19
Sat, Sep
0 New Articles
LexusBannerStrip

AVFnew2HK banner380

RSM

Top Stories

Grid List

Building a home is an exciting prospect, but it entails careful consideration, the ability to consider the future, and the need to exercise caution. There are legal, design, engineering, and functional elements woven into the process as well that need a lot of consideration. While all of this may seem a little daunting, the overall result will ultimately be worth the ordeal. So without further ado, here is how to safeguard and secure your home:

From the elements

In our post ‘The Architect Expert Witness and Building Defects’, we discussed how an architect planned for a bespoke window system as opposed to a manufacturer’s system that would have already gone through complex testing processes. While it was a matter of aesthetics, the end result led to windows that were not properly weathered to prevent rainwater from leaking in, or thermal breaks to guard against condensation. This is the type of issue you will want to be wary of when building a home. Form will not matter if function fails. In the UK, where harsh external elements are very common, this is a matter that shouldn’t be taken lightly. Consider weatherproofing doors with primers, undercoats, and topcoats made from oils or varnish. Some choices even have UV protection to minimise fading. It’s also important to check for draughts and properly seal around the doors. These are clear demonstrations of blending design with practicality.

From repairs

When it comes to building a home, forward thinking is an absolute must. Aside from mapping out current plans for construction, you will also have to create contingency plans for when the project has been completed. An overview of emergency coverage by HomeServe outlines how these policies can safeguard homes from any potential wear and tear. From boilers to heating and plumbing, these utilities will need repairing over time, especially when they are being used frequently. To mitigate any foreseeable or unforeseeable worry with regard to home maintenance, it’s always wise to stay one step ahead. This is something to factor in prior to even settling into a new property.

From intruders

There should always be a premium placed on securing a home to guard against intruders. These days, there are lots of options when it comes to security, especially due to the introduction of the IoT. Smart homes are actually becoming more widespread and a number of these use interconnected gadgets to provide the best protection possible to homeowners. These systems are no longer inaccessible and complicated. An article by The Guardian highlights how today’s security systems allow homeowners to access security footage from their smartphones even while they are away. Aside from the cameras, there are also a number of smart home alarms and entire integrated systems that can be installed by professionals, depending on your particular needs.

From harsh environmental footprints

Lessening the environmental impact has become a priority in the construction industry in recent years, with “building green” concepts becoming a major focus. This ethos means choosing sustainable alternatives to safeguard against harsh environmental footprints. Citu operates low-carbon sites with a community focus that tackles climate change in the process. Meeting this pressing need is a generational goal, and while you don’t always have to follow the same format, integrating sustainable approaches into your building process will minimise the harm on the environment. While these tips may be further additions to a seemingly never-ending checklist for constructing a home, you cannot put a price on your own peace of mind. For more tips from experts and advice on a number of fields, do check out The Expert Witness Journal

Following the Grenfell Tower fire of 14 June 2017, Forensic Architecture, a multidisciplinary team of investigators based at Goldsmiths, University of London, launched an open ended investigation into the circumstances of the night of the fire.

by Martin Burns RICS, Head of ADR Research and Development

by Richard Morton, RM Architects

“An Englishman's home is his castle,” This is a very old saying, which initially proclaimed the right for someone to prevent entry to their home. Over time it has progressively been used to imply that people have an exclusive right to act entirely as they please within their own home. The truth is that they do not. This becomes crystal clear to any home owner who decides to undertake significant construction work on, or in proximity to, the boundary between his/her property and that of his/her neighbour.

Adept is the UK's first civil & structural engineering firm to achieve BRE Global BIM Level 2 Business Systems Certification. The certificate is awarded to Adept three months in advance of Government’s mandatory requirement for BIM to be applied to all publically procured buildings.

’Well done to Adept - we know that our BIM business certification process is challenging and rigorous but ultimately it will enhance the competitiveness of Adept in national and international markets and enable them to deliver better value to customers throughout the lifecycle of a project’ said BRE Group’s Director for BIM, Guy Hammersley.

Since 2013 Adept have applied BIM on all their projects including the new Next Distribution Centre in Doncaster, a Staycity Hotel in Manchester, the refurbishment of Leeds Kirkgate Market, the new Humber University Technical College and on residential projects for UK’s McCarthy & Stone and social housing organisations across the UK.

Adept’s Managing Director Erol Erturan says: 'BIM is a great way of demonstrating to clients that we have the right procedures in place at every level to deliver what are very rigorous Government requirements. It also simplifies the tendering process, as once a business is BIM certified its competence levels are guaranteed.’

This was funded by the Barrow Cadbury Trust and The Pilgrim Trust.

The Disabilities Trust, in collaboration with Royal Halloway, University of London, recently announced the results of the first study of its kind into brain injury in female offenders and how a support pathway can be put in place to manage the health, cognitive and behavioural issues which may impact on likelihood of reoffending.

by Alec Samuels

One might have thought that with the Rules, the Practice Direction and the Guidance, the professional institutes and the literature, that the path of the expert  called upon to prepare a report and to give evidence in court would be smooth. Unfortunately the problems and the challenges continue. The ethical and professional standards remain very high, to the credit of the experts generally. What then must the expert watch out for?

by Dr Kathryn Newns, Clinical Psychologist, Applied Psychology Solutions

The DSM 5 or ICD10 (or 11) are frequently used to establish whether the difficulties described by aclaimant meet the full criteria for a psychological disorder in a psychological assessment for civil litigation purposes.

by Professor Hugh Koch, Clinical Psychologist and Visiting Professor to BirminghamCity University

Dr David Mushati and Dr Ken McFadyen, Clinical Psychologists and Associates ofHK Associates. For Expert Witness Journal September 2019 Edition

The aim of this paper is to understand and learn from the cases reported in BAILII or West Law and associated sources how psychological thinking is relevant to the understanding and practice of law. It summarises the main points that have been addressed in “LegalMind Case and Commentary” a new publication published this autumn (Koch, 2019 (a)).

The rate of unfilled NHS consultant psychiatrist posts in England has doubled in the last six years, a survey by the Royal College of Psychiatrists shows.

Wearable devices offer exciting opportunities to longitudinally detect and track multi-modal stress and symptoms of disease in an objective and unobtrusive way

by Antony Fanshawe

Forensic accounting

I have been asked to write about Forensic Accounting, which is a dull subject which I, mysteriously, find quite exciting. I think it’s the word forensic. Having always wanted to be a detective, the idea of finding clues, chasing them down and then fitting a sustainable narrative to them is, to me, fascinating. Accounting is a language for communicating financial information about business, but business activities are nuanced, and the numbers alone cannot fully reveal the motivations and outcomes of transactions. This is where experience is invaluable- in understanding the business and the context of the events and interpreting the accounts accordingly. Experience helps filter the important issues from the flotsam and informs the reporting of findings and opinions concisely for the benefit of the Court.

What I do is story-telling, but non-fiction; history not romance!

I have come to expert work by a roundabout route. I am a chartered accountant, who qualified with Price Waterhouse and then went into their insolvency department in 1981 after a spell in Egypt. I left PW in 1990 setting up my own corporate finance and recovery practice, Fanshawe Lofts, which traded very successfully for 18 years until 2008 when we sold it to Begbies Traynor. I was a partner with BTG until the end of 2012. In early 2013 I set up FPN Ltd with my business partner, and in 2018 I decided not to renew my Insolvency Licence, turning my hand to Corporate Finance, strategic advisory and expert work.

In 2002 I was awarded an MBA by the University of Bath and for 12 years I was a member of R3 Council, and instrumental in establishing the Thames Valley chapter of R3

I have taken on expert assignments since the turn of the (21st) century, these have varied from business valuations for divorce, to wrongful and, in one case, fraudulent, trading allegations, by way of preferences, misfeasance, and insolvency practitioners’ conduct and fees.

I have always seen my expert work as being an adjunct to my main practice, and being informed by my advisory work, rather than being the main source of my income.

In addition to appearing in court (of which more below), I have assisted with mediations and negotiated settlements.

I work on both sides of the fence, but increasingly I am instructed by the defence.

Cross Examination

Let’s start with the tricky bit, the elephant in the room, the acid test, which can reduce the most confident experts to gibbering wrecks, and which most experts hope will never happen to them- Cross Examination.

I work on the assumption that every case could end up in court, and that means cross examination. And so the choice of an expert should, in my view, be made with that outcome in mind.

Being cross-examined is undoubtedly nerve-wracking, and can be difficult if the expert is mainly desk bound and not used to robust social interactions. I have a strong minded wife and children and I am a former IP. So, I am used to being criticised. This experience stands me in good stead whether I am cold calling to sell a business or giving evidence under cross-examination.

The first thing I learnt about expert work is to turn to the bench and address my comments to the judge. I never forget that my job is to assist the Court in coming to its judgement and not to assist Counsel facing me.

This is really helpful in overcoming the initial butterflies. I find that by being helpful to the court the court will often reciprocate and be helpful to me.

There are other tricks. Imagine that Counsel (theirs not yours) is naked, for example. But this can be too much to bear…..

I also remind myself that I have a considerable depth of expertise and experience, which is rare if not unique, and I am comfortable with it. And opposing Counsel has his/hers. Theirs is law and mine is real and commercial life, insolvency practice and accountancy. If you think about these categories of knowledge as Venn diagram sets, our sets overlap. I know something about the law, and barristers know something about real life and accountancy for example. But I have found that when it comes to accountancy and commercial practice there can be weaknesses in the attack.

It is crucial to know your stuff. Not just technical knowledge but also the nitty gritty of your assignment and the commercial context of the business. It is also important to express yourself clearly, concisely and in everyday language, avoiding needless technical terms where possible. Above all you need to be able to think on your feet and respond quickly.

The argument concerned the profitability of the (construction) company during a period of alleged wrongful trading, much of which turned on the margins achieved. I was, out of the blue, shown an earlier year’s results from the comparable period, which showed a gross margin of 17%, which the opposing Counsel seemed to think was a poor result. I replied, without any appreciable delay, that if that margin had been achieved in the period of wrongful trading then the company would have been quite profitable.

There was a collapse of (a rather) stout party (not one to imagine naked), and the Court found in favour of my clients.

I am not always as lucky as that. Benjamin Franklin said “Diligence is the mother of good luck”. I like to think that this is right, but it might not be because Donald Trump thinks “Everything in life is luck”. You decide.

Assumptions

Accounting is as I have said a language for business. And like any language it is governed by rules. It may seem strange to say but it’s not the numbers that tell the story but the assumptions and the accounting standards that lie behind them. With different interpretations, losses can become profits and insolvent balance sheets can look quite handsome.

The most common argument is the treatment as assets of expenditure which may or may not yield a return to the business in the future eg R&D, goodwill on acquisition, work in progress or stock and so on. The effect is to avoid any hit to profit and to improve or at least sustain the balance sheet. You may have noticed that this habit has slipped into the political vocabulary in the last few years. Listen to politicians talk about “investment” rather than expenditure; so much more attractive, but at the end of the day they are still spending your cash.

It does matter where the debit for the payment goes. In one of my cases the pleadings had treated payments to another company in the same group as benefitting the receiving party. But the other side of the accounting entry had gone to the intercompany account and they had been repaid- hence there was no permanent benefit to the recipient. However other payments had been incurred on behalf of the other companies in the group. A large part of my job was to help sort out the pleadings and replace them with a new argument with in depth evidential support from the accounting records.

When looking at the commercial reality facing a company an analysis of the cash position and likely projection can be much more revealing than the conventional accounts. Ultimately the success or failure of a business turns on its ability to generate or raise cash (whether debt or equity). Profit, at the end of the day is a proxy for cash generation and sometimes not a very good one!

It is a truism that the one thing you know about financial forecasts is that they will be wrong. They are though useful as an indicator of what could happen in the business. And at the very least they should make management think about their business, understand their cost structures and be realistic about what sales and margins they should achieve. Forecasts are always under-pinned by assumptions. Once the assumptions are understood- not always an easy task as accountants are often very poor at stating assumptions- it is a question of understanding whether the assumptions make sense in the context of the historic performance of the business and its current performance (in winning contracts for example). It is equally important that the forecasts should be well-constructed and reflect the stated assumptions (eg do they really show debtors being collected on 60 days?). If not they may have to be re-done.

Early engagement

Like many of my fellow experts, I am of a certain age, and have seen a lot in my professional life. And I like to share it. I know that budgets are tight in litigation, but can I respectfully suggest that a meeting with the expert at an early stage in the process can be very worthwhile? In the case of my specialism it can bring a commercial and “best practice” viewpoint to inform the approach taken to the conduct of the claim which can avoid or at least mitigate the need to change course, expensively, at a later point in the process.

To issue, or not to issue, is a very big financial decision for the client, and so it’s critical that the advisers do their best to ensure that the target is worthwhile and the strategy as well informed as it can be. Lawyers do very good law. Old IP’s do very good commercial. They are two different things. But at the end of the day clients tend to be interested in the commercial and rarely the law.

Remember, sometimes the best advice is to do nothing.

The Approach

Information gathering comes first, as in any professional exercise. This means reading and internalising the brief and the supporting papers, speaking to the principals, if possible, researching the company and its business by searches both of the company and its directors and by general internet searches around the subject. Understanding the business and how it was/is conducted and its commercial and regulatory environment can help build an idea of the context in which the company operated and how it operated. It really helps me to be able to relate the instruction to businesses that I have been involved in (or deconstructed in my role as an insolvency practitioner) in the past, and to recollect (if I can) any tricks of the trade or pitfalls, and if possible to think myself into the mind-set of the directors or the insolvency practitioner.

At this stage the picture I have is, necessarily, broad brush. It needs focus, and that means financial analysis. It’s amazing what emerges once one does some simple ratios and look at the trends over a number of years.

Gross margins are always very revealing. Are they too low/high for this type of business. If so, why? I would expect to be told that there is a solid commercial reason but it could be something else- the costs accounted for in arriving at the gross margin (is labour treated as direct or overhead?) or something as simple as the calculation of the stock value. If stock is what we call a plug figure (ie a guess) then the gross margin will be inevitably be wrong taken because stock movement is an important number in the calculation. Equally stock write offs will affect gross margin as will the basis of valuation of stock or work-in-progress, or any changes in the method of accounting year on year. All of this could affect underlying profitability, and may need to be explored, explained and interpreted in the context of the questions asked.

It can be a useful technique in getting to the heart of the matter to posit a counterfactual. So, one can say, this is what happened (say, the behaviour complained of), and this is what the outcome was. What would the outcome have been if something else had happened (which is not being complained of)? The argument goes, if the outcome was similar why is behaviour A wrong and B acceptable? This is one of the most interesting parts of the job as it requires a degree of creativity and very clear exposition and application of the assumptions adopted.

Making Mistakes

We can all be geniuses when we are comfortable and unchallenged. It’s relatively easy to produce attractive and superficially persuasive first reports. But that feeling of satisfaction rarely survives the first experts’ meeting when the report will be picked over thoroughly, conclusions will be challenged and any errors will be picked up and magnified. Mistakes can reduce the expert’s credibility when it comes to cross examination, and the confidence of his professional team. I know only too well how easy it is inadvertently to overlook transcription errors or Excel formulas that pick up the wrong cells. When found they need to be corrected without delay.

Check and double check, and then ideally get someone else to check it again. It becomes almost impossible to read one’s own work with any objectivity after a while, and fresh pair of eyes is invaluable.

I have recently seen a report where the expert has had to replace four (yes four) appendices because they were all wrong- by which I mean that they did not match their description, and consequently undermined the argument he was trying to make and by implication the integrity of the rest of his report.

This was a report produced by a top ten firm. The work had been delegated by the (partner) expert, and clearly not fully checked before it was released. I was impressed by the partner’s grasp, but less so by his assistants’ and the firm’s quality assurance.

I do all the work myself, and while that can be limiting, I do know what work has been done, I am very familiar with the facts and arguments, and I take full responsibility for my output.

But we are human and there but for the Grace of God go all of us. These things can hole an argument below the waterline, and change the balance in the negotiations.

Coming to Conclusions

When it comes to giving opinions on the evidence, I find myself from time to time thinking the same as Sherlock Holmes (fictionally) did when he repeatedly said to Watson, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth. We know that he did not come through the door, the window, or the chimney. We also know that he could not have been concealed in the room, as there is no concealment possible. When, then, did he come?" (Sign of Four). What this reveals is a willingness to think the improbable and to think it in 4 dimensions. Sherlock does not ask where he came in, he asks when did he come- so it is not a question about a place in space but a place in time.

And that requires thought and relevant knowledge. And that’s the hardest part, and the bit you can’t see, and, which, at the end of the day, is what gets results.

Thank you

Antony Fanshawe October 2018

Antony can be contacted on 07979 103275 or at This email address is being protected from spambots. You need JavaScript enabled to view it..

www.fpn.uk.com

 

Do you remember the movie “The Good, the Bad and the Ugly?” If you don’t,let’s just say the movie plot, and many other proto typical “spaghetti westerns,”involved someone hiring a bad gunslinger to either run people out of town or off lucrative land just to suit their own interests. Those gunslingers were so-called “hired guns.”

It’s a relatively common term in certain industries.Lawyers, doctors and forensic engineers or experts can all be considered a hired gun based on the circumstance.There is also more of a tendency to use(and believe) the use of a hired gun when it involves a large company versus an individual. For example,a corporate headquarters defending their company actions rather than individual “who was wronged.”But, it’s not really that black and white.

by Tina Lannin

Tina is a life-long lip reader, she is totally deaf and is a certified lip reading teacher. She has worked as a forensic lip reader for 20 years and heads up a forensic lip reading team at 121 Captions.

by Professor Niamh Nic Daeid, Mr Michael Marra, Dr Christian Cole, Dr Emma Comrie and Dr Heather Doran

The new WMG Forensic Centre for Digital Scanning and 3D printing – a research hub supporting Homicide Investigation has secured investment from West Midlands police to scan injuries and produce 3D print outs for use in expert testimonies.

In this article I explain how crypto currencies are used to launder illicit funds and how this affects the asset tracing work of forensic accountants Forensic accountants use their expertise in finance, accounting and transaction processing systems to investigate fraud and other financial wrongdoing. Their work includes assisting clients on financial crime risks and controls, detection, investigation and litigation support, as well as asset recovery. Two aspects of this work are money laundering and asset tracing. Money laundering is the transformation of the proceeds of crime from their original form (such as cash) into new assets and locations to disguise their origin and make them appear legitimate. Typically, the assets may have been moved through a complex chain of entities, such as bank accounts, companies, trusts and special purpose vehicles. Often these will span multiple jurisdictions. All this is done to ensure the trail is as hard to follow as possible. What began as cash received through a UK Ponzi scheme might end up in mega yachts in Monaco, property in Spain and blue-chip investments in the London Stock Ex- change. The money could be laundered via companies in Switzerland, bank accounts in Guernsey, trusts in the Cayman Islands and law firm client accounts in Gibraltar. Asset tracing is the process of carefully uncovering the trail of an asset from origin to ultimate destination, documenting each step along the way, in a forensically sound manner that can stand up to court scrutiny. Cryptocurrencies such as bitcoin provide new opportunities for money launderers, through the partial anonymity they can provide and the lack of centralised supervision. Both these attributes are seen as key attractions by genuine and dishonest users alike. Two examples are the notorious case of Ross Ulbricht, the founder of Silk Road, which was the first dedicated black market on the dark web; and the more recent alleged activities of Russian intelligence operatives accused of seeking to interfere with the US presidential election in 2016. Silk Road was created by Ross Ulbricht in 2011 as an online marketplace free from government oversight and interference. It provided anonymity through the Tor system, which helps internet users conceal their location and communications. Silk Road used bitcoin as the currency for all transactions. Bitcoins are held in online “wallets” whose ownership can be kept anonymous. Silk Road quickly became the main electronic bazaar for the buying and selling of black market goods, mainly drugs but also other illegal items such as stolen identity documents. According to the US authorities,1 the Silk Road site generated approximately $1.2 billion in sales revenue and $80 million in commissions – all of which was in bitcoin. Ulbricht was eventually caught and convicted, but only through old fashioned forensic investigation and not by breaking bitcoin’s security technology. However, his conviction was assured by another key feature of bitcoin, its tamper-resistant method of record-keeping – more on that later. Russian interference in the 2016 US presidential election was alleged by the US authorities in July 2018. The investigation by Special Counsel Robert Mueller led to the indictment of 12 Russian intelligence officers for “hacking into the computers of US persons and entities involved in the 2016 US presidential election” and conspiring “to launder the equivalent of more than $95,000 through a web of transactions structured to capitalize on the perceived anonymity of cryptocurrencies such as bitcoin.”2 It is alleged that bitcoins were used by the defendants to evade scrutiny when purchasing servers, registering domain names and making other payments as part of their hacking activity. So what are cryptocurrencies, exactly? Cryptocurrencies, such as bitcoin, are “any publicly available electronic medium of exchange that features a distributed ledger and a decentralised system for exchanging value.”3 They are an exciting innovation that seem to offer certainty, security and transparency without government regulation or any central au- thority being involved. They are lauded by many as a true free-market innovation. Cryptocurrencies are actually a combination of four technologies: 1. Distributed ledgers: each participant can have a copy of the whole ledger (transaction record), which for bitcoin and many other cryptocurrency systems is structured in a “blockchain”. 2. Decentralised control: participants can deal directly with each other, not through a central authority or controlling entity like a bank. 3. Use of cryptography: to protect and authenticate transactions, balances and participants. 4. Automation: the ability to automate transactions programmatically, such as in smart contracts or by triggering the payment of interest on a bond once a specified event occurs. Cryptocurrencies are not regarded as true currency – they are not official money, which is called “fiat currency”. They are not legal tender and currently are not widely accepted across society. However, they can offer the following benefits: • Security • Speed • Low transaction costs, avoiding banks and intermediaries • Convenience • Relative anonymity • Decentralised dealings without any central oversight or monitoring One key aspect of a classic cryptocurrency such as bitcoin is the distributed blockchain ledger technology. What this means is that is every single transaction, since day one, by every party in the cryptocurrency system, is recorded in a ledger, which is a chain or sequence of transaction “blocks” called a “blockchain”. The net result of the history of all the transactions affecting a user’s wallet determines the closing balance on that wallet. Every user can have a copy of the whole ledger, and can therefore see all the transactions, though the identity of wallet holders may be unknown. This sharing of information about transactions across the whole system makes it very hard to falsify the records. Because everyone else has a full copy of the ledger, altering one’s own copy will have no effect: each new block of transactions is only finalised and accepted – and then shared with all the users – once it has been properly validated by a special class of users called “miners” using complex cryptographic techniques. The transparency of the ledger record helps make it very hard to tamper with. What are the financial crime risks? As already mentioned, cryptocurrencies can offer a degree of anonymity and the ability to move financial assets across jurisdictions without government oversight or regulation. A person can open a cryptocurrency wallet, which appears simply as a computer address on the system, without disclosing anything about his or her identity. As we saw with Silk Road, many illicit items can be bought and sold using cryptocurrency. It is often the preferred means of exchange for items such as stolen personal data, ransomware payments, drug dealing and other black market goods and services. It is also increasingly used to evade state sanctions that prohibit the use of official currencies, such as the US dollar. Several sanctioned countries have reportedly indicated that they are developing their own cryptocurrencies, including Iran, Russia, Myanmar and North Korea. However, while cryptocurrencies may provide a safe space for criminals to transact with each other, the range of legitimate assets that can be purchased with cryptocurrencies is still fairly limited. Ultimately, if they want to spend their ill-gotten gains on useful items, criminals will eventually need to get their as- sets out of cryptocurrencies and into the “real” econ- omy. They also need to convert the proceeds of their crimes into the cryptocurrency in the first place. This highlights two key areas of vulnerability from the criminals’ perspective: the points of entry and exit. Criminals who make their money in the real econ- omy, for example through investment fraud, will need to convert their proceeds into cryptocurrencies, which means finding a party willing to accept fiat currency in exchange. In practice - for transactions of any size - the payment of the real currency will need to pass through a financial institution such as a bank. If the financial institution has strong anti-money laundering controls then it will consider whether the source of the funds and the nature of the transaction seems suspicious and, if so, report it to the authorities. Similar considerations apply when cryptocurrency is converted back into fiat currency. This is one area on which forensic accountants can focus when trying to trace assets: regulated financial institutions are required to follow stringent “know your customer” rules, and their records can therefore be a useful source of information about the identity of the parties. One weakness from the regulators’ point of view has been poor regulation of cryptocurrency exchanges – companies that buy and sell cryptocurrencies, providing the entry and exit points to customers. These have typically been exempt from anti-money laundering regulation. However, with the rise cryptocurrencies and the associated money laundering risk this is changing. The EU’s 5th Anti-Money Laun- dering Directive, which came into force in July 2018, requires member states to introduce tighter rules, bringing regulation of cryptocurrencies and cryptocurrency exchanges in line with existing rules for fiat currency and banks. In December the UK government announced it will address the risks by going significantly beyond the requirements of the new directive, and will be consulting on this during 2019. Other governments around the world are taking similar action: for example, in 2018 the US Treasury Department’s Office of Foreign Assets Control issued guidance expressing how it believes transactions in digital currencies should be treated similarly to those in fiat currencies. So how big a problem is cryptocurrency money laundering? The UK government’s 2015 and 2017 National Risk Assessment of Money Laundering and Terrorist Financing initially assessed the risks associated with cryptoassets to be relatively low.4 However, since then, money laundering with cryptoassets has been identified as a growing problem. Europol has estimated that £3-4 billion is laundered through cryptoassets each year in Europe, which is a relatively small proportion of total laundered funds, estimated at £100 billion.5 However, this seems set to rise. Naturally, criminals gravitate to exchanges in jurisdictions with the weakest anti-money laundering defences. While this means it is difficult to stamp out money laundering, it does result in illicit activity being pushed towards “rogue” jurisdictions. As a forensic accountant, seeing transactions pass through such jurisdictions raises red flags, which is useful since it can help narrow the focus of an investigation onto the areas where criminal activity is most likely. What specific techniques can forensic accountants use to investigate cryptocurrency transactions? It is a common misconception that digital currency is untraceable and completely anonymous. While it may be true that wallets are stored as anonymous com- puter addresses within the technical cryptocurrency system, there are multiple ways it may be possible to link wallets to the parties that control them. These can include traditional forensic investigation techniques, such as transaction pattern analysis (for example matching property transfer records with transactions in the cryptocurrency ledger), or simply obtaining information from co-operating parties. More advanced techniques include analysis of internet traffic through particular servers and IP addresses. In fact,cryptocurrencies can be the forensic accountant’s best friend, because literally every trans- action is indelibly recorded in the blockchain. And for traditional cryptocurrencies like bitcoin, this is a freely-available public ledger. Every transaction is literally there for all to see and analyse. This allows forensic accountants to use graph technology and network theory to analyse the recorded transactions, aided by sophisticated graph database systems (in mathematics, a graph is a net- work of nodes, such as wallets, and links, such as transactions between wallets). These systems can be used to analyse hundreds of thousands of transactions between different wallets to identify patterns of activ- ity, such as heavy traffic routes and clusters of activity, or the ultimate destination of apparently disparate in- dividual transactions. Since all transactions are fully recorded, it can be possible to trace flows across nu- merous intermediate nodes in the network to their entry and exit points. From there the focus can move to the relevant cryptocurrency exchange, where the assets are converted between crypto and traditional assets, and then into regular bank accounts. As mentioned above, more traditional techniques can be employed to identify who controls each of the nodes. Therefore, once the technology of cryptocurrencies is understood, the forensic accountant can use a range of traditional and new tools to crack open transaction secrets. And once anonymity has been breached the cryptocurrency ledger can become a treasure trove of complete and accurate information, all neatly tied in: something rarely possible in traditional forensic asset tracing. Postscript – how Ross Ulbricht was caught and convicted. Ulbricht’s anonymity was breached through an error he made that was spotted by Gary Alford, an Inland Revenue Service investigator working in his spare time. Alford had been working with the US Drug Enforcement Agency to find a way to bring down Silk Road. He noticed that Ulbricht had recently openly used the online nickname “altoid”. He recalled that this same pseudonym had previously been linked to the early days of Silk Road. Ulbricht’s use of the same name much later provided the lead that connected him to Silk Road. Thus, it was old fashioned forensic investigation techniques, and a mistake by Ulbricht, that blew his anonymity, not a flaw in bitcoin. The Federal Bureau of Investigation seized Ulbricht’s computer and discovered it contained hundreds of thousands of bitcoins, many of which had been re- ceived recently. During his trial Ulbricht claimed that the bitcoins were his, but he said they had nothing to do with Silk Road. Although he admitted he had orig- inally set up the site, he claimed to have stopped running it long ago. However, since the anonymity of Ulbricht’s wallet had been breached, it was easy for the FBI to analyse the transactions through his wal- let and demonstrate the provenance of his bitcoins. Since the bitcoin ledger – which is publicly available – is a full record of every transaction ever conducted, it was a simple exercise for the FBI to track Ulbricht’s bitcoins back to their source: Silk Road. He was convicted of money laundering, computer hacking and conspiracy to traffic narcotics. He was handed a double life sentence plus forty years without the possibility of parole. References 1, Ulbricht indictment, 27 September 2013. 2, Indictment, US vs. Viktor Borisovich Netyksho, et al., 13 July 2018. 3, “Dear CEO letter” from the UK Financial Conduct Authority to chief executives of regulated institutions, 11 June 2018. 4, Cryptoassets Taskforce Final Report, October 2018. This is a report by a UK government-sponsored taskforce including HM Treasury, the Financial Conduct Authority and the Bank of England. 5, Ibid. Article by Paul Doxey Paul is a Senior Consultant to the Forensic Services Practice of Charles River Associates +44-20-7959-1424 This email address is being protected from spambots. You need JavaScript enabled to view it. www.crai.com The views expressed herein are the views and opinions of the author and do not reflect or represent the views of Charles River Associates or any of the organizations with which the author is affiliated. CRA’s Forensic Services Practice – including our state-of-the art digital forensics, eDiscovery and cyber incident response lab – is certified under International Organization for Standardization (ISO) 27001:2013 requirements.
Sign up via our free email subscription service to receive notifications when new information is available.