Overview Flashcards
Under the Financial Action Task Force (FATF) Recommendations, which of the following should be subject to requirements for reporting suspicious transactions related to potential money laundering or terrorist financing?
A. Securities brokers
B. Casinos
C. Banks
D. All of the above
D. All of the above
See pages 2.536 in the Fraud Examiner’s Manual
Under the Financial Action Task Force’s (FATF) Recommendation 20, a financial institution should be required to file a report when it “suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing.” The name of these reports varies by jurisdiction, but they are generally called suspicious activity reports (SARs) or suspicious transaction reports (STRs).
The FATF Recommendations define financial institutions to include:
- Depository and lending institutions (i.e., traditional banks)
- Money services businesses (MSBs)
- Financial guarantors
- Securities brokers or traders
- Security issuing services
- Investment portfolio managers
- Parties that invest, administer, or manage funds or assets on behalf of others
- Insurance companies servicing life insurance and other investment-related insurance
Additionally, the parties that should file SARs or STRs have broadened to include designated nonfinancial businesses and professions (DNFBPs), such as:
- Casinos (including internet- and ship-based casinos)
- Real estate agents
- Dealers in precious metals and stones
- Legal professionals at professional firms (not internal legal professionals)
- Trust and company service providers
_______________ is comprised of the basic laws of rights and duties. When people refer to something that is “against the law,” they are usually referring to this type of law.
A. Administrative law
B. Natural law
C. Procedural law
D. Substantive law
D. Substantive law
See pages 2.103 in the Fraud Examiner’s Manual
Substantive law defines the type of conduct permissible and the penalties for violation; it is comprised of the basic laws of rights and duties. When people say an act is “against the law,” they are referring to substantive law.
Which of the following statements concerning tax shelters is MOST ACCURATE?
A. Tax shelters may be legal or illegal.
B. Tax shelters are always legal.
C. Tax shelters are generally illegal in most countries.
D. Tax shelters are inherently illegal.
A. Tax shelters may be legal or illegal.
See pages 2.603 in the Fraud Examiner’s Manual
Tax shelters are investments that are designed to yield a tax benefit to the investor. Such investments are made to produce tax write-offs, generate deductions, or convert ordinary income into capital gains taxed at a lower rate. Tax shelters might be legal or illegal; they are generally aimed at avoidance although they might, on occasion, cross the line into evasion if they take abusive forms. An illegal, abusive shelter is one that involves artificial transactions with little or no economic reality. For example, abusive tax shelters might artificially inflate the value of donations to charity; falsely identify an asset for business use that is mainly intended for pleasure; claim excess depreciation or depletion; or engage in the cross-leasing of luxury items such as automobiles, boats, vacation homes, and aircrafts.
Which of the following statements concerning the Financial Action Task Force (FATF) Recommendations is TRUE?
A. They suggest that countries should enable authorities to trace, suspend, and confiscate assets suspected in money laundering and terrorist financing
B. They suggest that countries should adopt a risk-based approach when setting anti-money laundering policies
C. They suggest that countries should create policies that increase cooperation and coordination with other countries
D. All of the above
D. All of the above
See pages 2.530-2.532 in the Fraud Examiner’s Manual
The Financial Action Task Force (FATF) is an intergovernmental body that was established at the G-7 Summit in 1989. Its purpose is to develop and promote standards and policies to combat money laundering and terrorist financing at both the national and international levels.
The FATF Recommendations, revised in 2012, created the most comprehensive standard with which to measure a country’s anti-money laundering (AML), counterterrorism, and nuclear proliferation laws and policies. They serve as a basic framework of laws that its members should have. While the FATF Recommendations are not required by the FATF’s members, and the FATF acknowledges that following each rule might not be possible, members often adopt them.
Some of the key measures in the FATF Recommendations provide that countries should:
- Use a risk-based approach when setting AML policies.
- Create policies that increase cooperation and coordination with other countries.
- Specifically criminalize money laundering and terrorist financing.
- Enable authorities to trace, suspend, and confiscate assets suspected in laundering and terrorist financing.
- Require financial institutions to keep certain records and establish AML policies, avoid correspondent banking with shell banks, and continuously monitor wire transfers.
Under the best practices listed in the Financial Action Task Force (FATF) Recommendations, which of the following should be required to submit reports to the government when they engage in large cash transactions with customers?
A. Depository institutions (banks)
B. Casinos
C. Dealers in precious metals and stones
D. All of the above
D. All of the above
See pages 2.536-2.537 in the Fraud Examiner’s Manual
Under the best practices provided in the Financial Action Task Force (FATF) Recommendations, countries should implement a reporting requirement for financial institutions and designated nonfinancial businesses and professions (DNFBPs) that engage in cash transactions above the jurisdiction’s designated threshold. The reports should cover domestic and international cash transactions. Many jurisdictions implement this reporting requirement.
Note that the recommended reporting requirement does not apply to everyone; it only applies to financial institutions and DNFBPs. DNFBPs include:
- Casinos (including internet- and ship-based casinos)
- Real estate agents
- Dealers in precious metals and stones
- Legal professionals at professional firms (not internal legal professionals)
- Trust and company service providers
The operation of alternative remittance systems involves inherently illegal activities.
A. True
B. False
B. False
See pages 2.525-2.526 in the Fraud Examiner’s Manual
Alternative remittance systems (also called parallel banking systems) are methods of transferring funds from a party at one location to another party (whether domestic or foreign) without the use of formal banking institutions. These systems do not require a direct physical or digital transfer of currency from the sender to the receiver. Instead, in the typical alternative remittance system, the payer transfers funds to a local broker who has a connection to another broker in the region where the payee is located. The latter broker then distributes the funds to the payee.
Transferring funds in this manner is not necessarily illegal (although some jurisdictions require brokers to register with the government). If available, using such systems can be beneficial because the commission that the networked brokers take might be lower than a banking fee for international transactions. Additionally, the payers and payees do not need to have bank accounts to perform the transactions.
Which of the following statements concerning digital currencies, such as bitcoin, is INCORRECT?
A. Digital currencies are appealing to money launderers because they rely on payment systems that are untraceable.
B. Money launderers often distribute digital currencies among many addresses or digital wallets to create a series of complex transactions that are difficult to trace.
C. Digital currencies generally face regulations that are less strict than regulations for payments made through traditional financial institutions.
D. Many jurisdictions require service providers that exchange or otherwise deal with digital currencies to have effective customer identification or recordkeeping practices.
A. Digital currencies are appealing to money launderers because they rely on payment systems that are untraceable.
See pages 2.515-2.516 in the Fraud Examiner’s Manual
Digital currencies are a type of online payment method that has emerged as a money laundering concern. Broadly defined, digital currencies are currencies that exist and are traded in a digital format. The term typically excludes government-backed currencies, despite the fact that they can also exist and be traded digitally. Digital currencies can come in several forms and can have limited or broad uses. Among the most popular digital currencies is bitcoin, a cryptocurrency that features a peer-to-peer network that allows users to send units of the currency to each other online without the use of a traditional financial institution.
Digital currencies are often vulnerable to money laundering because many of them function as international person-to-person (P2P) payment systems that cross jurisdictional boundaries, creating difficulties for authorities pursuing enforcement or legal actions. Money launderers can complicate fund-tracing efforts by distributing digital currencies among many addresses—unique identifiers that represent the destination where cryptocurrency can be sent—or digital wallets in complex transactions.
As is typical with developing payment systems, digital currencies generally face regulations that are less strict than they are for payments made through traditional financial institutions. However, many jurisdictions now require service providers that exchange or otherwise deal with digital currencies to have effective customer identification or recordkeeping practices. Therefore, digital currencies do not provide complete anonymity, so very few service providers actively promote anonymous digital currency ownership and payments.
In most jurisdictions, a taxpayer will typically be guilty of conducting a criminal tax offense willfully even though they had a good faith or legitimate misunderstanding of the law’s requirements.
A. True
B. False
B. False
See pages 2.601-2.602 in the Fraud Examiner’s Manual
To establish criminal liability for tax evasion, most jurisdictions require a willful attempt to evade or defeat taxes in an unlawful manner. In the context of tax evasion, a good faith or legitimate misunderstanding of the applicable law typically negates willfulness (the voluntary, intentional violation of a known legal duty). That is, honest mistakes, in contrast to willful evasion, do not constitute tax evasion. However, a court might find that a defendant’s claimed misunderstanding of the law is implausible given the evidence presented.
Digital currencies are appealing to money launderers because payments often cross jurisdictional boundaries, making it difficult for authorities to pursue enforcement or legal actions.
A. True
B. False
A. True
See pages 2.515-2.516 in the Fraud Examiner’s Manual
Digital currencies are often vulnerable to money laundering because many of them function as international person-to-person (P2P) payment systems that cross jurisdictional boundaries, creating difficulties for authorities pursuing enforcement or legal actions. Money launderers can complicate fund-tracing efforts by distributing digital currencies among many addresses—unique identifiers that represent the destination where cryptocurrency can be sent—or digital wallets in complex transactions.
Which of the following is an example of the use of a digital currency?
A. Bitcoin transactions
B. Credit card transactions
C. Wire transfers
D. All of the above
A. Bitcoin transactions
See pages 2.515 in the Fraud Examiner’s Manual
Digital currencies are a type of online payment method that has emerged as a money laundering concern. Broadly defined, digital currencies are currencies that exist and are traded in a digital format. The term typically excludes government-backed currencies, despite the fact that they can also exist and be traded digitally. Digital currencies can come in several forms and can have limited or broad uses. Among the most popular digital currencies is bitcoin, a cryptocurrency that features a peer-to-peer network that allows users to send units of the currency to each other online without the use of a traditional financial institution.
In some jurisdictions, self-regulatory organizations (SROs) play an important role in the resolution of disputes arising from securities transactions.
A. True
B. False
A. True
See pages 2.439-2.440 in the Fraud Examiner’s Manual
In some jurisdictions, securities markets are regulated through a combination of self-regulation by self-regulatory organizations (SROs) and direct government regulation. An SRO is a nongovernmental entity that exercises some level of regulatory authority over the operations, standards of practice, and business conduct of an industry or profession.
Many SROs play an important role in the resolution of disputes arising from market transactions. For instance, SROs might provide venues for hearing customer disputes.
In general, for a contract, transaction, or scheme to be classified as an investment contract, the instrument must be purchased by investors who display management activity in the instrument’s enterprise and have expectations of making profits that are to be generated from their own efforts.
A. True
B. False
B. False
See pages 2.412-2.413 in the Fraud Examiner’s Manual
In many countries, the term security includes investment contracts. The leading global definition of investment contract provides that a contract, transaction, or scheme is an investment contract if all the following four elements are met:
- There is an investment of money or another asset.
- The investment is in a common enterprise.
- The investment was made with expectations of making a profit.
- The profits are to come solely from the efforts of people other than the investor.
To qualify as a security under this definition of investment contract, the essential managerial efforts, which affect the success or failure of the enterprise, must come from someone other than the investor. As a general rule, the more actively involved an investor is in the enterprise, the less likely it is that an investment contract will be found to exist.
The Financial Action Task Force (FATF) Recommendations advise that countries should require financial institutions to keep certain records and establish anti-money laundering (AML) policies.
A. True
B. False
A. True
See pages 2.530-2.532 in the Fraud Examiner’s Manual
The Financial Action Task Force (FATF) is an intergovernmental body that was established at the G-7 Summit in 1989. Its purpose is to develop and promote standards and policies to combat money laundering and terrorist financing at both the national and international levels.
The FATF Recommendations, revised in 2012, created the most comprehensive standard with which to measure a country’s anti-money laundering (AML), counterterrorism, and nuclear proliferation laws and policies. They serve as a basic framework of laws that its members should have. While the FATF Recommendations are not required by the FATF’s members, and the FATF acknowledges that following each rule might not be possible, members often adopt them.
Some of the key measures in the FATF Recommendations provide that countries should:
- Use a risk-based approach when setting AML policies.
- Create policies that increase cooperation and coordination with other countries.
- Specifically criminalize money laundering and terrorist financing.
- Enable authorities to trace, suspend, and confiscate assets suspected in laundering and terrorist financing.
- Require financial institutions to keep certain records and establish AML policies, avoid correspondent banking with shell banks, and continuously monitor wire transfers.
In trade-based money laundering schemes, importers and exporters collude to misrepresent the price, quantity, or quality of imported or exported goods or services.
A. True
B. False
A. True
See pages 2.518 in the Fraud Examiner’s Manual
The Financial Action Task Force (FATF) defines trade-based money laundering as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.” Trade-based money laundering schemes generally involve importers and exporters who collude to misrepresent the price, quantity, or quality of imported or exported goods or services. These schemes can be used to create artificial profits for the purpose of laundering money between countries; to create a complex paper trail; and to avoid taxes, customs duties, and capital controls.
Angela and Michael live in two different countries. Angela believes that she has been financially harmed by Michael and wants to bring a lawsuit against him. Which of the following courts would be the MOST LIKELY to have jurisdiction to hear the case?
A. A court in the country where the harm was done
B. Whichever court in which Michael, the defendant, prefers the case to be brought
C. Any court that hears cases involving the type of financial harm caused
D. Whichever court in which Angela, the plaintiff, prefers the case to be brought
A. A court in the country where the harm was done
See pages 2.111 in the Fraud Examiner’s Manual
Being a plaintiff or defendant does not automatically entitle either party to choose any court to hear the case; a case may only be heard before a court that has proper jurisdiction. Jurisdiction is the power of a court to hear and decide a given case; it refers to both the subject matter and people over which lawful authority may be exercised by a court. A particular court’s jurisdiction is defined by the laws of its jurisdiction, but generally, there are three common elements to consider when determining whether a given court has the power to hear and determine a case.
First, does the court hear cases of the type in question? For example, if a plaintiff brings a civil complaint claiming $500,000 in damages, the plaintiff needs a court that hears civil complaints of that magnitude.
Second, does the court have the authority to exercise its power over a particular defendant or piece of property? This element usually requires the party to have some level of current or past presence or activity within the jurisdiction. Courts generally do not have jurisdiction over foreign parties who have had no activities or presence in the court’s jurisdiction.
Third, most jurisdictions require the court to have proper venue as an element of jurisdiction. Venue is the physical location where the lawsuit is to be tried. Rules of venue can be based on a mixture of factors, including convenience to the parties (e.g., where they reside) and where the acts that underlie the case occurred.
Which of the following is NOT a legal element that must be shown to prove a claim for commercial bribery?
A. The principal suffered damages because of the bribe.
B. The defendant gave or received something of value.
C. The defendant acted with corrupt intent.
D. The defendant acted without the victim’s knowledge or consent.
A. The principal suffered damages because of the bribe.
See pages 2.206 in the Fraud Examiner’s Manual
Commercial bribery refers to the corruption of a private individual to gain a commercial or business advantage. That is, in commercial bribery schemes, something of value is offered to influence a business decision rather than an official act.
The elements of commercial bribery vary by jurisdiction, but they typically include:
- The defendant gave or received something of value.
- The defendant acted with corrupt intent.
- The defendant’s scheme was designed to influence the recipient’s action in a business decision.
- The defendant acted without the victim’s knowledge or consent.
To establish that a defendant violated a law that criminalizes making false statements to government agencies, the government must prove that the defendant made a false statement regarding a matter within the jurisdiction of a government agency and that the agency relied on the false statement to its detriment.
A. True
B. False
B. False
See pages 2.221 in the Fraud Examiner’s Manual
Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue.
Generally, to prove a violation, the government must show that the defendant:
- Knowingly and willfully (or with reckless disregard for truth or falsity)
- Made a false claim or statement (or used a false document)
- That was material (i.e., sufficiently important or relevant to influence decision-making)
- Regarding a matter within the jurisdiction of a government agency
- With knowledge of its falsity
Also, the following are general rules regarding laws that criminalize making false claims and statements to government agencies:
- An individual can be found guilty of making a false claim or statement even if the claim or statement is not made directly to a governmental department or agency. That is, a false claim or statement need not be made directly to the government; it can be made to a third party if it involves a matter within the jurisdiction of a governmental department or agency.
- An individual can be found guilty of making a false claim or statement even if the government was not deceived by the falsity.
- An individual can be found guilty of making a false claim or statement even if the government did not rely on the falsity.
- An individual can be found guilty of making a false claim or statement even if the government did not suffer a loss in reliance on the falsity.
- For an individual to be found guilty of making a false claim or statement, the claim or statement at issue must have been capable of influencing the government entity involved.
If a broker who is subject to rules that prohibit securities broker-dealers from making unsuitable recommendations on investments or investment strategies recommends an investment to a client without ascertaining relevant personal and financial information about the client, then the broker has violated the rules that prohibit unsuitable recommendations.
A. True
B. False
A. True
See pages 2.443-2.444 in the Fraud Examiner’s Manual
In many countries, securities laws and regulations impose a suitability requirement on broker-dealers. Broker-dealers subject to a suitability requirement are prohibited from recommending investments or investment strategies that are unsuitable for their clients. Thus, making unsuitable recommendations (e.g., recommending high-risk options to an older individual with limited assets) is prohibited in countries with such suitability requirements.
In most countries, a suitability requirement only arises when broker-dealers make recommendations or provide advice to clients to purchase a product.
Essentially, there are two rules relating to suitability: the know-your-customer (KYC) rule and the suitability rule. The KYC rule provides that securities broker-dealers must know their customers financially to effectively service their accounts and minimize the risk of recommending an inappropriate investment. To comply with the KYC rule, broker-dealers must use due diligence to ascertain relevant personal and financial information about clients and potential clients in regard to opening and maintaining accounts. Thus, this form of suitability violation occurs when a broker recommends an investment or an investment strategy to a client without having conducted due diligence to ascertain relevant personal and financial information about the client.
In addition to the KYC rule, there are suitability requirements that broker-dealers must follow when making recommendations to a client. Suitability rules prohibit broker-dealers from making recommendations to clients if they do not have reasonable grounds for believing that the recommendations are suitable for the respective clients. That is, a suitability rule requires a broker-dealer to make a customer-specific determination of suitability and to tailor their recommendations to the customer’s financial profile and investment objectives.
Which of the following is NOT a common type of administrative penalty?
A. Monetary fines
B. Imprisonment
C. License suspension
D. Debarment
B. Imprisonment
See pages 2.114-2.115 in the Fraud Examiner’s Manual
Imprisonment and other criminal penalties are not generally imposed in administrative proceedings. Although administrative penalties vary by jurisdiction, some common types of administrative penalties include monetary fines and penalties, license suspension or revocation, and debarment.
Administrative proceedings can result in the suspension or revocation of a professional license. For example, a government medical board might revoke a doctor’s license to practice medicine after determining that the doctor engaged in health care fraud.
Under some laws, individuals and businesses can be debarred (i.e., excluded) from participating in government programs. For example, a contractor who engages in procurement fraud might be prohibited from bidding on government contracts in the future. Debarment can be temporary or permanent, and debarred parties are often added to a list that is maintained by the government agency and viewable by the public.
___________ refers to any fraudulent actions a taxpayer commits to avoid reporting or paying taxes.
A. Tax evasion
B. Tax avoidance
C. Tax reduction
D. None of the above
A. Tax evasion
See pages 2.601 in the Fraud Examiner’s Manual
The term tax evasion refers to any fraudulent actions that a taxpayer commits to avoid reporting or paying taxes. Tax evasion, however, should not be confused with tax avoidance. Tax avoidance refers to a legal means of lowering one’s tax bill through legitimate deductions, credits, and shelters. The intent of the taxpayer to wrongly file a tax return or provide other false tax information will determine the difference between tax evasion and tax avoidance.
The primary distinguishing characteristic of tax evasion as compared to tax avoidance is that tax evasion is illegal, but tax avoidance is legal.
Which of the following MOST ACCURATELY describes the legal elements that must be shown to prove a claim for commercial bribery?
A. The defendant, while acting with corrupt intent, gave or received something of value that was intended to influence the recipient’s action in a business decision, causing their principal to suffer damages.
B. The defendant, while acting without due care, gave or received something of value that was intended to influence the recipient’s action in a business decision, causing their principal to suffer damages.
C. The defendant, while acting negligently and without the victim’s knowledge or consent, gave or received something of value that was intended to influence the recipient’s action in a business decision.
D. The defendant, while acting with corrupt intent and without the victim’s knowledge or consent, gave or received something of value that was intended to influence the recipient’s action in a business decision.
D. The defendant, while acting with corrupt intent and without the victim’s knowledge or consent, gave or received something of value that was intended to influence the recipient’s action in a business decision.
See pages 2.206 in the Fraud Examiner’s Manual
Commercial bribery refers to the corruption of a private individual to gain a commercial or business advantage. That is, in commercial bribery schemes, something of value is offered to influence a business decision rather than an official act.
The elements of commercial bribery vary by jurisdiction, but they typically include:
- The defendant gave or received something of value.
- The defendant acted with corrupt intent.
- The defendant’s scheme was designed to influence the recipient’s action in a business decision.
- The defendant acted without the victim’s knowledge or consent.
The Organisation for Economic Co-operation and Development’s (OECD) Recommendation on Combating Bribery in International Business (the Recommendation) urges member states to combat the bribery of foreign public officials by taking steps to improve certain areas within their respective infrastructures. Which of the following is NOT one of those primary areas?
A. Tax systems and regulations
B. Laws and regulations covering the handling of sensitive protected data
C. Banking and accounting requirements and practices
D. Criminal, civil, commercial, and administrative laws
B. Laws and regulations covering the handling of sensitive protected data
See pages 2.224 in the Fraud Examiner’s Manual
The Recommendation on Combating Bribery in International Business (the Recommendation), which was published by the Organisation for Economic Co-operation and Development (OECD) in 1994, urges member states to deter and penalize the bribery of foreign public officials by taking “concrete and meaningful steps” to improve the following areas within their respective infrastructures:
- Criminal, civil, commercial, and administrative laws
- Tax systems and regulations
- Banking and accounting requirements and practices
- Laws and regulations related to public subsidies, licenses, and contract procurement
To determine if a misrepresentation in the offer or sale of any securities is ________, the fraud examiner should answer the following question: “Would a reasonable investor want to know this information to make an informed decision?”
A. Material
B. Promotional
C. Relevant
D. Privileged
A. Material
See pages 2.453 in the Fraud Examiner’s Manual
Securities laws require that the investor receive full and fair disclosure of all material information, and they make it unlawful for anyone to obtain money or property by using a material misstatement or omission in the offer or sale of any securities.
As a general rule, to determine materiality, the fraud examiner needs to answer the following question: “Would a reasonable investor want to know this information to make an informed decision?” If the answer is “yes,” then this information, or the lack thereof, has a high likelihood of being deemed material. (If an actual investor acted based on the misrepresentation, then that clearly strengthens the case, but it is not essential that the false or misleading statement influenced an investor, merely that a reasonable investor could have been so influenced.)
Craig and Donna each own 40% of the shares of Indiewealth and serve on its board of directors. Georgia is also a shareholder, but she is not a member of the board of directors. Donna dies, and her son, Steven, inherits her shares of Indiewealth and replaces her on the board. Steven, however, is inattentive to Indiewealth’s corporate affairs. During this time, Craig diverts corporate funds for personal use, and consequently, Indiewealth becomes insolvent. If Georgia decides to sue Steven for violating his fiduciary duties, under what theory is she likely to file the suit?
A. Violating the duty of loyalty
B. Violating the duty of care
C. Violating the duty of reasonableness
D. Violating the duty of responsibility
B. Violating the duty of care
See pages 2.215-2.216 in the Fraud Examiner’s Manual
Steven failed to act as a reasonably prudent director would under similar circumstances; therefore, Georgia would likely file suit against Steven for violating his duty of care. People in a position of trust or fiduciary relationship—such as officers, directors, high-level employees of a corporation or business, and agents and brokers—owe certain duties to their principals or employers, and any action that runs afoul of such fiduciary duties constitutes a breach. The principal fiduciary duties are loyalty and care. The duty of loyalty requires that the employee/agent act solely in the best interest of the employer/principal without any self-dealing, conflicts of interest, or other abuse of the principal for personal advantage. The duty of care means that people in a fiduciary relationship must act with such care as an ordinarily prudent person would employ in similar positions.
Wire fraud is generally defined as the use of a country’s mail system to perpetrate fraud.
A. True
B. False
B. False
See pages 2.219 in the Fraud Examiner’s Manual
Mail fraud laws generally prohibit the use of a country’s mail system to perpetrate fraud. In the United States, the mail fraud statute also applies to the use of private interstate commercial carriers (e.g., FedEx, UPS, and DHL) in connection with a fraud scheme.
Mail fraud laws generally give the government broad authority to prosecute fraud schemes, even if parts of the scheme occur in another country. For example, an international Ponzi scheme perpetrated from Nigeria could be prosecuted under the U.S. mail fraud statute if the Nigerian fraudsters used the U.S. mail system to advance the scheme in a significant way.
The U.S. wire fraud statute makes it a crime to defraud a victim of money or property by means of wire or other electronic communications (e.g., computer, telephone, radio, or television) in foreign or interstate commerce.
Which of the following is a legal element that must be shown to prove a claim for fraudulent misrepresentation of material facts?
A. The defendant knew the representation was false
B. The victim suffered damages because of the misrepresentation
C. The victim relied on the misrepresentation
D. All of the above
D. All of the above
See pages 2.202 in the Fraud Examiner’s Manual
Fraudulent misrepresentation of material facts is most often thought of when the term fraud is used. The specific elements of proof required to establish a misrepresentation claim vary somewhat according to where the fraud occurred and whether the case is brought as a criminal or civil action, but the elements normally include:
- The defendant made a false statement (i.e., a misrepresentation of fact).
- The false statement was material (i.e., the statement was sufficiently important or relevant to influence decision-making).
- The defendant knew the representation was false.
- The victim relied on the misrepresentation.
- The victim suffered damages because of the misrepresentation.
A successful liquidation bankruptcy case results in the selling of the debtor’s property to pay creditors and the discharging of the debtor’s dischargeable debts.
A. True
B. False
A. True
See pages 2.304 in the Fraud Examiner’s Manual
The structure of bankruptcy proceedings varies by jurisdiction, so it is always important to study the rules of the relevant jurisdiction when dealing with potential bankruptcy fraud. However, there are common types of bankruptcy filings, and most countries have adopted a similar version of at least one. Liquidation is the most basic type of bankruptcy proceeding and involves accounting for all dischargeable debts the subject owes, identifying all the subject’s assets, and liquidating nonexempt assets to pay off creditors. This process allows the debtor to get a court or administrative order under which some or all debts may be eliminated.
Each jurisdiction determines what exceptions exist in terms of debts that may not be discharged and assets that may not be liquidated. Some debts, like taxes owed or child support payments, might be non-dischargeable, meaning the bankruptcy will not wipe these debts away. Typical items that may not be liquidated include the debtor’s primary residence, items of nominal value, or assets deemed necessary for the debtor to maintain employment.
Which of the following statements concerning judges and juries is MOST ACCURATE?
A. Inquisitorial judicial processes are those that do not use juries in a fact-finding role.
B. In a bench trial in adversarial jurisdictions, the judge only decides questions of law.
C. In serious cases, some inquisitorial jurisdictions use juries that include both judges and laypersons.
D. Juries primarily decide issues of law in adversarial jurisdictions.
C. In serious cases, some inquisitorial jurisdictions use juries that include both judges and laypersons.
See pages 2.109 in the Fraud Examiner’s Manual
While juries can be found in both adversarial and inquisitorial jurisdictions, most adversarial jurisdictions actively use juries as the fact-finding body while the judge decides issues of law. However, some cases in adversarial jurisdictions (often called bench trials) are decided factually and legally by a judge.
The judge in an inquisitorial process both serves as the traditional fact finder and makes determinations on issues of law. However, some inquisitorial systems will use juries, laypersons, or a combination of judges (or legal professionals) and laypersons in serious cases.
A defendant who destroys material documents or records that are intended to be used in a future criminal proceeding might be charged with obstruction of justice by the government.
A. True
B. False
A. True
See pages 2.219-2.220 in the Fraud Examiner’s Manual
Obstruction of justice occurs when an individual engages in an act designed to impede or obstruct the investigation or trial of other substantive offenses.
Jurisdictions might have several criminal obstruction statutes. Some common types of obstruction statutes are those that prohibit:
- Influencing or injuring any officer of the court or juror by force, threats of force, intimidating communications, or corrupt influence
- Influencing a juror through a writing
- Stealing or altering records or processes by parties that are not privy to the records
- Using force or threats of force to obstruct or interfere with a court order
- Destroying documents related to a future proceeding
- Tampering with a witness, victim, or an informant (e.g., killing or attempting to kill, using force or threats of force, intimidating, influencing with bribes or other corrupt means, misleading, or harassing the protected parties)
- Influencing, obstructing, or impeding a government auditor in the performance of their official duties
- Obstructing the examination of a financial institution
All the following would violate rules that prohibit securities broker-dealers from making unsuitable recommendations on investments or investment strategies EXCEPT:
A. A broker-dealer makes an investment that is inconsistent with the client’s objectives.
B. A broker-dealer makes an investment without obtaining approval to make the transaction.
C. A broker-dealer recommends an investment strategy that is unsuitable for the client.
D. A broker-dealer recommends an investment without ascertaining relevant financial information about the client.
B. A broker-dealer makes an investment without obtaining approval to make the transaction.
See pages 2.443-2.444 in the Fraud Examiner’s Manual
In many countries, securities laws and regulations impose a suitability requirement on broker-dealers. Broker-dealers subject to a suitability requirement are prohibited from recommending investments or investment strategies that are unsuitable for their clients. Thus, making unsuitable recommendations (e.g., recommending high-risk options to an older individual with limited assets) is prohibited in countries with such suitability requirements.
In most countries, a suitability requirement only arises when broker-dealers make recommendations or provide advice to clients to purchase a product.
Essentially, there are two rules relating to suitability: the know-your-customer (KYC) rule and the suitability rule. The KYC rule provides that securities broker-dealers must know their customers financially to effectively service their accounts and minimize the risk of recommending an inappropriate investment. To comply with the KYC rule, broker-dealers must use due diligence to ascertain relevant personal and financial information about clients and potential clients in regard to opening and maintaining accounts. Thus, this form of suitability violation occurs when a broker recommends an investment or an investment strategy to a client without having conducted due diligence to ascertain relevant personal and financial information about the client.
In addition to the KYC rule, there are suitability requirements that broker-dealers must follow when making recommendations to a client. Suitability rules prohibit broker-dealers from making recommendations to clients if they do not have reasonable grounds for believing that the recommendations are suitable for the respective clients. That is, a suitability rule requires a broker-dealer to make a customer-specific determination of suitability and to tailor their recommendations to the customer’s financial profile and investment objectives.
The purpose of a liquidation bankruptcy filing is to allow the debtor respite from creditors so that the debtor can reorganize its financial affairs and continue as a going concern.
A. True
B. False
B. False
See pages 2.304-2.305 in the Fraud Examiner’s Manual
The structure of bankruptcy proceedings varies by jurisdiction, so it is always important to study the rules of the relevant jurisdiction when dealing with potential bankruptcy fraud. However, there are common types of bankruptcy filings, and most countries have adopted a similar version of at least one. Liquidation is the most basic type of bankruptcy proceeding and involves accounting for all dischargeable debts the subject owes, identifying all the subject’s assets, and liquidating nonexempt assets to pay off creditors. This process allows the debtor to get a court or administrative order under which some or all debts may be eliminated.
Unlike liquidation, which seeks to give the debtor a fresh start, the purpose of reorganization bankruptcy is to allow the debtor respite from creditors so that the debtor can reorganize its financial affairs and continue as a going concern. Some reorganization proceedings involve putting the debtor’s business under receivership for a certain period to ensure as much debt is paid back as possible.
Which of the following is an example of insider trading?
A. An individual buys a company’s shares because the company operates in an industry that is growing rapidly.
B. A bank manager tells a customer that the interest rates for thirty-year mortgages have reached an all-time low.
C. An individual sells their shares in a company after reading a news article about an explosion at the company’s factory.
D. An employee sells shares of their company’s stock because they know that the company is going to publicly announce that it is filing for bankruptcy.
D. An employee sells shares of their company’s stock because they know that the company is going to publicly announce that it is filing for bankruptcy.
See pages 2.451 in the Fraud Examiner’s Manual
Insider trading occurs when an insider—someone who possesses inside information about a security—buys or sells securities based on material information about the security that is not available to the public. Inside information is any material, nonpublic information about a security that is not generally available to the public and that could affect the security’s price. Examples of insider trading include:
- Corporate officers, directors, and employees who traded their corporation’s securities after learning of significant, confidential business developments
- Friends, business associates, and family members of corporate officers, directors, and employees who traded the corporation’s securities after learning of significant, confidential business developments
- Employees of law, banking, and accounting firms who were given inside information to provide services to the corporation whose securities they traded
- Government employees who traded a corporation’s securities after learning of inside information about the corporation because of their employment with the government
Most jurisdictions have rules that forbid investors from buying or selling securities where the decision to buy or sell is based on material, nonpublic information, but the rules and efforts to enforce them vary widely. Some countries are strengthening their existing insider trading laws, some countries are only beginning to establish insider trading laws, and others do not enforce the laws already in place.
A transfer of assets is a fraudulent conveyance if the purpose of the transfer is to hinder, delay, or defraud a creditor.
A. True
B. False
A. True
See pages 2.306 in the Fraud Examiner’s Manual
Debtors often attempt to conceal their assets by transferring the assets to another person or a company. A transfer is a fraudulent conveyance if the purpose of the transfer is to hinder, delay, or defraud a creditor. Many countries have laws that prohibit fraudulent conveyances. Depending on the law, a court or a bankruptcy trustee might have the power to set aside a fraudulent conveyance and seize the assets that were fraudulently conveyed.
XYZ Bank has an anti-money laundering (AML) program that provides for internal controls and procedures to prevent money laundering, money laundering awareness training for employees, and a regular independent audit function to test the bank’s procedures. If these are the extent of XYZ’s AML measures, which of the following elements suggested under the Financial Action Task Force (FATF) Recommendations is missing from the AML program?
A. The designation of a compliance officer at the management level
B. Prohibition of large consumer cash deposits
C. A mandatory thirty-day waiting period before cash deposits can be transferred
D. Reporting of all foreign bank transfers to the government
A. The designation of a compliance officer at the management level
See pages 2.534 in the Fraud Examiner’s Manual
Under the Financial Action Task Force (FATF) Recommendations, countries should require financial institutions to implement anti-money laundering (AML) and terrorist financing programs. A financial institution’s AML program is highly dependent on which jurisdictions it operates in, as well as the services that it offers. Generally, financial institutions should adopt the AML policies and procedures in the FATF Recommendations, but they need to tailor their programs to the requirements of the specific jurisdictions in which they operate. According to the FATF Recommendations, these programs should include:
- The development of internal procedures and controls, including adequate screening procedures to ensure high standards in employee hiring
- Ongoing employee training programs on money laundering risks
- An independent audit function to test the effectiveness of the programs
- The designation of a compliance officer at the management level
While the FATF does recommend reports from financial institutions to the government on large cash transactions and suspicious transactions, it does not recommend the other choices mentioned.
Which of the following is considered obstruction of justice?
A. Influencing a witness with bribes
B. Showing disrespect to a judge
C. Contacting a government investigator
D. Subpoenaing a government witness
A. Influencing a witness with bribes
See pages 2.219-2.220 in the Fraud Examiner’s Manual
Obstruction of justice occurs when an individual engages in an act designed to impede or obstruct the investigation or trial of other substantive offenses.
Jurisdictions might have several criminal obstruction statutes. Some common types of obstruction statutes are those that prohibit:
- Influencing or injuring any officer of the court or juror by force, threats of force, intimidating communications, or corrupt influence
- Influencing a juror through a writing
- Stealing or altering records or processes by parties that are not privy to the records
- Using force or threats of force to obstruct or interfere with a court order
- Destroying documents related to a future proceeding
- Tampering with a witness, victim, or an informant (e.g., killing or attempting to kill, using force or threats of force, intimidating, influencing with bribes or other corrupt means, misleading, or harassing the protected parties)
- Influencing, obstructing, or impeding a government auditor in the performance of their official duties
- Obstructing the examination of a financial institution
Contempt of court is the offense of showing disrespect or disobedience to a court and its officers (among other things, such as refusing to obey a judge’s order).
Which of the following acts would constitute violations under the U.S. Foreign Corrupt Practices Act’s (FCPA) anti-bribery provisions?
A. To induce a public construction contract award, a U.S. company promises to pay a foreign official $45,000 upon securing the contract
B. A U.S. company transfers $45,000 to a foreign official to influence the official to award it a public construction contract
C. A German company that is publicly traded on the New York Stock Exchange transfers $45,000 to a foreign official to influence the official to award it a public construction contract
D. All of the above
D. All of the above
See pages 2.234-2.237 in the Fraud Examiner’s Manual
Each of the above acts would constitute a violation under the U.S. Foreign Corrupt Practices Act (FCPA). For individuals and businesses within its jurisdiction, the FCPA prohibits the payment or offer of anything of value to a foreign official for the purpose of obtaining or retaining business. Promises to pay are considered items of value. Furthermore, foreign companies are within the reach of the FCPA if they have registered securities or are otherwise required to file under the U.S. Securities Exchange Act of 1934 (the Exchange Act). Here, the German company would be subject to the FCPA because it is publicly traded on the New York Stock Exchange (NYSE), which requires registration with the U.S. Securities and Exchange Commission (SEC).
The anti-bribery provisions of the FCPA make it unlawful to bribe a foreign official for business purposes. Only regulated parties, such as issuers, domestic concerns, and foreign nationals or businesses, are subject to FCPA jurisdiction. An issuer is a corporation that has issued securities that have been registered in the United States or that is required to file periodic reports with the SEC. A domestic concern is any citizen, national, or resident of the United States or any business entity that has its principal place of business in the United States or that is organized under the laws of a state, territory, possession, or commonwealth of the United States. Moreover, the FCPA applies extraterritorially to U.S. citizens working for foreign subsidiaries of domestic companies. A foreign national or business is subject to the FCPA if it takes any act in furtherance of a corrupt payment within U.S. territory.
Additionally, the agents, subsidiaries, or other third-party representatives who act on behalf of an issuer, a domestic concern, or a foreign national or business are liable under the same conditions as the issuer, domestic concern, or foreign national or business.
The FCPA’s anti-bribery provisions extend only to corrupt payments made to foreign officials. The FCPA does not, however, prohibit all payments to foreign officials; it contains an explicit exception for certain types of payments, known as facilitating payments, or grease payments, made to expedite or secure performance of a routine governmental action by a foreign official, political party, or party official that relates to the performance of that party’s ordinary and routine functions.
The placement stage of the money laundering process occurs when a criminal first steals or obtains illicit proceeds.
A. True
B. False
B. False
See pages 2.501-2.503 in the Fraud Examiner’s Manual
The three stages of money laundering are placement, layering, and integration. Placement is the first stage of the money laundering process. In this stage, the launderer introduces their illegal profits into the financial system. Placement occurs after the initial act of stealing or receiving illicit assets.
If the placement of the initial funds goes undetected, the launderer can design numerous financial transactions in complex patterns to prevent detection. For example, the launderer can move funds between bank accounts, transfer funds from one form of currency to another, or transfer money between businesses. This stage of the money laundering process is referred to as layering.
Integration is the final stage in the laundering process. In this stage, the money is integrated back into the economy in a way that makes it appear to be part of a legitimate business transaction.
The ABC Company, a UK company with securities that are registered in the United States, transferred $40,000 to a Japanese public official to influence the award of overseas contracts. This act would constitute a violation of the U.S. Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act.
A. True
B. False
A. True
See pages 2.235, 2.242-2.243 in the Fraud Examiner’s Manual
The U.S. Foreign Corrupt Practices Act’s (FCPA) anti-bribery provisions make it unlawful for regulated parties (such as issuers, domestic concerns, and foreign nationals or businesses) to bribe foreign government officials to obtain or retain business. An issuer is a corporation that has issued securities that have been registered in the United States or that is required to file periodic reports with the U.S. Securities and Exchange Commission (SEC). Thus, the ABC Company is a regulated party under the FCPA because it is an issuer.
The UK Bribery Act is the United Kingdom’s analogue of the FCPA, although with several distinctions. In short, the UK Bribery Act contains a specific offense for the bribery of foreign public officials; it contains a general commercial bribery offense; and it creates a corporate offense of failure to prevent bribery.
The UK Bribery Act exercises broad jurisdiction over all individuals and corporate entities for such acts when any part of the offense occurs in the United Kingdom. Furthermore, liability exists for acts committed outside the United Kingdom by individuals and entities with a close connection to the United Kingdom, including:
- British citizens, overseas citizens, overseas territories’ citizens, and any person declared a British subject under the 1981 British Nationality Act
- Individuals who normally reside in the United Kingdom
- An entity incorporated under the law of any part of the United Kingdom
One of the most common methods of laundering funds is to filter the money through a front business. A front business can be useful to a criminal for which of the following reasons?
I. It provides a safe place for organizing and managing criminal activity.
II. It provides a base of operations where the comings and goings of large numbers of people will not arouse undue suspicion.
III. It is an easy way for the criminal to avoid paying taxes on illegal sources of revenue.
IV. The front that does the legitimate business provides cover for delivery and transportation related to illegal activity.
A. II, III, and IV
B. I, II, and III
C. II and IV only
D. I, II, and IV
D. I, II, and IV
See pages 2.504-2.505 in the Fraud Examiner’s Manual
One of the most common methods of laundering funds is to filter the money through a seemingly legitimate business, known as a front business. A front business can be a very effective way to launder money for a number of reasons. Front businesses provide a safe place for organizing and managing criminal activity, where the comings and goings of large numbers of people will not arouse undue suspicion. In addition, a front that conducts legitimate business provides cover for delivery and transportation related to illegal activity. The expenses from illegal activity can be attributed to the legitimate enterprise, and the illegal revenues can be easily placed into the enterprise. One disadvantage to this, however, is that launderers usually end up having to pay taxes on their illegal income.
Both Country A and Country B follow the Financial Action Task Force (FATF) Recommendations concerning cross-border transfers of currency. Jessica is about to travel from Country A to Country B while carrying $17,000 in cash, which exceeds Country A’s reporting threshold for cross-border currency transfers. Will Jessica be required to disclose to Country A the amount of currency she is carrying?
A. No, because she is traveling to Country B, which also requires the disclosure of cross-border currency transportation.
B. Yes, because a disclosure is required for any amount of currency physically transferred out of the country.
C. No, because disclosure is only required for currency going into Country A.
D. Yes, because she is transferring currency above the reporting threshold out of Country A.
D. Yes, because she is transferring currency above the reporting threshold out of Country A.
See pages 2.537 in the Fraud Examiner’s Manual
Under the Financial Action Task Force’s (FATF) Recommendation 32, countries should implement disclosure requirements for individuals who are physically carrying currency or currency equivalents (i.e., bearer instruments) into or out of the country in amounts that are above the country’s designated reporting threshold. Generally, individuals who are carrying currency or the equivalent above the reporting threshold while attempting to cross jurisdictional borders should be required to disclose the amount to authorities, or they will face penalties if they fail to do so.
Which of the following statements about the International Organization of Securities Commissions (IOSCO) is TRUE?
A. IOSCO is comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries
B. IOSCO is recognized as the international standard-setter for securities markets
C. One of IOSCO’s main objectives is to assist its members in promoting high standards of regulation in order to maintain just, efficient, and sound markets
D. All of the above
D. All of the above
See pages 2.426-2.427 in the Fraud Examiner’s Manual
The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets.
IOSCO’s main objectives are to assist its members to:
- Cooperate to promote high standards of regulation in order to maintain just, efficient, and sound markets.
- Exchange information on their respective experiences in order to promote the development of domestic markets.
- Unite their efforts to establish standards and an effective surveillance of international securities transactions.
- Provide mutual assistance to promote the integrity of the markets through a rigorous application of the standards and effective enforcement against offenses.
Which of the following would MOST LIKELY be considered a security that is subject to registration and regulation regarding trading?
A. An instrument that represents ownership interest
B. A notarized contract
C. Anything of material value or usefulness
D. An investment contract
D. An investment contract
See pages 2.412-2.413 in the Fraud Examiner’s Manual
In many countries, the term security includes investment contracts. The leading global definition of investment contract provides that a contract, transaction, or scheme is an investment contract if all the following four elements are met:
- There is an investment of money or another asset.
- The investment is in a common enterprise.
- The investment was made with expectations of making a profit.
- The profits are to come solely from the efforts of people other than the investor.
Which of the following is a commonly available defense against tax fraud accusations?
A. Death of the taxpayer
B. Mental illness
C. Amending the fraudulently submitted information
D. Bankruptcy
B. Mental illness
See pages 2.608-2.609 in the Fraud Examiner’s Manual
Some defenses will be ineffective against charges for tax crimes. The death of the taxpayer often cannot be used as a defense because taxes owed due to tax evasion typically survive the taxpayer’s death, meaning the deceased taxpayer’s estate will be held liable. Also, liabilities owed as a result of tax evasion may not be discharged in bankruptcy proceedings. If a person commits a tax fraud offense, amending fraudulent information held by the government will not generally relieve the taxpayer of criminal liability.
Mental illness, however, may be an appropriate defense.
Suzanne owns a business, but she has decided to close it and file for bankruptcy. Before she does so, she orders a large quantity of inventory using credit and resells it for cash. She closes the business and leaves the suppliers with almost nothing to recover in the bankruptcy proceeding that follows. Which of the following BEST describes Suzanne’s scheme?
A. Concealed asset scheme
B. Bustout scheme
C. Pump and dump scheme
D. Multiple filings scheme
B. Bustout scheme
See pages 2.306 in the Fraud Examiner’s Manual
A bustout is a planned and fraudulent bankruptcy. It can take many different forms, but the basic approach is for an apparently legitimate business to order large quantities of inventory or other goods using credit, and then dispose of those goods through legitimate or illegitimate channels. Because the point of the bustout scheme is to quickly resell the goods for cash, the fraudster is likely to purchase more liquid items like inventory than real estate, insurance policies, or services. The perpetrator then closes the business, absconding with the proceeds and leaving the suppliers unpaid. The debtor might then go into bankruptcy. Often by this point, the debtor has already made false accounting entries or taken other steps to conceal the assets or make the sales look legitimate. Other times, debtors flee the jurisdiction or do not show up at the proceedings.
Bars, restaurants, and nightclubs are favorite businesses through which to launder funds because:
A. It is easy to match the cost of providing food, liquor, and entertainment with the revenues they produce.
B. They charge relatively low prices for services.
C. Sales are generally in cash.
D. All of the above choices are correct.
C. Sales are generally in cash.
See pages 2.508 in the Fraud Examiner’s Manual
Bars, restaurants, and nightclubs are commonly used to front money laundering operations for a number of reasons. These businesses charge relatively high prices, and customers vary widely in their purchases. Sales are generally in cash, and it is difficult to match the cost of providing food, liquor, and entertainment with the revenues they produce.
Which of the following is NOT a favorite front business for laundering money?
A. Electronics stores
B. Wholesale distribution
C. Restaurants
D. Vending machines
A. Electronics stores
See pages 2.508-2.509 in the Fraud Examiner’s Manual
Bars, restaurants, and nightclubs are commonly used to front money laundering operations. These businesses charge relatively high prices, and customers vary widely in their purchases. Vending machine operations also possess many characteristics favorable to a money laundering operation. Wholesale distribution businesses have historically been a prominent part of money laundering. Wholesale distribution is attractive for money laundering because it is well embedded in a community’s economic fabric.
Which of the following is the MOST ACCURATE statement about laws that criminalize making false statements to government agencies?
A. An individual can be found guilty of making a false statement only if the statement was made directly to a governmental department or agency.
B. An individual can be found guilty of making a false statement even if the individual did not know the statement was false at the time the statement was made.
C. An individual can be found guilty of making a false statement only if the statement was made under oath.
D. An individual can be found guilty of making a false statement even if the government did not suffer a loss for relying on it.
D. An individual can be found guilty of making a false statement even if the government did not suffer a loss for relying on it.
See pages 2.221 in the Fraud Examiner’s Manual
Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue.
Generally, to prove a violation, the government must show that the defendant:
- Knowingly and willfully (or with reckless disregard for truth or falsity)
- Made a false claim or statement (or used a false document)
- That was material (i.e., sufficiently important or relevant to influence decision-making)
- Regarding a matter within the jurisdiction of a government agency
- With knowledge of its falsity
An act is done knowingly and willfully if it is done voluntarily and intentionally and not by mistake or another innocent reason. Thus, an individual can be found guilty of making a false statement or claim only if the individual knew the statement or claim was false at the time it was made.
Also, the following are general rules regarding laws that criminalize making false claims and statements to government agencies:
- An individual can be found guilty of making a false claim or statement even if the claim or statement is not made directly to a governmental department or agency. That is, a false claim or statement need not be made directly to the government; it can be made to a third party if it involves a matter within the jurisdiction of a governmental department or agency.
- An individual can be found guilty of making a false claim or statement even if the government was not deceived by the falsity.
- An individual can be found guilty of making a false claim or statement even if the government did not rely on the falsity.
- An individual can be found guilty of making a false claim or statement even if the government did not suffer a loss in reliance on the falsity.
- For an individual to be found guilty of making a false claim or statement, the claim or statement at issue must have been capable of influencing the government entity involved.
Assuming that the relevant jurisdiction recognizes each of the legal defenses below, which of the following is the BEST defense against a tax evasion charge, provided that the facts will support the defense?
A. Reliance on an accountant
B. Ignorance of the law
C. Reliance on an attorney
D. Lack of tax deficiency
D. Lack of tax deficiency
See pages 2.607 in the Fraud Examiner’s Manual
A suspect or a criminal defendant might raise various defenses to accusations of tax evasion. For example, the defendant can establish that there is no tax deficiency. If there is no deficiency, then there is no tax liability. This is generally the best defense, if available, because several other defenses might negate willfulness but do not necessarily eliminate a tax liability with interest and penalties.
The stage in which money laundering schemes are MOST OFTEN detected is called:
A. Integration
B. Placement
C. Layering
D. Washing
B. Placement
See pages 2.501-2.502 in the Fraud Examiner’s Manual
Placement is the first stage of the money laundering process. In this stage, the launderer introduces their illegal profits into the financial system. It is at this stage that legislation has been developed to prevent launderers from depositing or converting large amounts of cash at financial institutions or taking cash out of the country. Money laundering schemes are most often detected at the placement stage.
Which of the following BEST describes the primary source(s) of law in civil law jurisdictions?
A. Codified principles or statutes
B. Judge-made law
C. A combination of judge-made law and codified principles or statutes
D. None of the above
A. Codified principles or statutes
See pages 2.105-2.106 in the Fraud Examiner’s Manual
Almost every country can be classified as having either a common law or a civil law judicial system; knowing the differences between the two is essential to understanding how legal and judicial processes work in foreign jurisdictions.
Civil law systems apply laws from an accepted set of codified principles or compiled statutes. Individual cases are then decided in accordance with these basic tenets. Under a civil law system, judges or judicial administrators are bound only by the civil code and not by the previous decisions of other courts. In deciding legal issues, a civil law judge applies the various codified principles to each case.
A value-added tax can be defined as a tax on goods or services that is usually assessed at the consumer level and collected by the retailer or seller at the point of sale.
A. True
B. False
B. False
See pages 2.606 in the Fraud Examiner’s Manual
A sales tax is a tax on goods or services that is usually assessed at the consumer level and collected by the retailer or seller at the point of sale. In contrast, a value-added tax is a tax on an item that is assessed incrementally based on its increase in value at each point along a supply chain, from manufacture, to wholesale, to retailer, to consumer; the tax is collected by the seller in each transaction, and only the difference between the price paid by the initial purchaser and the price paid by the subsequent purchaser is taxed.
Under the World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (World Bank Principles), which of the following statements MOST ACCURATELY represents the recommended powers of a bankruptcy administrator (or an equivalent appointee)?
A. The administrator has the ability to cancel fraudulent transactions entered into by the debtor.
B. The administrator must abide by all contracts the debtor entered into prior to bankruptcy.
C. The administrator is not authorized to compel testimony from third parties who have knowledge of the debtor’s financial affairs.
D. The administrator is allowed to collect and preserve the debtor’s property but has no power to dispose of it.
A. The administrator has the ability to cancel fraudulent transactions entered into by the debtor.
See pages 2.311 in the Fraud Examiner’s Manual
Most bankruptcy processes, whether through a court or otherwise, appoint a person or group with administrative powers to oversee the process. The name of this appointee varies between jurisdictions but is often called the administrator, trustee, receiver, examiner, or supervisor. The World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (World Bank Principles) recommends that the administrator have broad powers, including:
- The right to cancel fraudulent contracts or transactions entered into by the debtor
- The power to collect, preserve, and dispose of the debtor’s property
- The ability to interfere with contracts to meet the objectives of the insolvency process
- The power to examine the debtor, the debtor’s agents, or other people who have knowledge of the debtor’s affairs and compel them to provide relevant information
Generally, for a contract, transaction, or scheme to qualify as an investment contract, four elements must be met. Which of the following is one of those four elements?
A. The investment is in a common enterprise
B. The investment was made with expectations of making a profit
C. There is an investment of money or another asset
D. All of the above
D. All of the above
See pages 2.412-2.413 in the Fraud Examiner’s Manual
In many countries, the term security includes investment contracts. The leading global definition of investment contract provides that a contract, transaction, or scheme is an investment contract if all the following four elements are met:
- There is an investment of money or another asset.
- The investment is in a common enterprise.
- The investment was made with expectations of making a profit.
- The profits are to come solely from the efforts of people other than the investor.
Which of the following MOST ACCURATELY describes the legal elements that must be shown to prove a claim for official bribery?
A. The defendant, while acting negligently, gave or received something of value that was intended to influence an act or duty of the recipient who was (or was selected to be) a public official, causing the government to suffer damages.
B. The defendant, while acting with corrupt intent, gave or received something of value that was intended to influence an act or duty of the recipient who was (or was selected to be) a public official.
C. The defendant, while acting without due care, gave or received something of value that was intended to influence an act or duty of the recipient who was (or was selected to be) a public official.
D. The defendant, while acting negligently, gave or received something of value that was intended to influence an act or duty of the recipient who was (or was selected to be) a public official.
B. The defendant, while acting with corrupt intent, gave or received something of value that was intended to influence an act or duty of the recipient who was (or was selected to be) a public official.
See pages 2.206 in the Fraud Examiner’s Manual
Official bribery refers to the corruption of a public official with intent to influence an official act of government. Illegal payments to public officials can be prosecuted as official bribery, and they can result in severe penalties.
The elements of official bribery vary by jurisdiction, but they generally include:
- The defendant gave or received (offered or solicited) something of value.
- The recipient was (or was selected to be) a public official.
- The defendant acted with corrupt intent.
- The defendant’s scheme was designed to influence an official act or duty of the recipient.
The U.S. Foreign Corrupt Practices Act (FCPA) has two major parts. The first part criminalizes the bribery of a foreign public official to obtain or retain business. The second part pertains to money laundering, requiring publicly traded companies to adopt policies, procedures, and internal controls reasonably designed to prevent money laundering.
A. True
B. False
B. False
See pages 2.234-2.235 in the Fraud Examiner’s Manual
The U.S. Foreign Corrupt Practices Act (FCPA) has two principal components: the anti-bribery provisions and the accounting provisions. In short, the anti-bribery provisions make it unlawful to bribe foreign government officials to obtain or retain business, and the accounting provisions require publicly traded companies subject to the FCPA’s jurisdiction to keep accurate books and records and adopt internal controls to prevent improper use of corporate funds.
To launder funds, a consultant reports payments for services that they never actually provided. They then deposit unrelated illicit assets disguised as payments for the fake services. This laundering technique is called overstating revenues.
A. True
B. False
A. True
See pages 2.504 in the Fraud Examiner’s Manual
Overstating revenues occurs when the money launderer records more income on a business’s books than the business actually generates. The fictitious revenue accounts for the illegal funds that are secretly inserted into the company.
Which of the following is an element the government must prove to establish that an individual violated a law that criminalizes making false statements to government agencies?
A. The defendant made a false statement
B. The false statement was material
C. The statement concerned a matter within the jurisdiction of a government agency
D. All of the above
D. All of the above
See pages 2.221 in the Fraud Examiner’s Manual
Laws prohibiting false claims and statements to government agencies make it illegal for a person to lie to, or conceal material information from, a government agency. A false claim is an assertion of a right to government money, property, or services that contains a misrepresentation. A false statement is an oral or written communication, declaration, or assertion that is factually untrue.
Generally, to prove a violation, the government must show that the defendant:
- Knowingly and willfully (or with reckless disregard for truth or falsity)
- Made a false claim or statement (or used a false document)
- That was material (i.e., sufficiently important or relevant to influence decision-making)
- Regarding a matter within the jurisdiction of a government agency
- With knowledge of its falsity
Self-regulatory organizations (SROs) are nongovernmental entities that exercise some level of regulatory authority over the operations, standards of practice, and business conduct of an industry or profession.
A. True
B. False
A. True
See pages 2.439 in the Fraud Examiner’s Manual
In some jurisdictions, securities markets are regulated through a combination of self-regulation by self-regulatory organizations (SROs) and direct government regulation. An SRO is a nongovernmental entity that exercises some level of regulatory authority over the operations, standards of practice, and business conduct of an industry or profession.
For a conflict of interest claim to be actionable, the conflict must be undisclosed.
A. True
B. False
A. True
See pages 2.208-2.209 in the Fraud Examiner’s Manual
A conflict of interest occurs when an employee or agent—someone who is authorized to act on behalf of a principal—has an undisclosed personal or economic interest in a matter that could influence their professional role. Conflicts of interest do not necessarily constitute legal violations if they are properly disclosed. Thus, for a conflict of interest claim to be actionable, the conflict must be undisclosed.
The UK Bribery Act has a broader application than the U.S. Foreign Corrupt Practices Act (FCPA) because, unlike the FCPA, it makes commercial bribery a crime.
A. True
B. False
A. True
See pages 2.242-2.243 in the Fraud Examiner’s Manual
Both the UK Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) make it a crime to offer foreign public officials bribes or to accept bribes from them in connection with international business transactions, and their prohibitions on bribing foreign government officials are broadly comparable. Thus, like the FCPA, the UK Bribery Act seeks to punish corruption on a global level, but the UK Bribery Act has an even broader application than the FCPA. One way in which the UK Bribery Act has a broader application than the FCPA is that it makes commercial bribery—bribes paid to people working in the private sector—a crime, whereas the FCPA only prohibits bribes involving foreign government officials.
Which of the following refers to a court’s power to hear and decide a given case?
A. Res judicata
B. Jurisdiction
C. Political domain
D. Venue
B. Jurisdiction
See pages 2.111 in the Fraud Examiner’s Manual
Jurisdiction is the power of a court to hear and decide a given case; it refers to both the subject matter and people over which lawful authority may be exercised by a court. For instance, a country might have a system of probate courts that only have jurisdiction to hear cases whose subject matter is related to wills, inheritance, and other probate matters. Some countries have low-level trial courts that only have jurisdiction to hear matters under a certain monetary amount. Similarly, a court’s jurisdiction is defined by the parties that it may hear a case about. For example, courts usually do not have jurisdiction over foreign parties who have never been to and have had no business or presence in the court’s jurisdiction.
Venue refers to the geographical area covered by the court; it is the physical location where the lawsuit is to be tried. Venue is technically an element of the court’s jurisdiction. This issue may be important in deciding where to file charges or claims.
Greg purchased restaurant supplies from a supplier in a single cash payment of $15,000. Under the best practices in the Financial Action Task Force (FATF) Recommendations concerning large cash transactions with customers, the restaurant supplier would be required to report the transaction to the government.
A. True
B. False
B. False
See pages 2.536-2.537 in the Fraud Examiner’s Manual
Under the best practices provided in the Financial Action Task Force (FATF) Recommendations, countries should implement a reporting requirement for financial institutions and designated nonfinancial businesses and professions (DNFBPs) that engage in cash transactions above the jurisdiction’s designated threshold. The reports should cover domestic and international cash transactions. Many jurisdictions implement this reporting requirement.
Note that the recommended reporting requirement does not apply to everyone; it only applies to financial institutions and DNFBPs. DNFBPs include:
- Casinos (including internet- and ship-based casinos)
- Real estate agents
- Dealers in precious metals and stones
- Legal professionals at professional firms (not internal legal professionals)
- Trust and company service providers
Assuming a jurisdiction is adhering to the Financial Action Task Force (FATF) Recommendations, if a securities broker suspects that a client might be engaging in transactions to launder money, then the broker is required to report the suspicious transactions.
A. True
B. False
A. True
See pages 2.536 in the Fraud Examiner’s Manual
Under the Financial Action Task Force’s (FATF) Recommendation 20, a financial institution should be required to file a report when it “suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing.” The name of these reports varies by jurisdiction, but they are generally called suspicious activity reports (SARs) or suspicious transaction reports (STRs).
The FATF Recommendations define financial institutions to include:
- Depository and lending institutions (i.e., traditional banks)
- Money services businesses (MSBs)
- Financial guarantors
- Securities brokers or traders
- Security issuing services
- Investment portfolio managers
- Parties that invest, administer, or manage funds or assets on behalf of others
- Insurance companies servicing life insurance and other investment-related insurance
Which of the following statements about the UK Bribery Act is INCORRECT?
A. The UK Bribery Act has a broader application than the FCPA because, unlike the FCPA, it makes commercial bribery a crime.
B. Unlike the FCPA, the UK Bribery Act does not contain an explicit exception for facilitating payments.
C. If an organization’s anti-corruption program complies with the FCPA, then it will also comply with the UK Bribery Act.
D. The UK Bribery Act exercises jurisdiction over all individuals and corporate entities for acts of corruption when any part of the offense occurs in the United Kingdom.
C. If an organization’s anti-corruption program complies with the FCPA, then it will also comply with the UK Bribery Act.
See pages 2.242-2.243 in the Fraud Examiner’s Manual
Both the UK Bribery Act and the U.S. Foreign Corrupt Practices Act (FCPA) make it a crime to offer foreign public officials bribes or to accept bribes from them in connection with international business transactions, and their prohibitions on bribing foreign government officials are broadly comparable. Thus, like the FCPA, the UK Bribery Act seeks to punish corruption on a global level, but the UK Bribery Act has an even broader application than the FCPA. One way in which the UK Bribery Act has a broader application than the FCPA is that it makes commercial bribery—bribes paid to people working in the private sector—a crime, whereas the FCPA only prohibits bribes involving foreign government officials.
Consequently, even if an organization’s anti-corruption program is sufficiently robust for the purpose of complying with the FCPA, it might not be sufficient to comply with the UK Bribery Act. Therefore, it is important for international organizations to be aware of the differences between the FCPA and the UK Bribery Act.
Another way that the UK Bribery Act differs from the FCPA concerns facilitating payments. The FCPA does not prohibit all payments to foreign officials; it contains an explicit exception for facilitating payments made to expedite or secure performance of a routine governmental action. The UK Bribery Act, however, makes no such exception.
The UK Bribery Act exercises broad jurisdiction over all individuals and corporate entities for acts of corruption when any part of the offense occurs in the United Kingdom. Furthermore, liability exists for acts committed outside the United Kingdom by individuals and entities with a close connection to the United Kingdom, including:
- British citizens, overseas citizens, overseas territories’ citizens, and any person declared a British subject under the 1981 British Nationality Act
- Individuals who normally reside in the United Kingdom
- An entity incorporated under the law of any part of the United Kingdom
More specifically, foreign companies that have offices in the United Kingdom, employ UK citizens, or provide any services to a UK organization are responsible for complying with the UK Bribery Act. A listing on the London Stock Exchange will not, in itself, subject a company to the Act.
Which of the following entities is recognized as the international standard-setter for securities markets?
A. The World Federation of Exchanges (WFE)
B. The International Organization of Securities Commissions (IOSCO)
C. The International Council of Securities Associations (ICSA)
D. The International Capital Market Association (ICMA)
B. The International Organization of Securities Commissions (IOSCO)
See pages 2.426 in the Fraud Examiner’s Manual
The International Organization of Securities Commissions (IOSCO) is an international organization comprised of securities commissioners and administrators responsible for securities regulation and the administration of securities laws in their respective countries. IOSCO is recognized as the international standard-setter for securities markets, and the organization’s members regulate more than 95% of the world’s securities markets.
If a subject has purchased several bearer instruments, each for less than the jurisdiction’s threshold for mandatory reports on currency transactions, then this could be an indication of which of the following?
A. Entrapment scheme
B. Structuring scheme
C. Forged check scheme
D. Counterfeit checks scheme
B. Structuring scheme
See pages 2.502 in the Fraud Examiner’s Manual
Bearer instruments (such as cashier’s checks) could provide evidence of structuring operations. Many countries require financial institutions to report all currency transactions above a certain threshold (e.g., more than $10,000) to the government. However, criminals might attempt to illegally evade these laws. Structuring occurs when a deposit or other transfer is made using a method that is specifically designed to avoid regulatory reporting requirements or an institution’s internal controls. The most common type of illegal structuring scheme in the money laundering context occurs when the launderer breaks up the illicit money into smaller amounts and then makes multiple deposits into bank accounts or purchases bearer instruments, such as cashier’s checks, traveler’s checks, or money orders. This type of scheme is sometimes known as smurfing, especially in cases where the launderer uses runners (i.e., smurfs) to perform multiple transactions. A red flag of a structuring scheme is a customer who attempts to make many transactions just under the reporting threshold.
