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CFE Exam: Financial Transactions and Fraud Schemes

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Shell Companies Fictitious entities created for the sole purpose of committing fraud; usually involve an employee making fraudulent payments to the dummy company. Most shell company schemes involve the purchase of services rather than goods. The primary reason for this is that services are not tangible. If an employee sets up a shell company to make fictitious sales of goods to their employer, these goods will obviously never arrive. By comparing its purchases to its inventory levels, the victim organization might detect the fraud. It is much more difficult for the victim organization to verify that the services were never rendered. For this reason, many employees involved in shell company schemes bill their employers for things like "consulting services." New account fraud Fraud that occurs on an account within the first ninety days that it is open; often, perpetrators open these accounts with the sole intent of committing fraud. Prompt, decisive action is necessary to manage and/or close apparent problem accounts. Some of the more common red flags of potential new account schemes are: * Customer residence outside the bank's trade area * Dress and/or actions inconsistent or inappropriate for the customer's stated age, occupation, or income level * New account holder requesting immediate cash withdrawal upon deposit * Request for large quantity of temporary checks * Services included with the account that do not match the customer's purpose * Missing or inaccurate customer application information * Invalid phone numbers or addresses in customer account information * Use of a mail drop address (a service where a non-affiliated party collects and distributes mail for individuals or entities) * Large check or automated teller machine (ATM) deposits followed by rapid withdrawal or transfer of funds (a pass-through account) * Business accounts without standard business transactions, such as payroll or transactions that would be expected in that business * Transactions without a clear purpose in jurisdictions known for high levels of corruption * Opening deposit that is a nominal cash amount * Rare customer ID type * Applicants over the age of 25 with no credit history * Customers who cannot remember basic application information (i.e., phone number, address) Markey Division (or market allocation) schemes involve agreements among competitors to divide and allocate markets and to refrain from competing in each other's designated portion of the market. Ratio Analysis a means of measuring the relationship between any two different financial statement amounts. The relationship and comparison are the keys to the analysis, which allows for internal evaluations using financial statement data. Traditionally, financial statement ratios are used in comparisons to an entity's industry average. They can be very useful in detecting red flags for a fraud examination. Separation of Duties The primary means of preventing cash fraud; Whenever one individual has control over the entire accounting transaction (e.g., authorization, recording, and custody), the opportunity is present for cash fraud. Each of the following duties/responsibilities should be separated: - Cash receipts - Bank deposits - Bank reconciliation - Cash disbursements If one person has the authority to collect the cash, deposit the receipts, record that collection, and disburse company funds, the risk of fraud is high. Entries to the left side of an account are referred to as: Debits Entries on the right side of the account are: Credits 3 basic ways to prove corrupt payments 1) Turn an inside witness. 2) Secretly infiltrate or record ongoing transactions. 3) Identify and trace the corrupt payments through audit steps. Pay-and-return scheme an employee intentionally mishandles payments that are owed to legitimate vendors. One way to do this is to purposely double pay an invoice. For instance, a clerk might intentionally pay an invoice twice and then call the vendor to request that one of the checks be returned. The clerk then intercepts the returned check. Ponzi Scheme an illegal business practice in which new investors' money is used to make payments to earlier investors. The investment opportunity is typically presented with the promise of uncommonly high returns. While the scam is presented as a legitimate investment, there is little or no actual commerce involved. When an enterprise promotes an investment opportunity that invests little or none of the participants' money and uses new investments to make dividend payments, the enterprise is running this. Human Intelligence gathered from subject-matter experts and informed individuals. Such efforts typically target individuals who can provide the most valuable information

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CFE : Financial Transactions And Fraud Schemes

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Uploaded on: January 20, 2025
Number of pages: 20
Written in: 2024/2025
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cfe exam financial transactions and fraud schemes

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CFE Exam: Financial Transactions and Fr
io io io io io

aud Schemesio

ShellioCompanies
Fictitiousioentitiesiocreatedioforiotheiosoleiopurposeioofiocommittingiofraud;iousuallyioinvolveioanioemplo
yeeiomakingiofraudulentiopaymentsiotoiotheiodummyiocompany.ioMostioshelliocompanyioschemesioinvolveiotheio
purchaseioofioservicesioratheriothaniogoods.ioTheioprimaryioreasonioforiothisioisiothatioservicesioareionotiotangible.io
Ifioanioemployeeiosetsioupioaioshelliocompanyiotoiomakeiofictitiousiosalesioofiogoodsiotoiotheirioemployer,iotheseiogo
odsiowillioobviouslyioneverioarrive.ioByiocomparingioitsiopurchasesiotoioitsioinventoryiolevels,iotheiovictimioorganiza
tioniomightiodetectiotheiofraud.ioItioisiomuchiomoreiodifficultioforiotheiovictimioorganizationiotoioverifyiothatiotheiose
rvicesiowereioneveriorendered.ioForiothisioreason,iomanyioemployeesioinvolvedioinioshelliocompanyioschemesiobilli
otheirioemployersioforiothingsiolikeio"consultingioservices."

Newioaccountiofraud
Fraudiothatiooccursioonioanioaccountiowithiniotheiofirstioninetyiodaysiothatioitioisioopen;iooften,ioperpetrato
rsioopeniotheseioaccountsiowithiotheiosoleiointentioofiocommittingiofraud.ioPrompt,iodecisiveioactionioisionecessar
yiotoiomanageioand/oriocloseioapparentioproblemioaccounts.ioSomeioofiotheiomoreiocommonioredioflagsioofiopote
ntialionewioaccountioschemesioare:

*ioCustomerioresidenceiooutsideiotheiobank'siotradeioarea

*ioDressioand/orioactionsioinconsistentioorioinappropriateioforiotheiocustomer'siostatedioage,iooccupation,ioorioinc
omeiolevel

*ioNewioaccountioholderiorequestingioimmediateiocashiowithdrawaliouponiodeposit

*ioRequestioforiolargeioquantityioofiotemporaryiochecks

*ioServicesioincludediowithiotheioaccountiothatiodoionotiomatchiotheiocustomer'siopurpose

*ioMissingioorioinaccurateiocustomerioapplicationioinformation

*ioInvalidiophoneionumbersioorioaddressesioiniocustomerioaccountioinformation

*ioUseioofioaiomailiodropioaddressio(aioserviceiowhereioaionon-
affiliatediopartyiocollectsioandiodistributesiomailioforioindividualsioorioentities)

*ioLargeiocheckioorioautomatediotelleriomachineio(ATM)iodepositsiofollowediobyiorapidiowithdrawaliooriotransferio
ofiofundsio(aiopass-throughioaccount)

*ioBusinessioaccountsiowithoutiostandardiobusinessiotransactions,iosuchioasiopayrolliooriotransactionsiothatiowoul
diobeioexpectedioiniothatiobusiness

*ioTransactionsiowithoutioaiocleariopurposeioiniojurisdictionsioknownioforiohighiolevelsioofiocorruption

*ioOpeningiodepositiothatioisioaionominaliocashioamount

*ioRareiocustomerioIDiotype

,*ioApplicantsiooveriotheioageioofio25iowithionoiocreditiohistory

*ioCustomersiowhoiocannotiorememberiobasicioapplicationioinformationio(i.e.,iophoneionumber,ioaddress)

MarkeyioDivision
(oriomarketioallocation)ioschemesioinvolveioagreementsioamongiocompetitorsiotoiodivideioandioallocatei
omarketsioandiotoiorefrainiofromiocompetingioinioeachioother'siodesignatedioportionioofiotheiomarket.

RatioioAnalysis
aiomeansioofiomeasuringiotheiorelationshipiobetweenioanyiotwoiodifferentiofinancialiostatementioamoun
ts.ioTheiorelationshipioandiocomparisonioareiotheiokeysiotoiotheioanalysis,iowhichioallowsioforiointernalioevaluation
siousingiofinancialiostatementiodata.ioTraditionally,iofinancialiostatementioratiosioareiousedioiniocomparisonsiotoioa
nioentity'sioindustryioaverage.ioTheyiocaniobeioveryiousefulioiniodetectingioredioflagsioforioaiofraudioexamination.

SeparationioofioDuties
Theioprimaryiomeansioofiopreventingiocashiofraud;ioWheneveriooneioindividualiohasiocontroliooveriotheio
entireioaccountingiotransactionio(e.g.,ioauthorization,iorecording,ioandiocustody),iotheioopportunityioisiopresenti
oforiocashiofraud.ioEachioofiotheiofollowingioduties/responsibilitiesioshouldiobeioseparated:

-ioCashioreceipts

-ioBankiodeposits

-ioBankioreconciliation

-ioCashiodisbursements

Ifiooneiopersoniohasiotheioauthorityiotoiocollectiotheiocash,iodepositiotheioreceipts,iorecordiothatiocollection,ioandio
disburseiocompanyiofunds,iotheioriskioofiofraudioisiohigh.

Entriesiotoiotheioleftiosideioofioanioaccountioareioreferrediotoioas: Debits

Entriesiooniotheiorightiosideioofiotheioaccountioare: Credits

3iobasiciowaysiotoioproveiocorruptiopayments 1)ioTurnioanioinsideiowitness.

2)ioSecretlyioinfiltrateiooriorecordioongoingiotransactions.

3)ioIdentifyioandiotraceiotheiocorruptiopaymentsiothroughioauditiosteps.

Pay-and-returnioscheme
anioemployeeiointentionallyiomishandlesiopaymentsiothatioareioowediotoiolegitimateiovendors.ioOneiow
ayiotoiodoiothisioisiotoiopurposelyiodoubleiopayioanioinvoice.ioForioinstance,ioaioclerkiomightiointentionallyiopayioanioi
nvoiceiotwiceioandiotheniocalliotheiovendoriotoiorequestiothatiooneioofiotheiochecksiobeioreturned.ioTheioclerkiotheni
ointerceptsiotheioreturnediocheck.

PonziioScheme
anioillegaliobusinessiopracticeioiniowhichionewioinvestors'iomoneyioisiousediotoiomakeiopaymentsiotoioearli
erioinvestors.ioTheioinvestmentioopportunityioisiotypicallyiopresentediowithiotheiopromiseioofiouncommonlyiohig
hioreturns.ioWhileiotheioscamioisiopresentedioasioaiolegitimateioinvestment,iothereioisiolittleioorionoioactualiocomme
rceioinvolved.ioWhenioanioenterpriseiopromotesioanioinvestmentioopportunityiothatioinvestsiolittleiooriononeioofiot

, heioparticipants'iomoneyioandiousesionewioinvestmentsiotoiomakeiodividendiopayments,iotheioenterpriseioisiorunn
ingiothis.

HumanioIntelligence gatherediofromiosubject-
matterioexpertsioandioinformedioindividuals.ioSuchioeffortsiotypicallyiotargetioindividualsiowhoiocanioprovideiothei
omostiovaluableioinformation.

Thisioapproachioexploitsiotwoioweaknessesioofiocorporateioculture:io(1)ioalliosalespeopleiowantiotoiomakeioaiosaleio
andio(2)iomanyiosalespeopleiowilliodoioalmostioanythingiotoiomakeioaiosale.ioOtherioapproachesioinclude:

-ioEmploymentiointerviewsio(realioandiofake)

-ioFalseiolicensingionegotiations

-ioFalseioacquisitioniooriomergerionegotiations

-ioHiringioanioemployeeioawayiofromioaiotargetioentity

-ioPlantingioanioagentioinioaiotargetioorganization

-ioSocialioengineering

twoiomethodsioofiopercentageioanalysisioofiofinancialiostatements
VerticalioAnalysisioandioHorizontalioAnalysis

VerticalioAnalysis
aiotechniqueioforioanalyzingiotheiorelationshipsioamongiotheioitemsioonioanioincomeiostatement,iobalanc
eiosheet,iooriostatementioofiocashioflowsioduringioaiospecificioaccountingioperiodiobyioexpressingiocomponentsioasi
opercentagesioofioaiospecifiediobaseiovalueiowithiniotheiostatementiobeingioanalyzed.

HorizontalioAnalysis
aiotechniqueioforioanalyzingiotheiopercentageiochangeioinioindividualiofinancialiostatementiolineioitemsiof
romiooneioaccountingioperiodiotoiotheionext.ioTheiofirstioperiodioiniotheioanalysisioisioconsiderediotheiobaseioperiod
,ioandiotheiochangesiotoiosubsequentioperiodsioareiocomputedioasioaiopercentageioofiotheiobaseioperiod.io(TrendioA
nalysis)

Scavenging
involvesiocollectingioinformationioleftioaroundiocomputeriosystemsio(e.g.,iooniodesksioorioworkstations).

DumpsterioDiving
involvesioobtainingiosensitiveioinformationiobyiolookingiothroughiosomeoneioelse'siotrashio(e.g.,ioviaiodu
mpstersioandiootheriotrashioreceptacles).

ShoulderioSurfing
involvesioobservingioaniounsuspectingiotargetiofromioaionearbyiolocationiowhileiotheiotargetioentersioaiou
sernameioandiopasswordiointoioaiosystem,iotalksiooniotheiophone,iofillsiooutiofinancialioforms,ioorioperformsiosomei
ootheriotaskiofromiowhichiovaluableioinformationiocaniobeioobtained.

Spoofing
refersiotoiotheioprocessiowherebyioanioindividualioimpersonatesioaiolegitimateiouseriotoioobtainioaccessiot
oiotheiotarget'sionetwork.

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CFE Exam: Financial Transactions and Fraud Schemes

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