Our firm was engaged by a defense
attorney to provide financial forensic
services in a criminal case. During our
initial discussion, the defense attorney
presented the preliminary facts and
asked, “Do you know what the ‘Source
and Application’ method is?”
The Detective’s Criminal Report
The defense attorney had interviewed the detective, who had used the
‘Source and Application’ method to arrive at his conclusions. According to the
detective’s criminal report, the defendant allegedly engaged in money laundering activities as a member of a drug
Based on his “Source and Application” analysis of financial documents,
the detective attempted to identify the
cash being allegedly laundered through
defendant’s bank accounts. He concluded the defendant had laundered large
amounts of cash, which he assumed
were derived from illicit drug-related
A Financial Analyst’s Review
After reviewing the evidence, our opinion was that the detective’s application
of the “Source and Application” method was flawed, misleading, and ignored
potentially exculpatory evidence.
During an evidentiary hearing, we
provided the defense attorney with
suggested cross-examination questions, which ultimately assisted the
judge and lead to the money laundering charges being dropped.
Defense attorneys need to consider the possibility
that detectives, with the most honest of intentions,
can arrive at erroneous conclusions due to their lack
of technical knowledge on financial issues.
Defending Criminal Allegations
Involving Unreported Income
Methods to Determine Income
A defense attorney should have a general understanding of the methods used
by law enforcement to determine income. As part of the financial forensic
investigation, the detective should develop a personal and financial profile:
n;Personal Behavior Profile:
Reveals the subject’s personal
habits; may identify currency
transactions relevant to the
investigation, such as large
debts; addictions; liquidation
of assets; investments.
n;Individual Financial Profile:
Identify assets: cash on hand;
vehicles; real property; jewelry;
weapons; as well as identify
significant liabilities, income
sources, and expenditures.
In this case, the criminal investigator
used the “Source and Application” method, a common income reconstruction
method used to determine unreported
income, if any. All known expenditures
are compared with all known sources
Expenditures represent the use of
funds for any purpose, such as buying
things (e.g. clothes, fuel, travel, meals,
major assets, etc.); paying off debt (e.g.
credit cards, mortgage, etc.); and in-
vestments. Sources of funds represent
activities, such as loans, gifts, earned
income, as well as cash on hand at the
beginning of the period being analyzed.
Threshold of Proof
The measurement of unknown sources
alone does not prove criminal activity;
rather, it is a “lead” that must be investigated further. This is especially true
when the detective is developing facts
necessary to meet the “beyond a reasonable doubt” threshold of proof.
Unlike an assault case where the existence of the crime is self-evident and
the government’s task is to prove who
perpetrated the crime, in complex financial cases, the government has the
difficult task of proving the existence
of a crime hinged on the defendant’s
subjective culpable mental state (e.g.
intent, knowledge, recklessly, or with
Methods such as the “Source and
Application” analysis may appear impressive; however, this or any method
of financial analysis is only as valid as
the foundation on which it is built. This
case is a good example of a detailed examination, as performed by the criminal
investigator, which lacked foundation
and was sufficiently flawed to warrant
dismissal of money laundering charges.
Defense attorneys should consider
the possibility that detectives, with the
best of intentions, may arrive at erroneous conclusions due to their lack of
financial technical knowledge. A financial expert can identify such errors
and, if necessary, testify in the trial for
DAVID SUTHERLAND, CPA/CFF, CFE, CLEA
EPPS FORENSIC CONSULTING PLLC
Dave specializes in financial investigations, forensic accounting, litigation
support, fraud examination, and law enforcement consulting services.
He also teaches Financial Forensics in Law Enforcement (FFLE®).
13880 N. Northsight Blvd., Suite 115, Scottsdale, AZ 85260
minus: Known Sources of Funds
equals: Funds from Unknown Sources