CrFA Money Laundering & Asset Tracing 2 — Questions and Answers
Question 1: In asset tracing, the 'net worth method' is used to:
- Estimate the total assets laundered through real estate
- Calculate unexplained increases in a subject's wealth over time (Correct answer)
- Determine the fair market value of seized assets
- Reconcile a company's balance sheet with its cash flows
Correct answer: Calculate unexplained increases in a subject's wealth over time
The net worth method compares a subject's beginning and ending net worth and accounts for known income and expenditures; unexplained increases suggest unreported income from illegal sources.
Question 2: Which of the following best describes 'tracing' as used in forensic accounting asset investigations?
- Estimating the value of hidden assets using industry benchmarks
- Following the movement of specific funds through financial transactions to establish their origin or destination (Correct answer)
- Reconstructing destroyed financial records from secondary sources
- Interviewing witnesses to establish ownership of disputed assets
Correct answer: Following the movement of specific funds through financial transactions to establish their origin or destination
Tracing involves following the paper trail of specific funds through a series of transactions to identify the source, movement, and ultimate destination of money.
Question 3: A shell company used in a money laundering scheme is best characterized as:
- A business that primarily deals in cash transactions
- A legal entity with no significant assets or operations used to obscure ownership (Correct answer)
- A foreign bank account held under a nominee's name
- A trust established to protect assets from creditors
Correct answer: A legal entity with no significant assets or operations used to obscure ownership
Shell companies are legal entities that have no genuine business activities but are used to disguise the true ownership of assets and obscure the paper trail of illicit funds.
Question 4: When tracing assets through real estate transactions, forensic accountants should pay particular attention to:
- Mortgage interest deduction schedules
- All-cash purchases and rapid property flipping (Correct answer)
- Property tax assessment records
- Homeowner association fee payment histories
Correct answer: All-cash purchases and rapid property flipping
All-cash real estate purchases (avoiding bank scrutiny) and quick resales at potentially inflated prices are classic indicators of real estate-based money laundering.
Question 5: The 'expenditures method' in asset tracing involves:
- Calculating total unexplained expenditures to infer unreported income (Correct answer)
- Tracing how seized assets were spent by law enforcement
- Auditing a company's capital expenditure budget
- Estimating damages based on lost spending power
Correct answer: Calculating total unexplained expenditures to infer unreported income
The expenditures method calculates all known personal or business spending; when total expenditures exceed documented income sources, the difference suggests unreported income.
Question 6: International asset tracing often relies on Mutual Legal Assistance Treaties (MLATs). What is the primary function of an MLAT?
- To standardize accounting rules across jurisdictions
- To allow governments to request and share evidence and assistance in criminal investigations across borders (Correct answer)
- To establish dual-taxation agreements between countries
- To permit extradition of financial criminals
Correct answer: To allow governments to request and share evidence and assistance in criminal investigations across borders
MLATs are bilateral or multilateral treaties that allow law enforcement and judicial authorities to obtain evidence, serve legal process, and share information with foreign counterparts in criminal investigations.
Question 7: Which red flag is most indicative of trade-based money laundering (TBML)?
- A company purchasing insurance policies with cash premiums
- Significant over- or under-invoicing of goods and services in international trade transactions (Correct answer)
- A business frequently converting currency at multiple locations
- A customer making large wire transfers to domestic accounts
Correct answer: Significant over- or under-invoicing of goods and services in international trade transactions
TBML exploits international trade transactions through misrepresentation of price, quantity, or quality of goods (over/under-invoicing) to move value across borders and launder proceeds.
CrFA Money Laundering & Asset Tracing 2
In asset tracing, the 'net worth method' is used to: