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CFE - Law ACFE Practice Test Questions and Exam Dumps

Question 1
Greta has been convicted of a white-collar crime, but her sentence is suspended in exchange for her agreement to maintain good behavior. What is the most accurate term to describe the sentence she received?

A. Determinate sentence
B. Probation
C. Indeterminate sentence
D. Deferred prosecution agreement

Correct Answer: B

Explanation:

The correct answer is probation, as it best fits the description of Greta’s situation: she has been convicted, and instead of serving jail time, her sentence is suspended on the condition that she maintains good behavior. Probation is a court-ordered period of supervision in the community, typically used as an alternative to incarceration, especially in white-collar crime cases where the offender is not seen as a physical threat to the public.

To elaborate, probation occurs after a conviction, and it allows the individual to remain in the community rather than serve time in prison, as long as they adhere to specific conditions such as avoiding further legal trouble, reporting to a probation officer, paying restitution, or attending counseling. If Greta were to violate the terms of her probation, the suspended sentence could be reinstated, and she might be required to serve the original jail time.

Option A, determinate sentence, refers to a prison sentence that is fixed in length and clearly defined—for example, “5 years in prison,” with no flexibility or range. This clearly does not match Greta’s situation, as her sentence was suspended and contingent on her behavior.

Option C, indeterminate sentence, is also incorrect because it involves a range of time, such as “5 to 10 years,” and the release depends on factors like parole board decisions or rehabilitation progress. This doesn’t describe Greta’s case, which involves no active imprisonment due to her agreement to behave well.

Option D, deferred prosecution agreement (DPA), is frequently misunderstood. A DPA is a pre-trial agreement between the prosecutor and the defendant. Under a DPA, charges are filed but not prosecuted as long as the defendant meets certain conditions, often including fines or compliance programs. However, Greta was already convicted, so a DPA no longer applies. DPAs are about avoiding conviction, not deferring punishment after conviction.

Question 2
Bob receives a confidential memorandum from his attorney that is covered by legal professional privilege. He then emails the memorandum to an unrelated third party who has no legitimate reason to know its contents. 

Which of the following statements most accurately reflects the consequences of this action?

A. Bob might have waived the privilege because he transmitted the protected information to a third party who has no need to know the information.
B. Bob might have waived the privilege because he used email to transmit the protected information.
C. Bob did not waive the privilege because the legal professional privilege belongs to the attorney, not the client.
D. Bob did not waive the privilege because the legal professional privilege cannot be waived by transmitting protected information to a third party.

Correct Answer: A

Explanation:

The most accurate statement regarding Bob’s actions is A: he might have waived the legal professional privilege by disclosing the privileged content to a third party who had no legitimate interest or necessity to receive that information. Legal professional privilege (also known as attorney-client privilege) is a powerful doctrine designed to protect the confidential communications between a client and their attorney, but this protection is not absolute and can be waived, either intentionally or inadvertently.

In this case, Bob's transmission of the memorandum to an unrelated third party who had no legitimate "need to know" could be seen as voluntary disclosure, which is one of the key factors in determining whether privilege has been waived. Courts generally hold that once privileged information is shared with a third party, particularly one who is not bound by confidentiality or who is not within the attorney-client relationship, the privilege is waived. The rationale is that privilege only applies when the communication is confidential—and voluntarily disclosing it to outsiders effectively destroys that confidentiality.

Option B is incorrect because the method of communication (email), by itself, does not waive privilege. Courts have largely accepted that emails are a normal and secure enough means of attorney-client communication, particularly when reasonable precautions are taken. The waiver is based not on the method used to share the information but on who receives it.

Option C misstates the law. Legal professional privilege belongs primarily to the client, not the attorney. Therefore, it is Bob’s privilege to protect or waive—not the lawyer’s. Bob’s actions are directly relevant to whether the privilege remains intact.

Option D is also incorrect because privilege can absolutely be waived by disclosing privileged information to a third party. The law is clear that such disclosure—if made without the protection of confidentiality agreements or privilege extensions—can constitute a waiver.

Question 3
After concluding a civil lawsuit, the court determines that the defendant company is responsible for the plaintiff's losses and mandates the company to pay a significant amount of money as compensation. 

What is the most accurate term for this type of legal remedy?

A. Declaratory relief
B. Equitable relief
C. Damages
D. Injunction

Correct Answer: C

Explanation:

The correct answer is damages, which refers to a monetary award ordered by a court to compensate a plaintiff for losses suffered due to the actions or negligence of a defendant in a civil case. In civil law, when one party is harmed by another, the court may provide several types of remedies. However, compensatory damages—payments meant to make the injured party whole—are by far the most common and are specifically used when financial loss or injury has occurred.

In this question, the court found the defendant liable and ordered a financial payment to the plaintiff. This is a textbook example of damages, and more specifically, it could involve compensatory damages, which are intended to restore the injured party to the position they would have been in had the harm not occurred. In some cases, courts may also award punitive damages, which are meant to punish the defendant for egregious behavior, but this depends on jurisdiction and case details.

Option A, declaratory relief, refers to a court’s decision that defines the rights and legal standings of the parties without ordering any specific action or awarding monetary compensation. For example, a court might declare that a certain contract is valid or that one party has no obligation under a disputed agreement. Because no money is being paid and no action is being enforced, declaratory relief is not applicable here.

Option B, equitable relief, involves non-monetary remedies that are applied when damages are insufficient to address the harm. Examples include specific performance (ordering someone to fulfill a contractual obligation) or rescission (canceling a contract). This is not relevant in the scenario described, where a monetary award was issued.

Option D, an injunction, is a type of equitable remedy that requires a party to do or refrain from doing something. For example, a court might issue an injunction to stop a company from polluting a river or to prevent a former employee from disclosing trade secrets. Because the remedy in this question is strictly financial, an injunction is not the correct answer.

Question 4
Which of the following statements best reflects the most accurate understanding of the rules that prohibit securities broker-dealers from making unsuitable investment recommendations or investment strategy suggestions?

A. A suitability violation occurs when a broker recommends an investment or investment strategy that is inconsistent with the client's objectives.
B. A suitability violation occurs when a broker does not carry out a trade requested by or promised to a customer.
C. A suitability violation occurs when a broker enters into transactions and manages a client's account for the purpose of generating excessive commissions.
D. A suitability violation occurs when a broker trades in a client's account without obtaining prior approval for making the transaction(s).

Correct Answer: A

Explanation:

The most accurate statement regarding suitability violations is that a suitability violation occurs when a broker recommends an investment or investment strategy that is inconsistent with the client’s objectives, as stated in option A. This is a fundamental principle in securities regulation, especially under rules enforced by organizations such as FINRA (Financial Industry Regulatory Authority) and the SEC (Securities and Exchange Commission).

The suitability rule, particularly FINRA Rule 2111, requires that broker-dealers have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer, based on information obtained through reasonable diligence regarding the customer's investment profile. This profile includes the client’s financial status, tax situation, investment experience, risk tolerance, time horizon, and stated objectives.

If a broker fails to consider these factors and instead recommends securities or strategies that do not align with the client’s goals or risk capacity, it constitutes a suitability violation. This can lead to serious penalties for the broker-dealer, including fines, suspension, or revocation of licenses.

Option B is incorrect because it refers to failure to execute a customer’s trade, which may be a breach of contract or duty but not necessarily a suitability violation. Suitability deals with the appropriateness of recommendations, not the execution or non-execution of requested trades.

Option C describes churning, which is a form of excessive trading in a client’s account to generate commissions. While unethical and illegal, churning is generally considered a separate violation under securities laws. It may involve issues of unsuitability, but it is more accurately categorized as an abuse of discretionary authority or a fraudulent practice intended to benefit the broker rather than the client.

Option D refers to unauthorized trading, which is also a serious violation. If a broker trades in a client’s account without prior consent or discretionary authority, it breaches fiduciary duty and client trust, but this falls under the category of unauthorized or discretionary trading violations, not specifically suitability.

Question 5
According to best practices outlined in the Financial Action Task Force (FATF) Recommendations, which of the following transactions would most likely require a report to the government based on large cash transaction guidelines?

A. A domestic credit card purchase of a piece of jewelry above the jurisdiction's designated threshold
B. A lump-sum cash deposit to a bank above the jurisdiction's designated threshold
C. An international purchase of a small boat with a lump-sum cash payment below the jurisdiction's designated threshold
D. A cash payment to a restaurant supplier for restaurant supplies above the jurisdiction's designated threshold

Correct Answer: B

Explanation:

The Financial Action Task Force (FATF) provides international standards and best practices to combat money laundering and terrorist financing. One of the areas FATF emphasizes is the monitoring and reporting of large cash transactions, which are commonly used in illicit financial activities due to their anonymity and difficulty to trace.

Option B — a lump-sum cash deposit to a bank above the jurisdiction’s designated threshold — directly aligns with FATF’s recommendation for reporting large cash transactions. Most jurisdictions, under FATF guidance, require financial institutions to report any single cash transaction or multiple linked cash transactions exceeding a certain threshold (often set at the equivalent of USD 10,000, although this can vary by country). This threshold reporting requirement helps law enforcement agencies monitor and detect potentially suspicious financial activity. Therefore, B represents a clear instance where a currency transaction report (CTR) would be filed with the relevant financial intelligence unit (FIU).

Option A is incorrect because it involves a credit card transaction, not a cash transaction. The FATF’s reporting guidelines typically focus on cash transactions, as they are more susceptible to misuse for laundering. Since a credit card transaction is processed through a financial institution with a traceable audit trail, it does not carry the same red flags as cash and would generally not fall under large cash transaction reporting requirements.

Option C is also incorrect because, although it involves a cash transaction, the payment is below the jurisdiction’s designated threshold. FATF guidelines apply when the amount exceeds the specified threshold. Below-threshold transactions do not require reporting unless they are structured to avoid detection, such as smurfing, which is the deliberate splitting of transactions to fall under the reportable limit.

Option D, while it involves a cash payment above the threshold, is typically not automatically subject to government reporting unless it takes place in a context governed by FATF’s designated non-financial businesses and professions (DNFBPs). FATF guidance focuses on reporting large cash transactions particularly by financial institutions and certain high-risk non-financial entities like jewelers, real estate agents, and casinos. Restaurant suppliers may not automatically fall under these categories unless national legislation explicitly includes them. Thus, unless the local laws dictate otherwise, this scenario may not require a report.

Question 6
Which of the following examples of judicial systems would best be described as a civil law system?

A. The courts are bound primarily by previous court decisions to resolve legal issues.
B. The courts are bound by both previous court decisions and codified principles or statutes.
C. The courts are allowed to consider both codified statutes and previous court decisions but are bound by neither.
D. The courts are bound by codified principles or statutes but are not bound by previous court decisions.

Correct Answer: D

Explanation:

The civil law system is one of the two main legal traditions used around the world, the other being the common law system. Understanding the key characteristics of each legal system helps distinguish them, particularly in how they rely on statutes (laws passed by legislative bodies) versus judicial precedent (decisions made by judges in prior cases).

In a civil law system, legal reasoning and court decisions are primarily based on codified statutes or written legal codes. Judges interpret and apply these codes to the facts of individual cases. While past judicial decisions may be consulted for guidance, they do not hold binding precedent in the way that they do in common law systems. The judge’s role in a civil law system is often more investigative, and their responsibility is to apply the written law as it stands.

This aligns directly with option D, which states that courts are bound by codified principles or statutes but are not bound by previous court decisions. This is the hallmark of the civil law tradition as practiced in many countries, particularly in Europe (e.g., France, Germany, Spain) and other jurisdictions that have adopted European-style legal systems.

Let’s briefly review why the other options are incorrect:

Option A describes a common law system, not a civil law system. In a common law system, which is predominant in countries like the United States, the United Kingdom, and other Commonwealth nations, courts are generally bound by legal precedents established in prior judicial rulings. These prior decisions form a body of case law that future courts must follow in similar cases, a concept known as stare decisis.

Option B presents a hybrid view. While some legal systems may consider both statutes and precedents, the idea of courts being bound by both reflects more of a mixed or pluralistic legal tradition, not a pure civil law system. In civil law systems, only the codified statutes are binding.

Option C implies a legal system where courts have wide discretion to consider statutes and past decisions but are not bound by either. While some modern legal systems might offer judges greater discretion, this is not representative of the strict doctrinal structure of civil law systems, where statutes are binding, even if judicial precedents are not.

Question 7
Which of the following scenarios best represents how international trade might be manipulated to hide or transfer illegally obtained funds?

A. An accountant overstates a restaurant's revenues to hide illegal funds that are secretly laundered through the business.
B. A drug cartel outside of the United States launders illicit funds by hiring runners to deposit small amounts of money in bank accounts throughout the United States.
C. An importer and an exporter conspire to conceal illicit funds by creating invoices that understate the quantity of goods shipped internationally.
D. A businessperson deposits illicit funds into the bank account of a company they secretly own, which then lends the funds back to them.

Correct Answer: C

Explanation:

Trade-based money laundering (TBML) is a method used by criminals to disguise the origins of illicit money by exploiting the international trade system. It typically involves manipulating invoices, shipping documentation, or the value and quantity of traded goods to move money across borders under the appearance of legitimate commerce. The aim is to make illegal funds seem as though they originate from lawful trade.

Option C is the most accurate example of a TBML scheme. In this case, an importer and exporter collaborate to create invoices that deliberately understate the quantity of goods being shipped. This technique is known as under-invoicing. By reporting fewer goods than are actually shipped, the criminal parties can conceal the transfer of value—in other words, hide the fact that more money is changing hands than the paperwork would suggest. This is a classic TBML tactic and fits the definition precisely.

Option A describes a different money laundering method: using legitimate business revenues as a front to absorb illegal cash. Although it is a laundering technique, it falls under business-based laundering, not trade-based laundering, because it does not involve any international trade manipulation.

Option B illustrates a smurfing or structuring tactic, in which a criminal organization launders money by making multiple small deposits to avoid triggering reporting thresholds. Again, this method is not related to trade and doesn’t involve falsified documents or transactions between trading partners, so it does not qualify as trade-based laundering.

Option D presents a loan-back laundering technique, where a person funnels illegal funds into a company they secretly control and then receives those funds back as a loan. This method is commonly used to make the money appear legitimate, but again, it is unrelated to international trade, invoices, or the misrepresentation of goods.

Trade-based money laundering is often difficult to detect due to the complexity of trade documentation, involvement of multiple jurisdictions, and the challenges of verifying the authenticity of shipment records. It is one of the most sophisticated forms of money laundering because it uses legitimate international commerce to mask criminal transactions.

Question 8
Raj is employed in a jurisdiction where the law protects employees from unreasonable searches in places where they can reasonably expect privacy. Given this context, in which of the following locations or items is Raj most likely to be legally entitled to expect privacy?

A. A filing cabinet in the office lobby
B. A waste bin in the employee's office
C. A company-issued tablet computer
D. A backpack brought from home

Correct Answer: D

Explanation:

Workplace privacy rights often vary by jurisdiction, but in general, employees are protected from intrusive or unreasonable searches in areas where they have a reasonable expectation of privacy. Whether an expectation of privacy is considered reasonable typically depends on ownership, control, and accessibility of the space or item in question. Let's break down each option:

Option A: A filing cabinet in the office lobby
This location is highly public and under the employer's control. Filing cabinets in lobbies are likely accessible by many employees or even visitors, and any documents stored there typically belong to the company. Therefore, an employee would not reasonably expect privacy in this location.

Option B: A waste bin in the employee’s office
Although this bin might be near Raj’s workspace, it is still considered company property, and its contents are generally not protected by privacy expectations. Employers often reserve the right to inspect company trash for various reasons, including maintaining cleanliness or investigating misconduct.

Option C: A company-issued tablet computer
Despite being used by Raj, the tablet is company-owned. Employers typically retain the right to monitor or inspect usage on their devices. They often provide clear policies stating that there is no expectation of privacy on work-issued electronics, especially when used on the company network.

Option D: A backpack brought from home
This is a personal belonging, and courts or labor regulations in many jurisdictions recognize a stronger privacy expectation in personal items brought into the workplace. If the jurisdiction in question prohibits unreasonable searches, searching Raj’s personal backpack without consent, a warrant, or very specific justification would likely be considered a violation of his rights. Employees typically have a reasonable expectation of privacy in personal bags, purses, or backpacks, especially when kept close to them and not left in shared spaces.

Question 9
Which of the following would serve as the most straightforward proof that a former cashier at a home improvement store engaged in a cash larceny scheme that led to the theft of over $5,000?

A. A witness testifies that they saw the defendant take the money.
B. A diagram is used to display the location of the store's registers.
C. A witness testifies that the defendant was almost always the last cashier to leave the store.
D. A coworker testifies that the defendant was acting nervously the day the money was taken.

Correct Answer: A

Explanation:
Direct evidence refers to information that, if believed, directly proves a fact without the need for any inference. In criminal cases, direct evidence clearly shows that an event happened as claimed and usually comes in the form of eyewitness testimony, audio/video recordings, or confessions. In contrast, circumstantial evidence requires the fact-finder (e.g., a jury or judge) to make inferences from facts that are indirectly related to the matter at hand.

In this scenario, option A is the most accurate example of direct evidence. If a witness testifies that they actually saw the defendant take the money, that is a direct account of the theft. This kind of evidence doesn't require assumptions or indirect conclusions; the witness's statement alone, if credible, directly connects the defendant to the act of stealing.

Option B is not direct evidence. A diagram showing the location of the store's registers merely provides context; it does not show or prove who took the money. It could support other evidence, but on its own, it proves nothing about who committed the theft.

Option C is circumstantial. A statement that the defendant was often the last cashier to leave the store might imply opportunity, but it doesn't directly prove theft. It merely suggests a possibility based on routine behavior and requires a leap in reasoning to connect it to the actual crime.

Option D is also circumstantial. Nervous behavior may seem suspicious, but it is not definitive proof of theft. There could be countless reasons why someone appears nervous. This evidence might support a theory of guilt when combined with other facts, but on its own, it is not direct proof.

Thus, only option A provides direct evidence by describing an eyewitness account of the theft itself. This kind of testimony, assuming its credibility and admissibility, is often the strongest form of proof in a criminal trial because it directly addresses the criminal act being tried. The remaining options, while potentially valuable as supporting or circumstantial evidence, lack the definitive, straightforward nature required to be considered direct evidence.

Question 10
Frederick holds several high-volume foreign bank accounts. Although his country requires him to report these accounts annually for taxation, he deliberately fails to do so in an effort to minimize his tax obligations. What type of tax evasion scheme has Frederick most likely committed?

A. A tax credit evasion scheme
B. An income and wealth tax evasion scheme
C. An excise tax evasion scheme
D. A value-added tax evasion scheme

Correct Answer: B

Explanation:
Frederick's actions involve intentionally hiding foreign bank accounts to reduce the amount of tax he owes. This kind of activity fits the characteristics of an income and wealth tax evasion scheme. These schemes typically involve the underreporting or non-disclosure of personal income or assets, including offshore accounts, to avoid paying taxes that are based on an individual's earnings or net worth.

Income and wealth tax evasion schemes are among the most common types of tax fraud and are often considered serious offenses. Governments often require citizens to disclose their foreign holdings because income generated from those accounts may still be taxable in their country of residence. By failing to report such assets, individuals like Frederick are misrepresenting their financial position to tax authorities and unlawfully reducing their tax liability.

Option A, a tax credit evasion scheme, refers to the improper claim of credits (such as child tax credits or renewable energy credits) to which a taxpayer is not entitled. These schemes usually involve falsifying eligibility for a specific tax benefit rather than hiding income or wealth, making this option inapplicable to Frederick’s behavior.

Option C, an excise tax evasion scheme, deals with taxes imposed on specific goods such as alcohol, tobacco, or fuel. These taxes are usually collected at the point of sale or production. Evading excise tax typically involves illegal activities like smuggling or selling untaxed goods. Since Frederick’s conduct does not involve such goods or transactions, this choice is incorrect.

Option D, a value-added tax (VAT) evasion scheme, involves avoiding the VAT imposed at each stage of production or distribution of goods and services. VAT schemes are common in jurisdictions that use this system and often involve businesses manipulating sales and purchase invoices. Frederick, however, is not involved in a commercial transaction or business operation related to VAT; instead, he is hiding personal financial assets to reduce income or wealth-based taxation.

Because Frederick’s actions clearly revolve around concealing personal financial holdings to avoid taxes on income or assets, the correct classification is an income and wealth tax evasion scheme. This conduct demonstrates willful intent to defraud tax authorities, which is a key element of criminal tax evasion.