Tag Archives: Al Capone

Not Again…

I don’t know what life was like for you, growing up, but my youth was full of lectures. I never just got into trouble. I got into trouble AND I got a lecture to go along with it. We never just went on vacation; we went on vacation, had to write an essay about our experiences AND we got a lecture about how both things were important. We didn’t just discuss our report cards, good or bad; we discussed our report cards AND got a lecture about the long-term benefits of each class we were taking. The lectures often came with true-life stories about one or both of my parents, someone they knew or someone who lived in their “day”. I am not saying that I was lectured a lot, but I did hear some stories more than once. On the occasions that I tried to interrupt to say that I had heard the story, I was told either that there was a new lesson to be learned, or asked why, if I knew the story and the wisdom it imparted, I continued to make the same mistakes.

Well, at last, I get it. Because the other day, I came across a case that includes so many lessons on fraud that, if I were teaching a semester on fraud, I could use it as an example in just about every lesson. This is the case of Christopher Myles, a former bookkeeper in New York City. He worked at Central Park Realty Holding Corp., and some of its affiliates, and reported to the President of the company. Tragically, in May 2010, the President, suffered a stroke and ended up in “a comatose-like state until her death in February 2012”.

With the president incapacitated, no one stepped in to VERIFY Myles’ work. By the time September 2011 rolled around, Christopher was aware that he could pretty much do whatever he wanted without anyone really questioning what was going on. He knew that he now had the OPPORTUNITY to defraud his employer and he took advantage of this opportunity. True to the trend, Christopher Myles started his fraud on a small scale, using the President’s credit cards to pay for personal expenses. He escalated quickly and by early 2012, he was transferring funds out of her personal bank account in order to pay his and his mother’s bills. He did this until there was no longer any money in the President’s bank account. Myles did not let this empty bank account stop him though; he then started transferring money from the business accounts, first, into the President’s personal bank account and, subsequently, into his own personal accounts. On days when he felt particularly bold, or reckless, Myles would transfer money straight into his and his mother’s personal bank accounts. Christopher Myles had unfettered access to all of these accounts, both business and personal, and never needed anyone else to sign off on any of the funds he moved into and out of these accounts. The lack of segregation of duties made this fraud simple for Myles.

If anyone had been watching him and taking notice, they may have noticed that Christopher Myles was living beyond his official means. He used his ill-gotten funds to buy a new home, go on shopping sprees and fancy vacations. This is another red flag for possible fraud. Throughout this fraud, created falsified bank statements and recorded all of these illicit transfers as business transfers. Unfortunately, no one followed up closely on any of these untruths. Perhaps none of those looking at the fake bank statements understood how the company worked and what kind expenses would appear as out of character, or maybe no one was familiar with the ledger and how to analyze it. I am not sure, but, the result was that Myles was able to continue his fraud for over two years (just a little bit longer than the median duration of a fraud), until November 2013, when he resigned.

It was only when his replacement discovered the fraudulent invoices that Myles created, in attempt to disguise his embezzlement, that Christopher Myles’ theft was discovered. A forensic investigation revealed that, in two years, Myles had stolen about $1.3 million from his employer. Myles’ former employer reported all of this to the authorities and, in addition to an indictment for the theft, Christopher Myles is also facing tax evasion charges. This is because, in the manner of Al Capone, Christopher Myles did not report any of his fraudulently acquired income on his tax returns.

Almost like a bonus in the lesson that keeps on giving series, once his theft had been exposed, Christopher Myles sent an email to all parties involved. In this email, he RATIONALIZED his fraud, claiming that he was entitled to the funds because he was due a raise and compensation for having to deal with a difficult coworker.

As I read the press release about Christopher Myles’ indictment, my jaw hung open. I said out loud, “wow, this has all the classic markers; it’s unbelievable!” Yet, the markers are classic for a reason. There are probably a lot more lessons to learn from the story of Christopher Myles, but don’t get me started!

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All For Love

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“Valentine’s Day; red roses
It’s said that some have died for love.
In North Clark Street, Chicago
They died for money…”

It was with those words, uttered by Laurence Olivier, on a Paul Hardcastle song about greed, that Al Capone first fascinated me. It started with that tale of the St. Valentine’s Day Massacre – “It’s a good day to die,” the gangster laughed in a scene in the video – and it continued as I learned more about his legacy as a famous gangster. I mean, as perennially single as I have been most of my life, I have been known to don black clothing and disdain on February 14th, but to shoot a bunch of people on that day? That just seemed a little much. You couldn’t wait until the 15th? What kind of person does that? I found out that others were similarly outraged by Capone’s actions and expended a lot of time and energy trying to bring him down.

A few weeks ago, I was reminded of Al Capone when I spoke with Meredith Engel of The New York Daily News. She was reporting on the financial issues faced by those in the marijuana business. Marijuana is legal in some states, such as Colorado and Washington, but is still illegal on a federal level. This dichotomy may lead to confusion on what income is taxable on a state level, where pot is legal, and on a federal level, where it is illegal.

What does this have to do with Al Capone? Well, despite being blamed for the St. Valentine’s Day Massacre, among other murders, and in spite of being investigated for racketeering and his bootlegging business, the authorities struggled to get Capone convicted on his gang-related crimes. However, there was a government agency that he had not seriously considered; the IRS. You see, it does not matter where your income comes from, be it from legal or illegal sources, you have to pay taxes on it.

It doesn’t matter whether you are selling pot or stealing from your boss, if you don’t pay taxes on that money coming into you, you cold find yourself in trouble with the IRS, ranging from interest and fines to imprisonment. Federal agents couldn’t find enough evidence to pin murder on Al Capone, but they were able to use forensic accounting methods to put together enough evidence to indict Capone on tax evasion charges. He was sentenced to 11 years in prison, was fined $50,000, was charged $7,692 in court costs and $215,000 plus interested in back taxes.

Preparing a tax return can get rather complicated. Figuring what deductions, exemptions and credits you are eligible for can be a like navigating a maze. However, the most simple part of the tax return is the income that you start with. If you don’t want to get into trouble with the IRS – REPORT ALL OF IT, regardless of how you came about it.

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So Fresh And So… Not Clean

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Last week, online currency exchange, Liberty Reserve, was shut down, several individuals were arrested and an indictment was filed by the United States Justice Department in New York. filed and indictment accusing six individuals of, among several other things, money laundering. Media outlets all over keep throwing out that term but how exactly does money laundering happen?

In the United States, money that is earned, whether by legal or illegal means, is subject to taxation. Al Capone went to jail, not for the many (as I gather from watching Boardwalk Empire) people he killed and his unlawful business ventures but for tax evasion. When the government sees you spending money and you do not give them a reasonable reason for your having that money, they will work hard to find out just where your money is coming from. However, if they find out that this money comes from illegal sources, they can arrest and prosecute you for your unlawful activities. This is where money laundering comes in. People who make money via illegal methods, find ways to make their money look clean, as though it came from lawful sources. How does this happen?

  1. The first step in money laundering is referred to as placement. At this stage, money is put into the financial system. This can be risky as US banks are required to report large cash deposits, and wires and checks contain the payer’s information and are, therefore, quite traceable. This is where Liberty Reserve was very handy. First of all, the only honest information Liberty Reserve required from an account holder was an email address. Although they requested a name and birth date, none of that information was verified. This gave the account holders anonymity. Also, Liberty Reserve did not accept money directly from users. Instead, users took their money to approved exchangers who then issued LR currency, Liberty Reserve’s currency. These exchangers were located in countries with little or no oversight over their financial systems, such as Malaysia and Vietnam, so questions were not asked about where the money came from. This LR currency was then deposited into the users’ Liberty Reserve accounts with no clear path to where the money originally came from.
  2. The second step in money laundering is layering. During this phase, money is moved around, through many different sources, in an attempt to make the money difficult to trace. Under ordinary circumstances this involves moving funds from one bank account to another, generally in different countries and in varying amounts, buying expensive items and then selling them and changing money from one currency to another. The goal is to make the money’s path as complicated and difficult to trace as possible. Liberty Reserve made this relatively simple. Money going into a Liberty Reserve account holder’s account was already pretty anonymous and difficult to trace. Funds could then be moved, as LR currency, between various anonymous Liberty Reserve accounts. The sources of the funds became near, if not totally, impossible to trace, without having to go through the complications of multiple bank transfers through different countries and bank accounts.
  3. The final step in money laundering is integration. Here, the money re-enters the economy, disguised as coming from a legitimate source. The funds are transferred into a business that is probably a front for the illegal business but now that its origin has been disguised, it appears to be coming from a legal source. In the case of Liberty Reserve, the LR currency was transferred to money exchangers who converted the LR currency back to US dollars and then moved that money to wherever it was the Liberty Reserve account holder requested.

It is pretty clear just how handy Liberty Reserve was to those involved in illegal business and wanting to launder money so that it looked clean. By removing identification and making money transactions anonymous, placement and layering of dirty money a far less complicated endeavor than it tends to be. It is not surprising that Liberty Reserve had over a million users, 200,000 of which were in the United States, and that over $6 billion went through its system.

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