By the time a federal money laundering case lands on a defense attorney's desk, the government has usually been building its file for months — sometimes years. Bank records have been subpoenaed. Suspicious Activity Reports have been pulled and analyzed. In many cases, a grand jury is already seated and working. The prosecution's financial theory isn't a rough draft at that point. It's close to finished.
I spent more than 20 years as a Special Agent with IRS Criminal Investigation building exactly those cases. I know how they start, how they're constructed, and — critically — where they can fall apart. This article walks through the investigative framework IRS-CI uses in a federal money laundering matter, written for defense counsel who need to understand the government's approach before they can effectively challenge it.
The statutory foundation: 18 U.S.C. § 1956 and § 1957
Federal money laundering charges almost always flow from one of two statutes, both enacted under the Money Laundering Control Act of 1986. They're related, but they work differently — and that distinction matters for how you defend against them.
18 U.S.C. § 1956 is the broader of the two. There's no dollar threshold, and a financial institution doesn't even have to be involved — a cash transaction between two individuals can be enough. Section 1956 covers four types of laundering: promotional (using proceeds to further the underlying crime), concealment (disguising where the money came from), structuring (deliberately avoiding bank reporting requirements), and tax evasion. Each carries its own intent requirement, and penalties can reach 20 years.
18 U.S.C. § 1957 is narrower and commonly called the "spending statute." It applies to monetary transactions over $10,000 in criminally derived property that run through a financial institution. What makes § 1957 particularly dangerous from a defense standpoint is that specific intent isn't required — the government only has to prove the defendant knew the money was dirty and that the transaction exceeded $10,000 at a bank or similar institution. Maximum exposure is 10 years.
Both statutes require the government to prove the funds came from a Specified Unlawful Activity (SUA). This is where many attorneys are surprised. The SUA list goes well beyond drug trafficking — wire fraud, mail fraud, bank fraud, healthcare fraud, bankruptcy fraud, insurance fraud, and dozens of other offenses all qualify. Notably, tax crimes are not SUAs, though they frequently run alongside laundering charges. In practice, the SUA hook can attach to almost any financial crime that generates proceeds.
How IRS-CI gets involved
IRS Criminal Investigation is the only federal law enforcement agency with exclusive jurisdiction over criminal tax violations, and it handles a substantial share of federal money laundering enforcement. Cases come in through several channels, and understanding the origination matters because it tells you how much the government already knew — and when they knew it.
FinCEN referrals and SAR analysis. Under the Bank Secrecy Act, financial institutions are required to file a Suspicious Activity Report with FinCEN within 30 days of detecting potential money laundering or related financial crime. SARs get filed when a transaction hits $5,000 or more and a suspect can be identified, $25,000 or more regardless of whether a suspect is known, or $5,000 or more involving a suspected BSA violation. FinCEN analysts look for patterns across filings from multiple institutions and route high-priority leads to IRS-CI field offices. By the time a referral reaches a special agent, the financial pattern has often already been mapped.
Currency Transaction Report (CTR) patterns. Any cash transaction exceeding $10,000 requires a mandatory CTR filing. IRS-CI data analysts mine CTR data for structuring patterns — transactions deliberately kept just below the threshold to avoid triggering a report. These patterns are a common entry point into broader money laundering investigations.
Referrals from other agencies. IRS-CI works alongside DEA, FBI, HSI, and U.S. Attorneys' offices regularly. A drug trafficking case or public corruption investigation will often generate a parallel IRS-CI referral once the financial flows become complex enough that a financial investigator is needed. Joint investigations are common.
Whistleblowers. Under 26 U.S.C. § 7623, the IRS Whistleblower program can pay informants up to 30% of collected proceeds in qualifying cases. Former employees, disgruntled business partners, and competitors have all been productive sources of case origination.
The IRS-CI investigative phases
Once IRS-CI accepts a matter as a subject investigation, it moves through four structured phases: preliminary investigation, subject investigation, grand jury, and prosecution referral. Each phase has a distinct evidentiary footprint — and distinct implications for the defense.
Phase 1: Preliminary investigation
Agents analyze what's available — public records, FinCEN data, open-source financial intelligence — to determine whether there's enough to justify a full investigation. If the indicators are there, the case moves forward. This phase is almost always invisible to the target.
Phase 2: Subject investigation
This is where the financial reconstruction begins in earnest. Agents issue administrative summonses or grand jury subpoenas to banks, brokerage firms, and other financial institutions for account records, wire transfer histories, and loan files. Search warrants may be executed for electronic communications, personal residences, and business locations where evidence is believed to be held.
The investigative focus is source of funds tracing — following money from its point of origin through the financial system and into the accounts or assets the government believes represent laundered proceeds. Agents use both direct methods (specific identification of funds, matching deposits against known legitimate income) and indirect methods (net worth analysis, bank deposits method, cash expenditures method) to reconstruct the financial picture. When legitimate income can't explain observed wealth, that gap becomes the evidentiary core of the laundering theory.
At the same time, agents are locking down the Specified Unlawful Activity nexus — building the paper trail that proves where the money came from in the first place. Without a provable SUA, the money laundering charge doesn't hold.
Phase 3: Grand jury investigation
When administrative summons authority runs out — or when witness testimony under oath is needed — the U.S. Attorney's office convenes a grand jury. Grand jury subpoenas reach further than administrative summonses: they compel testimony, require document production from third parties, and can access records that would otherwise need a court order to obtain.
Special agents serve as case agents in grand jury proceedings, working directly with DOJ prosecutors to develop the evidence. The grand jury can subpoena bank records, real estate documents, corporate formation records, email communications, and virtually anything else relevant to the financial scheme.
From a defense standpoint, the grand jury phase is the most critical window most attorneys miss. By the time an indictment comes down, the government has had months of sealed proceedings. Your forensic expert needs to be in the case before the grand jury wraps up — not after — to begin an independent reconstruction of the financial record while there's still time to shape discovery strategy.
Phase 4: Prosecution referral and indictment
When the investigation is complete, the case agent prepares a Special Agent Report (SAR) or Summary of Investigation (SOI) and submits it to IRS-CI District Counsel and the relevant U.S. Attorney's office for prosecution review. IRS-CI's conviction rate for cases accepted for prosecution has historically exceeded 90% — because the division doesn't send cases it doesn't believe it can win.
Structuring and smurfing: the most common entry point
Of all the patterns I encountered during my IRS-CI career, structuring — and its more elaborate variation, smurfing — showed up most frequently as the thread that unraveled a larger case.
Structuring is simple in concept: deliberately breaking transactions into amounts below the $10,000 CTR threshold to avoid the filing requirement. Deposits of $9,800, $9,500, and $8,700 over several days into the same account is textbook structuring under 31 U.S.C. § 5324. What surprises many defendants and their counsel is that the underlying funds don't have to be dirty — the act of structuring to avoid the reporting requirement is itself a federal crime.
Smurfing takes it a step further by recruiting multiple individuals — the "smurfs" — to make separate deposits at different branches or institutions. This spreads the transaction pattern across multiple accounts and multiple financial institutions, making it harder for any single compliance department to flag. But FinCEN's cross-institutional analytics exist precisely to surface these distributed patterns, and they're good at it.
In my experience, structuring is frequently how a money laundering case opens. Agents identify the pattern, pull the full deposit history, compare it against documented legitimate income, and build outward from there. It's a thread — and once you start pulling it, you often find the whole scheme.
Placement, layering, and integration: how IRS-CI maps the financial record
IRS-CI's investigative approach tracks directly to the three recognized stages of money laundering. Understanding which stage the government's evidence addresses — and where the gaps are — is where a forensic expert generates the most value for the defense.
Placement is where illicit funds enter the financial system: cash deposits, structured transactions, monetary instrument purchases, payments to money services businesses. The government's evidence at this stage typically consists of CTRs, SARs, and bank deposit records.
Layering is the movement of funds through a series of transactions designed to obscure the trail. Wire transfers through multiple accounts, shell company transactions, currency exchanges, and securities purchases are the common mechanisms. The defense challenge at this stage is often showing that the observed transactions had a legitimate business purpose — or that the government's tracing methodology lumped in clean money alongside tainted funds.
Integration is the point where laundered funds re-enter the legitimate economy — real estate purchases, luxury assets, business investments, or simple spending. Government evidence here comes from property records, title company documents, and financial institution records.
A forensic expert works through the government's financial analysis at each stage and asks four questions: Is the tracing methodology sound? Is the SUA nexus properly established? Were legitimate funds commingled and misidentified as tainted proceeds? And has the government overstated the scope of what was actually laundered?
The role of a defense forensic expert
Defense counsel in a federal money laundering case typically needs two different things from a forensic accountant, and it helps to understand the distinction before you make the call.
As a consulting expert operating under a Kovel arrangement, the forensic accountant works within attorney-client privilege. A Kovel engagement — named for United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) — allows an attorney to bring in an accountant to assist in rendering legal advice, extending privilege protection to the accountant's work product and communications with counsel. Under this arrangement, I can review grand jury discovery materials, reconstruct the financial record independently, identify weaknesses in the government's tracing theory, and help counsel build cross-examination strategy — all without creating discoverable material. That work stays protected.
As a testifying expert, the accountant takes the stand to challenge the government's financial analysis directly — presenting an alternative reading of the financial record that is consistent with legitimate activity, or attacking the methodology the government's expert used. Under Federal Rule of Evidence 702 and Daubert, a credentialed, properly qualified expert can significantly limit what the government is permitted to present to the jury.
The most effective defense experts in federal money laundering matters bring three things together: genuine forensic accounting depth, real federal investigative experience, and the ability to make complex financial analysis clear to a federal jury under cross-examination. Those three qualifications don't often come in the same person.
Questions to ask before you retain a forensic expert
Not all forensic accountants are equally equipped for federal money laundering work. Before you retain someone, these are the questions worth asking:
- Has the expert actually worked federal money laundering investigations — not just civil fraud or bankruptcy matters? The methodology is meaningfully different.
- Does the expert hold a CPA credential? The CPA signals professional accountability standards that carry real weight with federal judges and juries.
- Is the expert a Certified Fraud Examiner (CFE)? The CFE curriculum covers fraud investigation methodology, financial transactions, and legal elements directly relevant to laundering cases.
- Can the expert do independent source-of-funds reconstruction — not just critique what the government produced?
- Where has the expert testified? Federal district experience matters. Ask specifically about criminal matters, not just civil litigation.
- Does the expert hold a private investigator license? In Texas and other states, complex engagements sometimes require independent financial investigation beyond document review. A licensed PI can conduct that work without creating a separate chain of custody issue.
Why early engagement matters
The single most common mistake I see in federal money laundering defense work is bringing in the forensic expert too late. By the time an indictment is returned, the government has spent months — sometimes years — assembling the financial record. That record has already been organized and interpreted through a particular lens. The defense is starting from behind.
Early engagement changes that. It means the forensic expert can identify what documents should be sought in defense discovery, begin an independent reconstruction before trial prep consumes all available time, evaluate and challenge the government's Rule 26 expert disclosures on informed terms, and advise counsel on the evidentiary weight of specific financial records before depositions begin.
If your client has received a federal grand jury subpoena, been contacted by IRS-CI Special Agents, or learned that their financial records are under investigation — the time to bring in a forensic expert is now. Not at indictment. Now.
About the author
Michael J. Fernald, CPA, CFE, Texas Licensed Private Investigator (License A28599601) is the principal of {the} Fernald Firm, LLC, a forensic accounting and expert witness practice based in Austin, Texas. He spent more than 20 years as a Special Agent with IRS Criminal Investigation, conducting and supervising complex financial crime investigations involving money laundering, structuring, tax evasion, wire and bank fraud, and related federal offenses. He earned his BBA and MPA from the McCombs School of Business at the University of Texas at Austin.
{the} Fernald Firm provides forensic financial analysis, expert witness and litigation support, financial investigations, and business consulting to attorneys and businesses in Texas and nationwide.
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© 2026 {the} Fernald Firm, LLC. All rights reserved. This article is general practitioner commentary for informational purposes only and does not constitute legal or accounting advice. Engagements with the firm proceed only under a written letter of engagement and conflict check.