Al Capone famously said that “you can get more with a kind word and a gun than with a kind word alone”. But when it came to catching him, all it took was diligent and skilled forensic accounting, explains Tristan Yelland.
Criminals continue to find new and sophisticated ways of both perpetrating and concealing their crimes and white-collar criminals are no exception. But financial crimes will always leave a footprint - be it fraud, money laundering, bribery, asset misappropriation or tax evasion. Thanks to double-entry book-keeping, a financial crime will almost inevitably be captured in accounting records somewhere. This means that, despite the criminals’ best efforts, someone who is skilled at investigating those records can solve these crimes. This is why forensic accounting has always been integral to the successful outcome of a financial investigation.
Most people know that, despite controlling a vast criminal empire and ordering hits on a multitude of his enemies, Alphonse “Scarface” Capone was ultimately convicted not of murder or racketeering, but of tax fraud. This was no fluke, but rather the result of a dogged two-year forensic accounting investigation that was conducted by the US Treasury department and led by special agent (and accountant) Frank Wilson.
Wilson had a reputation as a thorough, if not obsessive, investigator. His work on the case demonstrates not only the broad range of skills that are required to perform forensic accounting investigations, but the rewards that can be obtained by doing so.
It should have been straightforward to bring racketeering and murder charges against Capone. During the Prohibition era, he owned or controlled illegal bars, distilleries, gambling houses, nightclubs and horse and dog tracks throughout Chicago; he bribed judges, politicians, the police and reporters; and he killed off most of his competitors, most notoriously ordering the murders of seven members of a rival gang on Valentine’s Day in 1929.
However, Capone was very good at covering his tracks and, because he either bribed or 'silenced' anyone who could point a finger at him, attempts by local and federal law enforcement agencies to build a racketeering case against him went nowhere. Famously, FBI Agent Elliott Ness and his band of 'Untouchables' (so-called because they could not be bribed) even tried to bring Capone down by force, but their efforts were ultimately just as fruitless.
Unfortunately for Capone, he had a weakness: he was fond of the finer things in life and wanted to flaunt his wealth. He was famous for living a life of luxury in Chicago’s Lexington hotel, where he could often be seen drinking fine wines and wearing the best suits that money could buy. But, despite his obvious wealth, Capone never filed a tax return. This was a mistake, for his lavish lifestyle made it clear that he had an income (gainful or otherwise), on which he should have paid income tax. And so the Treasury department conceived the strategy of pursuing Capone for tax evasion.
Capone was extremely careful, but he had a dilemma: like all criminals, he did not want there to be any record of the connections between himself and the crimes he authorised and profited from; however, in order to manage his vast empire of illegal businesses, Capone necessarily had to keep comprehensive accounting records. Over the years and the course of various raids on Capone’s establishments, many of these records had been seized by the authorities.
In the summer of 1930, Wilson and his team reviewed approximately two million of these documents. They also questioned hotel proprietors, real estate agents, bartenders and accountants, though most were too overwhelmed by fear to admit to having any dealings with Capone.
Finally, Wilson’s investigation found the key that cracked the case: late one night, he found three bound ledgers, one of which appeared to show the distribution of proceeds from a huge gambling operation among three people, referred to only as “A”, “R” and “J”. On one page was the notation: “Frank paid $17,500 for Al”. This was the first tangible link between the proceeds of a gambling operation and Capone. However, Wilson still needed to prove that the proceeds actually found their way to Capone.
Using forensic accounting, he first of all identified the individual who made the notations in the ledgers by matching his handwriting against bank deposit slips. Wilson tracked that individual down and convinced him to turn witness against Capone. Next, Wilson was able to identify a bank depositor who had turned up to a bank with bags full of cash and purchased $300,000 of cashier’s checks, the cash from which went directly to Capone. This was Capone’s share of the gambling operation, and by tracing it to him, Wilson was able to demonstrate that the gangster received income on which he should have paid tax.
Further findings followed, and in March and June of 1931, a grand jury indicted Capone on 23 counts of tax evasion, with the trial beginning in October of that year. Capone maintained that he had received no income and was confident that he would escape justice, which was not altogether surprising as he had bribed the whole jury. However, the judge found out and switched juries with a courtroom down the hall. The new jurors - who were sequestered so that Capone’s gang could not reach them - found Capone guilty of tax evasion. He received an 11-year prison sentence together with fines totalling $250,000 and $30,000 in court costs. It was the largest penalty levied against a taxpayer up to that time.
This would not have been possible were it not for the efforts of Frank Wilson and his team of forensic investigators. Their work provides an excellent insight into the wide range of skills that forensic accounting brings to an investigation, including document review, financial analysis, witness interview, asset tracing and, ultimately, litigation support.
Capone did his best to distance himself from his crimes. He got other people to carry out his murders, had no bank accounts, paid bribes and silenced witnesses. But for all that, it was a few entries in the accounting records of an illegal gambling operation that ultimately gave him away.
The speak-easies and illegal distilleries of Capone’s day may be long gone, but the criminals have not. The Tommy gun-wielding gangs have been replaced by modern, technologically savvy criminals, who could be a single rogue employee or a company that is committing corporate fraud. But despite the advent of digitisation and the automation of financial systems, a fundamental principle still applies: a financial crime requires a transaction, and that will have to be recorded in the accounting records somewhere. It may be evident in an unusually large payment to a supplier, an odd pattern of transactions or a journal that was posted without the proper authorisations, but it will be recorded.
Being skilled in forensic accounting means not only possessing the ability to identify those transactions, but being able to see how they fit into the bigger picture. Forensic accountants will understand the commercial drivers of a business and therefore what seems out of place. Often, the effect is like pulling on a thread; once the accountant has identified that first crucial clue, everything else begins to unravel as one line of enquiry leads to another and eventually the crime is exposed.
This is exactly what Frank Wilson did when he came across the ledgers that night and this is why forensic accountants continue to be deployed to assist with investigations by businesses and government agencies around the world today.
For assistance with forensic accounting, contact Tristan Yelland.