Decoding Financial Crimes: Red Flags, STRs and the Money Laundering Trail
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photo: victor goodpasture photography
During her session at the 36th Annual ACFE Global Fraud Conference, Pamela Morley, CFE, CPA, described her job as “essentially accounting in anticipation of court or in anticipation of a legal proceeding.” Morley is a senior forensic accountant with the Forensic Accounting Management Group of Public Services and Procurement Canada. She said she approaches cases as though they’re puzzles to be pieced together. “I'm not given the box top that has the picture I'm creating. I don't know if I've got all the pieces. It's the same thing with information. You've got to fit the pieces of information together to find out what's missing, and there might be alternative sources to fill those gaps in,” she explained.
Morley introduced conference attendees to the money laundering process, shared her five-step process for analyzing an allegation of money laundering and identified the common red flags of money laundering. Using real-world examples of suspicious transaction reports (STRs) submitted to FINTRAC (Financial Transactions and Reports Analysis Centre of Canada), she showed how they can effectively be used to enhance criminal money laundering investigations.
Money Laundering Process and Stages
After covering the U.S. and Canadian anti-money laundering (AML) frameworks, Morely defined the three stages of money laundering:
Placement: deposit proceeds from illegal sources of income into the financial system undetected.
Layering: create distance between the source of the proceeds and the ultimate use of the funds by confusing the audit trail, concealing the true origin of the proceeds.
Integration: use the proceeds for personal benefit in a manner that makes the funds appear to have originated from a known, legitimate source.
The sources of income in a money laundering scheme may originate from tax crimes, fraud, embezzlement, drug sales, theft, bribery and/or corruption, according to Morley. Criminals typically accomplish the placement stage of money laundering via currency exchange, transportation of cash and cash deposits. Layering typically involves wire transfers, cash withdrawals and cash deposits in other bank accounts. When attempting to create an apparent legal origin for criminal proceeds, those engaging in money laundering may create fictitious loans, disguise ownership of assets and use criminal funds in third-party transactions. When using criminal proceeds for personal gain, criminals will engage in liquidating assets and investing.
Morley added that criminals typically engage in money laundering to:
Evade taxes.
Conduct criminal activity.
Avoid personal responsibility.
Avoid reporting to FINTRAC or FINCEN (Financial Crimes Enforcement Network).
Hide assets.
Conceal financial accounts.
Investigation in Five Steps
When approaching a criminal investigation that potentially involves money laundering, Morely said she follows a five-step process:
Build personal, business, behavioral and financial profiles.
Identify various information sources, including those that pertain to banking, taxes and third parties.
Examine financial accounts by analyzing net worth, source and use of income, and tracing of deposits and purchases.
Identify red flags of money laundering, such as sudden loan payoff, use of shell companies and transfers to offshore entities.
Report findings with the expectation that the case will go to court.
“These steps may or may not be done in this order, and they may or may not be revisited as the analysis continues,” she clarified.
When reporting the findings of a money laundering allegation in a criminal investigation to FINTRAC, Morley recommended writing STRs with the expectation that the case will go to court. “Think about what information readers might need to make their decision and what information you’d want if you were a reader. Make use of meaningful charts and graphs to give a simplified overview of a complex situation,” she advised.
“The suspicious transaction reports that I find most useful tell a story,” she added. “They're based on a short period of time encompassing a series of transactions, and they will detail the reasons why something was weird.” Looking at bank statements and supporting financial documents alone, she said, only provides part of the picture. An STR that tells a story will “tell you who's involved, give you locations and provide a bunch of detail that you can't see if you just go and get the bank statements and the supporting documents.”
