CFE Exam - Law Questions With
Complete Solutions
Following the Wall Street Crash of 1929, the U.S. Congress passed the ______________ to
regulate the public offering of securities and to protect investors. - ANS Securities Act of
1933 - Concern over the Wall Street Crash of 1929 and the manipulation of the securities
markets precipitated the need for federal intervention. In 1933, the U.S. Congress enacted the
Securities Act of 1933 to regulate the public offering of securities and to protect investors. The
U.S. Securities Act of 1933 created interstate registration requirements, providing that it is
unlawful to sell or offer to buy or sell a security unless a registration statement has been filed
with the SEC. The registration filing, however, will not prohibit the offer or sale of a security if the
transaction is exempt or the security being sold is exempt. Therefore, if a security qualifies for
an exemption, it can be offered to the public without being registered with the SEC. Both federal
and state laws provide for exemptions.
Securities Exchange Act of 1934 Rule 10b-5 - ANS In the United States, Rule
10b-5—which the SEC promulgated pursuant to Section 10 of the Exchange Act—prohibits
false statements and other fraudulent activity in connection with the purchase or sale of any
security. Rule 10b-5 is often referred to as the Act's anti-fraud provision. Specifically, Rule 10b-5
states:
"It shall be unlawful for any person, directly or indirectly, by the use of any means or
instrumentality of interstate commerce, or of the mails, or of any facility of any national securities
exchange,
• To employ any device, scheme, or artifice to defraud,
• To make any untrue statement of a material fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the circumstances under which they were
made, not misleading, or
• To engage in any act, practice, or course of business which operates or would operate as a
fraud or deceit upon any person, in connection with the purchase or sale of any security."
Providing non-material information (whether inadvertently or not) would not be a violation of
Rule 10b-5.
In the United States, a successful Rule 10b-5 action requires the party bringing the action to
allege and prove the following five elements:
• The defendant made a material misstatement (false statement) or omission.
• The alleged fraud was in connection with the purchase or sale of a security.
• The defendant acted with scienter (typically meaning that the party charged with the violation
acted with a specific intent to defraud).
• The plaintiff relied on the misrepresentation or omission.
,• The plaintiff suffered economic loss caused by the misrepresentation or omission.
Stages of Money Laundering - ANS The first stage of the money laundering process is
placement. In this stage, the launderer introduces his illegal profits into the financial system.
Placement occurs after the initial act of stealing or receiving illicit assets. It is at this stage that
legislation has been developed to prevent launderers from depositing or converting large
amounts of cash at financial institutions or taking cash out of the country. Money laundering
schemes are most often detected at the placement stage.
If the placement of the initial funds goes undetected, the launderer can design numerous
financial transactions in complex patterns to prevent detection. For example, the launderer can
move funds between bank accounts, transfer funds from one form of currency to another, or
transfer money between businesses. This stage of the money laundering process is referred to
as layering.
Integration is the final stage in the laundering process. In this stage, the money is integrated
back into the economy in a way that makes it appear to be part of a legitimate business
transaction.
Smurfing/Structuring - ANS Bank checks (such as cashier's checks and money orders)
could provide evidence of smurfing operations. Many countries require financial institutions to
report all currency transactions above a certain threshold (e.g., more than $10,000 in the United
States) to the government. As a result, the most common type of illegal structuring scheme in
the money laundering context is smurfing, where the launderer breaks up the illicit money into
smaller amounts and deposits it into bank accounts or purchases cashier's checks, traveler's
checks, or money orders. A red flag of a smurfing scheme is a customer who attempts to make
many deposits just under the reporting threshold.
Miranda warnings - ANS Miranda warnings (named after the Miranda v. Arizona U.S.
Supreme Court case) are only required if the suspect is (1) interrogated (2) while held in
custody (3) by government authorities. The warnings are not required at all when a person is
being questioned by private parties; however, some fraud examiners may choose to do so as a
matter of policy. Custodial setting refers to questioning initiated by government agents after a
person has been taken into custody, or otherwise deprived of his freedom or action in any
significant way. As a result, both private and public employers in the United States may
interview employees in noncustodial settings without giving Miranda warnings.
In the context of employee interviews by public employers, the answer to whether Miranda
warnings are legally required depends on the applicability of the Fifth Amendment to the
employee interviews. When a public employee is being questioned by his employer, he is being
questioned by the government; therefore, the Fifth Amendment applies to employee interviews
that are related to potentially criminal conduct.
And because the Fifth Amendment's protection against self-incrimination applies to internal
investigations conducted by government employers, public employers must give Miranda
warnings to employees being subjected to custodial interviews (i.e., employees in custody and
,subject to interrogation). That is, public employers must give Miranda warnings to employees
being interviewed about a potentially criminal matter if the government (or its agent) has
arrested the employee or deprived him of action in a significant way.
Office of Foreign Assets Control (OFAC) - ANS The Office of Foreign Assets Control
(OFAC) is an office within the Department of the Treasury charged with administering and
enforcing U.S. sanction policies against targeted foreign organizations and individuals that
sponsor terrorism and international narcotics traffickers. OFAC maintains a list of individuals,
governmental entities, companies, and merchant vessels around the world that are known or
suspected to engage in illegal activities. Persons or entities on the list, known as Specially
Designated Nationals and Blocked Persons (SDNs), include foreign agents, front organizations,
terrorists and terrorist organizations, and drug traffickers.
Overstating Revenues - ANS Overstating revenues occurs when the money launderer
records more income on a business's books than the business actually generates. The fictitious
revenue accounts for the illegal funds that are secretly inserted into the company.
Chapter 7 Bankruptcy - ANS Chapter 7 bankruptcy is the most common/basic type. It
allows the debtor to get a court order under which some or all debts may be eliminated. In
addition, it involves the liquidation of assets that are not exempt by state law. Taxes, fines,
alimony, child support, and certain student loans, however, generally cannot be discharged
under a Chapter 7 bankruptcy.
A Chapter 7 case is a type of liquidation proceeding; it involves accounting for all dischargeable
debts the subject owes, identifying all of the subject's assets, and liquidating nonexempt assets
to pay off creditors.
US Bankruptcy Judge Responsibilities - ANS In the United States, all bankruptcy cases are
filed in federal court, and many are filed in the local district of the U.S. bankruptcy court.
Bankruptcy judges hear all cases involving debtors' and creditors' rights, approve plans of
reorganization, award fees to professionals who assist with the proceeding, and conduct
hearings and trials when necessary to resolve disputes.
Chapter 11 Bankruptcy - ANS Chapter 11 is a type of bankruptcy that is designed to help
the debtor by allowing the debtor to reorganize its financial affairs and continue in business. It
enables debtors to restructure their debt, pay their creditors, and emerge from bankruptcy.
Defense for Bankruptcy Concealed Asset Charges - ANS In the United States, defendants
facing criminal charges for concealing assets in bankruptcy cannot use the fact that their
creditors have actual knowledge of the concealed assets or that they did not conceal assets
from all of their creditors as a defense against the charges. They also cannot use the fact that
they returned the concealed assets to the estate as a defense, though this might mitigate the
defendant's criminal culpability.
, CMIR Requirements - ANS A person is required to file a CMIR if he transports or is about
to transport monetary instruments of more than $10,000 into or out of the United States at one
time, or if he receives by transport, mail, or shipment monetary instruments in excess of $10,000
at one time transported into the United States from a place outside the United States. The form
is to be filed at the time of transportation or within 15 days of receipt.
Currency Transaction Report (CTR) Requirements - ANS Title II of the Bank Secrecy Act
requires certain reports or records to be filed or kept by U.S. financial institutions. The Act
defines financial institution very broadly in some sections and can include not only banks, but
also securities brokers; currency exchange houses; insurance companies; loan companies;
travel agencies; telegraph companies; issuers or cashiers of checks or money orders; auto,
boat, and airplane dealers; casinos; and persons involved in real estate closings and
settlements. All banks, and certain other financial institutions (including securities
broker-dealers, money transmitters, and currency exchangers), are required to fill out Currency
Transaction Reports (CTR) whenever there is a currency transaction (deposit, withdrawal,
exchange, or cashing of checks) of $10,000 or more. The easiest way to summarize the filing
requirement is to remember the following: if currency in excess of $10,000 is brought into a
financial institution to conduct a transaction, or if $10,000 in currency leaves the financial
institution as the result of a transaction, a CTR must be filed.
Bank Secrecy Act - ANS The Bank Secrecy Act (BSA), which went into effect in the United
States in 1970, was the first major piece of legislation aimed at detecting and preventing money
laundering. The purpose of the law as stated in Section 5311 is "to require certain reports or
records where they have a high degree of usefulness in criminal, tax, or regulatory
investigations or proceedings."
The BSA sets forth a system of reporting and recordkeeping requirements designed to help
track large, unusual, and suspicious financial transactions. Title I contains provisions requiring
that financial institutions and securities brokers and dealers keep extensive records of the
transactions and accounts of their customers. Title II of the BSA (originally entitled Currency and
Foreign Transactions Reporting Act) requires banks, financial institutions (which include
casinos, securities brokers and dealers, and currency exchanges), and, in some cases,
individuals to report to the government certain transactions that tend to have a relatively high
risk of money laundering or other crime.
Customer Identification Program - ANS Section 326 of the USA PATRIOT Act expands the
Bank Secrecy Act by requiring U.S. financial institutions to implement Customer Identification
Programs (CIPs). These CIPs are to be incorporated into financial institutions' money laundering
programs, and, at a minimum, they must include reasonable procedures for:
• Verifying the identity of any person seeking to open an account to the extent reasonable and
practicable
• Maintaining records of the information used to verify a person's identity, including name,
address, and other identifying information
• Consulting lists of known or suspected terrorists or terrorist organizations to determine if the
person seeking to open the account appears on any such list
