Assignment Cover Sheet

Student Name: MAMPHASA JULIA MOETI

Student Number: 171411
Course: FORENSIC ACCOUNTING (LEVEL 7 DIPLOMA)
Assignment No: ASSESSMENT # 2

Marking Criteria:

We expect the learners to write minimum one well expressed point in three lines
against each allocated mark. This means one needs to write 15 lines with 5 well
expressed points to get high grades for a 5 marks question.

For high grades use examples and illustrations where appropriate.

1. SHORT ANSWERS FOR THE FOLLOWING QUESTIONS

i. THE EFFECTS OF CRIME ON ECONOMY
 Economic and social effects of crime

Crime is a major part of every society. Its costs and effects touch just about
everyone to some degree. The types of costs and effects are widely varied. In
addition, some costs are short-term while others last a lifetime. Of course the
ultimate cost is loss of life. Other costs to victims can include medical costs,
property losses, and loss of income. Losses to both victims and non-victims can
also come in the form of increased security expenses including stronger locks,
extra lighting, parking in more expensive secure lots, security alarms for homes
and cars, and maintaining guard dogs. Considerable money is spent to avoid
being victimized. Other types of expenses can include a victim or person fearful of
crime moving to a new neighbourhood, funeral expenses, legal fees, and loss of
school days.

Some costs of crime are less tangible (not easily or precisely identified). These
kinds of costs can include pain and suffering, and a lower quality of life. There are
also the traumatic impacts on friends and the disruption of family. Behaviour can
be forever changed and shaped by crime, whether it be weighing the risks of going
to certain places or even the fear of making new friends. Crime not only affects
economic productivity when victims miss work, but communities also are affected
through loss of tourism and retail sales. Even the so-called victimless crimes of
prostitution, drug abuse, and gambling have major social consequences. Drug
abuse affects worker productivity, uses public funds for drug treatment programs
and medical attention, and leads to criminal activity to support the expenses of a
drug habit. Communities and governments spend public funds for police
departments, prisons and jails, courts, and treatment programs, including the
salaries of prosecutors, judges, public defenders, social workers, security guards,
and probation officers. The amount of time spent by victims, offenders, their
families, and juries during court trials also take away from community productivity.
By the beginning of the twenty-first century it was estimated that the annual cost of
crime in the United States was reaching upward toward $1.7 trillion.

ii. HOW DOES CRIME COSTS THE ECONOMY AND TAX PAYERS

Criminal activity acts like a tax on the entire economy. It discourages domestic and
foreign direct investments, it reduces firms' competitiveness, and reallocates
resources creating uncertainty and inefficiency. Although the impact of economic
variables on crime has been widely investigated, there is not much concern about
crime also affecting the overall economic performance. This work aims to bridge
this gap by presenting an empirical analysis of the macroeconomic consequences
of criminal activity. Italy is the case study for the time span 1979–2002. Dealing
with a state space framework, a time varying parameter approach is employed to
measure the impact of criminality on real Gross Domestic Product (GDP) along
time, and to measure the asymmetric impact in recession and expansion periods.
The analysis is completed evaluating the effects of crime fluctuations in the long
period by an impulse response analysis.

The occurrence of crime and the spread of criminal are causing human societies to
face social, cultural and economic crises. Reducing feelings of security,
undermining public confidence, expanding anti-social behaviour’s psychological
pressures, etc., are the consequences of the spread of crime in a society, which a
serious impediment to economic growth and development. Therefore, studying
and identifying the effective factors which cause these social problems is very
important in policy makers’ planning for prevention and reduction of crime in a
society. Criminal incident defined as a negative social event that arise from
people’s contextual circumstance. Increasing evidence suggests that economic
factors may be associated with increase of crime in a society.

The economic problems like unemployment, inflation, poverty, and income

inequality would increase the possibility of crime commitment by individuals
significantly. Also, among the other variables affecting crime commitment, human
development and governance index, education and domestic production have had
a negative influence and population growth has also had a positive correlation with
crime. Also the country population and globalization has also had a positive
correlation with crime commitment.

Socioeconomic factors have influence on increase of crime in a society using

panel data of the selected countries. Unemployment is the major factor in crime
occurrence. Also, inflation in various ways, such as reducing the purchasing power
of people, creating class divisions and conflicts, etc., cause people to commit
crimes. When people of the society feel that they are in an unfair situation, act in a
way that they can show themselves, and they commit a crime to achieve the right
that is not foreseen to him. Lack of transparency in the economics of societies,
parallel and unnecessary laws, lack of control over corruption, and the possible
existence of a crime in general, can increase committing crime by a citizen of a
society.

The existence of corruption in society creates a sense of injustice in the citizens

and provokes people to act crime, when this phenomenon expands, committing a
crime is justified in the custom. In such a situation, imposing heavy punishment
can never reduce crime the training is influence development rate and can reduce
criminal activity. Economically, it can be argued that an increase in the level of
education increases the level of income of an individual; this increase in the level
of income can be a reason to reduce the crime rate in the community.

Targeting to reduce crime in society is not possible without identifying the factors.
We found that various factors such as unemployment rate, inflation rate, and Gini
coefficient, and education, quality of regulation in society and corruption index are
the most important factors influencing the use of dental services. The results of
this study show a suitable path to officials, planners and policy makers.

iii. ARSON

Arson, crime commonly defined by statute as the wilful or malicious damage or

destruction of property by means of fire or explosion. In English common law,
arson referred to the burning of another person’s dwellings under circumstances
that endangered human life. Modern statutes have expanded this definition so that
arson now includes the wrongful burning of any public or private property.

Most jurisdictions have divided arson statutes into two or more degrees, reserving
the heavier punishments for burnings that pose a danger to human life. Such acts
generally include the burning of vehicles, bridges, and forests as well as habitable
dwellings such as houses, stores, office buildings, and factories. In nearly all
countries, an arsonist may be prosecuted for murder if someone dies as a result of
the act, even if the intention to kill is absent. Some jurisdictions for instance,
Germany and some U.S. states) also impose a higher penalty for arson committed
for the purpose of concealing or destroying evidence of another crime.

It can be arson to burn personal property as well as real estate. Statutes also have
forbidden burnings caused by incendiary devices. By contrast, a fire caused by
accident or ordinary carelessness is not arson, because criminal intent is lacking.
Nonetheless, reckless activity or burning without regard to consequences can
result in an arson conviction. An arsonist may act from a variety of different
motives, including rage, jealousy, profit such as burnings undertaken to commit
insurance fraud, and the desire to conceal or destroy evidence. Persons suffering
from pyromania have a pathological and uncontrollable urge to set fires.
 iv. MONEY LAUNDERING

Money laundering is the illegal process of making large amounts of money

generated by criminal activity, such as drug trafficking or terrorist funding, appear
to have come from a legitimate source. The money from the criminal activity is
considered dirty, and the process launders it to make it look clean.

Money laundering is a serious financial crime that is employed by white-collar and

street-level criminals alike. Most financial companies today have anti-money-
laundering (AML) policies in place to detect and prevent this activity.

SOME ACTIVITIES WHICH COULD ENCOMPASS MONEY LAUNDERING

 STRUCTURING: Also known as smurfing, structuring is when someone

takes the total amount of dirty money and breaks it into smaller, less
suspicious amounts. They often purchase money orders or cashier’s checks
in order to avoid suspicion from the bank. Although money orders and
cashier’s checks are completely legal, depositing a large number of them
with or around the same total could look suspicious. As such, if one’s
profession requires that she deposits several cashier’s checks or money
orders at a time, prepare for the possibility of an investigation for money
laundering.
 TRADE-BASED LAUNDERING: Similar to embezzlement, trade-based
laundering typically involves altering invoices or business documents in
order to disguise dirty money as business profits. Because the money has a
paper trail, the bank does not suspect the profits as “dirty.” However, if the
business documents show an unexplainable, substantial profit increase, the
bank may see it as a red flag and investigate further.
 CASH-BUSINESS LAUNDERING: If a person deposits a large amount of
cash for his strip club, car wash, or other cash-heavy business, the bank
has no way of knowing if the cash is dirty or not. With no easy way to prove
the legality or illegality of his profits, simply owning a cash-heavy business
could falsely incriminate of money laundering.
 BANK CAPTURE: This occurs when the money launderers themselves own
or run the financial institution. In this case, the money can move throughout
the bank and is legally transferable to other banks. Because the money
 moves without investigation, this form of laundering can be difficult to catch.
If, however, you own a financial institution that someone else uses to store
their laundered funds, your entire bank could face investigation.
 CASINO LAUNDERING: Gambling winnings are completely legal and
typically received in cash. By purchasing chips with the dirty funds,
gambling a small amount, and turning the total chips back in for cash,
someone could theoretically claim all of the money as gambling winnings.
As a result, banks are often suspicious of these winnings and may suspect
a person of money laundering.
 REAL ESTATE LAUNDERING: Another form of laundering is through real
estate. Theoretically, someone could purchase a piece of real estate
property with cash, and quickly sell it. Any profits made would be associated
with the sale and are completely legal. Although a legitimate business
tactic, the increased use of property flipping for money-laundering purposes
can make the tactic seem suspicious.
2. DEFINITION OF EMBEZZLEMENT AND WHY IT IS CONSIDERED A
FINANCIAL CRIME

Embezzlement refers to a form of white-collar crime in which a person or entity

intentionally misappropriates the assets entrusted to them. In this type of fraud, the
embezzler attains the assets lawfully and has the right to possess them, but the
assets are then used for unintended purposes. Embezzlement is a breach of the
fiduciary responsibilities placed upon a person. Individuals who are entrusted with
access to an organization’s funds are expected to safeguard those assets for their
intended use. It is illegal to intentionally access that money and convert it to
personal use. Such activities can include diverting funds to accounts that appear to
be authorized to receive payments or transfers.

However, the account is a front that allows the individual, or a third party they are
collaborating with, to take the funding. For instance, an embezzler might create
bills and receipts for business activities that never took place or services that were
never rendered to disguise the transfer of funds as a legitimate transaction. An
embezzler might collaborate with a partner who is listed as a consultant or
contractor who issues invoices and receives payment, yet never actually performs
the duties they are charging for. The nature of embezzlement can be both small
and large. Embezzling funds can be as minor as a store clerk pocketing a few
bucks from a cash register. However, on a grander scale, embezzlement also
occurs when the executives of large companies falsely expense millions of dollars,
transferring the funds into personal accounts. Depending on the scale of the crime,
embezzlement may be punishable by large fines and time in jail.

Embezzlement occurs when someone steals or misappropriates what they were

entrusted to manage or safeguard. The property or asset need not be of
substantial value for embezzlement to occur. Although closely related, it differs
from fraud in that the embezzler had authorization to use or oversee the property
or funds.

Some types of embezzlement might be combined with other forms of fraud, such
as Ponzi schemes. In such cases, the embezzler scams investors to entrust them
with their assets to invest on their behalf but instead uses the money for personal
gain and enrichment. Maintaining the fraud often includes seeking out new
investors to bring in more money to appease prior investors. An embezzler might
also transfer other assets aside from money. An embezzler might claim the real
estate, company vehicles, smartphones, and other hardware such as laptops that
belong to an organization for personal use.

Embezzlement might take place in the government sector as well if employees

seize local, state, or national funding for themselves. Such instances may occur
when funding is disbursed to fulfil contracts or to support projects, and a member
of the staff skims some of the money that was earmarked. People who embezzle
can be charged with a criminal offense and/or held civilly responsible for their
crimes. Punishment can range from paying monetary damages and restitution to
victims to incarceration. White-collar offenses don't prevent offenders from being
prescribed lengthy prison sentences, ones traditionally handed to violent
offenders.

One example of embezzlement would be if a store clerk took money from

transactions. In this case, the money would be the property of the business, but
the clerk opted to take the money to use for himself or herself. Another example is
if a payroll clerk creates fake employees and pays those fake employees. The
payroll clerk would keep the money that was paid to the fake employees. Since
there wasn’t an actual employee who did work, the business’ assets are being
diverted illegally to the payroll clerk.

3. WHAT IS FORGERY

Forgery is a common technique in fraud schemes, where the fraudster uses forged
documents in order to gain access to information or materials they should not truly
have access to. The term forgery usually describes a message related attack
against a cryptographic digital signature scheme. That is an attack trying to
fabricate a digital signature for a message without having access to the respective
signer's private signing key.

WHAT IS THE DIFFERENCE BETWEEN FORGERY AND UTTERING

Uttering and forgery are both common law offenses derived from English and
American common law. Forgery is the creation and fabrication of a document with
intent to defraud, while uttering is the passing or publication of a forged document
that someone else had made with the intent to defraud. Uttering is the publication
of the forged document. To “utter” means and includes, to use or attempt to use a
forged document to induce any particular person or entity.

Forgery is the changing or making of a document with the intent to defraud

someone. Uttering is passing that document to someone with the intent to
defraud. So, if a person made a counterfeit $100 bill, which would be forgery. If
an accountant gave that counterfeit bill to a convenience store in exchange for
groceries, that would be uttering. A person could be arrested and convicted of both
forgery and uttering and he could be sentenced consecutively on each, meaning
one sentence would start after the other was finished.

 UTTERING

Uttering a forged instrument is the passing or making use of a forged writing or

document with knowledge of its forged nature. Uttering is a crime usually charged
in conjunction with a forgery. “Utter” means and includes using or dealing with, and
attempting to use or deal with, and attempting to induce any person to use, deal
with, or act upon, the thing in question. The uttering must have been done with
intent to defraud. It is not necessary to prove an intent to defraud any particular
person. Falsification of information on employment applications has also been held
to involve uttering. The elements of the crime of uttering include:

 Passing or making use: This is any putting into circulation a writing or

document that involves forgery.
 Intent to defraud.
 Knowledge of forgery: suspicion of something unusual may satisfy this
element.
 FORGERY

Forgery, in law, making of a false writing with an intent to defraud. Writing, to be

forgery, must either have legal significance or be commonly relied upon in
business transactions. It need not be handwriting; the law of forgery covers
printing, engraving, and typewriting as well. In most jurisdictions, however, “writing”
excludes objects such as works of art, which when misrepresented are legally
considered to be falsifications or frauds.

The three types of forgery

Forgery and aggravated forgery

 A forgery charge is applied when there is criminal intent behind defrauding
another person or entity by doing any of the following:
 Intentionally using a false document for purposes of recommendation or
identification; for example, a fake driver’s license
 Intentionally dressing merchandise falsely in an effort to present the
merchandise as something other than what it actually is
 Intentionally falsifying or altering a membership card for a business, labour
union, or any other kind of association, or possessing such a falsified card
 Intentionally falsifying or altering a ticket for a common carrier, such as an
airplane, train, or bus
 Intentionally falsifying, destroying, or mutilating a record, account, or any other
kind of document that relates to a person or business or is filed in a public
office
 Intentionally destroying evidence to keep it from being produced in court.

Aggravated forgery refers to the same type of actions as forgery, but the
documents involved are more official in nature, including, official seals, public
records, court judgments, orders, or decrees and bank records.

Check forgery

Check forgery is a common type of forgery that refers to intentionally:

 Forging someone else’s signature on a check. The type of check forgery

charge may also be paired with an identity theft charge as well.
 Using a check when there aren’t enough funds in the account to back it up.
 Using a check from an account that is closed, frozen, otherwise
inaccessible, or doesn’t exist at all.
 Producing fraudulent checks by either ordering them or manufacturing
them. This can also be paired with an identity theft charge.
 Altering checks by fraudulently modifying them, such as altering the amount
of money listed on the check.

The Penalties Faced For a forgery charge, an individual can be sentenced to up to

3 years in prison, a monetary fine up to $5,000, or a combination of the two. For an
aggravated forgery charge, an individual can be sentenced up to 10 years in
prison, a monetary fine up to $20,000, or a combination of the two. As a person is
facing forgery charges, he faces serious penalties that can have a lasting negative
effect on his future. A forgery charge can:

 Make it very difficult to secure employment. Employers are often reluctant

or refuse to hire individuals convicted of forgery charges.
 Decrease the earning potential in the future.
 Severely hamper the ability of a person to support his family.
 Permanently tarnish his social standing.
 Inflict damage to his relationships with family members, loved ones, and
friends.
 Cause a person to lose his professional licensure.
 Diminish a person’s educational opportunities and render his ineligible for
many student loans.
 Seriously limit his ability to rent a home. Like employers, landlords
 frequently decline housing applications of convicted criminals.

Counterfeit currency

Counterfeiting refers to intentionally defrauding by falsely making, altering, printing,

scanning, or copying any United States currency, postal money order, or Federal
Reserve note (or any other kind of obligation or security), and attempting to pass
the counterfeit notes off as genuine through purchases and transactions. The
penalties associated with counterfeiting convictions are more severe than other
forgery convictions, with sentences up to 20 years in prison, a monetary fine up to
$100,000, or a combination of the two.

CASE STUDY

The term undisclosed income could denote any income of the specified previous
year which is represented by any money, bullion, jewellery, other valuables, any
entry in the books of account; other documents or transactions discovered during
the search, which has not been recorded on or before the date of search in the
books of account or other documents maintained in the normal course pertaining
to the financial year or have not been communicated to the Chief Commissioner or
Commissioner prior to the date of search. Further, undisclosed income could be
any income of the particular previous year which is represented by any entry in
respect of an expense recorded in the books of account or other documents
maintained in the normal course in connection with the particular previous year
which is found to be incorrect.

One of the most effective weapons in a forensic accountant’s arsenal is lifestyle

analysis. Forensic accounting methodology can reveal hidden assets and sources
of income. They can be invaluable in a variety of litigation contexts. For example,
forensic accountants can help support a fair division of property in divorce cases,
trace and recover funds in fraud cases, gather data relevant to business
valuations, and facilitate damages award collection. One of the most effective
weapons in an expert’s arsenal is lifestyle analysis.

WHAT IS LIFESTYLE ANALYSIS

Simply put, lifestyle analysis involves determining and analysing a person’s

income, expenses, assets and liabilities. By scrutinizing gaps or mismatches, a
forensic accountant can uncover evidence that a party’s income or net worth isn’t
what it appears to be. For example, if a party’s known income sources and liquid
assets are insufficient to support his or her standard of living, it’s likely that he or
she is hiding something.

The first step is to develop a comprehensive financial profile of the person in

question. The accountant scrutinizes banking transactions, known income sources
and expenditures, and changes in net worth for signs of unreported income or
hidden assets.

WHAT TECHNIQUES DO FORENSIC ACCOUNTANTS USE

To avoid detection, many individuals with unreported income typically receive it in

cash. Forensic accountants use a number of forensic accounting methodology
techniques to show that cash is missing and to estimate the amount, including:

 Bank deposits method: This technique is based on the assumption that all
funds are either deposited or spent. To reconstruct a party’s income, the
financial expert:
Analyses bank deposits, cancelled checks and currency transactions, and
Accounts for cash payments from deposited currency receipts and none-
income cash sources (such as gifts, loans, insurance proceeds and
inheritances). Next, the expert deducts funds from known sources from total
receipts to arrive at the total funds from unknown sources.
 Expenditures method: Also known as the source and application of funds
method. This technique involves analysing a person’s personal sources and
uses of cash during a given time period. Sources of funds may include
salaries, inheritances, loans, gifts and cash on hand at the beginning of the
period. If the person is spending more than he or she is taking in, the
excess likely represents unreported income.
 Asset method: Also known as the net worth analysis method. This
technique operates under the assumption that any unsubstantiated increase
in a party’s net worth reflects unreported income. The financial expert
begins by estimating the party’s net worth using bank and brokerage
 statements, real estate records, loan and credit card applications, and other
documents. Next, he or she determines the increase in the person’s net
worth during the relevant time period and deducts reported income and
known expenditures. The excess represents income from unknown
sources.

HOW DO EXPERTS TRACE HIDDEN ASSETS AND FUNDS

Proving that a person has unreported income is one thing. Tracing that income to
assets or accounts that can be used to support a claim or enforce a judgment is
another story, particularly when the person is actively concealing those assets. To
uncover hidden assets, forensic accountants examine a variety of documents,
including tax returns, bank records, real estate records, insurance policies and
court filings. Loan applications, employment applications and credit reports also
may yield valuable clues about the value and location of a person’s wealth.
Another potential strategy is to interview people with knowledge about that
person’s finances, such as accountants, real estate agents or business partners.

Tax returns are particularly useful. Because people have strong incentives to
prepare accurate returns, including the availability of deductions for certain
expenditures and the fear of being charged with tax evasion. As a result, tax return
entries may reveal clues about assets or income that someone is otherwise
attempting to conceal.

HOW DOES A FORENSIC ACCOUNTANT READS THE SIGNS

Proving, quantifying, and tracing unreported income and assets can be a

challenge, especially when someone is actively attempting to conceal them.
Forensic accountants have the skills and experience to read the signs that lead to
hidden wealth, improving the odds of a satisfactory litigation result.

USE TAX RETURNS AS AN INVESTIGATIVE TOOL

Tax returns can be a rich source of information about a taxpayer’s financial

condition and income sources. Typically, financial experts examine returns from
several years to identify significant trends. For instance, an expert may note a
large increase in interest or dividend income from one year to the next, which may
 indicate that the taxpayer sold stocks or other investments. Following are a few
examples of tax return entries that can lead an expert to hidden income or assets:

 Income from wages may lead to undisclosed business interests.

 W-2 entries may reveal unknown retirement plans.
 An examination of real or personal property taxes may reveal undisclosed
assets.
 Entries for state and local income taxes may indicate income or assets in
other states.

Student Statement:

By submitting this assignment, I confirm that this is my own work.

Student Signature: MJMoeti Date: 11th August

2022

For Tutor / Assessor Use Only

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