How to Prove Illicit Payments from the Point of Receipt

This method is preferred if the investigators cannot access the suspected payer’s records, or if there are many suspected payers, of if the payer is not known, or if cash payments are suspected.  It requires that the suspect recipient’s records be available by compulsion (as would be the case if subject is an employee of the investigating organization), or by consent, subpoena or from third parties.

Corrupt payments can be proven by focusing on the suspected recipient either:

  • Directly: by tracing funds used to purchase assets or deposits back to the point of payment, or
  • Indirectly (circumstantially): by showing that the subject’s expenditures exceed his legitimate, disclosed income, or by showing cash expenditure forwhich there is no legitimate source, and connecting such expenditures to other evidence of corrupt payments.

Prepare the “Financial Profile”

Start the tracing process by preparing a “financial profile” of the subject and his or her spouse, children and related parties and entities.  Begin by obtaining the information below on the subject’s assets, liabilities, income and expenses through public record checks, requests to financial institutions, and from third-party witnesses.  Each request should include the subject, his family members, known nominees and related entities.

Assets

  •       Personal and business bank accounts
  •       Brokerage and investment accounts
  •       Trust accounts
  •       Safe deposit boxes
  •       Real property (residence and other properties)
  •       Vehicles, boats, aircraft, etc.
  •       Substantial personal property (jewelry, artwork, etc.)
  •       Stocks and bonds
  •       Mutual funds
  •       Closely held businesses
  •       Rental and investment properties
  •       Private business investments (e.g., limited partnership shares, etc.)
  •       Whole life insurance policies (with cash values)
  •       Cash savings (cash “hoards”)

Liabilities

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

Expenditures

  •       Standard living expenses: housing, transportation, food, insurance, etc.
  •       Travel and entertainment
  •       Hobbies and collectibles
  •       Alimony and child support

Known and legal “income” (all sources of household funds, including from spouse, adult children, etc.)

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

Sources of Information for the Financial Profile 

Public records

See the public record sources listed in Step Three, above.

From third-party witnesses

Use consents obtained from the subject or subpoenas to obtain bank and real property records, loan files, credit card, and accounting records.  See the complete list of potential useful records under “From the Subject,” immediately below.

Do not forget to interview the subject’s colleagues, current and former business associates, neighbors, ex-spouses accountants, real estate agents and sellers, home contractors, etc.  Such interviews are often as productive, if not more so, than document searches to identify hidden assets.

From the subject’s employer

Collect the following from the subject’s employer:

  • Human Resource (Personnel) Department records
  • Pay checks or direct deposit records and expense reimbursement records (to identify bank accounts).
  • Email, telephone records, fax logs, and business credit card records.
  • Travel reimbursement claims
  • Fed Ex and DHL records
  • Retirement accounts

From the subject (or third party sources)

Obtain the following records from the subject, based on (1) his or her consent, (2) duty to cooperate (if the subject is employed by the investigating organization), or (3) by the issuance of subpoenas or search warrants, with law enforcement assistance.

An employee or agent has a fiduciary duty to cooperate and provide pertinent records, including financial records, in a good faith investigation by the employer.  An employee or agent who fails to cooperate and produce relevant records can be terminated for that reason.

Include in the requests the subject’s spouse, children, known business names, trusts, and other related entities.  Ask for all records regarding the items listed below that were held during the relevant time period.  If the subject claims not to have the records, ask him or her to sign consents to get the records from the institutions.

Ask for:

Bank records

These include checking, savings, trust, brokerage, investment, retirement and “private banking” accounts (for high net worth individuals), Certificates of Deposit and safe deposit boxes.

Look for financial statements and the purchase of traveler’s checks, cashier’s checks and wire transfers, in and out.  Request account applications, monthly statements, deposit items, the front and back of checks, even for small amounts (which can identify hidden assets or other accounts), safe deposit access logs, etc., for all accounts opened and closed during the relevant time period.  Also ask for “Know Your Customer” records, bank memoranda, any Suspicious Activity Reports and Cash Transaction  Reports filed with regulators or law enforcement agencies.

Real property records

For example, mortgages (including applications and supporting documents, such as financial statements and tax returns) liens and property tax records, settlement sheets, source for down payment, and payment records.

Ask for records of the subject’s residence[s], rental and vacation properties, properties occupied by others (children, mistress, etc.) acquired or sold during the relevant period.  Include in the request all properties in other countries.  Look for the names of sellers and agents and contact them directly to obtain leads to hidden assets and accounts.

Loan records

Ask for applications, financial statements, credit reports, payment records.

Credit cards

Get the names of all cards and account numbers.  Ask for cards issued by offshore banks.

Personal investments

These include stocks and bonds, mutual funds, closely held businesses, rental or investment property, real estate investment trusts, limited partnership interests, retirement accounts, etc.

Closely-held business records

Ask for all records, including incorporation documents, bank accounts and tax returns.  Ask for the name of the subject’s partners, accountant, or financial advisor.

Insurance

Whole life policies, which can have substantial cash value, property insurance, which can have riders that identify valuable personal property, such as expensive jewelry, etc.

Tax returns

Ask for all filings, including individual, business and trusts, with supporting schedules and documents.  Look for the name of the subject’s accountant and tax preparer, and request the subject execute a consent to obtain further information and documents.

Litigation records

Look for the names of the adverse parties and counsel.  This might reveal discovery or judgments leading to hidden assets.

Property settlements in divorce cases

Property settlement agreements can identify the assets and their value for each party.

Telephone records

Ask for residential and cell phone bills for relevant time period or consents to access them from the telephone companies.

Travel records

These include travel agency bookings and correspondence, credit card and travel receipts.

Home computer, email

Ask for consents to access personal email provider records.

Private mail services: Fed Ex, DHL, etc.

Or other private delivery account records; ask for consents if necessary.

Telephone/address directories, business diaries, etc.

To identify dates, travels, contact names, etc.

Credit reports

Ask the subject to consent to the release of this information.

Direct Proof of Payments from the Point of Receipt

Use the information from the “Financial Profile” to identify the accounts, assets and expenditures of the subject, and then trace back the source of funds for each.  This might require the filing of civil action or a criminal referral to obtain subpoenas.

The “tracing back” steps are relatively simple, assuming the records are available and the witnesses are cooperative.  The investigator might begin by contacting persons from whom the subject purchased property, goods or services, such as real estate agents, home sellers, home improvement contractors, art dealers, etc., during the relevant period.  Leads to these witnesses can be found in public records, such as building permits or real property records.

Sellers, agents and contractors often retain records reflecting how the subject paid them – cash, cashier’s checks, traveler’s checks, regular checks, etc.  The records can provide leads to previously unknown bank accounts or other sources of funds, leading eventually back to the original corrupt payments.  If the witnesses did not retain the payment records, ask them to request microfilm copies of checks or other deposits to their bank accounts.

Law enforcement agents should check filings of bank Cash Transaction Reports (CTR’s), Suspicious Activities Reports (SAR’s) and cash purchases.

                                                                 EXAMPLE

A check of local building permits revealed that the subject of an international bribery case had spent several hundred thousand dollars in a short period of time on additions to his house and a swimming pool.  Witness interviews revealed that the subject purchased expensive artwork, a luxury automobile and took extensive vacations during the same time period.

Contacts with the contractors, auto dealership, art gallery and travel agency revealed that the subject and his wife paid in cash ($100 bills), traveler’s checks purchased overseas and checks drawn on seven previously undisclosed bank accounts.  The home contractor kept copies of the $100 bills, suspecting a visit from law enforcement at some point, and other sellers kept copies of the traveler’s checks and checks.

The serial numbers on the bills showed they were recently issued (rebutting a possible cash hoard defense), copies of the traveler’s checks revealed they were purchased by a vendor of  the subject, and the checks led to proof of bribe deposits.

The sellers also testified that the subject had boasted of his illegal “deals” providing further evidence against him.

Circumstantial Proof of Payments from the Point of Receipt   

If direct evidence of corrupt payments is not available, prove them circumstantially by showing:

  • The subject’s expenditures exceeded his legitimate source of funds (known as the “expenditures method” or the “source and applications” method.)
  • The subject acquired assets or paid down his debts, i.e., increased his net worth, in an amount that exceeded his legitimate source of funds (known as the “net worth” method)

How to prove excess expenditures (“Source and Application Method)

  • Identify all known and legal sources of funds during the relevant time period
  • Identify all “applications” of funds, e.g., purchases, loan payments, etc. during the relevant time period
  • Deduct all known and legal sources of funds from applications
  • The difference equals funds from UNKNOWN SOURCES
  • Eliminate legitimate sources of unknown funds (interview subject and other witnesses; do records checks, etc.)
  • Show that subject lied about his sources of funds

How to prove excess net worth (“Net Worth Method”)

  • Identify and value at costnot market value – all current assets
  • Deduct current liabilities
  • Equals current net worth
  • Deduct prior years’ net worth
  • Equals net worth increase
  • Add living expenses for prior year
  • Equals income or expenditures for prior year
  • Deduct known sources of funds
  • Equals FUNDS FROM UNKNOWN SOURCES
  • (Repeat for prior years in which misconduct is suspected)

The Sources and applications methods is much simpler and is to be preferred in almost all cases.  See an illustration of the method:

Sample Source and Application of Funds Chart

Rebut Defenses to Circumstantial Proof of Illicit Income

The investigation must exclude all legitimate sources of funds that might exist or be claimed by the subject.  This usually requires an interview of the subject, as described in detail in step nine, below.

Ask the subject to identify all financial accounts and assets and to describe the source of all funds, particularly cash (see below).

A guilty subject usually will either deny having any illicit cash, accounts or assets, or admit their possession but falsely identify their source.  Such false statements can be used as evidence of guilty knowledge or intent.  Of course, a subject might be able to account for his finances from legitimate sources, avoiding an injustice.