Tracing Illicit Transactions: Process & Examples

Instructor: Scott Tuning

Scott has been a faculty member in higher education for over 10 years. He holds an MBA in Management, an MA in counseling, and an M.Div. in Academic Biblical Studies.

Significant acts of fraud are often committed by well-educated, capable, and intelligent individuals who utilize effective cloaking techniques. Identifying and tracing dubious transactions is often the best way to identify participants in the fraudulent activity.

I Fought the Fraud Examiner, and the Fraud Examiner Won: A Case Study in Illicit Transactions

In response to some unusual claim payments, an insurance industry forensic accountant began tracing a series of transactions associated with the checks. Investigator Mary Stewart had been in the business long enough to be absolutely sure of two things. First, Mary knew that following the money always leads to the subject. Second, she knew that no matter how careful the fraudster was, they would all eventually make a mistake. Armed with this knowledge, Mary launched an investigation into an insurance fraud scheme.

Sources for Identifying Illicit Transactions

Public Records

Mary knew that one of a subject's most common mistakes is overlooking information found in public records. While most are familiar with public records like criminal history or real estate transactions, Mary knew how to look deeper into:

  1. Incorporation records
  2. Professional licenses or certifications
  3. Voter registrations
  4. Business licenses
  5. Civil judgments, bankruptcy records, and business credit reports

As Mary looked at the payees on the unusual checks, she noticed a trend. All of the payees had business names that were nearly identical to the actual vendor. When Mary searched by address, she saw numerous seemingly unrelated companies that shared the same physical address. She immediately identified this as an indicator that a shell company may be involved. Shell companies are legally incorporated businesses, but instead of engaging in legitimate commerce, the only purpose is to provide cover for manipulating the paper trail associated with various transactions.

Authentic vendors names and shell company names can be very similar.
Payee and Shell Company Names

Multiple corporations registered to the same residential address can be a red flag.

Altered Documents

Another source for discovering illicit transactions are other institutions, such as vendors or contractors. If Mary's subject is missing documents or has documents with suspicious authenticity, she should compare them to original documents belonging to other organizations. Some documents are easy to tamper with, but many are not. When examining transaction records such as invoices, receipts, or work orders, Mary will ask all parties (even the vendor) for original documentation. She will make note of things like inconsistent ink types or colors, illegible words and signatures, or other techniques to erase or white-out information.

Attempted Destruction of Records

Paper Records

Mary's experience in fraud investigations became even more valuable when she was able to apply previous knowledge to the current situation. She recalled a recent case in which a large company in the United States had been under scrutiny for quite some time. It was becoming clear to the company's executives that the end was near. However, with government regulators ready to pounce at any moment, the executives launched an all-out attempt to purge their files. The company's accounting practices were so bad that management could not distinguish fraudulent records for authentic ones, so they simply started throwing them all away.

Fortunately for Mary and the government regulators working with her, the perpetrators did not give much thought to their method of disposal. Imagine their surprise when, after fighting a subpoena for almost a year, they arrived at the business to find more than ten thousand documents in the dumpster right behind the building! Investigators often find the most damning evidence (original receipts with altered receipts, etc.) in the wastebasket at or near the subject's desk.

Electronic Records

Illicit transactions involving computers can present an easy target for a fraudster who has high-level access to the company's financial systems. However, access is not usually granted to the audit logs, backups, or external control systems. Illicit transactions can often be identified by examining access patterns and/or comparing records with back-up copies or other organizations with reciprocal transactions.

The Power of Persistence

Although traipsing through seemingly endless invoices and receipts would seem mind-numbing to some, it was one part of the job that Mary enjoyed. A few years before this investigation, Mary and a prosecutor worked together on a case in which the evidence suggested illicit transactions had taken place. Unfortunately, the incident was several years old and original documents were hard to come by. However, the team caught a break when a document storage warehouse sent the now-defunct company a warning that their documents were going to be destroyed as the company had not paid their bill in two years.

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