Cashing Out

Solving Frauds in the Cash Economy

By By Roland Daysh, CFE, BCA, CA, and Anita Exley, CFE, BCOM, CA

Through surveillance and police work, investigators in Wellington, New Zealand, had strong suspicions that a middle-aged male was selling illegal narcotics. However, a financial analysis of the suspect’s lifestyle failed to show a cash shortage when comparing his expenses against his reported legitimate income. So, what was the suspect doing with the money he made from his drug deals?

The police decided to execute a search warrant on the suspect’s home. During the search, one of the investigators noticed a freshly dug area in the backyard. Thinking the suspect had buried his drugs, the investigators proceeded to dig in the loose soil. Instead of finding illegal narcotics, the investigators uncovered hundreds of thousands of dollars in gold coins. This was the missing key! This explained what the suspect was doing with his ill-gotten gains. When the purchase of gold was factored into the financial analysis, it was revealed that the suspect had a significant deficit in available cash, which proved to be strong circumstantial evidence when it was presented in court with the rest of the investigation’s findings.

Because New Zealand has proceeds of crime legislation, this analysis convinced the judge to levy a substantial fine against the defendant to be paid to the New Zealand government. Consequently, the defendant’s bank accounts were cleared out and all his assets and property were sold.

Like street criminals, white-collar fraudsters often believe that if they deal primarily in cash, their crimes are undetectable. Fortunately for those of us in the fraud examination field, this belief is simply not true. By using income determination methods, such as the cash available technique used in the above example, fraud examiners can build a case of circumstantial evidence that often leads to a successful prosecution in court.

Income determination methods generally require that the fraud examiner have certain statutory powers to access information, and therefore, these techniques are more relevant to investigators working within regulatory agencies such as taxation or customs authorities, police agencies, and social services. However, there are situations in which these techniques are applicable to private practice fraud examiners. For instance, the methods can be used when the issue under investigation is relatively narrow and there’s public information available (i.e., if a suspect purchases a house and there’s no registered mortgage).

Revenue authorities around the world initially developed income determination methods to counter tax evasion. Now other governmental agencies are developing expertise and dedicated staff to utilize these techniques. Police agencies use the methods to determine crime proceeds, and welfare agencies use them to quantify benefit frauds.

There are three basic types of income determination methods: asset accretion, source and disposition of funds, and cash available. The cash available technique, which will be covered here, is the most relevant tool for cash economy frauds.

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