identification and ballistics classification. Sometimes
evidence comes from the forensic analysis of documents involved
in the crime. Take, for example, the Lindbergh kidnapping case.
On March 1 , 1932, 20-month old Charles A. Lindbergh, Jr. was
284 CHAPTER 10
kidnapped. A ransom note left at the scene of the crime read:

Have fifty thousand dollars ready, 25,000 in twenty -dollar
bills 15,000 in ten -dollar bills, and 10,000 in five-dollar bills.
In 4-5 days we will inform you where to deliver the money. We
warn you for making anything public of for notify the police.
The child is in gut care. Indication for all letter are signature
and three holes.
On May 12, 1932 the child's body was found in some woods a
few miles from the Lindbergh mansion. It wasn't until September,
1935 that a person was charged with the kidnapping and murder
of the Lindbergh baby. On January 2, 1935 Bruno Richard
Hauptmann went to trial. Since the ransom note was a key piece
of evidence, the prosecution needed to show that Hauptmann
wrote the note . They obtained other samples of his handwriting
and compared them to the ransom note. Handwriting experts took
the stand and stated that Hauptmann's handwriting and that of the
ransom note were one and the same . This crucial testimony
helped convict Hauptmann.
What is a Questioned Document?

Since the end product of financial investigation is documentary
evidence, scientific examination of documents by a qualified
expert can be an important aspect of the investigation. Besides
verifying a person's handwriting, a document examiner can ana
lyze checks, kidnapping and hold-up notes, hate letters, wills,
contracts, birth /death /marriage certificates, passports or any other
document to determine if they have been forged, erased , or
changed in any way.
Document examiners are called into an investigation when a
questioned document is involved. A questioned document is a
document that has been questioned in whole or in part with
respect to its authenticity, origin, or contents.For example, a sus
pect denies that she signed a check used to make aa bribe pay
ment. Or Cousin Jane accuses Cousin Larry of altering Uncle
Charlie's will so that Larry receives the bulk of Charlie's estate.
Types of Forensic Analyses

Document examiners can perform many types of analyses on a
document. The following types of forensic analyses are discussed
in this section:
• Handwriting analysis
• Typewriter analysis
• Alteration analysis
• Ink analysis
• Paper analysis
• Document restoration
Handwriting Analysis
Over the years, an individual's brain ,arms, and fingers create
a pattern of handwriting. Everyone's handwriting possesses “ nor
mal” or “ natural” variations . But the basic pattern does not
change. When analyzing handwriting, the document examiner has
the suspect submit an exemplar, a sample to be used in compari
son to the questioned document. The document examiner deter
mines the range of variation in a person's handwriting from the
exemplar and compares that handwriting to the questioned docu
ment. The document examiner can determine if the writing on the
questioned document falls within the individual's “ normal ” or
“ natural ” range .
Typewriting Analysis
Every typewriter is unique. Each one types differently from every
other one because typewriters develop individual characteristics
during the manufacturing process and through use. Examiners
attempt to determine a document's type style and escapement
(pica, elite, or proportional) to establish the make and model of the
typewriter that created it. Also, the examiner attempts to find hori
zontal and vertical misalignment of characters, which if signifi
cant, is considered to be an identifying characteristic. Examiners
also search for any typeface defects or damaged letters.
286 CHAPTER 10
Alteration Analysis
Document examiners can determine if a document has been
altered. They look for additions ( inserts between lines, addition of
a word, sentence, or paragraph to a document) and deletions (era
sures or obliterations ). Utilizing infrared and ultraviolet viewing
techniques and photography, alterations unseen by the naked eye
become apparent. By looking through a microscope, a document
examiner can determine if information was erased by determining
if paper fibers were disturbed due to abrasive action.
Sophisticated chemical deletions such as white-out oblitera
tions or ink over -writes can be examined through infrared reflec
tants .
Interlineation, the addition of a word, sentence or an entire

paragraph to a document can be detected because it is nearly
impossible to perfectly realign paper in a typewriter once a docu
ment has been removed. The examiner can detect the misalign
ment of the added information by the use of typewriting test
plates .
Ink Analysis
> The ink on a questioned document can be examined through the
use of scientific techniques. One ink can be differentiated from
another by microscopy, infrared reflectants, transmission, flores
cence, and thin layer spectro-chromatography. Inks are identified
.
and dated by their chemical properties . Even pencil writing can

The ink components in various
be dated within 50 years based on carbon methods .
types of writing instruments can Paper Analysis
react differently to infrared
lighting. Dissolved ink is tested Paper can be identified by characteristics such as dimensions,
by spotting itonto a thin layered
a texture, thickness, color and opacity. Higher grades of paper have
chromatography plate which is watermarks that identify both the brand of paper and its manufac
placed into a solvent tank . turer. Some papers are coded by the manufacturer to show the
year of make .
Document Restoration
It is possible to restore a document that has been torn , mutilated,
or even burned. Through scientific processing, some documents
that have been partially destroyed can be pieced together and
used for investigative purposes.
In this age of desktop publishing, a new type of forgery has
come about - desktop forgery. With a scanner, computer, and laser

printer, desktop forgers can re-create almost anything: checks,
invoices, etc. While some of the forensic analysis techniques
described above can be applied to desktop forgery, new tech
niques will evolve.
Evidence Recovered from Computers

Recent law enforcement reports suggest that - just as legitimate
business managers have found computers indispensable in con
ducting business - organized criminals, drug dealers, and even
-
child pornographers increasingly depend on computer transac

tions. The computer is a powerful tool in today's business society,
providing access to many services and programs. Computers also
can provide evidence of criminal activity. A computer could con
tain a drug dealer's database, the daily operations of a prostitution
ring ,or a pornographer's mailing list.Physical evidence including
handwritten notes , printouts , manuals , sales invoices , pho
tographs, and fingerprints may also be found in the area of the
computer.
Link Analysis
Link analysis is a technique for evaluating, integrating, and pre
senting complex information by taking bits of information col
lected from various sources and putting them together to show
patterns and meanings . It provides a graphic picture of associa
tions and relationships among various of persons and organiza
tions. Link analysis is ideally suited for showing the associations
among identifiers such as:
• Telephone numbers
• Vehicle license plates
• Aircraft/boat/vehicle registration numbers
288 CHAPTER 10
• Property ownership
• Financial transactions
For the investigator, link analysis converts written informa

tion into a graphic summary called an association matrix. The
association matrix is converted into a link diagram which
graphically depicts relationships among people, organizations,
and activities . Look at how an association simplifies the follow
ing relationships:
Smith is the vice president of the ABC Corporation and
President of DEF Corporation, a subsidiary ofABC. DEF is a
general partner in two limited partnerships. Jones and Green
are limited partners in the first partnership, Brown and Black
are limited partners in the second partnership. Black is also a
general partner in a third partnership. Smith may have an
interest in thefirst partnership.
ABC DEF
Corp Corp
Smith
LTD 1 LTD 2
Jones Brown Black
3rd
Green PTRN
Link networking can also be used to identify the direction and

frequency of telephone traffic between suspect parties. The num
bers inside the small circles indicate the number of calls made to
particular telephone numbers.
450-1011 1 550-2022
3 7.
8 2
650-3033
8 9
750-4044 850-5055
Link networking offers the investigator the ability to simplify

and synthesize the relationships and suspected relationships of
people in organizations involved in aa criminal activity. This tech
nique can be used to present material during the investigative
process or at any legal proceedings that may occur subsequent to
the investigation .
290 CHAPTER 10
Summary
An investigator's success or failure is often determined by the
investigative techniques used . “ Proving aa financial crime ”
requires evidence of guilt beyond a reasonable doubt. This often
can be achieved only through the use of specialized techniques.
With the continuing growth and sophistication of financial crimes,
knowing what investigative means are available and how to apply
them is the trademark of a successful financial investigator.

1. Why is it important that an investigator obtain a search war

rant prior to searching a suspect's residence or place of business?
2. What is probable cause and how does an investigator show

that probable cause exists?
3. What six types of information should be included in an affi

davit for a search warrant for financial information ? After you
have listed the six, place an * beside the type of information that
is not required in an affidavit for a “ general” search warrant.
.
a
b.
.
c
d.
292 CHAPTER 10
e.
f
.
4. You are developing an affidavit for аa search warrant for finan

cial information . You are trying to obtain a warrant to search John
Winkler's residence at 34 Tremont Avenue . Winkler is an
accounting clerk suspected of embezzling money from the com
pany he works for. In your affidavit, you include the following
statement:
While going through the trash left for garbage collection at 34

Tremont Avenue, I found an electric and phone bill addressed to
John Winkler of that address. I also found a bill from Haggler's
Electronic Store indicating that Winkler recently bought $ 2,435
worth ofstereo and video recording equipment.
How does the statement support your quest for aa search warrant ?
5. During the execution of a search warrant, a typewritten con

tract between the suspect, Toni Tuesday, and Frank Friday is
seized. Mr. Friday claims that the contract is a fake, that it is not
the contract his office created. What could aa document examiner
contribute to the investigation?
6. The University of Muckraker's basketball team is under inves

tigation for its suspected involvement with professional gamblers
in a point-shaving scandal. You have been tasked with going
undercover as one of the team's tutors. What do you suppose are
some of the objectives of this undercover operation?
7. During your undercover activities at the University of

Muckraker, you discover the following:
• Sam Roundball and Terry Rebound are the starting for
wards for the basketball team . They are also roommates and live
in aa fraternity house off campus .
• Roundball's uncle , Joe Bench , served time in prison .
Bench shared a cell with Jack Dice. Dice was convicted of run
ning an illegal gambling operation.
• Dice is a season ticket holder for University of Muckraker
basketball games . Dice's son, Kurt, attends the university. Kurt
Dice lives in the same fraternity house as Sam Roundball and
Terry Rebound.
• Jack and Kurt Dice often attend University of Muckraker

basketball games together.
Develop an association matrix that depicts the relationships
described above .
8. How might an informant contribute to your investigation of the

University of Muckraker's basketball team?
294 CHAPTER 10
Endnotes
Geis , Fraud Examiner's Manual, (National Association of
Certified Fraud Examiners, 1989), Section 11 , p. 85
2 “ Strife and Death in the Family,” Time, January 18, 1988, p . 21
3 Fraud Examiner's Manual, Section 11 , p.. 85
4 Wolf Blitzer, Territory of Lies, (New York : Harper & Row
Publishers, 1989), Chapters 7 and 8
5 Jay Robert Nash , Encyclopedia of World Crime, Volume 1 ,
(Wilmette, IL: CrimeBooks, 1990), pp. 603-618
6 “ Lifting the Lid on Garbage,” Time, May 30, 1988, p.54
7 Gordon Hinkley, “ The Search for the South Side Strangler,"
Reader's Digest, April 1991 , pp . 73-78
8 Jay Robert Nash, Encyclopedia of World Crime, Volume 2,

(Wilmette, IL: CrimeBooks, 1990 ), pp. 1479-1490
9 Catherine H. Conly, Organizing for Computer Crime
Investigation and Prosecution , (U.S. Department of Justice,
National Institute of Justice, 1989), p. 1
CHAPTER 111
7
Money Laundering and Forfeitures

ay back in Chapter 1 , we described money
W omfoney m o “rthe
fras
laundering ,dr or ttransfer
a investment
cketeer r
ug ansac
ing
tions, and other illegal sources into legitimate channels so that its
original source cannot be traced .” This chapter identifies methods
used to launder funds and techniques for detecting laundering
schemes . Additionally, the specific laws used in prosecuting
money laundering crimes are detailed. The evidentiary require
ments for successfully imposing forfeitures are also discussed in
this chapter. Forfeiture actions are a means to take the profit out
of criminal activity. The knowledge and expertise of the financial
investigator is particularly suited to dealing with the crime of
money laundering.
After studying Chapter 11,you should be able to:
• Distinguish between the two types of transaction systems.
• Describe three methods of moving money from the cash
transaction system to the business transaction system.
Identify methods used to move money into and out of the
United States .
Identify characteristics of businesses used as money laun

dering fronts.
Identify and interpret money laundering and forfeiture
statutes .
• Distinguish between civil and criminal forfeitures.

296 CHAPTER 11
QUELLE
• Describe the factors that assist an investigator in establish

ing probable cause for aa forfeiture proceeding.
In 1989, it was reported that “ the international trade in illicit
drugs may now be worth $300 billion a year. Most of that cash
must be laundered before it can be spent or invested. In the past,
narco-cops have spent most of their time, resources, and energy
trying to seize illicit drugs and arrest drug traffickers, many of
LOU
E
whom were minor miscreants. Now the attention has switched to
tracing flows of dirty money, arresting launderers, and confiscat
ing the assets of traffickers.”!
The illicit drug business is Even though the preceding quote focuses on drug trafficking
reportedly making $ 300 billion and money laundering, it pretty much sums up what this textbook
a year in the underground econ
omy. This is more than the is all about. In Chapter 1 , you read that an overwhelming majority
2
Gross National Product of the of crimes committed in America today are motivated by money
Netherlands. Traditional drug and that many of these crimes cannot be solved solely by the use
interdiction methods haven't
of traditional investigative techniques. In fact, not only are new
been effective — the emphasis
has now switched to hittingdrug investigative techniques required, a whole new approach to inves
dealers where it really hurts: in tigation is needed - a financial approach. The quote above con
the wallet. firms all of this . Investigations are now being geared to the
financial aspect of the crime.
This chapter deals with the crime of money laundering. The
term “money laundering” typically invokes the thought of money
being transported to a foreign country and, through some vague
method, being “ cleaned up .” This clean cash is then somehow
secretly transported back to the United States for use by narcotics
traffickers. The truth is, money laundering can occur on any street
corner or in any bank; may not involve currency; and does not
exclusively relate to narcotics trafficking. The growth of this
crime poses a major challenge to law enforcement because money
laundering takes place in the majority of financial crimes commit
ted in America.
In a report issued by the Presidential Commission on
Organized Crime, money laundering was defined as “ the process
by which one conceals the existence, illegal source, or illegal
application of income and then disguises that income to make it
appear legitimate.” The financial criminal has a need to manipu
late the proceeds generated from a crime so that he or she can use
them for personal benefit. Both the embezzling bank teller and
MONEY LAUNDERING AND FORFEITURES 297
the top echelon narcotics trafficker need to be able to spend their

illegal gains. And they want to achieve their goal without being
detected by law enforcement. They must launder their money.
Transaction Systems
Everyone conducts financial transactions. Activities such as buy
ing groceries , paying bills, carrying on a business, and conduct
ing an illegal activity all involve financial transactions . These
transactions are conducted either by a cash system or by what can
be referred to as a business system . The cash transaction system
is a method of conducting all financial transactions exclusively
through the use of currency. The business transaction system is a
method of conducting transactions that generates a trail of finan
cial records (i.e., checks , receipts , invoices , deeds , etc. ) . The
resultant records summarize the financial activity by reflecting
specific sources, destinations, participants, and dates.
For the financial criminal there are advantages and disadvan
tages to both systems. The table on the next page lists the advan
tages and disadvantages of both transaction systems.
If it was feasible to remain entirely within one system, partic
ularly the cash system, criminals would be afforded strong protec
tion from law enforcement's detection and scrutiny. However,
motivations exist for financial criminals to carry out some of their
activities in both systems, and virtually all move from one system
to the other. From an investigative viewpoint, the movement
between systems is often where the criminal is most vulnerable.
298 CHAPTER 11
Advantages and Disadvantages of Transaction Systems

Cash Transaction System Business Transaction System
Advantages Advantages
Everyone can come up with currency to There is greater efficiency and security
pay for illegal goods and services in the transfer of funds
Lack of records makes it difficult to connect Losses owing to employee theft are controllable
a person with a criminal activity or with
the purchase of illicit goods and services Other business opportunities are available such as
legitimate investments in real estate and securities
Unreported revenues are not taxed
A legitimate business is a valuable base of operations
Currency is universally accepted and source of cash for criminal activities
Ownership of a business permits acquisition of

community standing and influence which provides
additional camouflage for illegal operations
Disadvantages Disadvantages
In large amounts, cash is suspicious and calls Taxes must be paid on reported revenues
attention to those who hoard it
Business records are subject to
Lack of records makes it difficult to prevent examination by authorities
theft by employees
Falsification of records is a criminal act and
Large amounts of cash are difficult to can lead to a prosecution even without
handle and transport proof of other criminal activities
Certain assets cannot be acquired for cash Transactions have a source and destination
without an extensive inquiry into its source which can lead to the criminal activity
Methods of Laundering Funds

There are three basic methods used by financial criminals to
move their illegal funds from one transaction system to another.
These methods are:
• Legitimate businesses
Buy/sell transactions
• Offshore havens
Use Of A Legitimate Business

Legitimate businesses are often used to move money from the
cash system into the business transaction system. The proceeds
from an illegal activity can be laundered through a legitimate
business by one or more of the following means:
• Overstatement of legitimate revenue
• Overstatement of legitimate expenses
Deposits of currency
Let's look at how Stage One Records and Videos moves

money between the cash and business transaction systems. We'll
also introduce some investigative strategies that can be used to
detect money laundering.
Stage One Records and Videos is located in a small metropoli
tan shopping mall. The bulk of its business activity is the sale
of records, tapes, and compact discs. A smaller portion of busi
ness revenue is generated from the rental of video tapes. The
owner, Greg November, a local narcotics dealer, works part
time in the store and has fourfull -time employees who are not
aware of the his drug activity. November's wife, who is aware of
the illegal activity, maintains the business's books and records.
Customers are encouraged to pay cashfor purchases, and when
they do, they receive a 15% discount.
Overstatement of Legitimate Revenue

With this method of money laundering, illegal proceeds are added
into the sales records of a legitimate business . Greg November
employs this scheme at Stage One by doing the following three
things :
Falsifying invoices. November has his staff compute the
15% cash discount on purchases at the check-out line but has
300 CHAPTER 11
them show the full price on the sales invoice — “for bookkeeping
purposes.” For 1992 , total legitimate cash sales as recorded on
invoices amounted to $300,000. The 15% cash discount reduced
actual cash receipts by $ 45,000 , for net cash receipts of
$255,000. Now November can deposit $45,000 of drug proceeds
into the business's bank account to replace the discount reduc
tion .
• Generating phony invoices. November generated phony

sales invoices and video rental invoices totaling $65,000 and
$ 32,000, respectively. The creation of fictitious sales involves a
little more risk because it requires completely fabricating all ele
ments of aa sale rather than just modifying part of aa normal sale.
But apparently for November it's worth the risk. Now he can
deposit an additional $97,000 in narcotics proceeds .
.
Inflating the cost of goods sold. In 1992, the actual cost of
goods sold was $260,000. November inflated this amount by
$28,000 by copying, and then altering, purchase invoices.
The income statement on the next page shows the affect of
November's money laundering activities on his business . The
results of the activities described above can be seen in the Gross
Income figure.
MONEY LAUNDERING ANDFORFEITURES 301
Stage One Records and Video

Income statement for year ending
December 31 , 1992
Without With
Money laundering Money laundering
Sales :
Cash $ 255,000 $ 365,000
Checks 120,000 120,000
Video rentals 52,000 84,000
Total sales $427,000 569,000
Cost of goods sold $ 260,000 $288,000
Gross income $ 167,000 $ 281,000
Expenses :
Salaries/wages 96,000 144,000
Supplies 6,000 10,000
Rent 36,000 36,000
Interest expense 12,000 12,000
Telephone 9,000 9,000
Consultants' fees 0 10,000
Total expenses $ 159,000 $ 221,000
Net income $8,000 $ 60,000
Overstatement of reported revenue does have one significant

disadvantage; because the additional income is openly reported ,
the amount is taxable . Unless financial criminals want to pay a
large portion of their laundered proceeds in taxes, they need to
find some way to reduce their increased tax liability. They resolve
this problem by overstating their legitimate business expenses.
Overstatement of Legitimate Expenses
Overstating business expenses compliments overstating revenues .
Because inflated expenses, like real expenses, are tax deductible,
the additional tax liability caused by inflated revenues can be
302 CHAPTER 11
reduced or eliminated. The possibilities of overstating expenses

are limited only by one's imagination. Amounts can be “ paid ” for
supplies or goods never received, fictitious consultants can be
“ paid ” fees, nonexistent employees can be “paid” on a regular
basis, and depreciation can be claimed on inflated or nonexistent
assets .
By reviewing the income statement on page 301 , you can see

that Greg November inflated his legitimate business expenses in
1992 by $62,000. He added two of his narcotics distributors to
his payroll ledger and increased his yearly salary expenses by
$48,000. By withholding taxes and issuing year-end wage state
ments, he has provided his distributors with an apparent legiti
mate source of income . Throughout the year, he overpaid
suppliers by $4,000 and then deposited their refund checks to the
business's bank account as additional revenue from sales . The
original amount paid the supplier is recorded as an expense and
the canceled check is used as substantiation of the expense.
A consultant's fee of $ 10,000 is shown as an expense. This
could be completely fictitious— maybe November paid the
$ 10,000 to a narcotics confederate in his illegal activity or maybe
he used the money to purchase a personal asset .
Greg November manipulated his business's financial activi
ties by overstating both revenues and expenses . Not all money
launderers use both methods together. Some use just one or the
other. A narcotics dealer who wishes to generate a substantial
amount of income to support a lavish lifestyle, may only overstate
revenues. On the other hand, a money laundering front that hopes
to evade taxes, would inflate only expenses.
Deposits of Cash
The third means for a legitimate business to launder money is to
deposit cash proceeds generated from an illegal activity directly
into business bank accounts without disguising the deposits as
normal business receipts . This method cannot withstand the
scrutiny of an investigator because any cash that goes into aa busi
ness must come from somewhere; if not from revenues, then from
loans, sales of business assets, or investments from the owners.
The deposits of cash method is used mainly to take advantage
of the business's bank accounts to transfer illegal proceeds to the
business transaction system. Checks can then be written on busi

ness accounts for personal living expenses, and purchase of per
sonal assets, etc., thereby avoiding the arousal of suspicion that
large amounts of currency would generate.
Indicators of Money Laundering Fronts
As you can see from our example involving Stage One Records
and Video, the use of legitimate enterprises as fronts to conceal
and commingle illicit dollars in a money laundering operation
involves compromising accounting procedures. The illegal dollars
are rarely physically mixed with the legitimate business receipts,
rather, the accounting records are falsified to attribute more
income or more expenses to the enterprise (and indirectly to the
owners) than was actually earned or incurred .
Ideally, a money laundering store front operation would be
one that :
• Deals primarily in currency

• Has relatively fixed costs
• Is exempt from bank currency reporting requirements
Historically, taverns, restaurants, movie theaters, and mas
sage parlors have been used as “ front operations ” in money laun
dering schemes . These types of business operations provide a
ready location for illicit sales and clandestine meetings .
Depending on the sophistication and managerial talents of the
persons involved, almost any business activity can be used for
money laundering. However, businesses that are highly competi
tive or require substantial technical skills , are less likely to
attract direct criminal involvement. The rationale for this is that it
is difficult to run both a demanding business and a demanding
criminal organization at the same time.
Independent indicators can be used to develop financial leads
when money laundering is suspected . For example, if Stage One
Records and Video had an inventory of 400 videotapes and the
rental fee was $2 a day, then the monthly gross revenue should
not exceed $24,000 $ 400 x 2 x 30) . If the store reports gross
receipts of $35,000 per month, the investigator should deduce
that $ 11,000 was coming from elsewhere. While small variations
304 CHAPTER 11
do not constitute adequate proof of fraud, large scale fraud is

extremely hard to hide from this type of analysis.
The validity of certain types of expenses can be determined
through the use of independent indicators . For example, the
reported purchase of gasoline (a business expense) in amounts
that are enough to keep a delivery service truck running for 24
hours a day all year long would obviously be suspect. The exis
tence of fictitious employees may be independently verified by
non- payroll sources of information ( timecards, union records,
unemployment compensation payments, and tax withholding
records). Investigative findings revealing that certain sales never
took place, employees on the payroll never existed, or reported
inventory items are false, would provide strong indications of a
money laundering operation. For the financial investigator, detec
tion of money laundering is heavily dependent upon the quality of
documentation. By using independent indicators to test the valid
ity of reported revenue and expenses, the extent of the variation
from true business-related activities can be determined.
Buy/Sell Transaction
Besides using legitimate businesses as a way of moving money
into the business transaction system , the manipulated buy/sell
transaction can accomplish the same thing. Real estate or other
types of personal property transactions can be manipulated to
hide the flow of illegal proceeds and provide an apparent source
of legitimate income to the financial criminal. Suppose you're
buying a house that has aa fair market value of $2 million. You and
the seller agree that you will pay $ 1 million dollars for the house
and pay the balance paid off the books (i.e. in currency, drugs). In
this instance, the transfer from the cash transaction system to the
business transaction system has been accomplished and money
laundering has occurred . In principle, this type of money laun
dering can be used in any buy/sell transaction. Through indepen
dent appraisals or comparative sales data, the “ real value ” of a
transaction can be discovered .
Off Shore Havens

Countries in various parts of the world have legal and/or eco 9
nomic climates exactly right for laundering of “ dirty money.”

Historically, places such as the Cayman Islands, the Bahamas,
Switzerland, Panama and the Netherland Antilles have been asso
ciated with hidden bank accounts, fictitious corporations, and
money laundering. Even though there have been successful pros
ecutions, little is known about the actual operation of “laundering
factories ” in these “off shore” havens. Narcotics traffickers and
other financial criminals frequently use financial institutions,
legitimate businesses and/or front operations to move the pro
ceeds of their illegal activity out of the country. Often, there is
virtually no way to obtain documentation of these transactions
once they leave the United States. Accordingly, in a money laun
dering investigation, it is incumbent upon the investigator to fol
low the flow of funds as they cross the border. The graphic on the
next page highlights the common methods of moving cash into
and out of the country during a money laundering operation .Each
of these methods is discussed below .
Methods of Moving Money Out of the United States

• Physical Transportation. Illegally obtained currency is
physically transported from the United States to an off shore
haven in a briefcase, luggage, on a person, etc.
• Wire Transfer. Illegal proceeds are deposited into bank

accounts in the United States in increments below $ 10,000, thus
avoiding the filing of aa Currency Transaction Report. After
deposit, wire transfers are sent from the domestic bank to a bank
account in an off-shore country.
• Cashier's Check. Currency is deposited into bank accounts

(as described above) and cashier's checks are purchased . The
cashier's checks are either mailed or physically transported off
shore. Additionally, cashier's checks can be directly purchased in
increments less than $ 10,000.
306 CHAPTER 11
• Attorneys, Accountants, and Money Managers. Currency is

given to a party such as an attorney, accountant, or money man
ager who deposits the currency into his or her trust account. A
trust account is aa bank account maintained by and under the cus
tody and control of this party which is used for funds relating to
the client's financial and/or business interests . The other party
then transfers (i.e. wires, purchases cashier's checks, etc.) the
funds off shore.
Methods out of U.S. Methods into U.S.

Physical Transportation Proceeds of Ficticious Loans
Wire Transfer Ficticious Foreign Investors
Cashier's Checks Finder's Fee- Services Rendered
Attorneys, Accountants Corporate “ Salary ”
Brokerage Houses Cashier's Checks— Wire Transfers
Wire Services Physical Transportation- CMIR Filed
For money laundering purposes, the term “financial institu

tion ” goes beyond banks and brokerage houses. Individuals can
be financial institutions. A person who is in the business of
receiving money or negotiating for the movement of funds, is con
sidered aa financial institution . Accordingly , attorneys, accoun
tants, money managers, and even couriers who assist in the
movement of money can be considered financial institutions. As a
financial institution, when currency is moved in increments of
over $ 10,000 by an individual, he or she must file the required
forms (Currency Transaction Reports, and Currency and Monetary

Instrument Reports) to report the flow of funds.
• Brokerage Accounts. Currency, cashier's checks or ficti
tious business or personal checks are deposited into brokerage
accounts. The subsequent withdrawals are mailed or physically
transported off shore.
• Wire Services. Wire services (Western Union, American

Express, etc.) are often used to domestically transfer funds, but
can be used to move money off shore .
Western Union and other “ wire service ” transfers are no
longer just point to point forwarding of funds. A “ deposit” can be
accessed by the receiving party at any domestic or foreign office
of the wire service. Additionally, the sender is not required to pro
duce identification and, by the use of passwords and/or false
identification, the receiver can conceal his /her true identity. For
example:
A local drug dealer, Perry Webster, needs to forward $ 30,000
to a supplier, Martin Sapata, in Phoenix, Arizona. Webster goes to
a Western Union office, provides a fictitious name, and requests a
$7,500 wire transfer to “ Eddy Tucker ” who will use the password
“ Ironwood” as an identifier. Webster goes to three other Western
Union offices and repeats the procedure using different fictitious
names and passwords at each office. Sapata then goes to the four
different Western Union offices in Phoenix, provides the fictitious
name and appropriate identifying password for each transfer and
receives four drafts of $7,500 each .
Wire transfers can be difficult to trace, or even identify, and
are available internationally.
Methods of Moving Money into the United States
• Fictitious Loans. Fictitious corporations can set up bank
accounts in a foreign country. Checks are then mailed back to the
United States as loans from these fictitious companies. Cashier's
checks or wire transfers can also be used.
• Fictitious Foreign Investors. A legitimate business is

formed in the United States, but fictitious “foreign investors ” are
used to provide capital to the enterprise. Business transaction
308 CHAPTER 11
system payments (cashier's checks, wire transfers, and business

checks from fictitious companies or individuals) flow back into
the country.
• Finder's Fees. Finder's fees or payments for services ren

dered are generated. These false transactions may be for locating
investors for foreign businesses, negotiating real estate purchases,
etc.
• Corporate Salaries. Corporate “ salaries ” are paid from fic

titious off shore companies by way of corporate checks , wire
transfers, or cashier's checks.
• Cashier's Checks and Wire Transfers. Cashier's checks and
wire transfers are obtained from foreign banks and sent into the
country.
Physical Transportation. Physical transportation of large

amounts of currency back into the United States with the appro
priate Currency and Monetary Instrument Report (CMIR) being
filed at the border. This isolates the incoming currency from the
illegal activity that originally generated the currency.
Combinations of any of the before-mentioned methods, both
going out and coming into the country, are often used in complex
money laundering operations. For example, once the proceeds are
in a bank account in the Cayman Islands, an electronic transfer
can be made to a bank account held under aa fictitious name in
Panama by the Panamanian company that controls the Cayman
account. From there aa “ loan” is made to a shell corporation in the
9
Bahamas, which in turn “ invests” in aa real estate venture in the
United States controlled by the financial criminal who in fact gen
erated the illegal proceeds. Investigative problems arise when
money laundering goes off shore, beyond the jurisdiction and
resources of law enforcement. The key to detecting and resolving
money laundering operations is documenting the flow of money
prior to its leaving the United States.
Laundered funds may be left in a foreign country to be used
by the criminal for foreign investments, trips abroad, or the pur
chase of assets. A secondary effect of international money laun
dering occurs when the funds are repatriated. They often come
back in the form of “ tax - free ” sources of income. Loans, gifts and
investments used to capitalize or start- up a business are nontax
able receipts and represent a nontaxable source of income to the
alleged money launderer.
The investigator's most valuable asset in a money laundering
investigation is information . Information is developed through
informants or by the utilization of undercover and surveillance
operations. Of particular importance is information concerning
the movement of money through financial institutions. Once cur
rency that is generated from an illegal activity enters the banking
system, it loses its identity and becomes inseparable from other
funds inside the bank. The transaction entry point (i.e. the teller
window), is where currency moves into the business transaction
system . It is here that the Currency Transaction Reports (Form
4789) are generated when more than $ 10,000 in currency is
deposited, withdrawn, or exchanged. The information provided by
these reports is used to detect money laundering activities .
Similarly, Currency and Monetary Instrument Reports (Form
4790) are required to be filed with the U.S. Customs Service when
more than $ 10,000 in currency or monetary instruments crosses
an international border. The failure to file either of these reports
is aa criminal violation of the money laundering laws. Additionally,
structuring transactions in such a way as to avoid the $ 10,000
benchmark for either the CTR or the CMIR , can be a prose
cutable offense.
Money Laundering Statutes

Crimes involving money laundering made for big headlines in the
1980s and continue to do so in the 1990s. Over the years, federal
statutes have been developed for use against those who launder
money and/or those who assist them. Although the four money
laundering statutes were listed and described in Chapter 2, it is
appropriate that we revisit them here.
310 CHAPTER 11
Title 18 U.S.C. § 1956. Laundering of Monetary

Instruments
Title 18 U.S.C. § 1956 states that it is illegal to:
• Conduct or attempt to conduct a financial transaction if you
know that the proceeds used in the transaction are from an illegal
activity
• Take part in a transaction that is designed to conceal or

disguise, in any manner, the proceeds of an illegal activity
Transport, transmit, transfer, (or attempt to) money into or
out of the United States with the intent to promote a specified
unlawful activity or knowing that the money represents the pro
ceeds of an unlawful activity
• Avoid a transaction reporting requirement or conduct a
financial transaction involving property that law enforcement rep
resents to be the proceeds of an unlawful activity
§ 1956. Laundering of monetary instruments

( a )( 1) Whoever, knowing that the property involved in a financial
transaction represents the proceeds of some form of unlawful activ
ity, conducts or attempts to conduct such a financial transaction
which infact involves the proceeds ofspecified unlawful activity
( A )(i) with the intent to promote the carrying on ofspecified unlaw
ful activity; or
( ii) with the intent to engage in conduct constituting a violation of
section 7201 or 7206 of the Internal Revenue Code of 1986 ; or
( B ) knowing that the transaction is designed in whole or in part -
(i) to conceal or disguise the nature, the location, the sources, the
ownership, or the control of the proceeds ofspecified unlawful activ
ity; or
(ii) to avoid a transaction reporting requirement under State or
Federal law, ...
shall be sentenced to afine ofnot more than $500,000 or twice the

value of the property involved in the transaction, whichever is

greater, or imprisonmentfor not more than twenty years or, both .
( 2) Whoever transports, transmits, or transfers, or attempts to trans
port, transmit, or transfer a monetary instrument or funds from a
place in the United States to or through a place outside the United
States or to a place in the United States from or through a place
outside the United States
( A ) with the intent to promote the carrying on ofspecified unlawful

activity; or
( B ) knowing that the monetary instrument orfunds involved in the
transportation represent the proceeds of some form of unlawful
activity and knowing that such transportation is designed in whole
or in part—
(i) to conceal or disguise the nature, the location, the source, the
ownership, or the control of the proceeds ofspecified unlawful activ
ity; or
(ii) to avoid a transaction reporting requirement under State or

Federal law...
shall be sentenced to a fine of $ 500,000 or twice the value of the

monetary instrument or funds involved in the transportation ,
whichever is greater, or imprisonment for not more than twenty
years, or both ...
( 3 ) Whoever, with the intent
( A ) to promote the carrying on ofspecified unlawful activity;

( B ) to conceal or disguise the nature, location, source, ownership,
or control ofproperty believed to be the proceeds ofspecified unlaw
ful activity; or
( C ) to avoid a transaction reporting requirement under State or
Federal law, conducts or attempts to conduct a financial transac
tion involving property represented by a law enforcement officer to
be the proceeds of specified unlawful activity, or property used to
conduct or facilitate specified unlawful activity, shall be fined
under this title or imprisoned for not more than 20 years, or both.
312 CHAPTER 11
Title 18 U.S.C. § 1957. Engaging in Monetary

Transactions in Property Derived from Specified
Unlawful Activity
Title 18 U.S.C. § 1957 states that it is unlawful to take part in, or
attempt to take part in, monetary transactions involving crimi
nally derived property that is of aa value greater than $ 10,000 and
is derived from a specified unlawful activity.
§ 1957. Engaging in monetary transactions in property derived

from specified unlawful activity
( a ) Whoever, in any ofthe circumstances setforth in subsection ( d ),
knowingly engages or attempts to engage in a monetary transac
tion in criminally derived property that is of a value greater than
$10,000 and is derived from specified unlawful activity, shall be
punished as provided in subsection ( b ).
.
( b )( 1) Except as provided in paragraph ( 2 ), the punishment for an

offense under this section is a fine under title 18, United States
Code, or imprisonmentfor not more than ten years or both.
Title 31 U.S.C 5313. Reports on Domestic Coins and

Currency Transactions
Financial transactions in excess of $ 10,000 must be reported on a
Currency Transaction Report (CTR) . Title 31 U.S.C. § 5313
requires that financial institutions file this report. If a person
takes actions to falsely or fraudulently stop a financial institution
from filing the report with the federal government, a violation of
criminal law has occurred .
§ 5313. Reports on Domestic Coins and Currency Transactions

( a) When a domestic financial institution is involved in a transac
tion for the payment, receipt, or transfer of United States coins or
currency (or other monetary instruments the Secretary of the
Treasury prescribes ), in an amount, denomination , or amount and
denomination , or under circumstances the Secretary prescribes by
regulation, the institution and any other participant in the transac
tion the Secretary may prescribe shall file a report on the transac
tion at the time and in the way the Secretary prescribes. A partici
pant acting for another person shall make the report as the agent
or bailee of the person and identify the person for whom the trans
action is being made...
( c)( 1) A person (except a domestic financial institution designated
under subsection (b ) of this section ) required to file a report under
this section shallfile the report
( A ) with the institution involved in the transaction if the institution

was designated;
( B ) in the way the Secretary prescribes when the institution was not
designated; or
( C ) with the Secretary.
( 2) The Secretary shall prescribe
( A) the filing procedure for a domestic financial institution desig
nated under subsection ( b) ofthis section; and
( B ) the way the institution shall submit reportsfiled with it.
Title 31 U.S.C. $ 5324. Structuring Transactions to

Evade Reporting Requirement Prohibited
Title 31 U.S.C. § 5324 makes it unlawful to structure a single
cache of currency over $ 10,000 into increments of $ 10,000 or
less and conduct multiple transactions for the purpose of evading
the CTR reporting requirements. The multiple transactions take
forms such as depositing money :
• Several times at the same bank branch on the same day
• At different branches of the same bank on the same day
• At different banks on the same day
• At the same bank on different days

• At different banks on different days
Note that if the structuring occurs at the same bank on the
same business day, then the bank must file a CTR if the bank has
314 CHAPTER 11
knowledge of the multiple transactions aggregating more than

$ 10,000. If the bank files a CTR, then the launderer may still be
guilty of an attempt.
§ 5324. Structuring transactions to evade reporting requirement

prohibited
No person shall for the purpose of evading the reporting require
ments ofsection 5313 (a) with respect to such transaction
(1 ) cause or attempt to cause a domestic financial institution tofail
to file a report required under section 5313( a );
( 2) cause or attempt to cause a domesticfinancial institution to file
a report required under section 5313 (a ) that contains a material
omission or misstatement of fact; or
( 3) structure or assist in structuring, or attempt to structure or assist

in structuring, any transaction with one or more domesticfinancial
institutions.
Asset Forfeitures
The money criminals make from their financial crimes is often
put toward their personal benefit. They buy cars, boats, property,
clothing, etc. Fortunately for law enforcement, new and stronger
laws provide the means to divest criminals of their illegal gains .
This means is commonly referred to as "forfeiture." A forfeiture
is a legal proceeding that the Government initiates against the
proceeds of an illegal activity. The term "proceeds” is aa flexible
term that appears in many areas of the law and in virtually every
context, the term means “ whatever is received when an object is
sold, exchanged, or otherwise disposed of.” It does not necessar
ily mean just money. Each time proceeds are disposed of and
exchanged for other property, the newly -acquired property
becomes proceeds. In a sense, proceeds is a status that attaches
to any property substituted for what was originally exchanged.
MONEYLAUNDERING AND FORFEITURES 315
Criminal and Civil Forfeitures

In Chapter 2, you read that law can be divided into many cate
gories. Two of these categories are criminal and civil law . Well,
just like law, forfeitures can be either criminal or civil in nature.
The government brings suit against the property or owner of the
property and, if successful, gains right, title, and interest thereof.
To initiate a forfeiture action, the government needs to show that
"probable cause" exists . In this instance, probable cause
belief that the property in question was either used illegally or
represents the proceeds from unlawful activity. This probable
cause standard is identical to the standard discussed in Chapter 9
for the issuance of search warrants.
Criminal forfeitures are imposed by Court order at the con
clusion of a criminal trial or as a part of a guilty plea agreement.
To impose a criminal forfeiture, the government must prove beyond
a reasonable doubt that the property to be forfeited was either the
a
proceeds of some illegal activity or was significantly connected to

the illegal activity.
In a civil forfeiture proceeding, the government need only
show that probable cause exists and that the property to be for
feited was involved in some illegal activity. No criminal convic
tion is necessary and it is up to the individual with an interest in
the property to prove, through a preponderance of the evidence,
that the government's contentions are incorrect . Should the
claimant fail to present any evidence, the property is forfeited to
the government. Because of this burden on the claimant rather
than the government, in a civil forfeiture action the “discovery
process ” can be used to obtain information pertaining to the
movement of money. The claimant may be deposed and the dis
closure of his/her financial records compelled. Additionally, per
jury and contempt sanctions are available for use by the
government against untruthful or recalcitrant witnesses . These
legal possibilities place the claimant in an awkward legal posture
when criminal charges against him or her are pending. Asserting
a Fifth Amendment Constitutional right against self-incrimina
tion , may result in an adverse civil determination (forfeiture ),
while answering questions may have incriminating consequences
in the criminal proceedings.
316 CHAPTER 11
In Rem versus In Personam

The history of civil forfeiture goes back to Medieval England
when in rem proceedings could be instituted against any property
which had been involved in some type of wrongdoing. An in rem
proceeding refers to a legal proceeding directed solely against
property. The legal findings determine the proper ownership of
the property in question. The defendant in an in rem proceeding
is the object or property itself, and since in rem proceedings are
limited to the determination of ownership, they do not impose
personal obligations. In rem proceedings are totally independent
of any criminal action against the owner.
Medieval England also had aa form of criminal forfeiture. If an
individual was convicted of aa crime, the felon's property was for
feited to the king as a form of fine. The proceedings to establish
the forfeiture action were in personam, against the felon , and suc
cess depended upon proving that the felon was criminally guilty.
In 1790, the first Congress of the United States prohibited these
“ criminal ” forfeitures and criminal forfeitures were unheard of in
the United States for another 180 years. It wasn't until 1970 when
Congress enacted the Racketeer Influenced and Corruption
Organization Act (RICO) that the concept was resurrected.
Facilitation Versus Proceeds

Forfeiture laws distinguish between property which represents
“ proceeds” and property which “ facilitates” a violation. To “ facil
itate” means to have a significant connection to. Federal law pro
vides for the forfeiture of conveyances that facilitate the sale,
receipt, possession, or concealment of illegal activity. Whether
property can be seized and forfeited for facilitating an offense is
determined by whether a significant connection exists to the pro
hibited activity. For example, an airplane used to move narcotics
from Columbia to Chicago is closely connected to the illegal
activity and could be seized and forfeited.
Federal Forfeiture Statutes

The key question in a forfeiture action, for both the investigator
and the court, is not the good faith or guilty knowledge of the
owner, but the use of the property in question and whether that
use requires forfeiture under the statute . For instance, was the
monetary instrument acquired in aa financial transaction designed
to conceal the ownership of proceeds of specific unlawful activ
ity? Or, is aa deposit in aa financial institution traceable to coin or
currency used in a transaction designed to evade or defeat the
CTR filing requirements ?
The following Federal statutes relate to forfeiture procedures:
• Title 18 U.S.C. $ 981. Civil Forfeiture
• Title 18 U.S.C. § 982. Criminal Forfeiture
• Title 21 U.S.C. $ 881. Forfeitures
Title 18 U.S.C. § 981. Civil Forfeiture

Title 18 U.S.C. § 981 states that the following property is subject
to forfeiture:
• Property obtained, directly or indirectly, through violation
of Title 18 U.S.C. § 1956 or § 1957
• Any property which represents the proceeds from the sale

or distribution of a controlled substance
Any coin, currency, or interest in property traceable to a

transaction or attempted transaction in violation of Title 31 U.S.C.
§ 5313 or § 5324
§ 981. Civil Forfeiture

( a )(1 )... the following property is subject to forfeiture to the United
States:
( A ) Any property, real or personal, involved in a transaction or

attempted transaction in violation ofsection 5313 (a ) or 5324 of
318 CHAPTER 11
Title 31 , or of section 1956 or 1967 of this title, or any property

traceable to such property.
( B ) Any property within the jurisdiction of the United States,
which represents the proceeds of an offense against the foreign
national involving a manufacturer, “sale or distribution of a con
trolled substance...”
( C ) Any coin and currency ... or any interest in any other property,
including any deposit in a financial institution, traceable to such
coin or currency involved in a transaction or attempted transaction
in violation of Sections 5313( a) or 5324 of Title 31 may be seized
and forfeited to the United States government...
Title 18 U.S.C. $ 982. Criminal Forfeiture

Title 18 U.S.C. $ 982 states that a person convicted of money
laundering is required to forfeit any property which resulted from
§ 982. Criminal Forfeiture

( a) The Court, in imposing sentence on a person convicted of an
offense under Section 1956 or 1957 (money laundering violations)
of this title shall order that the person forfeit to the United States
any property, real or personal, which represents the gross receipts
the person obtained directly or indirectly, as a result of such
offense, or which is traceable to such gross receipts.
Title 21 U.S.C. $ 881. Forfeitures

Title 21 U.S.C. § 881 (see page 320) identifies items that are sub
ject to forfeiture to the Unites States government. The items listed
are associated with the manufacture and distribution of controlled
substances .
Statutory Authority Versus Constitutional Standards

The authority granted by the language of a statute or the written
opinions in a case law finding does not end the discussion on for
feiture proceedings. All case law and statutory authorizations

must comply with Constitutional standards . A statute or legal
opinion cannot authorize conduct which comes into conflict with
protected Constitutional rights.Therefore, any seizure and /or sub
sequent forfeiture action must be in agreement with the reason
ableness requirement of the Constitution's Fourth and Fifth
Amendments .
For Constitutional purposes, a search results from an investi
gator's intrusion into an individual's “reasonable expectation of
privacy” and a seizure occurs when an investigator's conduct
“ interferes with a person's ownership of property .” The law has
consistently preferred that a warrant be obtained prior to any
search procedure. This legal preference for a warrant is not as
great in seizure and subsequent forfeiture actions. The basis for
this difference is that aa seizure, the first step in aa forfeiture action,
when based upon probable cause is considered reasonable action
under the Fourth Amendment. However, evidence obtained in
violation of either Fourth Amendment or Fifth Amendment guar
antees is not admissible in court . The seizure of property in
“ plain view” is presumed reasonable, assuming that the investi
gator can establish probable cause to associate the property with
criminal activity .
The government's right to seize the proceeds of an illegal
activity even though it interferes with the owner's Constitutional
right of ownership was enacted by statute and upheld by the
Supreme Court . The Supreme Court first enunciated this legal
position, known as The Doctrine of Relation, in U. S. v. Stowell,
133 U.S. (1890 ) .4 In that decision, the Court indicated that when
a statute provides for civil forfeiture, the forfeiture takes place at
the moment the property is used or illegally generated, unless
another statute provides otherwise. At that moment, all rights and
legal title to the property vest in the government and any subse
quent transfer is of no effect. In the eyes of the law, the subse
quent judicial proceedings merely confirm a forfeiture that has, in
theory, already taken place. Because the government's right to
proceeds relates back to the time they are generated, it is legally
entitled to all the gain thereafter accruing from the proceeds of
320 CHAPTER 11
§ 881. Forfeitures
( a ) Subject property
The following shall be subject to forfeiture to the United States and
no property right shall exist in them:
( 1) All controlled substances which have been manufactured, dis
tributed,dispensed, or acquired in violation of this subchapter.
( 2) All raw materials, products, and equipment of any kind which
are used, or intended for use, in manufacturing, compounding,
processing, delivering, importing, or exporting any controlled sub
stance in violation of this subchapter.
( 3 ) All property which is used, or intended for use, as a container
for property described in paragraph (1) or ( 2 ).
(4 ) All conveyances, including aircraft, vehicles, or vessels, which
are used, or are intendedfor use, to transport, or in any manner to
facilitate the transportation, sale, receipt, possession, or conceal
ment of property described in paragraph ( 1) or ( 2 ), except that
( A ) no conveyance used by any person as a common carrier in the
transaction of business as a common carrier shall be forfeited
under the provisions of this section unless it shall appear that the
owner or other person in charge of such conveyance was a consent
ing party or privy to a violation of this subchapter or subchapter II
ofthis chapter; and
( B ) no conveyance shall be forfeited under the provisions of this
section by reason of any act or omission established by the owner
thereof to have been committed or omitted by any person other than
such owner while such conveyance was unlawfully in the possession
of a person other than the owner in violation of the criminal laws
ofthe United States, or of any State.
( 5 ) All books, records, and research, includingformulas, microfilm ,
tapes, and data which are used , or intendedfor use, in violation of
this subchapter.
(6 ) All moneys, negotiable instruments, securities, or other things
of value furnished or intended to be furnished by any person in
exchangefor a controlled substance in violation of this subchapter,
all proceeds traceable to such an exchange, and all moneys, nego

tiable instruments, and securities used or intended to be used to
facilitate any violation of this subchapter, except that no property
shall be forfeited under this paragraph, to the extent of the interest
of an owner, by reason of any act or omission established by that
owner to have been committed or omitted without the knowledge or
consent ofthat owner.
( 7) All real property, including any right, title, and interest in the
whole of any lot of tract of land and any appurtenances or
improvements, which is used, or intended to be used, in any man
ner or part, to commit, or to facilitate the commission of, a viola
tion of this title punishable by more than one year's imprisonment,
except that no property shall be forfeited under this paragraph, to
the extent of an interest of an owner, by reason of any act or omis
sion established by that owner to have been committed or omitted
without the knowledge or consent of that owner.
(8 ) All controlled substances which have been possessed in violation
of this subchapter.
Factors That Establish Probable Cause

The paper trail of financial events is the investigator's starting
point in a forfeiture investigation. The investigator must be pre
pared to use techniques such as subpoenas, surveillance, and
interviewing to secure financial records relative to the movement
of money. The majority of forfeiture actions do not require com
plex document analysis. The basis for this in large part is due to
the standard of proof (probable cause) necessary to start the for
feiture action and the judiciary's willingness to accept the fact
that illegal activities generate illegal income. It follows then that
the key to a forfeiture investigation is discovering factors that
establish probable cause. The following are examples of court
recognized situations that can be used by the financial investiga
tor to establish probable cause in aa forfeiture investigation.
322 CHAPTER 11
• Close proximity. In situations where targeted forfeitable

proceeds are found in close proximity to narcotics, probable cause
can be established to support the forfeiture action. For example, in
The United States v. $ 33,000 United States Currency, probable
cause for forfeiture was satisfied by the following evidence :
-Claimant's guilty plea to conspiracy to distribute marijuana
and to evade taxes
—The seizure of $33,000 located in a brown paper bag in

claimant's home
—The presence of drugs on the premises

—The claimants lack of legitimate employment
Close proximity does not necessarily require direct physical
proximity to the narcotics/contraband . In The United States v.
Brock, the government sought forfeiture of jewelry valued at
$ 120,000 which was found in a bag in the claimant's attic .
Despite the absence of any direct evidence connecting the jew
elry with the claimant's narcotic's activity, the Court of Appeals
concluded probable cause was present and sufficient to support
the forfeiture action. The court felt tható
The circumstances were sufficient to warrant a conclusion that

there was no other way that Brock could have acquired the jew
elry other than... as proceeds of the alleged narcotics violation.
The jewelry was found secreted in the same house as the nar
cotics and paraphernaliafor distribution of narcotics. In addi
tion, a large quantity of cash and aa loaded revolver, further
suggestive of ongoing narcotics activity, were seized at the
house. These circumstances fairly lead to an inference that the
jewelry was the proceeds of narcotics activity ... circumstantial
evidence and inferences therefrom are good grounds for a find
ing of probable cause in aa forfeiture proceeding...
• Means of support. In situations where there appear to be
obvious discrepancies between the claimant’s lifestyle and his or
her means of support, probable cause for aa forfeiture
action can be established . In particular, substantial currency

expenditures , without apparent legitimate employment, has
proven to be extremely probative (supplying evidence or proof).
• Pre-trial statements. Statements made to associates or to
undercover agents during the investigative stages of aa criminal
prosecution can result in probable cause to establish aа forfeiture
action. For example, in The United States v. A Single -Family
Residence, testimony from several co -conspirators established that
the trafficker had told them narcotics proceeds had been used to
buy the property.?
• Narcotics records. Records of narcotics sales can provide
the basis for probable cause in a forfeiture investigation. By
reporting the “profits earned ,” investigators can show the illegal
proceeds generated from drug dealing. During the investigative
process, the claimant's effort to conceal or commingle his or her
illegal funds with legitimate sources of income and /or his or her
evasive testimony can be important factors in the establishment of
probable cause.
Summary
Money laundering is the process by which one conceals the exis
tence, illegal source, or illegal application of income and then
disguises that income to make it appear legitimate. There are two
basic transaction systems money launderers work with: the cash
transaction system and the business transaction system. The goal
of the money launderer is to move from the cash transaction sys
tem to the business transaction system. The goal of the investiga
tor is to spot this movement and halt the laundering operation.
There are three basic methods available to launder money:
through legitimate businesses, buy/sell transactions, and off shore
havens. Legitimate businesses launder money by overstating legit
imate revenue and expenses, or by depositing currency into busi
ness accounts. Buy/sell transactions are manipulated financial
transactions that use an apparent legitimate purchase or sale of an
324 CHAPTER 11
asset to transfer currency into the business transaction system. Off

shore havens are used by criminals to hide their illegal proceeds.
Asset forfeiture continues to hold great potential for attacking
large -scale financial crimes. By using the benefits of civil discov
ery and the lower burden of proof, law enforcement has an oppor
tunity to strike at the profits generated by financial crimes .
Existing case law demonstrates that forfeitures can be accom
plished through modes of proof that are relatively straight forward
when tracing the flow of funds from illegal activity. Even beyond
that, indirect methods of tracing the movement of money may
offer new means for reaching the proceeds of illegal activity and
bankrupting complex financial criminal enterprises thereby
putting them out of business .

1. What is the difference between the cash transaction system

and the business transaction system?
2. List three characteristics of a business used for money laun

dering.
3. What affect does overstating its legitimate revenue have on a

business? How is this affect counteracted ?
4. Suppose you were going to purchase a $20,000 car from a

friend. Explain how you could use a buy/sell transaction to laun
der money.
5. List three methods used to move U.S. currency into and three
methods used to move currency out of the United States.
6. What is meant by “structuring” financial transactions? Identify

three ways a criminal can structure transactions.
7. What are the “ proceeds” of a crime?
8. Describe the burden of proof as it relates to civil and criminal

forfeitures.
9. Explain what is meant by the following statement:

The car he owned “ facilitated ” his ability to sell narcotics; there
fore, it is subject to forfeiture.
10. In Chapter 8, you read about the methods of indirect proof.

What role would these methods play in establishing probable
cause for forfeiture of assets ?
326 CHAPTER 11
Endnotes
1 “ Laundering Drug Money: Whitewash— or Crackdown ?”,
Economist, (Volume 310, Issue 7592 , March 4, 1989), p. 76
2 President's Commission on Organized Crime , The Cash
Connection, (U.S. Government Printing Office, October 1986),
P. vii
3 Joseph T. Wells, W. Steve Albrecht, Jack Bologna, Gilbert Geis,

and Jack Robertson , Fraud Examiner's Manual, (National
Association of Certified Fraud Examiner’s ), 1989, Section 111 ,
p. 69
4 U.S. v. Stowell, 133 U.S. ( 1890)
5 U.S. v. $33,000 United States Currency, 640 F. Supp. 899-900
(D.Md. 1986)
6 U.S. v. Brock, 747 F.2d 761 , 762-63 (D.C. Cir 1984)
7 U.S. v. A Single Family Residence, 803 F 2d 625 ( 11th Cir.
1986)
Responses to End -of-Chapter Questions
Chapter 2
1 Civil law deals with private conflicts and differences between
individuals, whereas criminal law deals with public wrongs
against the state. Remedies for violations of civil law are usu
ally in the form of money damages or court -ordered actions to
do, or refrain from doing, certain specific things. Remedies for
violations of criminal law include fines, penalties, and /or incar
ceration.
2 A felony is a more serious crime than aa misdemeanor. Felonies

are punishable by incarceration of more than one year, a fine,
and loss of certain civil rights. Misdemeanors are punishable
by fines and/or incarceration of less than one year.
3 An offense that is “mala prohibita” is an offense made criminal
by statute, whereas an offense that is “mala in se ” is an offense
that is evil in and of itself.
4 a. Jerry Wilson has conspired with a drug dealer to allow his

clothing store to be used to launder drug money. The statutes
violated and their corresponding elements are as follows:
1 ) Title 18 U.S.C. § 371. Conspiracy to commit offense or to
defraud the United States
• The conspiracy was willfully formed
• The suspect willfully became a member of the conspiracy
• At least one of the conspirators knowingly committed at
least one overt act in furtherance of the conspiracy
328 RESPONSES TO END - OF -CHAPTER QUESTIONS
2) Title 18 U.S.C. § 1956. Laundering of monetary instruments

• The suspect must conduct or attempt to conduct a “ finan
cial transaction ”
• The suspect must know that the property involved in the

transaction represents the proceeds of some form of unlaw
ful activity
• The transaction must involve property which , in fact, repre
sents the proceeds of “specified unlawful activity ”
• The suspect must engage in the transaction with either -
—the intent of promoting the carrying on of the “specified

unlawful activity,” or
—the intent to engage in conduct constituting tax evasion
under Title 26 U.S.C. § 7201 or tax fraud under Title 26
U.S.C. § 7206 , or
-knowledge that the purpose of the transaction, in whole or

in part, was either to conceal or disguise the nature, loca
tion, source, ownership , or control of the proceeds of “ spec
ified unlawful activity ;" or to avoid a transaction reporting
requirement under State or Federal law
b. Troy Avery is using his position with the Navy to threaten
another employee into doing something. Avery is committing
extortion in violation of Title 18 U.S.C. § 872, extortion by offi
cers or employees of the United States. Elements of the crime
include the following :
• Intent
• The suspect is an officer or employee of United States gov

ernment
• The suspect used his or her employment with government

as part of the extortion scheme
• Extortion is committed or attempted
c . Since Jenny is using an 800 number to further her scheme to
defraud, she is committing wire fraud in violation of Title 18
RESPONSES TO END -OF- CHAPTER QUESTIONS 329
U.S.C. § 1343, fraud by wire, radio, or television. Elements of

the crime include the following:
• Intent
• Scheme to defraud
• Use of interstate communications to further scheme
d. David Stevens is aa bank employee who is using his position

with the bank to commit embezzlement and bank fraud. The
statutes violated and their corresponding elements are as follows:
1) Title 18 U.S.C. $ 656. Theft, embezzlement, or misapplica
tion by bank officer or employee
• Intent
• The suspect is aa bank employee or officer

• The suspect attempted to defraud the bank
2) Title 18 U.S.C. § 1344. Bank fraud
• Intent
• Scheme to defraud aa financial institution
e. Linda Carson is threatening to use the fact that her competi

tor is involved in a criminal activity to get that person to do
something against his or her will. Linda is committing black
mail in violation of Title 18 U.S.C. § 873. Elements of the
• Intent
• The suspect made threats
f. Susan Tompkins is in violation of Title 26 U.S.C. § 7203,

Willful failure to file return, supply information, or pay tax.
Elements of the crime include the following:
• Duty to pay
• Failure to pay
• Willfulness
330 RESPONSES TO END - OF - CHAPTER QUESTIONS
5 Lance Gordon is intentionally structuring his financial transac

tions so that the financial institutions he is dealing with do not
file Currency Transaction Reports. The money involved hap
pens to be from an illegal activity, therefore, Lance is in viola
tion of Title 31 U.S.C. 5324, Structuring transactions to evade
reporting requirement prohibited .
Chapter 3
1 a. 16 to 23 people “ sit” on a federal grand jury.
b . It takes 12 jurors to return an indictment.
2 If a witness is granted transactional immunity, he or she cannot
be prosecuted for any criminal offenses about which he or she
testifies during grand jury proceedings . The witness could
admit to murder and drug trafficking, and not be prosecuted for
them.
If a witness is granted use immunity, the testimony that the
witness provides cannot be used in prosecutions against the
witness. For example, a witness testifies that she forged checks
in order to get cash to buy drugs. If that witness is brought up
on drug charges, that testimony cannot be used against her.
Transactional immunity is rarely used . If immunity is
offered, it is more likely to be use immunity.
3 Evidence is anything that can make a person believe that aa fact
or proposition is true or false.
4 Proof is the result of evidence.
5 In criminal cases, the standard of proof is ““ beyond a reason
able doubt ;” in most civil cases the standard is “preponder
ance of evidence .” “ Beyond a reasonable doubt" is a greater
degree of proof than is “ preponderance of evidence .” To reach
a conviction in a criminal case, each juror must have no doubt
that, based on the evidence presented, the accused committed
the crime. Verdicts in civil cases where the preponderance of
evidence is the standard of proof, are reached by the jurors
weighing the evidence presented and deciding who they
believe, the plaintiff or the defendant.
RESPONSES TO END- OF- CHAPTER QUESTIONS 331
6 Use of mails to further scheme Direct evidence could be an

item of mail received by a victim of the fraud that was sent by
the suspect to perpetuate the fraud. Circumstantial evidence
could be testimony from a postal employee who assisted the
suspect in matters related to the mailing.
7 Judicial notice is when a judge allows a known fact to be
admitted as evidence . Examples of judicial notice include:
George Washington was our first president; May 2, 1993 falls
on a Saturday; and aa financial depression occurred in America
in 1931 .
8 According to Rule 401 , evidence must be relevant and compe

tent. A fact presented as evidence must, in some logical way,
relate to proving the case. If you are trying to prove that the
suspect committed bank fraud, you're not going to submit as
evidence testimony stating that the suspect washed his car
every Sunday morning. It's not relevant. And you've got to
make sure that the relevant evidence is provided by a compe
tent person. Testimony provided by a former spouse with an ax
to grind may not come off as very convincing.
9 a. Kay White can, if she chooses to (she has testimonial privi
lege) , provide the testimony because it is not a confidential
communication since it occurred before she and Todd were
married.
b. Again, Kay can, if she chooses, provide the testimony. In

this instance she'd testify to something she saw , not something
that was said .
c . This testimony is covered by the confidential communica

tion privilege. Kay can provide it only if Todd consents to the
testimony
d . Joey can provide the testimony since there is no
parent/child communications privilege .
e. Leon Norton can provide the testimony since the Federal
courts do not recognize an accountant/client communications
privilege.
332 RESPONSES TO END -OF -CHAPTER QUESTIONS
f. Kent Parks can provide the testimony since it deals with an

event rather than aa communication.
10 Hearsay evidence is inadmissible because when one person

repeats what another has said, there is room for distortion and
misunderstanding.
11 The shop book rule allows that a person who currently is the
“ custodian ” of a business's books can introduce the books and
provide testimony about them even though that person did not
make the original entries.
12 The terms “ best evidence ” and “secondary evidence ” apply to
documentary evidence. If evidence concerning a document is
needed, the “ best evidence ” is the document itself. If the origi
nal has been destroyed or is not attainable even through the
use of a search warrant or subpoena, an authenticated copy of
the document can be used. “Secondary evidence ” is used when
an original of the document in question is unavailable. A wit
ness can testify to the contents of the document or a copy of the
document .
Chapter 4
1 According to the table in Appendix A, a social security number
that begins with the numbers “ 421,” is issued in the state of
Alabama.
2 a. To discover if any complaints have been lodged against

Base Ball, Inc. , you should contact the Better Business Bureau
that serves the area where the company is located.
b. To obtain a list of businesses in the Raleigh, North Carolina
area, you should contact the Chamber of Commerce that serves
the area .
.
33 a. If you want information concerning a suspect's use of his or
her American Express Card , you can contact the American
Express Company in New York City.
b. By analyzing a suspect's credit card activity you can find
RESPONSES TO END - OF - CHAPTER QUESTIONS 333
out all sorts of things. Has the suspect made any major pur
chases using the credit card ? If the suspect used the card on a
trip, you can track where the suspect went as well as what the
suspect purchased. Did the suspect use the credit card to get a
cash advance? How does the suspect pay off what he or she
owes on the credit card? These are just some of the things that
an investigator can discover about a suspect when analyzing
the suspect's credit card activity.
4 The following factors come into play when selecting a suspect
to target for investigation:
• Available law enforcement resources
• Probability of obtaining a conviction

• Jury appeal
• Judicial interpretations of the law
5 The best source of information concerning a suspect is the sus
pect. Suspects know what really happened and can easily pro
vide, if they choose, information and documents to assist the
investigator.
6 The Immigration and Naturalization Service and the U.S.
District Court maintain information concerning aliens and nat
uralized citizens.
7 The U.S. Secret Service maintains records pertaining to

forgery.
8 The FBI maintains the National Stolen Property Index.
Chapter 5
1 The check provides the following information:
• Owner of the account is Allison Henderson . She lives in
Rockville, Maryland, at 923 Prospect Lane.
• The payee is Hankinson's Automotive. Apparently, Allison
took her car in for a tune up and paid for it on June 8,
1992 .
334 RESPONSES TO END -OF - CHAPTER QUESTIONS
• Allison's checking account number is 084931121.

• The first part of the ABA transit number, “68," tells us that
the Capital Bank and Trust is located in Virginia.
• The second part of the ABA transit number tells us that the
code for the Capital Bank and Trust is “ 999. ”
• The number “ 561" is the check routing symbol. The “ 5 ”
means that the Capital Bank and Trust is located in the
fifth Federal Reserve district (Richmond). The “6 ” corre
sponds to the federal reserve facility that collected the
check and the “ 1” indicates aa deferred payment.
2 Check spread analysis is a useful investigative tool because it

reveals a suspect's pattern of financial activity. A break in the
pattern is cause for further investigation, for example, if aa usual
monthly payment (mortgage , rent , phone, electric , etc.) is
absent, the investigator will want to see how the suspect made
the payment.
3. A safe -deposit box rental agreement and entry log are avail
able. The rental agreement will show who rented the box and
on what date. The entry log shows the date and times of visits
to the box and who made them . Bank records do not reveal the
contents of the box .
4 Banks are required to retain the following records for 5 years:

• The signature card filled out when the account was opened
• Bank statements disclosing all deposits and withdrawals
• Copies of both sides of customer checks
5 It is difficult to trace currency - for-currency transactions
because they seldom leave a paper trail inside the bank unless
the transaction is in excess of $ 10,000 . Transactions of
$ 10,000 or more must be recorded on a Currency Transaction
Report.
6 An investigator can ask suspects for their bank records or for
permission to get them from the bank. If a suspect is uncooper
ative , it becomes a bit more difficult for the investigator
RESPONSES TO END - OF - CHAPTER QUESTIONS 335
because the Bank Secrecy Act and the Right To Financial

Privacy Provisions of Federal law cause banks to restrict
access to a customer's records. However, banks can be legally
compelled to provide records.
7 A haven country is a country that offers a legal and /or eco
nomic climate for laundering money or hiding illegally gotten
profits. It is difficult for an investigator to gain access to infor
mation concerning money sent to a haven country via a wire
transfer.
8 A loan application is good source of financial information

because a suspect, wanting to get the loan approved, will iden
tify assets and other accounts to impress the person who
reviews to application .
9 The documentation surrounding aa Western Union money order
will identify who purchased the money order, who received it,
and the money order's worth.
A casino can provide bank statements, loan applications,
credit card applications , and other financial information.
Casinos are also required to file reports on currency transac
tions in excess of $ 10,000.
10 a. Securities are stocks and bonds whereas commodities are
produced goods, such as grain, livestock, gold, or timber.
b. A stock represents ownership in a corporation, that is a
claim against the corporations assets and earnings. A bond is
issued when a corporation or governmental unit wishes to bor
row money for some period. Stockholders can sell their shares
of stock at any time, and receive a profit or loss based on the
relationship of the purchase price to the selling price .
Bondholders can collect on their investment only at a specified
time .
c . Common stock are units of ownership that allow owners to

receive dividends on their holdings and vote on matters affect
ing the corporation in which they own stock . If aa stockholder
owns preferred stock, he or she will be paid dividends before
common stockholders, however, preferred stock does not ordi
narily carry voting rights. If a corporation is authorized to issue

only one class of stock, it is common stock that is authorized.
d. Transfer agents keep a record of a corporation's outstanding
stock certificates. A transfer agent is usually a commercial
bank appointed by the corporation. A registrar double checks
the actions of the transfer agent to prevent improper issue of
stock or fraudulent transfer.
e. A corporate bond is a registered bond issued by a private

corporation . A municipal bond is an obligation of a state,
county, municipality or any agency thereof. All municipal
bonds issued after July 1 , 1983, are registered. The interest on
a municipal bond is free from Federal taxes .
f. Treasury bills are short term securities with maturities of one
year or less. They do not pay a fixed rate of interest and are
issued and subsequently traded at a discount from face value.
Treasury bills are issued in minimum denominations of
$ 10,000, with $5,000 increments . Treasury bonds are long
term bonds with maturities of 10 years or longer. They carry a
fixed interest rate and are issued and traded as a percentage of
their face value. Their minimum denomination is $ 1,000.
g. Securities held in the name of the account holder simply

reflect the name of the customer who maintains the account .
Securities held in a street name are registered in the name of
the owner's broker.
11 An investigator will probably want to pursue the following:

a. Check 183, written for $ 2000.
b. Check 187, written for $5,000. Both checks 183 and 184
are significantly higher than the next highest payment ($745).
c . The $5,000 deposit on June 10. All other deposits to the
account are the same amount and deposited at the same time in
each month .
d. No check was written in the amount of $745 in July. Mr.

Davids has plenty of money to make the payment . Maybe he
forgot. Maybe he paid in cash.
RESPONSES TO END -OF - CHAPTER QUESTIONS 337
12 Both of the deposit slips show that currency was deposited .The
total amount deposited equals $13,500. Had all of the currency
been deposited into one account, the bank would have had to
file a Currency Transaction Report (CTR). Since the deposits
are into two different accounts owned by the same person , it
looks like that person may have split the deposit to avoid hav
ing to have a CTR filed.
13 The brokerage account statement reveals that Nancy Garrity

bought, sold, and received stock during July 1992. She made a
$256.25 profit on her Lakewood, Inc. stock . Unless other
account statements are available for analysis, an investigator
cannot determine if Nancy's brokerage activities for July 1992
are unusual.
Chapter 6
1 In a proprietorship, the owner of the business is responsible for
all debts incurred. In a partnership, the partners are personally
responsible for the business's debts. Since a corporation is a
legal entity in and of itself, it is responsible for its debts, not its
owners (stockholders).
2 A corporation's Articles of Incorporation and a partnership’s
Articles of Partnership are important to the financial investiga
tor because of the information they provide. Each of these doc
uments provides personal and financial information relating to
those involved in the start up of the business.
3 A liability is a claim on an asset by a creditor. An asset is
something of value owned by a business and the owner's equity
is the amount of capital furnished by a business's owner(s).
4 Based on the equation A = L + OE, and given that assets
equals $675,325 and owner's equity is $276,580, it follows that
liabilities equals $398,745.
5 Accounting is able to show, in summary form , the results of a
business's financial transactions through financial records such
as journals, ledgers, balances sheets, and income statements.
338 RESPONSES TO END - OF -CHAPTER QUESTIONS
6 A balance sheet represents a business's condition at the

moment the document is prepared. One prepared on Monday
will differ from one prepared on Tuesday, etc. This is because
Monday's transactions that affect balance sheet accounts will
differ from Tuesday's transactions, and so on.
7 The following journal entry:
Cash 10,000
describes aa financial transaction . An asset, cash, has increased

by $ 10,000. Another asset, accounts receivable, has decreased
accordingly. The journal entry indicates that $ 10,000 that was
owed to a business through the extension of credit (accounts
receivable) has been paid in cash.
8
Cash
10,000
Accounts Receivable
10,000
Collier Company
Balance sheet
December 18, 1992

Current Assets Current Liabilities
Cash $ 1,000 Accounts Payable $ 25,000
Inventory 40,000 Notes Payable 6,000
Total current assets $41,000 Total Current Liabilities $ 31,000
Fixed Assets Owner's Equity

Equipment $ 15,000 Capital from stock $ 25,000
Total assets $56,000 Total Liabilities and Equity $ 56,000

RESPONSES TO END-OF- CHAPTER QUESTIONS 339
10
Gollier Company
General Journal
Date Ledger
1992 Accounts and Explanations Folio Debit Credit
12/12 Cash 25,000
Capital 25,000
Stock sale
12/14 Equipment 12,000

Cash 6,000
Notes payable 6,000
Bought machine
12/15 Inventory 40,000
Cash 15,000
Accounts Payable 25,000
Bought production materials
12/16 Equipment 3,000
Cash 3,000
Bought machine
11
Cash Capital Equipment

12/12 25,000 12/14 6,000 12/12 25,000 12/14 12,000
12/15 15,000 12/16 3,000
12/16 3,000
Inventory Accounts Payable Notes Payable

12/14 40,000 12/15 25,000 12/14 6,000
12
Pratt, Inc.
Income statement
Sales revenue $ 155,000
Less: sales returns and allowances 5,000
Net sales $ 150,000
Less : cost of goods sold 30,000
Gross profit $ 120,000

Less: Administrative expenses 100,000
Interest expense 10,000
Selling expense 5,000
Total operating expenses 115,000
Net income 5,000
13 A financial investigator can use accounting skills to evaluate

the appropri-ateness of journal and ledger entries. By knowing
how transactions are to be recorded and summarized , the finan
cial investigator is better able to trace the impact of aa transac
tion on a business.
Chapter 7
1 With the specific item method, the investigator tries to find a
direct link between a suspect and a specific financial transac
tion involving the payment or receipt of illegal funds. Once dis
covered, this direct link is very difficult for the suspect to deny.
2 Bank account information is the type of information most use
ful in a fictitious payable scheme.
3 An investigator will want to look into an employee's travel
expenses because travel expense reimbursements may be
padded to generate illicit funds.
RESPONSES TO END -OF -CHAPTER QUESTIONS 341
4 The following is in example of an overbilling scheme:

Company A buys a service from Company B for $2,500 .
Instead of writing Company B aa check for $2,500, Company A
writes a check for $3,500 . Company B returns the extra
$ 1,000, in cash, to Company A.
5 Illicit payments via currency are indicated by:
Unexplained or unusual currency disbursements or with
drawals, particularly from aa business which does not nor
mally deal in currency
Matching the payor's currency withdrawals to the recipi
ent's corresponding currency deposits, expenditures, or vis
its to a safe deposit box
• The purchase of a cashier's check or a wire transfer made
payable to the recipient at or shortly after cash withdrawals
or disbursements by the payor
6 Each month, two checks are written to Lopez Electronics. In
each instance, the second check is 10% of the first. This may
indicate some type of kickback scheme.
7 Checks written to a business are usually deposited into an
account at a financial institution . An investigator should
become suspicious if too many checks are cashed out instead
of being deposited.
8 Situations involving backup documentation that should make
an investigator suspicious include the following:
• The absence of documentation to support a particular pay
ment
Discrepancies between the payment information and the

backup documentation
• Coincidences in the backup documentation
• Unnumbered or sequentially unusual invoices
• Alterations or photocopies of backup documentation
1
Chapter 8
1 Indirect methods of proof are most useful when the suspect is
taking currency or other payments that cannot be directly
traced .
2 The base year becomes the point of comparison for subsequent

years' net worth changes. If the base year findings come into
question once the net worth analysis is complete, the entire
analysis is in doubt and must be recalculated.
3 Looking at the expenditures method formula, it becomes clear
that if the “ known sources of funds” is understated, the “ funds
from unknown sources ” will be overstated . For example, if
“ total expenditures” equals $50,000 and “ known sources of
funds” is $45,000, then “ funds from unknown sources ” equals
$ 5,000 . But if “ total expenditures ” equals $ 50,000 and
“ known sources of funds” is underestimated at $ 43,000, then
“funds from unknown sources ” becomes overstated at $ 7,000.
4 Both the net worth and expenditures methods look at a sus
pects sources of funds, expenditures, assets, and liabilities.
However, in the net worth method, the absolute amount of an
item is considered whereas the expenditures method considers
the net effect, not the absolute. For example, data shows that in
the base year the suspect owned $500 worth of jewelry and in
Year 1 , she owned $ 1,000 worth. In the net worth analysis, the
amount of jewelry owned in Year 1 would be listed as $ 1,000—
the absolute amount owned. In the expenditures method, Year
I would show $500 worth of jewelry— the difference between
Year 1 and the base year. With the expenditures method , only
the year-to -year increase and decreases in a suspect's assets
and liabilities are considered.
5 With the specific item method, an investigator is looking for a

specific financial transaction to link to a suspect. This link is a
direct one— one to the point at issue and cannot easily be
denied by the suspect. The indirect methods, on the other
hand, imply that a suspect's expenses exceed his or her known
sources of income (funds). They cannot prove where the addi
tional monies came from .
RESPONSESTOEND - OF -CHAPTER QUESTIONS 343
6. E a. Suspect has aa bank account balance of $ 1,300 on

January 1 , 1991 , and $ 1,600 on December 31 , 1991 .
E b. Suspect's mortgage decreased from $ 27,500 to
$ 25,200 during the year.
§ c . Suspect's beginning inventory was $52,000 and end
ing inventory was $ 38,000.
S d . Suspect sold stock costing $5,000 for $ 8,000.
E e.
e
Suspect paid $ 13,250 for a new car.
S f. Suspect embezzled $ 40,000 from his employer.
s g. Suspect took out a $ 50,000 loan to purchase a boat.
E h. Suspect donated $ 10,000 to the University of Higher
Education .
344 RESPONSES TO END -OF - CHAPTER QUESTIONS
7 Net Worth Problem Solution

1991 1992 1993
Assets
Cash - on -hand $ 1,000 $ 0 $ 0.
Checking account 4,000 9,000 2,000
Jewelry 0 25,100 25,100
Mink coat 0 0 15,900
Car 25,000 25,000 25,000
Boat 0 0 24,000
Residence 130,000 130,000 130,000
Pool 0 20,000 20,000
Total assets $ 160,000 $ 209,100 $ 242,000
Minus:
Liabilities
Loan- pool $ 0 $ 7,000 $ 1,000
Mortgage- residence 98,000 96,500 94,500
Loan- finance company 5,000 5,000 5,000
Total liabilities 103,000 108,500 100,500
Equals: Net worth $ 57,000 $ 100,600 $ 141,500
Minus: Prior year's net worth 57,000 100,600

Equals: Net worth increase 43,600 40,900
Mortgage interest 10,500 10,000
Real estate taxes 1,500 1,500
Apartment rental 18,000 18,000
Lease payments - car 3,600 3,600
Vacation 0 12,000
Total known expenses $77,200 $ 86,000
Net Profit - flower shop 40,000 45,000
Equals: Funds from unknown sources $ 37,200 $41,000
RESPONSES TO END -OF -CHAPTER QUESTIONS 345
8 Expenditures Method Solution

1992 1993
Expenditures
$
Increase in bank account $ 5,000 0
Purchase of jewelry 25,100 0
Purchase of mink coat 0 15,900

Purchase of boat 0 24,000
10,000 0
Downpayment - pool
Pool loan repayments 3,000 6,000
Mortgage repayments 12,000 12,000
Apartment rental payments 18,000 18,000
Lease payments - car 3,600 3,600
Vacation 0 12,000
Total expenditures $ 78,200 $ 93,000

Cash-on-hand $ 1,000 $ 0
Bank account decrease 0 7,000
Net profit - flower shop 40,000 45,000
Total known sources of funds 41,000 52,000

346 RESPONSES TO END -OF- CHAPTER QUESTIONS
9 Bank Deposit Solution

1992 1993
Total deposits $ 30,000 $ 25,000

Minus : Transfers and redeposits 0 0
Equals: Net deposits $ 30,000 $ 25,000
Outlays:
Jewelry purchase $ 25,100 $ 0
Mink coat purchase 0 15,900
Boat purchase 0 24,000
Downpayment - pool 10,000 0
Pool loan repayments 3,000 6,000
Mortgage repayments 12,000 12,000
Apartment rental payments 18,000 18,000
Lease payments— car 3,600 3,600
Vacation 0 12,000
Total outlays $73,200 $ 93,000
Minus: Net bank disbursements 25,000 32,000

Equals : Cash expenditures $48,200 $ 61,000
Plus: Cash disbursements 48,200 61,000

Equals: Total receipts (income) $ 78,200 $ 86,000
Minus : funds from known sources 1,000 0
Cash-on-hand 40,000 45,000

Net Profit— Flower shop total known sources $ 41,000 $ 45,000
Minus: Known sources 41,000 45,000

RESPONSES TO END -OF- CHAPTER QUESTIONS 347
Chapter 9
1 A financial interview is conducted to obtain information and
documentation from aa witness. A financial interrogation is con
ducted for aa different purpose. Its purpose is to elicit confes
sions or admissions of culpability from suspects or hostile
witnesses .
2 Many investigative interviews focus on the recollection of wit

nesses. Questions such as “ Do you remember seeing any suspi
cious cars in the neighborhood ? or What color jacket was he
wearing? are asked. Financial interviews go beyond recollec
tion questions and deal with the specific details of financial
transactions and the movement of money.
3 When planning interviews, an investigator should consider the

following:
• Who should I interview ?
• In what order should I interview the witnesses?
• What type of witness is this person going to be?

• Should I contact the suspect?
• When should I contact the suspect?
• What method of questioning should I use?
4 There are three general methods of questioning an investigator
can use during aa financial interview :
• The chronological method

• Questioning according to documents
Questioning according to transactions or events
With the chronological method of questioning, a witness is
questioned about the events in the order that they occurred,
from beginning to end. With questioning according to docu
ments, a particular document ( financial statement, canceled
check, tax return) is the focus of the interview. When question
ing according to transaction or event, questions focus on a par
ticular situation.
5 The introduction is critical as it sets the tone for the whole

interview . Its primary objective is to put the witness at ease and
get him or her to agree to answer questions.
6 To get hesitant witnesses to agree to cooperate, and investigator
must avoid coming across as a threat. He or she should try to
lead witnesses to believe that they will benefit from cooperating
with the investigator.
7 An investigator must actively participate in the interview

process. He or she must constantly analyze responses, and con
tinually check for inconsistencies, inaccuracies, and incom
pleteness. Also, investigators must attend to what witnesses do
during an interview . The visual and non-verbal aspects of an
interview are very important.
8 The sentence is negatively phrased, and so long and complex
that no one is going to understand it. Investigators should avoid
asking complex and negatively phrased questions. All ques
tions should be simple, to the point, and positively phrased.
9 The final question an investigator should ask is: “ Is there any
thing else that you would like to say ? " It gives the witness one
final chance to say anything that he or she wishes .
10 The major advantage of the question and answer statement is
that it contains all of the questions asked and answers provided
during an interview. Of course, this could be viewed as a disad
vantage also. The statement will be long, unedited, and could
contain unnecessary material. On the other hand, the memo
randum is more informal and it contains all pertinent testimony
obtained during the interview. However, the testimony is
recorded as the investigator recalls after refreshing his or her
memory through informal notes. The memorandum does not
contain the exact words of the witness. Both the memorandum
and question and answer statement are good methods for
recording an interview. The choice the investigator makes
should be based on the complexity and investigative impor
tance of the interview .
RESPONSES TO END -OF-CHAPTER QUESTIONS 349
11 By allowing the affiant to create the affidavit, the investigator

ensures that the affidavit will be in the affiant's own words and
the credibility of the affidavit will increase because it is in the
affiant's own handwriting. It would be difficult for the affiant to
later deny the affidavit was his or hers.
Chapter 10
1 If an investigator seizes evidence from a suspect's home or
office without first obtaining a search warrant, the evidence
collected could be ruled inadmissible.
2 Probable cause means that, based on the facts presented and

the experience of the investigator, a reasonable person would
think that the evidence sought exists in the place to be
searched. Probable cause is shown via an affidavit.
3 a. Affiant's experience
b. Detailed account of criminal activity
c. Description of place(s) to be searched
d. Financial evidence
e . Items to be seized
f. Conclusions based on the affiant's expertise *
4. The statement supports two types of information that must be

in an affidavit. The statement , While going through the trash
left for garbage collection at 34 Tremont Avenue, I found an
electric and phone bill addressed to John Winkler of that
address— shows that the suspect exercises dominion and con
trol over 34 Tremont Avenue, the place you want to search . The
second statement, I also found a bill from Haggler's
Electronic Store indicating that Winkler recently bought $ 2,435
worth of stereo and video recording equipment , is financial
evidence of a major expenditure and asset purchase.
5 A document examiner could perform handwriting analysis to

determine the authenticity of the signatures on the contract,
could determine whose typewriter was used to create the con
tract, and could analyze the paper to see if it's the same type of
paper used in the creation of contracts in Mr. Friday's office.
6 Undercover operation objectives could include:
Identifying persons on the basketball team and outside the
team who may be involved in the point-shaving activities
Obtaining probable cause for search and arrest warrants
• Gathering information and documents relative to the inves
tigation
Obtaining information and leads to purchases and expendi
tures made by members of the basketball team
RESPONSES TO END -OF-CHAPTER QUESTIONS 351
Fraternity
House
Roundball Rebound
Baseball
Team
Bench
Jack Kurt
Dice Dice
Prison
8 An informant could tell you many things including which bas

ketball players are involved in point shaving, who on the out
side directs the players to shave points, what past games were
involved, what future games might be involved, and how the
players are paid off.
Chapter 11
1 With the cash transaction system , all financial transactions are
conducted exclusively through the use of currency. In the busi
ness transaction system, financial transactions are conducted
using methods that generate a trail of financial records .
2 The three characteristics of aa business used as a money laun
dering front are:
• Deals primarily in currency
• Has relatively fixed costs
• Is exempt from bank currency reporting requirements
3 By overstating its revenue, a business increases its taxable
income. They reduce their tax liability by overstating their
business expenses .
4 You and your friend could agree that you purchase the car for
some amount less than $ 20,000 and then pay the remainder of
the balance off the books.
5 The six methods used to transport currency out of the United

States are: physical transportation; wire transfer; cashier's
check; attorneys, accountants, and money managers; brokerage
accounts; and wire services.
The six methods used to transport currency into the United
States are: fictitious loans, fictitious foreign investors, finder's
fees, corporate salaries, cashier's checks and wire transfers,
and physical transportation.
6 Structuring means taking an amount of money in excess of
$ 10,000, breaking it into increments of $ 10,000 or less, and
then conducting multiple transactions for the purpose of evad
ing the CTR reporting requirements. There are many ways
money launderers can structure transactions. They can deposit
money :
• Several times a day at the same bank branch

• At different branches of the same bank on the same day
• At different banks on the same day
RESPONSES TOEND -OF -CHAPTER QUESTIONS 353
• At the same bank on different days

• At different banks on different days
7 The proceeds of a crime are “ whatever is received when an
object is sold, exchanged, or otherwise disposed of.” Money is
not the only proceed that may result from a crime. Goods and
services are also considered proceeds.
8 A major difference between the two types of forfeitures has to
do with the burden of proof required and who that burden rests
with. In a criminal forfeiture, the burden of proof is “ beyond a
reasonable doubt ” and it rests with the government. In a civil
forfeiture, the burden of proof is a “ preponderance of evi
dence ” and it rests with the claimant .
9 The car described assisted the criminal in performing a crime.

It is subject to forfeiture.
10 The methods of indirect proof can be used to show that a sus
pect “ lives beyond his or her means ,” and although they cannot
pinpoint from where the suspect is receiving his or her addi
tional funds, the methods of indirect proof can be used to
strengthen the means of support or close proximity factors in
establishing probable cause for forfeiture.
Glossary
This glossary contains terms Accounting, cost. The process of

presented in the text as well as collecting material, labor,and
terms which may be brought overhead costs and attaching
out in discussion. them to products.
Account Accounting Period
An accounting device used in The period of time over which
recording the day -to-day the transactions of aa business
changes in revenue , expense , are recorded and at the end of
asset, liability, and owner's which aa financial statement is
equity items. prepared.
Account, nominal. Temporary Account Payable
account for an item appearing An obligation to pay an amount
on an income statement and to a creditor.
closed to a balance sheet
Account Receivable
account at the end ofan
An amount that is owed to the
accounting period.
business, usually by one of its
Account, real. Accountfor an customers, as a result of the
item appearing on a balance ordinary extension of credit.
sheet.
Account Transactions
Accounting Financial events that directly
The system of recording and affect the movement of money
summarizing business and through a bank account.
financial transactions in books Accrual Basis of Accounting
and analyzing, verifying, and
reporting the results. Recording business revenues
when they are earned, regard
less of when they are collected,
GLOSSARY 355
and recording expenses when Appraise

they are incurred, regardless of Cash or value established by
when cash was disbursed. systematic procedures that
Accrued Expenses include physical examination ,
pricing, and often engineering
Expenses incurred but not yet estimates.
paid for.
Asset
Accrued Income
Income earned but not yet Property or resources owned by
a business or individual.
received.
Asset, current. An asset which is
Adjusting Entry
either currently in theform of
Recording the correction of an
cash or is expected to be con
error, accruals, writeoffs, provi- verted into cash within a short
sions for bad debts or deprecia
tion, etc., expressed in the form period,usually one year.
of a simple journal entry. Asset, fixed. Tangible property of
relatively long life that gener
Affiant
ally is used in the production of
The person who prepares an goods and services.
affidavit.
Association Matrix
Affidavit
The graphic summary that
A handwritten or typed decla results from link analysis.
ration or statement of facts
made voluntarily and con- Audit
firmed by the oath or affirma- A critical review of aa business's
tion of the party making it accounting records.
before an officer having author Bad Debts
ity to administer such oath.
Accounts that are considered to
Alien Corporation be uncollectible.
Corporation of another nation
Balance , Beginning
ality operating in the United
The amount in an account at
States .
the start of the accounting
Amortize period.
To write off a portion or all of
Balance, New
the cost of an intangible asset. The amount in an account at
the end of the accounting
356 GLOSSARY
period , it is the difference do bodily harm , to injure prop

between the beginning balance erty, to accuse of crime, or to
plus increases and minus expose disgraceful defects.
decreases.
Bond
Balance Sheet Any interest bearing or dis
A financial statement that counted government or corpo
reports the assets, liabilities, rate security that obligates the
and equities of a company as issuer to pay the bondholder a
of a specified time. specified sum of money , usu
isually
at specific intervals, and to
Balance Sheet, consolidated.
repay the amount of the loan at
Aggregate accountsfor the vari
maturity.
ous categories ofassets and lia
bilities of a corporatefamily Bond, corporate. A bond issued
(more than one corporation ). by a private corporation.
Bank Deposit Method Bond, coupon .A bond that has
An indirect method of proving coupons attached to the bond
unknown sources of funds certificate, one couponfor each
through an analysis of bank interest payment due during the
records and other financial life ofthe bond. The interest is
transactions entered into by a payable to whoever turns in the
suspect . coupon, whether or not that per
Bank Reconciliation
son initially bought the bond.
A comparison of the customer's Bond, municipal.A bond issued
records with the records of the by a state, county, municipality,
bank, listing differences to or any agency thereof.
bring balances into agreement.
Bond, registered. A bond where
Bank Statement the name of the owner appears
A document rendered by the on the bond certificate. Interest
bank to the depositor, usually on the bond is paid by check
monthly, which reflects directly to the registered holder.
deposits and checks which
have cleared the bank .
Bond, registered coupon.A
bond where the name ofthe
Blackmail owner appears on records main
A demand for money or other tained by a registrar and /or
considerations under threat to transfer agent. The interest
GLOSSARY 357
coupons attached to the bond Cashier's Check

certificate do not contain the A check drawn by aa bank on its
name ofthe owner and are own funds and issued by an
payable to the bearer. authorized officer of the bank .
Registered coupon bonds are Certified Check
registered for the principal only, A check where the bank guar
notfor interest.
antees that there are sufficient
Bribery
funds on deposit for that partic
When money, goods, services, ular check .
information, or anything else of
value is offered with the intent Chart of Accounts
to influence the actions, opin- A listing, in sequentially num
ions, or decisions of the taker. bered order, of a business's
accounts .
Bylaws
The rules adopted by the stock- Civil Law
holders setting forth the gen- That body of law that deals
eral method by which the with conflicts and differences
corporate functions are to be between individuals .
carried on subject to the corpo
Closed Corporation
rate charter.
Corporation owned by aa few
Case Law stockholders, not available for
The practice of judges and investment by public.
lawyers looking into decisions
Codification
from past cases to determine
the state of law for the case
The process of collecting and
arranging laws by subject.
they are currently handling.
Collateral
Cash Basis of Accounting
Something of value pledged as
Recording business revenues security for a loan .
when cash is received and
business expenses when cash Common Law
is paid. The system of law that origi
Cash Flow
nated in England and was the
The cash flow calculation
body of law carried by the ea
attempts to measure the actual
liest English settlers to the
American colonies.
cash receipts and cash
expenses of a firm .
358 GLOSSARY
Contingency CR
A possible future event or con- Abbreviation of credit.
dition arising from causes
Credit Entry
unknown or at present undeter An entry on the right-hand side
minable .
of a T -account.
Contra Account
Creditor
One of two or more accounts
One who lends money.
which partially or wholly offset
each other. On financial state- Criminal Law
ments , they may either be That branch of law that deals
merged or appear together, for with offenses of aa public
example , an account receivable nature , that is, wrongs commit
from and payable to the same ted against the state .
individual .
Curtilage
Cooperative The area inside the boundary
A corporation in which profits of a person's residence or busi
are distributed to shareholders ness location which has been
in proportion to the amount of marked off by man-made or
business each shareholder does naturally -occurring devices.
with the company .
Debit Entry
Counterfeiting A entry on the left-hand side of
Copying or imitating an item a T -account.
without having been authorized Debt
to do so and passing the copy Current and non - current liabil
off for the genuine or original ities .
item .
Defalcation
Corporation The embezzlement of money .
An artificial being or business
entity created under state or Depreciation
federal law which is legally The expiration of an asset's
separate from the persons who " quality of usefulness .”
own it . Ownership is in the Discount
form of stock and the liability
of the owners is limited to the Amount by which the face
value of a financial instrument
amount of their investment in
exceeds the sales price.
the company .
GLOSSARY 359
Dividend Elements of a Crime

Portion of a company's profits
a Those constituent parts of a
distributed to stockholders. crime that must be proven to
sustain a conviction.
Dividend, cash. Dividend paid
in theform ofcash. Embezzlement
When one entrusted with
Dividend, property. Dividend money or property appropriates
paid in theform ofstockfrom it for his or her own use and
another corporation. benefit.
Dividend ,stock. Dividend paid
Entry, Closing
in theformт ofshares ofstock in
the issuing corporation . An entry reducing one account
to zero and offset by an entry
Domestic Corporation increasing another account by
A corporation doing business the same amount. It is one step
in the state from which it in transferring the balance of
received its charter. an account to another account.
Double-Entry Accounting Equity, Owner's

The type of accounting in Claims against assets by the
which the two aspects of each owner(s) .
financial event are recorded.
Evidence
DR Anything that can make a per
Abbreviation of debit . son believe that a fact or propo
sition is true or false.
Draft
An order in writing directing Evidence, circumstantial.
the payment of money by one Evidence relating to a series of
party (the drawee) to another facts other than those at issue
party (the payee). A bank that tend , by inference, to estab
check is an example of a draft. lish thefact at issue.
Electronics Fund Transfer Evidence, direct. Evidence pre
A transaction with a financial cise to the point at issue.
institution by means of aa com
Evidence, documentary.
puter, telephone, or electronic
instrument.
Evidence in theform ofwritings
and documents.
360 GLOSSARY
Evidence, real. Evidence that is force, fear, or violence, or under

tangible. cover of official right.
Evidence, testimonial. Evidence Felony
given by word of mouth . A serious crime punishable by
incarceration for a period
Exemplar
exceeding one year, a fine, and
Non-testimonial identification
the loss of certain civil rights.
evidence from a defendant,
such as a blood or handwriting Financial Condition
sample. The results conveyed by pre
senting the assets, liabilities,
Expenditure
and capital of an enterprise in
Payment for acquiring
a an asset the form of a balance sheet.
or service.
Sometimes called financial
Expenditures Method position.
An indirect method of deter
mining unknown sources of
Financial Interviewing
The systematic questioning of
funds by comparison of all
persons who have knowledge of
known expenditures with all
known receipts during a partic- events, those involved, and
dence surroundin g a case evi
ular period of time. under investigation.

Expense Fiscal Year
Goods or services consumed in
An accounting period of twelve
operating a business. successive calendar months.
Expense, accrued. A liability
Foreign Corporation
account arisingfrom expenses
A corporation with a charter
that are incurred prior to the from another state . A California
related expenditure, for exam
corporation doing business in
ple , accrued wages.
Nevada is a foreign corporation
Expense, prepaid . An expense in Nevada .
recognized after a relevant Forensic Science
expenditure, for example, future
The application of scientific
benefits.
techniques to legal matters.
Extortion
Illegally obtaining property from
another by actual or threatened
GLOSSARY 361
Forgery Hearsay
Passing a false or worthless Evidence that does not come
instrument, such as aa check or from the personal knowledge of
counterfeit security, with the the declarant but from the rep
intent to defraud or injure the etition of what the declarant
recipient. has heard others say.
Forfeiture Hybrid Method
A legal proceeding that the Method of accounting which is
Government initiates against the a combination of the cash and
proceeds of an illegal activity. accrual methods .
Fraud Immunity
Falsely representing a fact to An investigative tool used by
another in order to induce that the grand jury that allows aa wit
person to surrender something ness to provide testimony or
of value . documents without fear of pros
ecution .
General Partner
A partner personally liable for Income Statement
partnership debts. A financial statement showing
Goodwill
revenues earned by a business,
the expenses incurred in con
An intangible asset represent
ducting business, and the
ing the difference between the
purch ase price and the valueof resulting net income or net loss.
the tangible assets purchased. Income, Net
Excess of total revenues over
Grand Jury
total expenses in a given
A jury who hears evidence
period.
obtained by the prosecution
and then decides whether or Indictment
not a trial ought to occur. A formal written complaint of
criminal charges.
Guarantor
One who promises to make Indirect Methods
good if another fails to pay or Ways of proving unknown or
otherwise perform an assigned illegal sources of funds which
or contractual task. rely upon circumstantial evi
dence .
362 GLOSSARY
Informant products, which upon comple

A person who has specific tion, will be sold.
knowledge of a criminal event Investment Banker
and provides that information
to a law enforcement officer. A person or company in the
business of marketing bonds
Insider Trading and stocks for a corporation
Using “ inside” or advance desiring to raise money.
information to trade in shares
Invoice
of publicly held corporations.
Bill for goods delivered or ser
Intangible Asset vices rendered.
Any nonphysical asset, such as Journal
goodwill or a patent, which has
A book of original entry in
no physical existence. Its value which transactions are initially
is dependent on the rights that recorded before being posted to
possession confers upon the
owner.
a ledger.
Judicial Notice
Interest
When aa court recognizes the
Charge for the use of money. existence and truth of certain
Interrogation facts.
Questioning of suspects and/or Kickback
uncooperative witnesses for the
purpose of obtaining testimony When a person who sells an
item pays back a portion of the
and evidence or proof of signif
icant omissions .
purchase price to the buyer or
public official.
Interview
Lapping
A specialized form of face-to
The substitution of checks for
face communication between
cash received . A term used in
people that is entered into for a
embezzlement schemes.
specific task -related purpose
associated with a particular Larceny
subject matter. Wrongfully taking another per
Inventory
son's money or property with
the intent to appropriate, con
Goods being held for sale, and vert, or steal it.
material and partly finished
GLOSSARY 363
Law stated interest rate for аa stated

A formal means of social con period.
trol intended to guide or direct
Link Analysis
human behavior toward ends
A technique for evaluating,
that satisfy the common good.
integrating , and presenting
Ledger complex information collected
An accounting device used to from various sources and
summarize journal entries by putting them together to show
specific accounts. patterns and meanings .
Lessee Liquidity
The person or company pos Ability to meet current obliga
sessing and using a leased item. tions.
Lessor Loss, Net
The person or company holding Excess of total expenses over
legal title to aa leased item. total revenue in a given period.
Letter of Credit Mala In Se
A document issued by aa bank Crimes that are said to be evil
authorizing designated banks or immoral in and of them
to make payments on demand selves .
to a specified individual up to a Mala Prohibita
stated total amount.
Offenses that are made crimi
Liability nal by statute but in and of
A debt owed . themselves are not necessarily
immoral .
Liability, current. Obligation
that becomes due within a short Maturity of Loan
time, usually one year. The due date of a loan .
Liability, long -term . Obligation Memorandum

with maturity dates more than A written record of an inter
one year after the balance sheet view embodying something that
date. an investigator desires to fix in
Line of Credit memory.
A commitment by a bank to a Mens Rea
borrower to lend money at a A legal term meaning proof of
criminal intent.
364 GLOSSARY
Misdemeanor Note Receivable

Crimes less serious than A debt that is evidenced by a
felonies that are punishable by note or other written acknowl
incarceration for a period of edgment.
less than one year and /or aa
fine. Open Corporation
A corporation whose stock is
Money Laundering available for investment by the
The process by which one con- public.
ceals the existence, illegal Partner
source, or legal application of One of the owners of an unin
income and then disguises that corporated business.
income to make it appear legit
imate . Par Value
Money Order A specified amount printed on

the face of aa stock certificate.
A negotiable instrument that
serves as a substitute for a Partnership
check. A company created when two
Mutual Company or more individuals agree to do
business together.
Type of corporation that has no
stockholders, but is owned by Percentage Method
its customers . An indirect method of proving
Net Worth unknown sources of funds by
The excess of asset value over using percentages or ratios
creditor claims; Assets - considered typical of aa busi
Liabilities = Net Worth (Equity). ness under investigation.
Net Worth Method

Physical Inventory, Taking of
An indirect method of proving Counting all merchandise on
hand, usually at the end of an
unknown sources of funds by
comparing net worth at the accounting period.
beginning and end of specified Posting
period of time. Transfer of an entry from a
Note journal to a ledger account.
A written promise to repay a Probable Cause
loan. All the facts and circumstances
within the knowledge of an
GLOSSARY 365
investigator about aa criminal Question and Answer

activity that can be considered Statement
reasonable and trustworthy. A complete transcript of the
questions, answers , and state
Proceeds
Whatever is received when an ments made by each partici
pant during an interview .
object is sold, exchanged , or
otherwise disposed of. Questioned Document
A document that has been
Profit and Loss Account
A temporary account where questioned in whole or in part
revenue and expense accounts
in respect to its authenticity ,
are transferred at the end of an
identity, or origin.
accounting period. Racketeering
Profit, Gross
Running an illegal business for
Sales minus cost of goods sold. personal profit.
Reasonable Doubt
Proof
The degree of certainty a per
The establishment of aa fact by
evidence .
son has in accomplishing or
transacting the more important
Proprietor concerns in everyday life.
The owner of an unincorpo
Registration Statement
rated business.
A statement describing, in
Proprietorship detail, the financial condition
A business owned by one per- of a corporation, its business,
son who is usually both the and the reasons it proposes to
manager and the owner. offer an issue of stocks or
bonds to the public .
Prospectus
A summary of a corporation Revenue
registration statement designed An increase in owner's equity
to inform a prospective pur- arising from operations.
chaser of securities . It must
Search Warrant
contain a fairly extensive dis A written order by a judge or
closure statement of essential
magistrate, it describes the
facts pertinent to the security .
place to be searched as well as
the items to be seized.
366 GLOSSARY
Security Stock, capital.Stock that is

A stock, bond, note, or other authorized by a company's
document that represents a charter.
share in aa company or a debt
Stock, common. Units ofowner
owed by a company or govern
ship in a company that allow
ment entity.
the owner to receive dividends
Shell Corporation on his or her holdings.
A corporation that has no
Stock, issued . The number of
assets or liabilities, simply a
charter to do business . shares ofstock actually sold or
distributed by a corporation.
Single-Entry Accounting
Stock, outstanding. Issued stock
A system of accounting that less treasury stock.
makes no effort to balance
accounts . Stock,preferred. The class of
Silent Partner
stock entitled to preferential
A partner not liable for debts of treatment with regard to divi
dends or with regard to the dis
the partnership beyond the
amount of his or her investment tribution of assets in the event of
liquidation
in the partnership and who
does not participate in manage- Stock, treasury. Shares ofstock
ment . Also known as a limited issued and subsequently reac
partner. quired by the corporation.
Stakeout Stock Certificate
A common term for stationary A document evidencing owner
surveillance. ship in a corporation.
Sting Stockholders
A short -term undercover opera- An owner of an incorporated
tion . business with the ownership
Stock being evidenced by stock cer
tificates.
Ownership of a corporation
represented by shares that are Stock Split
a claim on the corporation's An exchange of the shares out
assets and earnings . standing for two or more times
their number.
GLOSSARY 367
Subpoena Torts
A document that requires a A terms used in civil law , it
witness to appear before a refers to the private wrongdo
grand jury or requires the wit ings between individuals.
ness to produce records and
Transaction
documents for the grand jury.
The exchange of goods and ser
Substantive Law vices .
The body of law that creates, Treasury Bill
discovers, and defines the
rights and obligations of each A short-term security offered
by the U.S. Government with
person in society.
maturities of 13 weeks , 36
Surplus, Capital weeks , and 52 weeks .
An increase in owner's equity
Treasury Bond
not generated through the com
A long -term security offered by
pany's earnings. the U.S. Government with
Surveillance maturities of 10 years or longer.
The secretive and continuous
observation of persons, places, Treasury Note
An intermediate -term security
and things to obtain informa
offered by the U.S. Government
tion concerning the identity with maturities from one to ten
and activity of individuals sus
years.
pected of violating criminal
laws . Trial Balance
A list of the account balances
T -Account
arranged in “ balance sheet
An accounting device used for
order” by debits and credits
recording increases and
decreases on either side of ver
with adjustment columns for
entries. Used as a basis sum
tical line, with account title on
the top mary for financial statements.
Undercover Operation
Tax Evasion
An investigative tool where law
Committing fraud in filing or enforcement officers or private
paying taxes .
individuals assume an identity
other than their own for the pur
pose of gathering information
relating to criminal violations.
368 GLOSSARY
Underwriter Unit and Volume Method

A person or firm guaranteeing An indirect method of proving
and usually participating in the unknown or illegal sources of
marketing of securities to the funds by applying price or
public . The guarantee states profit figures to the known
the dollar amount the under- quantity of business.
writer guarantees that the cor United States Code
poration will receive from the
sale .
A multi-volume publication of
the text of statutes enacted by
Underwriting Syndicate Congress.
A group of underwriters formed
Voucher System
for the purpose of guaranteeing A control system within a com
the successful sale of a particu
lar issue of securities. pany for cash payment.
Worksheet
An accounting device used to
organize accounting data.
Appendix A
This appendix contains a listing amounts of mortgages, and

of selected sources of business releases of mortgages.
information and government
Agriculture Records
records available to the finan • County veterinarians
cial investigator.
• Commission merchants
Business Records
Abstract and Title Company • Insurance companies (insure
Records shipments)
• Maps and tract books. • Transportation companies
• Escrow index of purchasers • Storage companies
and sellers of real estate (pri
mary source of information) • County and state fair boards
• Escrow files (number County farm agents

obtained from index) • State cattle control boards
• Escrow file containing escrow (some states maintain records
instructions, agreements , and of all cattle brought in and
settlements taken out of state)
Automobile Manufacturer and
• Abstracts and title policies Agency Record
Special purpose newspapers • Franchise agreements
published for use by attorneys , • Financial statements of
real estate brokers, insurance dealers
companies, and financial insti
tutions . These newspapers con • New car sales and deliveries
tain complete reports on (used car purchases, trade-ins,
transfers of properties, loca and sales)
tions of properties transferred,
370 APPENDIX A
• Service department (mileage, mental investigative agencies.

order, and delivery signature to Credit reports may only be fur
indicate presence in area) nished :
Bonding Company Records —In response to the order of a

• Investigative and other court having the jurisdiction to
records on persons and firms issue such an order;
bonded
-Upon written request of the
• Financial statements and consumer; or
date
-To aa person who has aa legiti
• Address of person on bond mate business need for the
Specialized Commercial Credit information in regard to a busi
Organizations ness transaction involving the
• United Beverage Bureau consumer, including but not
• National Fuel Credit limited to credit, insurance,
Association and employment purposes .
There is no specific excep
• Jewelers Board of Trade tion provided in the act that
will allow law enforcement
• Lumbermen's Credit
Association
agencies to obtain credit
reports for investigative pur
• Produce Reporter Company poses. The act provides crimi
• Packer Produce Mercantile nal penalties for obtaining
information under false pre
Agency
tenses and for unauthorized
• Paper and Allied Trade disclosures by officers or
Mercantile Agency employees of consumer report
Lyon Furniture Mercantile ing agencies.
Agency The identifying information
which is available under the
• American Monument act is limited to a consumer's
Association name, address , former
Credit Reporting Agencies addresses, place(s) of employ
The Fair Credit Reporting Act ment, and former place(s) of
of 1971 restricts the availabil- employment.
ity of information from credit If identifying information is
reporting agencies to govern needed for investigative pur
poses the following credit
APPENDIX A 371
reporting agencies can be -Dun and Bradstreet, Inc.

checked :
-Market Service Bureau
• Local credit rating and col
-Middle Market Director
lection agencies
(business guide of firms with a
• Local office of National net worth between $ 500,00 and
Association of Retail Credit $ 1,000,000)
Men
-Million Dollar Directory
- Insurance applicants (business guide firms with a net
worth of $ 1,000,000 or more)
— American Service Bureau
-Metal Working Directory
-Hooper Holmes Agency (marketing director of metal
-Retail Credit Company working plants in the United
States)
• Mortgage Loans
—Vendor Account Services
-Loan exchange (clearing
(used by retail stores in pro
house loan information )
cessing accounts payable, buy
-Retailer's Commercial ing, and merchandise control)
Agency (performs credit inves • International
tigations for credit cards, bank
ing, and mortgages) - International Credit Reports
(a division of Dun and
• Transportation Bradstreet which furnishes
- TRINC (furnishes statistics credit reports on overseas
on the trucking industry ). credit)
—Motor Carrier Directory ( lists –International Market Guides

motor carriers with revenues (Middle and South America
totaling $ 50,000 or more). only)
• Manufacturers -Continental Europe (lists
-The “ Census File of
European businesses in 39
9 countries)
Manufacturers” contains a cen
sus of manufacturing plants in —Guide to Key British
the United States . Enterprises (lists prominent
firms throughout the United
• Marketing Services Kingdom)
372 APPENDIX A
-Synopsis of Dun, Mexico • Public transportation

-Synopsis of Dun- Brazil • Stores
-Reference book , Argentina Distributors' Records

• Wholesale toiletry (cash
-Bradstreet Register rebates are paid by toiletry
International Mercantile Claims manufacturers ). Details of
Division available contracts which pay
rebates to wholesale toiletry
Department Store Records
distributors are contained in
• Charge accounts
publications issued by the
• Credit files Toiletry Merchandisers
Association, Inc., 230 Park
Detective Agency Records
• Investigative files Avenue, New York , N.Y.
10017, and the Druggist
-Civil Service Council, Inc., 1290
-Criminal Avenue of the Americas, New
York ., N.Y. 10019
-Commercial
Gambling equipment
-Industrial
• Wire service
• Character checks
• Factory, farm , home, office
• Fraud and blackmail investi- equipment , etc.
gations
Drug Store Records
• Divorce evidence • Prescription records (name,
address, date, and physician
Missing persons search
issuing prescription )
• Security patrols and guards Fraternal, Veterans, Labor,
• Undercover agents Social, and Political
Organization Records
• Shadow work • Membership and attendance
records
• Lie detector tests
• Dues, contributions, and
• Personnel screening and fin payments
gerprinting
• Locations and history of
• Service checking members
• Restaurants
APPENDIX A 373
Hospital Records • Correspondence files

Entry and release dates
• Payment records on termina
• Payments made tion, losses, or refunds on can
Hotel Records cellations
• Identity of guest • Payments to doctors, lawyers,

Payments made by guest appraisers, and photographers
hired directly by the insurance
• Credit record
company to act for the company
Forwarding address or as an independent expert
• Reservations for travel
Laundry and Dry Cleaning
Records
(transportation companies and • Marks and tags (marks are
other hotels ) sometimes invisible and are
• Telephone calls made to and brought out by use of ultraviolet
from room rays)
• Freight shipments and lug • Files of laundry marks

gage (in and out) -Local or State police depart
Insurance Company Records ments
(Life, accident, fire, burglary, -National Institute of Dry
automobile, and annuity
Cleaning, Inc., Washington, D.C.
policies)
• Applications (background Lenders Exchange or Consumer
and financial information, Loan Exchange
insurance carried with other An organization known as the
companies) Consumer Loan Exchange or
Lenders Exchange exists in all
• Fur and jewelry floaters of the large cities in the United
(appraised value and descrip States, as well as in some of the
tion) smaller cities. It is a nonprofit
• Customers' ledger cards organization supported by and
for its members . Most the lend
• Policy and mortgage loan ing institutions are members of
accounts
the exchange. It can supply
information concerning open
• Dividend payment records
and closed loan accounts with
• Cash value and other net
member companies, and is a
worth data
good source of general back
374 APPENDIX A
ground information. These Newspaper Records (from a

organizations are not listed in newspaper's morgue)
directories or telephone books. • Relatives, associates, and
Their location in aa city may be friends
obtained through local lending • Previous places of employ
agencies. ment ( employee or company
National Charge Plan Records publications)
National agencies, such • Police and FBI files
American Express, Diners
Club, and Carte Blanche, which • Schools (yearbooks, school
provide credit cards for use in papers , etc.)
charging travel, entertainment,
• License bureaus (drivers,
goods and services, can deter chauffeurs, taxis, etc.)
mine whether an individual or
business has an account from • Military departments
their central index files. If
details of the account are • Fraternal organizations
needed , information requests • Church groups
should indicate whether only
• Race tracks
copies of the monthly state
ments or copies of both the • Nightclub or sidewalk photog
statements and charge slips are raphers and photography studios
desired, name, social security Public Utility Company Records
number, the time period to be • Present and previous
covered, the subject's address, address of subscriber
and the name and address of the
subject's employer or business. • Payments made for service
Requests should be directed to: and “major” purchases
Publications
American Express Company,
• Who's Who in America and
770 Broadway, New York, N.Y. various States
10003, and Diners Club /Carte
Blanche , Adjustment • Tax services
Department, 180 Inverness
City directories
Drive West, Englewood, CO
80111 . • Billboard (amusements, coin
machines, burlesque, drive-ins,
fairs, state, radio, TV, magic,
APPENDIX A 375
music machines, circuses, rinks, rather than upon other assets

vending machines, movies, let- and liabilities of aa borrower.
ter lists, and obituaries) Telephone Company Records
• Variety (literature, radio, TV, • Local directories, library of
music , state , movies, obituar- “ out of city ” directories
ies, etc.) • Message unit detail sheets (in
• American Racing Manual some areas) which list numbers
(published by Triangle called by a particular telephone
Publications, Inc., 10 Lake
• Investigative reports on tele
Drive, P.O. Box 1015, phones used for illegal purposes
Highstown, New Jersey 08520) .
Records showing amounts paid • Payments for service
to owners of winning horses by • Toll calls. Because of the
each race track in the United existence of more than one long
States , Canada, and Mexico distance carrier, toll records of
• Professional, trade, and local phone company may be an
agriculture directories and incomplete listing of such calls.
magazines There may be a second tele
phone bill from another com
• Moody's Investors Service Inc. pany, such as GT & E or MCI .
• Standard and Poor's Transportation Company
Corporation Records
• Passenger lists, reservations
Real Estate Agency or Savings
and Loan Association Records • Destinations
Property transactions
• Fares paid
• Financial statements
• Freight carrier-shippers ,
Payments made and destinations, and storage points
received (settlement sheets)
• Departure and arrival times
• Credit files
• Loan applications. These do Government Records

not contain quite the same
information as loan applications State Police (Central Records
Section )
given to a bank. A savings and • Criminal cases
loan association depends pri
marily upon real estate security • Criminal intelligence
376 APPENDIX A
• Inflammable liquid installa — “ Scofflaw files” (consistent

tions violator of minor offense- pri
marily traffic)
• Firearms registrations
• Other divisions
• Investigations conducted for
other departments -Criminal division files
• Traffic arrests and motor -Forgery squad (check squad)

vehicle accident investigations
- Juvenile division
• Noncriminal and criminal
-Morals or vice squad files
fingerprint records
-Narcotics bureau
• “Rogues gallery"
—Organized crime division
• Investigation of aviation
rules and non -carrier civilian -Police force personal history
aircraft accidents files
• Police training school files -Public relations office (press

City Police file)
• Criminal identification -Traffic division files
-Records of arrests, acci Small Town Police
dents, and general information • Criminal index cards
-Alphabetical indexes of • Criminal arrest cards

every complainant or suspect • Accident reports
— “ Aided” cards (citizen assis
• Complaint forms
tance)
• Offense reports
-Gun permits or applications
and registrations County Police (Sheriff)
• Criminal records
-Lost or stolen articles
—Crimes involving bodily vio
-Pawn shop files lence
— Towed or repossessed autos —Crimes involving theft
-Ambulance files
-Crimes involving worthless
checks
-Business information files
APPENDIX A 377
- Personal history sheets on • International Association of

people connected with the Chiefs of Police
crimes
• The monthly police adminis
- Juvenile division records tration review list of police
publications
-County business owners
State and Local Court Records
• Traffic records
Typically, there are three levels
-Name, address, license plate of courts within the State sys
number, driver's license num tem. There is a Trial Court,
ber, arrest number, date and where most litigation begins,
place of birth , sex, color, age, an Appellate Court, which is
occupation, height, weight, the first level of appeal, and
complexion , color of hair, eyes, Court of Final Appeal.
marks, and facts of arrest Sometimes you will find a court
below the Trial Court which
National Sheriffs Association
Directory works much like the magistrate
• List of State institutions and does in the Federal system.
their superintendents Most litigation, such as
divorce or breach of contract,
• State and Federal enforce takes place in the State and
ment agencies and territorial local system. Documents sub
jurisdictions mitted to the court in connec
• Associate members of tion with a divorce are
National Sheriffs Association particularly helpful in financial
investigations. It is not unusual
• County sheriffs for detailed asset and liability
• Address of National Auto information to be present in a
Theft Bureau divorce file.
Probate records describing
Other State and Local Law estates and distribution of
Enforcement and Quasi-Law
Enforcement Organizations estates are also found in the
Specialized police organiza State and local court system.
tions These may be particularly
helpful in negating nontaxable
• Public, semi-public, and pri sources of cash.
vate organizations Anytime a person is involved
• The industrial security officer in aa civil action, whether it be
378 APPENDIX A
for breach of contract or some ing manufacturers, importers

type of negligence action, a and dealers
wealth of background informa • For weapons manufactured
tion on the individual is usu
or imported after 1986, capa
ally provided to the opposing
bility of tracing any firearm
party through the court. A
record of this information will
from manufacturer or importer
to retailer
be kept in the case files of the
court and is available to an Bureau of the Public Debt
investigator. • U.S. savings bonds pur
chased and redeemed
Federal Government
Records • Requests for information
must be addressed to:
Bureau of Alcohol, Tobacco,
and Firearms ( ATF) Bureau of the Public Debt
• Distillers , brewers, and per- Division of Transactions and
sons or firms who manufacture Rulings
or handle alcohol, as a sideline 200 Third Street
or main product Parkersburg, West Virginia
26101
• Inventory or retail liquor
dealers and names of suppliers Federal Aviation Agency (FAA)
as well as amounts of liquor This agency maintains records
purchased by brand which reflect the chain of own
• Names and records of known ership of all civil aircraft in the
United States . These records
bootleggers
include documents relative to
• Names of subjects of investi- their manufacture and sale
gations by ATF (sales contracts, bills of sale ,
mortgages, liens, transfers ,
• Processors, manufacturers,
inspections , and modifica
and wholesalers of tobacco
tions). They also maintain
products
licensing and medical informa
• List of all Federal firearms tion on pilots .
license holders, including
Federal Aviation Administration
manufacturers, importers, and
dealers Civil Aviation Security Division
AAC- 90, P.O. Box 25082
• List of all Federal explo- Oklahoma City, Oklahoma
sives license holders, includ- 73125
APPENDIXA 379
Department of Agriculture Department of the State

• Licensed meat packers and Import and export licenses
food canners
• Foreign information
• Inspections made under
• Passport records (date and
Pure Food and Drug Act
place of birth required ). Recent
• Transactions with individu data may be obtained from the
als and businesses (subsidies local district court.
and adjustments) Drug Enforcement
Department of Defense Administration (DEA)
The Department of Defense • Licensed handlers of nar

maintains data concerning pay, cotics
dependents, allotment accounts, • Criminal records of users ,

deposits, withholding state pushers, and suppliers of nar
ments (Forms W -2 ), and any cotics
other financial information rela
Federal Bureau of
tive to military personnel. This Investigation (FBI)
information is available at one
• Criminal records and finger
the following offices, depending prints
upon the branch of the Armed
Forces to which the individual Anonymous Letter Index
was or is presently attached: • National Stolen Property
United States Army Finance Index (stolen Government
Center property, including military
Indianapolis, Indiana 46249 property)
Request must include the com • Nonrestricted information
plete name and Army serial pertaining to criminal offenses
number and subversive activities
Air Force Finance Center
• National Fraudulent Check
RPTP
Index
Denver, Colorado 80279
U.S. Customs Service
Director, Bureau of Supplies • Record of importers and
and Accounts exporters
Department of the Navy
13th and Euclid Streets • Record of custom house bro
kers
Cleveland, Ohio 44115
380 APPENDIX A
• Record of custom house Money Order Division

truckers (cartage licenses) Postal Data Center
P.O. Box 14965
• List of suspects
St. Louis, Missouri 63182
• Records of persons who
transport or cause to be trans • Addresses of post office box
holders . These requests should
ported currency of more than
be made only when efforts to
$ 10,000, or certain monetary obtain the information from
instruments at one time into or
out of the United States
other sources are unsuccessful.
Information can be obtained
U.S. Secret Service
from the Inspector-in -Charge or
• Records pertaining to coun- Postal Inspector. Check with
terfeit, forgery, and United the local post office to learn the
States' security violation cases identity of the inspector who
the information.
• Records pertaining to anony can furnish
mous letters and background Immigration and
files on persons who write Naturalization Service (INS)
“ crank ” letters • Records of all immigrants
and aliens
• Secret Service's central files
in Washington, D.C., contain an • Deportation proceedings
estimated 100,000 handwriting • Passenger manifests and
specimens of known forgers. An declarations (ship, date, and
electronic information retrieval point of entry required)
system facilitates comparison of
questioned handwriting with • Naturalization records
the specimens on file for identi- (names of witnesses to natural
fication purposes. ization proceedings and people
who know the suspect)
U.S. Postal Service
• Mail watch or cover • Lists of passengers and crews
on vessels from foreign ports
• Current or forwarding
addresses of subjects and third • Financial statements of
parties aliens and persons sponsoring
their entry
• Photostats of postal money
orders. Requests for such Interstate Commerce
Commission (ICC)
records must be addressed to:
The ICC has information con
APPENDIX A 381
cerning individuals who are or -A description of the signifi

have been officers of transporta- cant provisions of the security
tion firms engaged in interstate to be offered for sale and its
commerce . This information relationship to the registrant's
includes the officer's employ- other capital securities
ment and financial affiliations.
-Information as to the man
In addition to the record
information available from the
agement of the registrant
ICC, most safety inspectors of -Certified financial state
the ICC are good sources of ments of the registrants
" reference” information
• Securities and Exchange
because they have personal Commission News Digest (a
knowledge of supervisory
employees of the various carri
daily publication giving a brief
summary of financial proposals
ers in their region.
files and the actions taken by
IRS National Computer Center the SEC)
The National Computer Center
• The SEC Bulletin is issued
is located in Martinsburg, West
Virginia and it maintains the quarterly and contains informa
Master File, a tax record of all tion of official actions with
known taxpayers. The Master respect to the preceding month.
File is designed to accumulate It also contains a supplement
which lists the names of indi
all data pertaining to the tax
liabilities of all taxpayers, viduals reported as being
regardless of location. The wanted on charges of violations
Master File is separated into of the law in connection with
securities transactions. It is
several categories. Two of the
categories are the Business available upon request at any
Master File and the Individual of the SEC regional or branch
Master File . offices in the following cities:
Securities and Exchange Atlanta, GA

Commission (SEC) Miami , FL
• Records of corporate regis- Boston , MA
trants of securities offered for New York , NY
public sale, which usually show : Chicago, IL
Philadelphia , PA
-A description of registrant's
-
Cleveland, OH
properties and business
Salt Lake City, UT
382 APPENDIX A
Denver, CO issued . Since many people

San Francisco, CA apply for aa social security num
Detroit, MI ber at a young age, this in turn
Seattle, WA can lead to locating the place
Fort Worth, TX of birth of an individual . There
St. Louis, MO are nine digits in the social
Los Angeles, CA security number. With the
Washington, D.C. exception of the 700 series, the
• The SEC's Securities
first three digits reflect the state
of issue. The last six digits are
Violations Section maintains
individual identifiers . The table
comprehensive files on individ
uals and firms who have been
on the next page contains a
listing of the states of issue of
reported to the Commission as
the first three digits .
having violated Federal or State
securities laws. The information
pertains to official actions taken
against such persons, including
denials, refusals, suspensions,
and revocations of registrations;
injunctions, fraud orders, stop
order, cease and desist orders;
and arrests, indictments, con
victions, sentences, and other
official actions .
Social Security Administration

The Social Security
Administration, headquartered
in Baltimore, is responsible for
the issuance of social security
numbers. Records on social
security paid by an individual
or business are not available
for review by the public.
If aa social security number is
known, it might lead to helpful
information regarding the loca
tion in which the card was
APPENDIX A 383
Initial Numbers State of Issuance Initial Numbers State of Issuance

001 - 003
-
New Hampshire 449 - 467 Texas

627 - 645
004 - 007 Maine 468 - 477 Minnesota

008 - 009
-
Vermont 478 - 485 Iowa
010-034 Massachusetts 486 - 500 Missouri
035 - 039 Rhode Island 501 - 502 North Dakota
040 - 049 Connecticut 503 - 504
-
South Dakota
050 - 134 New York 505 - 508 Nebraska
135 - 158
-
New Jersey 509 - 515 Kansas

159 - 211 Pennsylvania 516 - 517 Montana
212 - 220 Maryland 518 - 519
-
Idaho
221 - 222 Delaware 520 Wyoming
223 - 231
-
Virginia 521 - 524 Colorado

232 - 236 West Virginia 525, 585, New Mexico
648 - 649 allocated, not in use
-
237 - 246, 232 North Carolina 526 - 527 Arizona

with middle digits 30 600 - 601
247 - 251
-
South Carolina 528 - 529

-
Utah
646 - 647 allocated , not in use
252 - 260 Georgia 530 Nevada
261 - 267
-
Florida 531 - 539

-
Washington
589 - 595
268 - 302 Ohio 540 - 544
-
Oregon
303 - 317
-
Indiana 545 - 573
-
California
602 - 626
318 - 361 Illinois 574 Alaska
362 - 386 Michigan 575 - 576 Hawaii
387 - 399 Wisconsin 577 - 579
-
Washington, DC
400 - 407 Kentucky 580 groups 01 - 18-
Virgin Islands
408 - 415 Tennessee 580 (groups above 20) - Puerto Rico
584, 596 - 599
416 - 424
-
Alabama 586 Guam , American
Samoa, Northern
Mariana Islands,
Philippine Islands
425 - 428, 587
-
Mississippi 700 - 728 Railroad employees

588 allocated , not in use with
special retirement act
429 - 432
-
Arkansas
433 - 439 Louisiana
440 - 448
-
Oklahoma
384 APPENDIX A
Veterans Administration (VA) Treasurer of the United States

• Records of loans, tuition Checks paid by the U.S.
payments, insurance payments, Treasury are processed through
and nonrestrictive medical data the Office of the Treasurer of
related to disability pensions the United States . Photostats of
are available at regional offices. the canceled checks may be
This information, including obtained by initiating a request
photostats, may be obtained by through the U.S. government
writing the appropriate regional agency which authorized the
office. All requests should check .
include a statement covering National Crime Information
the need and intended use of Center (NCIC)
the information . The veteran The National Crime Information
should be identified clearly Center is aa repository of data
and, if available, the following relating to crime and criminals
information should be fur gathered by local, State, and
nished : Federal law enforcement agen
cies . The NCIC's computer
-VA claim number
equipment is located at FBI
-Date of birth
Headquarters in Washington,
-Branch of service D.C. The present equipment is
capable of accommodating
-Dates of enlistment and dis- nearly 2 million records on
charge criminal activities. In aa matter
Federal Reserve Bank (FRB) of seconds, stored information
• Records of issue of United can be retrieved through equip
ment in the telecommunica
States Treasury Bonds
United States Coast Guard
tions network. Connecting
terminals are located through
• Records of persons serving
on United States ships in any out the country in police
departments, sheriff's offices,
capacity
State police facilities, and
• Records of vessels equipped Federal law enforcement agen
with permanently installed cies. Dispatchers can respond
motors quickly to requests. NCIC, as
• Records of vessels over 16 well as operating statewide sys
feet long equipped with detach- data infurnishes
tems,
a matter computeriz
a
of seconds edto
able motors
APPENDIX A 385
all agencies participating in the El Paso Intelligence Center

centralized State systems . The (EPIC)
goal of NCIC is to serve as a EPIC is a multi-agency opera

national index to fifty statewide tion that collects, processes,
computer systems and heavily and disseminates information
populated metropolitan area on narcotics traffickers, gun
systems . smugglers, and alien smugglers
NCIC Headquarters might in support of ongoing field
be compared to a large auto- investigations.
mated "file cabinet” with each If a suspect is or has been
file having its own label or engaged in any of the previ
classification . Such a cabinet of ously mentioned activities , it is
data contains information con- possible that EPIC will have
cerning: intelligence information on him
or her. This information might
Stolen, missing, or recovered include the name of the indi
guns vidual, his or her known activi
Stolen articles ties, significant events,
Wanted persons
associations among individuals
or activities , aircraft or vessels
Stolen /wanted vehicles used by the subject, observa
tions of both foreign and
Stolen license plates domestic movements of the
Stolen /wanted boats subject, and his or her associ
ates and their aircraft or ves
Stolen / embezzled /missing sels. EPIC also provides the
securities
name, agency, and telephone
National Law Enforcement number of each investigator
Telecommunications System having expressed an interest in
(NLETS)
or having data regarding a sub
NLETS is a computerized com ject. EPIC records often contain
munication network linking
State and local enforcement
substantialfinancial informa
tion relative to the subject.
agencies in all 50 States . It can
provide information such as international Criminal Police
Organization (Interpol)
criminal history, driver's Interpol is an international
licenses, and vehicle registra
tion .
police agency with bureaus set
up in member countries. In the
386 APPENDIX A
United States, the National national bank is a party, and in

Central Bureau is under the cases where the law specifically
direction and control of the states that the U.S. District
Departments of Justice and Court has original jurisdiction.
Treasury : The U.S. District Courts
The National Central Bureau have concurrent jurisdictions
can assist in such things as with State courts on “ Federal
criminal history checks, license questions ” when the dispute
plate and driver's license arises under the Constitution ,
checks, and the location of sus- laws , or treaties of the United
pects, fugitives, and witnesses . States; disputes between citi
The Federal Courts zens of different States; one
U.S. citizen and one citizen of a
This system is basically a three
step process. The first step is foreign state; or a citizen and a
the U.S. District Court;, the foreign state.
second, the U.S. Court of The U.S. District Court has
Appeals; and the third, the broad criminal jurisdiction
U.S. Supreme Court. Since over all offenses against the
laws of the United States .
most court records are similar,
When both Federal and State
we will only deal with the U.S.
District Court in this appendix. laws are violated by one com
mitting a crime, the offender is
• U.S. District Courts subject to prosecution in both
There are U.S. District the Federal and State courts for
Courts in every State (the larger the separate crimes.

The files of the clerk's office
States have several) and in the
of a U.S. District Court are not
District of Columbia, Guam,
Puerto Rico, the Canal Zone, as complex as those of aa State
and the Virgin Islands. court of original jurisdiction .
The U.S. District Court has For the investigator, the most
exclusive jurisdiction in bank important records in the cus
ruptcy, maritime and admiralty, tody of a clerk of a U.S. District
a
Court are the case records.

patents, copyright penalties,
fines under Federal law , and These records consist of the
proceedings against consul and files (case papers), the minutes,

vice consuls of foreign states. In and the dockets .
addition, it has jurisdiction – The files consist of plead

when the United States or a ings, processes, and written
APPENDIX A 387
orders and judgments of the ralized. If an alien elects to

court, and such other papers as change his or her name at natu
pertain directly to the case. ralization, both the old an new
name appears in the index . In
-The minutes record, in sum
addition, a copy of the subject's
mary form , of what happened
Application to File Petition for
during the proceedings . In
some courts , the minutes are an
Naturalization appears in the
court records. This form (N
integral part of the file. 400) contains considerable
-The docket sheet on each information about the alien
case is aa chronological sum- being naturalized .
mary, not only of what takes
• Other Federal Courts
place in court, but also of the
papers in the file. The docket To handle particular types of
sheet can be very valuable to cases, Congress has estab
an investigator who is looking lished special courts . They are
for only one item in a huge file. described in the Guide to Court
In most U.S. District Courts Systems as follows:
there are separate sets of dock
-Court of Claims— The U.S.
ets for bankruptcy, and civil
and criminal cases . Some Government permits certain
claims to be brought against
clerks have found it to their
itself in the U.S. Court of
advantage to keep a set of mis Claims .
cellaneous dockets, and most
clerks keep the docket sheets -U.S. Customs Court
for closed cases in a separate When certain merchandise is
area . imported into the United States,
The clerk of аa district court customs duties have to be paid
to the U.S. Government.
will have a record of banking
Customs collectors at various
institutions that have been des
ports in the United States clas
ignated as depositories for
sify merchandise and appraise
money of estates in bankruptcy. it. When an importer complains
The United States District
on the rate , or that the mer
Courts have jurisdiction to nat
chandise was improperly
uralize aliens and maintain
excluded, the U.S. Customs
copies of the certificates of at
Court is the court to which the
uralization as well as a name
index of the individuals natu case must be brought. Appeals
388 APPENDIX A
from the U.S. Customs Courts

are taken to the Court of
Customs and Patent Appeals.
This court also reviews certain
decisions of the Patent Office
and the U.S. Tariff
Commission .
APPENDIX B 389
Appendix B
This appendix contains infor

mation regarding the American
Bankers Association prefix
numbers of cities and states
and a listing of Federal
Reserve Districts.
Federal Reserve Districts

1. Boston
2 - New York
N
A
c o
3 - Philadelphia
4- Cleveland
5- Richmond
6- Atlanta
7- Chicago
8 - St. Louis
9- Minneapolis
10 - Kansas City
11 - Dallas
12 - San Francisco
390 APPENDIX B
American Bankers Association Prefix Numbers
THE NUMERICAL SYSTEM

of The American Bankers Association
Index to Prefix Numbers of Cities and States
Numbers 1 to 49 inclusive are Prefixes for Cities

Numbers 50 to 99 inclusive are Prefixes for States
Prefix Numbers 50 to 58 are Eastern States
Prefix Number 59 is Hawaii
Prefix Numbers 60 to 69 are Southeastern States
Prefix Numbers 70 to 79 are Central States
Prefix Numbers 80 to 88 are Southwestern States
Prefix Number 89 is Alaska
Prefix Numbers of Cities in Numerical Order
1 New York , N.Y. 14 New Orleans , La. 26 Memphis, Tenn. 38 Savannah, Ga.
2 Chicago, Il . 15 Washington, D.C. 27 Omaha, Neb. 39 Oklahoma City,
Ok .
3 Philadelphia, Pa. 16 Los Angeles, Ca. 28 Spokane, Wash. 40 Wichita, Kan .
4 St Louis, Mo. 17 Minneapolis, Minn. 29 Albany, N.Y. 41 Sioux City, Iowa
5 Boston , Mass . 18 Kansas City, Mo. 30 San Antonio, Tx. 42 Pueblo, Co.
6 Cleveland, Ohio 19 Seattle, Wash . 31 Salt Lake City, Ut 43 Lincoln, Neb .
7 Baltimore, Md. 20 Indianapolis, Ind . 32 Dallas , Tx . 44 Topeka, Kan .
8 Pittsburgh, Pa. 21 Louisville , Ky. 33 Des Moines, Iowa 45 Dubuque, Iowa
9 Detroit, Mich . 22 St. Paul, Minn . 34 Tacoma, Wash . 46 Galveston , Tx.
10 Buffalo , N.Y. 23 Denver , Colo. 35 Houston, Tx . 47 Cedar Rapids,
Iowa
11 San Francisco, Ca. 24 Portland, Ore . 36 St. Joseph , Mo. 48 Waco, Tx.
12 Milwaukee, Wis. 25 Columbus, Ohio 37 Fort Worth , Tx. 49 Muskogee, Ok.
13 Cincinnati , Ohio
Prefix Numbers of States in Numerical Order
50 New York 64 Georgia 77 North Dakota 89 Alaska

51 Connecticut 65 Maryland 78 South Dakota 90 California
52 Maine 66 North Carolina 79 Wisconsin 91 Arizona
53 Massachusetts 67 South Carolina 80 Missouri 92 Idaho
54 New Hampshire 68 Virginia 81 Arkansas 93 Montana
55 New Jersey 69 West Virginia 82 Colorado 94 Nevada
56 Ohio 70 Illinois 83 Kansas 95 New Mexico
57 Rhode Island 71 Indiana 84 Louisiana 96 Oregon
58 Vermont 72 Iowa 85 Mississippi 97 Utah
59 Hawaii 73 Kentucky 86 Oklahoma 98 Washington
60 Pennsylvania 74 Michigan 87 Tennessee 99 Wyoming
61 Alabama 75 Minnesota 88 Texas 101 Territories
62 Delaware 76 Nebraska
63 Florida
Index
A Transit Number 96
Account 144 Articles of Incorporation
Account Transactions 85 content 130
Accountant /Client Privilege 51 sample 131
Accounting Articles of Partnership
defined 134, 135 content 128
function 135 sample 129
fundamental equation 140 Assets
141 current 144
methods 138 described 140
methods compared 139 fixed 145
systems 136-137 Association Matrix 288
Accounting Systems Assumed Name Index 70
compared 138 Attorney /Client Privilege 50
double -entry 137 Auditing 160
single-entry 136
Accounts Payable Journal 153
Accounts Receivable Journal B
153 Balance Sheet
Accrual Basis Accounting 139 account form 142
Affiant 252 , 266 accounts 144-146
Affidavit described 141-144
advantages and disadvan report form 143
tages 254 Bank Credit Cards 103
described 252, 266 Bank Deposit Method
for search warrant 266-272 described 209-214
sample 253 , 270-272 example 212, 213
Alteration Analysis 286 formula 209
American Banker's Association formula components
392 INDEX
described 210 real estate 72

prima facia case require vehicle 76
ments 214 Business Transaction System
when used 216 advantages and disadvan
Bank Fraud 25 tages 298
Bank Statement described 297
described 85
sample 87
Best Evidence Rule 56 C
Better Business Bureau 70 Capital Stock 106
Beyond a Reasonable Doubt Case Law 14
42, 43 Cash Basis Accounting 138
Biaggi, Mario 2 Cash Disbursements Journal
Blackmail described 153
described 7 sample 155
statute 25 Cash Receipts Journal
Boesky, Ivan 3 described 153
Bond sample 154
corporate 108 Cash Transaction System
coupon 109 advantages and disadvan
described 106 tages 298
municipal 108 described 297
registered 109 Cashier's Check 101
registered coupon 109 Casinos, financial records
treasury 109 available 115
treasury bill 108 Certified Check 101
treasury note 108 Chain of Custody Rule 55
Bribery Chamber of Commerce 70
described 6 Chart of Accounts
statute 19 described 149
Business Organizations sample 150
comparison of 133 Check Spread Analysis 99
corporation 130-132 Circumstantial Evidence 46
derivations 132 Civil Forfeiture 315, 317
forms 126 Civil Law 15
partnership 127, 128 Claims , described 140
proprietorship 126, 127 Clear and Convincing
Business Records Evidence 44
INDEX 393
Clearing House Banks 95 Currency Transactions 102

Clergyman /Penitent Privilege Current Assets 144
51 Current Liabilities 145
Codification, described 17 Curtilage 282
Commodities, documents
available 112-114
Commodities Exchange 111 D
Commodities Market 106, 110 Debit 151
Common Law 14 Debit Memo 99
Common Stock 106 Deposit Ticket 88
Computer Crime, general Deposits, investigating 88-96
elements of 32 Direct Evidence 46
Computers, evidence from 287 Dividend
Consensual Monitoring 279 cash 107
Conspiracy 20 described 106
Cooperative 133 property 107
Corporate Bond 108 stock 107
Corporate Records 69 Document Examiner 284
Corporation Document Restoration 286
Articles of Incorporation Documentary Evidence 47
130, 131 Double - Entry Bookkeeping
described 130-132 accrual basis 139
Correspondent Banks 95 cash basis 138
Counterfeiting described 137, 149
described 7 hybrid method 139
statute 21 methods compared 139
Coupon Bond 109 Drug Enforcement
Credit 151 Administration 11
Credit Memo 99 Dying Declarations 54
Criminal Forfeiture 315, 318
Criminal Law 15
Currency and Monetary E
Instrument Report 309 El Paso Intelligence Center 78
Currency Schemes 186 Electronic Funds Transfer
Currency Transaction Report Act 31
33, 92, 93, 309, 312
Currency Transaction Report
by Casinos 115
394 INDEX
Elements of aa crime 16 formula 205

18 U.S.C. § 1001 23 prima facia case require
18 U.S.C. § 1341 24 ments 208
18 U.S.C. § 1343 25 transaction treatment 206
18 U.S.C. § 1344 25 when used 215
18 U.S.C. § 1956 26 Expert Testimony 55
18 U.S.C. § 1957 27 Extortion
18 U.S.C. § 201 19 described 7
18 U.S.C. § 287 20 statute 22
18 U.S.C. § 371 20
18 U.S.C. $ 471 21
18 U.S.C. § 641 21 F
18 U.S.C. § 656 22 Facilitation 316
18 U.S.C. § 872 22 False Statements 23
18 U.S.C. § 873 22 False, Fictitious ,, or Fraudulent
18 U.S.C. § 874 23 Claims 20
26 U.S.C. § 7201 29 Federal Bureau of Investigation
26 U.S.C. § 7203 29 11
26 U.S.C. § 7206 30 Federal Reserve Routing Code
Embezzlement 96
by bank employees 21 Felony 15

described 6 Fictitious Payable Schemes
from the government 21 183
Evidence Filing a False or Fraudulent
best 56 Return 30
chain of custody 55 Financial Interview
circumstantial 46 objectives 230
defined 42 purpose 229
direct 46 question type 230
documentary 47 Financial Investigative
from computers 287 Approach
real 47 need for 4
requirement of original 56 what's involved 4
secondary 56 Financial Investigator
testimonial 47 major goal of 4
Expenditures Method skills required of 8
described 204-209 Financial Profile 195
example 207, 208 Financial Records 104, 105
INDEX 395
Financial Search Warrant 273 disadvantage 41

Fixed Assets 145 process described 38
Forensic Science role of financial investigator
alteration analysis 286 41
described 283 Grand Jury Transcript 257
document restoration 286
handwriting analysis 285
ink analysis 286 H
paper analysis 286 Handwriting Analysis 285
Forfeiture Haven Countries 103, 305
civil 315 Hearsay
criminal 315 described 52
described 314 exceptions to 52
facilitation 316 Hearsay Exceptions
proceeds 316 dying declarations 54
Forfeiture Statutes expert testimony 55
Title 18 U.S.C. $ 981 317 official records rule 54
Title 18 U.S.C. § 982 318 prior statements 53
Title 21 U.S.C. § 881 318 res gestae statement 54
Forgery shop book rule 54
described 6 statement against interest
statute 21 53
Form Letter 256 tacit admission 53
Formal Immunity 40 valid confession 53
Fourth Amendment 265 Helmsley, Leona 2
Fraud Husband /Wife Privilege 51
described 5 Hybrid Method Accounting
indicators 172 , 173 139
Futures Contract 111
In Personam Proceeding 316

Garbage, sifting 282 In Rem Proceeding 316
General Journal 153 Income Statement
Ghost Employee Schemes 184 described 146
Government Records 77 multi-step format 147, 148
Grand Jury single-step format 147
advantage 41 Indicators, of fraud 172, 173
396 INDEX
Indictment 38 J
Informal Immunity 40 Joint Stock Company 134
Informal Notes Joint Venture 134
described 246 Journal
sample 246 accounts payable 153
Informant 280 accounts receivable 153
Ink Analysis 286 cash disbursement 153
Insider Trading 7 cash receipts 153
Internal Revenue Code described 151 , 152
statutes 29, 30 general 153
Internal Revenue Service 11 purchases 153
International Criminal Police recording entries 152
Organization 78 sales 153
Interview sample entry 151
body 239-244 types of 153
closing 244, 245 Journal 151
conducting 236 Judicial Notice 47
contacting the suspect 234
defined 228
do's and don'ts 243 K
informal notes 246 Kickback
introduction 237 described 7
memorandum 246 statute 23
outline 236
phases 231
planning 231-234 L
question and answer state Larceny
ment 249 described 6
questioning methods 234, Law
235 categories 14, 15
recording 245, 250 defined 14
selecting witnesses 232 Law Enforcement
IRS National Computer Center Officer /Informant
78 Privilege 51
Ledger
described 156, 157
posting 158
recording entries 157
INDEX 397
subsidiary 160 methods 298

T -account format 157 off shore haven 305-309
Liabilities statute 26, 309
current 145 Money Laundering Statutes
described 140 Title 18 U.S.C. § 1956 310
long-term 146 Title 18 U.S.C. § 1957 312
Limited Partnership 132 Title 31 U.S.C. § 5313 312
Link Analysis 287 Title 31 U.S.C. § 5324 313
Loan, investigating 100, 101 Money Order 102
Long-Term Liabilities 146 Moving Money
into the U.S. 307
out of the U.S. 305
M Municipal Bond 108
Magistrate 265 Mutual Company 134
Magnetic Ink Character
Recognition 91
Mail, reading cover 283 N
Mail Fraud 27 National Crime Information
Majority Rule 57 Center 77
Mala In Se 15 National Law Enforcement
Mala Prohibita 16 Telecommunications System
Mechanical Recording 255 78
Memorandum Net Worth Analysis
advantages and disadvan approval in court 203
tages 247 base year 198
described 246 described 197
sample 248 example 200
Mens Rea 16 formula 198
Milken , Michael 3 keys to 201
Misdemeanor 15 prima facia case require
Money Laundering ments 204
buy /sell transaction 304 when used 215
defined 26, 296 Non-Account Transaction
described 7 described 100
fronts 303 loan 100
income statement 301
indicators 303
legitimate business 299-302
398 INDEX
0 clergyman /penitent 51
Offbook Schemes 186 husband /wife 51
Office of the Inspector General law enforcement officer/
10 informant 51
Official Records Rule 54 physician /patient 51
On- Us Items 96 rule of evidence 48
Operation Ill Wind 3 Probable Cause
Out Clearing Item 96 described 45, 266
Over-the -Counter Securities forfeiture investigations
Market 110 315, 321
Overbilling Schemes 185 Proceeds 314
Owner's Equity 140, 146 Proof
beyond aa reasonable doubt
42
P clear and convincing evi
Paper Analysis 286 dence 44
Partnership described 42
Articles of Partnership 128, preponderance of evidence
129 43
described 69, 127-129 probable cause 45
general 69 suspicious situation 45
limited 69 Proof Numbers 91
Partnership Records 69 Proprietorship 126, 127
Payroll Kickback Schemes 184 Public Records
Physician/Patient Privilege 51 assumed name indexes 70
Point-Of-Payment Schemes Better Business Bureau 70
182 Chamber of Commerce 70
Post-Qualifying Number 98 corporate 69
Posting, to a ledger 157 court 71
Pre -Qualifying Number 98 list of 71 , 72
Preferred Stock 106 partnership 69
Preponderance of Evidence real estate 69
43, 44 trust 70
Prima Facie Case 16 Uniform Commercial Code
Prior Statements 53 Filings 71
Privileged Communications Purchase Journal
accountant/ client 51 described 153
attorney /client 50 sample 156
INDEX 399
Q S
Question and Answer Statement Safe -Deposit Boxes 103
advantages and disadvan- Sales Journal
tages 251 described 153
described 249-251 sample 155
sample 250 Savings and Loan Scandal 3
Questioned Document 284 Search Warrant
described 264, 265
financial 265
R Secondary Evidence 56
Racketeer Influenced and Securities
Corrupt Organizations 27 documents available 112
Racketeering types of ownership 111
described 7 Securities Act of 1933 31
statute 25, 26 Securities Exchange 109
Real Estate Records Securities Exchange Act of
business 72 1934 31
public 69 Securities Market 106
Real Evidence 47 Shell Corporation 134
Reasonable Doubt 42 Shop Book Rule 54
Registered Bond 109 Signature Card 85
Registered Coupon Bond 109 Single -Entry Bookkeeping 136
Registrar 107 Specific Item Analysis
Relevancy And Competency point-of-payment analysis
rule of evidence 49 181
Res Gestae Statement 54 point-of-receipt analysis
Rose, Pete 6 182
Rules of Evidence Specific Item Method
best evidence 56 currency schemes 186
chain of custody 55 described 180
privileged communications fictitious payable schemes
50 183
relevancy and competency ghost employee schemes
49 184
requirement of original 56 offbook schemes 186
overbilling schemes 185
payroll kickback schemes
184
400 INDEX
point-of-payment schemes Subpoena 39

182 Subsidiary Ledger 166
reviewing suspect payments Substantive Law 15
187 Surveillance
thoughts on using 189 described 276, 277
Statement Against Interest 53 electronic 278
Statutes moving 278
18 U.S.C § 1001 23 objectives 277
18 U.S.C. § 1341 24 stationary 278
18 U.S.C. § 1343 25 Suspect
18 U.S.C. § 1344 25 as a source 66
18 U.S.C. § 1956 26, 310 selecting 64
18 U.S.C. § 1957 27, 312 Suspect Payments
18 U.S.C. § 201 19 reviewing 187
18 U.S.C. § 287 20 Suspicious Situation 45
18 U.S.C. $ 371 20 Sworn Statement
18 U.S.C. § 471 21 described 254
18 U.S.C. $ 641 21 Syndicate 134
18 U.S.C. § 656 22
18 U.S.C. § 872 22
18 U.S.C. § 873 22 T
18 U.S.C. § 874 23 T -account 157
18 U.S.C. $ 981 317 Tacit Admission 53
18 U.S.C. $ 982 318 Tax Evasion
21 U.S.C. § 881 319 described 6
26 U.S.C. § 7201 29 statute 29
26 U.S.C. § 7203 29 Testimonial Evidence 47
26 U.S.C. § 7206 30 Third -Party Check 102
31 U.S.C. § 5313 33, 92, Title 15 31
312 Title 18 18
31 U.S.C. § 5324 33, 313 Title 26 29
Sting Operation 275 Title 31 33
Stock Transaction 136
capital 106 Transaction Entry Point 89
common 106 Transaction Systems
described 106 advantages and disadvan
preferred 106 tages 298
treasury 107 business 297
INDEX 401
cash 297 W
Transactional Immunity 40 Wedtech 2
Transfer Agent 107 Western Union 115
Transit Items 95 Wire Fraud 25
Traveler's Check 102 Wire Transfers 103
Treasury Bills 108 Witnesses, types of 232
Treasury Bond 109
Treasury Notes 108
Treasury Stock 107
Trial Balance
described 159
sample 159
Trust 70
Typewriting Analysis 285
U
U.S. Customs Service 9
U.S. Marshall Service 10
U.S. Secret Service 10
Undercover Operation
described 274
objectives 275
Uniform Commercial Code
Filings 71
United States Code
described 16
Use Immunity
described 40
formal 40
informal 40
V
Valid Confession 53
Vehicle, records 76
ISBN 0-16-041830-5
90000
9 " 780160" 4183031
1 .
UNIVERSITY OF ILLINOIS -URBANA
3 0112 046957764

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This is a reproduction of a library book that was digitized

by Google as part of an ongoing effort to preserve the

For sale by the U.S. Government Printing Office

Don Vogel Cathy Pledger

Bob Wilson Richard Ruffin

John Imhoff Mike Spang

Ross Sutton Diane Svoboda

Elliott Lieb Diane Evans

Ed Federico Patricia Reid

Douglas Gastorf Sue Roderick

Paul Whitmore Dennis Madden

Bill O'Connor Vince Williams

Chapter 1 : Why Financial Investigation? 1

Why Financial Investigation ?

The knowledges and skills required of aa financial investigator will

Identify the skills required of a financial investigator.

A New Investigative Approach

• Hotel queen Leona Helmsley was convicted of tax evasion

What's Involved in the Financial Investigative Approach?

Bank account information (checking and savings account

Crimes with a Financial Aspect

• Fraud. Fraud is a generic term embracing all the ways one

person can falsely represent a fact to another in order to induce

lifetime of lodging rights at his glitzy Heritage USA theme park in

Bribery. Bribery occurs when money, goods, services, infor

• Embezzlement. Embezzlement occurs when a person who

• Larceny. Larceny occurs when one person wrongfully takes

Counterfeiting. Counterfeiting occurs when someone

illegal sources into legitimate channels so that its original source

The crimes listed above are what we normally think of when

Financial Investigation Skills

• Locate and interpret records that contain financial informa

• Trace the movement of money through a financial institu

• Use accounting and auditing techniques

• Use investigative techniques such as surveillance and

Each of the items listed above is a topic in this textbook .

Today's Financial Investigators

and facilitate the entry of passengers upon their return to the

• Bureau of Alcohol, Tobacco, and Firearms. The Bureau of

by their very nature , are financially -orientated. Making sure that

Laws Related to Financial Crimes

C tain crimes that are normally thought of as

the statutes that are related to a suspected criminal activity. After

• Identify the statute(s) related to a particular crime.

In Chapter 1 , we stated that the successful financial investi

Terms and Concepts

lawyers looking into decisions from past cases to determine the

An Introduction to Statutes and the Elements of a Crime

United States Code

CASE NO. 4053 - M

§ 7201. Attempt to evade or defeat a tax or the payment

• Title 31 , Money and Finance

Federal Statutes: Title 18, Crimes and Criminal Procedure

$ 287. Falso, fictitious, or Claims and Services in Matters Affecting Government

§ 371. Conspiracy to commit fraudulent

• At least one of the conspirators knowingly committed at

8471.Obligations or securities Counterfeiting and Forgery

§ 873. Blackmail Blackmail

• The suspect made threats

§ 874. Kickbacks from public Kickbacks