J.W. Verret here.
I have recently embarked on a career shift to focus study on accounting, specifically forensic accounting, and how it relates to the core issues in corporate, securities and banking law that have previously been the focus of my scholarship. That has included getting certified as a CPA and as a CFF (certification in financial forensics).
Along the way I’ve learned a ton about using financial accounting and forensic accounting techniques to catch bad guys. Forensic accounting is a core tool for financial fraud investigations under the securities laws (10b-5, FCPA, etc.) and banking law. It is also a core tool used by Delaware companies to meet their Caremark oversight obligations as forensic accountants design internal controls to prevent compliance violations and utilize forensic accounting to catch violators.
Before digging into issues at the intersection of forensic accounting and corp/securities law, I thought I would introduce readers to forensic accounting through the story of the FBI and CIA’s efforts to catch Aldrich Ames. This spy hunt was only successful because of evidence put together by a forensic accounting team conducting a net worth analysis, a common tool of forensic accountants which shows that changes in a subject’s net worth cannot be sufficiently explained by their legitimate sources of income.
Aldrich Ames sold information to the KGB about the identity of our intelligence assets within the USSR, and at the time of his arrest he was responsible for the greatest intelligence leak in American history. He identified at least ten active agents for the US, some of whom were later executed by the Soviets as a result of his tips.
A classic tool used by forensic accountants to guide investigations is the “Fraud Triangle.” Three factors that are nearly universal in frauds studied in an early survey of embezzlers by criminologist Donald Kressey. Its components are pressure, opportunity, and rationalization. In Ames’s case, pressure for money came initially from an expensive divorce and then from a lavish spending lifestyle he shared with a new wife (when she was arrested, investigators found 60 purses and 500 pairs of shoes among other items).
Opportunity (a prong that usually reflects poorly on the organization) was here created by his ability to walk out of headquarters with armloads of documents to give the Soviets (since remedied by the agency). Opportunity also came a result of his legitimate cover for meeting with handlers, which was often that he was attempting to recruit them in reports he would file with the agency about the meetings.
Rationalization in his case was a personal grudge over being passed over for promotion because of the impact of his drinking on his work. He would frequently return from long lunches unable to function.
The Fraud Triangle doesn’t only help to explain an embezzler, financial fraud, or in this case spy’s behavior after being caught. It informs key aspects of an internal investigation, from the email keywords used in email searches to the questions asked during internal interviews as a fraud investigator attempts to track down the perpetrator.
The fascinating details of the investigation of Aldrich Ames can be found in a Senate Intelligence Committee Report, available here.
The first 40 pages outline an intelligence disaster, a ten-year period during which Ames lived a dangerous double life. Some of his methods utilized sophisticated tradecraft, code names and the famous “dead-drop” mailbox where he would leave markings to indicate he left intelligence in one of several KGB dead drop locations for pickup.
Near the end of the story, the FBI and the CIA know they have a mole on their hands and have seen entire intelligence networks overseas rolled up by the KGB (and later the FSB) overnight. The first break they have in the case is a tip that Ames cover for his excessive spending, that he inherited the money from his wife and her family, was bogus. Subsequent forensic analysis of his spending showed him spending cash amounts of nearly $1.4 million and credit card billings of another $500,000 between 1985 and 1993. During that 8 year time-frame his aggregate CIA take home pay was $336,000.
Ames covered his tracks in part through the classic money laundering techniques of placement, layering, and integration. Placement takes illicit cash and enters it into the financial system. He would make structured cash deposits just below the SARs reporting threshold at which banks must report them to the Treasury Department of $10,000. He would then move the money overseas between various accounts, and then wire it back to the US to make it appear that the money came from his wife’s family.
One challenge CIA officials faced in investigating Ames was that, despite their tips concerning his strangely lavish spending, they did not have the authority themselves to obtain information from banks where he may have done business. And, at least early in the investigation, the CIA wasn’t eager to expose their dirty laundry to the FBI to pursue a FISA warrant.
From the initial tip about Ames’ odd spending, until his arrest, Ames was able to continue giving away secrets for four years! At one point a CIA officer went to Bogota to determine whether Ames’ wife was the source of his money. His was able to vaguely confirm that her family was successful, and had donated to a local sports stadium for naming rights, but specific details like Ames’ assertion about a windfall of money from his mother-in-law’s insurance policy were never nailed down.
It took some time for the FBI to gain access to his bank accounts to review the cash transactions. Once they did, the investigation quickly focused on him. One piece of smoking gun evidence in the case was the fact that roughly $9,000 cash deposits, in amounts at multiple banks appearing to be structuring transactions designed to stay below the suspicious activity reporting (SARs) threshold, seemed to take place just after incidents in which Ames was documented meeting with Soviet officials. Some of those meetings were documented by Ames as his efforts to “recruit” potential agents who were in fact his handlers. Some of those meetings were documented by FBI agents tailing the Soviet officials (who recorded Ames’ meeting with them) but suspiciously not documented by Ames in violation of procedure.
Spy stories are fun. Similar fact patterns play out in corporate internal investigations every day as corporations seek to maintain compliance with the federal securities and banking laws and fulfill their oversight duties under Caremark. The Fraud Triangle and other techniques of forensic accounting utilized in the mole hunt for Aldrich Ames are also used to design internal controls and to conduct investigations of suspected fraud in corporations. As a fan of cold war era spy fiction (I’ve probably read Le Carre’s George Smiley series a half dozen times) I think that is pretty cool.
