ADVANCE AUDITING

Money laundering
• Define ‘money laundering’.
• Explain how international efforts seek to combat money laundering.
• Explain the scope of criminal offences of money laundering and how professional
accountants may be protected from criminal and civil liability.
• Explain the need for ethical guidance in this area.
• Describe how accountants meet their obligations to help prevent and detect money
laundering including record keeping and reporting of suspicion to the appropriate
regulatory body.
• Explain the importance of customer due diligence (CDD)/know your customer (KYC)
information.
• Recognize potentially suspicious transactions and assess their impact on reporting
duties.
• Describe with reasons the basic elements of an antimony laundering program.
Definition of money laundering
Money laundering is the process by which criminals attempt to conceal the
true origin and ownership of the proceeds generated by illegal means,
allowing them to maintain control over the proceeds and, ultimately,
providing a legitimate cover for their sources of income.
Money laundering involves 3 main stages:

(1) Placement – where cash obtained through criminal activity is first placed into
the financial system.

(2) Layering – where the illegal cash is disguised by passing it through complex
transactions making it difficult to trace.

(3) Integration – where the illegally obtained funds are moved back into the
legitimate economy and is now 'clean'.
LAYERING
INTEGRATION
STAGES OF MONEY
LAUNDERING
EFFECTS OF MONEY
LAUNDERING
AUDITORS’ RESPONSIBILITIES
• ‘Know your client’. Proper identification of the people
involved, the ownership of companies, the economic
rationale of the business, the sources of funds.
• Appointment of a Money Laundering Reporting Officer
(MLRO).
• Train staff to identify the types and patterns of
transaction that might indicate money laundering.
• Establish a system for the reporting of suspicions to the
MLRO.
AUDITORS’ RESPONSIBILITIES
• Include a paragraph in the engagement letter setting
out the auditor’s responsibilities in respect of money
laundering.
• Maintain records detailing how the regulations have
been complied with.
 RISK FACTORS FOR MONEY
LAUNDERING
• A cash-based business
• Many similar deposits and withdrawals in various bank
accounts for not obvious reason
• Many jurisdiction involved in the transfer of money
• The use of tax havens ๏ Bearer bonds or cheques
• Higher profits than could be reasonably expected
• Poor documentation for transactions
• Secrecy
INTERNATIONAL EFFORTS TO COMBAT MONEY LAUNDERING
The Financial Action Task Force (FATF) is an international body that
promotes policies globally to combat money laundering and terrorist
financing. FATF issued recommendations to combat money laundering.
The recommendations included:
• International cooperation including extradition of suspects.
• Implement relevant international conventions on money laundering.
• Criminalize money laundering and enable authorities to confiscate the
proceeds of money laundering.
• Implement customer due diligence, record keeping and suspicious
transaction reporting requirements for financial institutions and designated
nonfinancial businesses and professions.
• Establish a financial intelligence unit to receive suspicious transaction
reports.
IN ORDER TO ACHIEVE THIS, QUALITY CONTROL PROCEDURES
ARE BASED ON A NUMBER OF KEY PRINCIPLES, INCLUDING:
• FATF focuses on three principal areas:
• Setting standards aimed at combating money laundering and
terrorist financing.
• Evaluating the degree to which countries have implemented
measures that meet those standards.
• Identifying and studying money laundering and terrorist financing
techniques.
In 1990, FATF drew up a document entitled “The Forty
Recommendations” as an initiative to combat the misuse of financial
systems to launder drug money.
 ANTI MONEY LAUNDERING BASIC ELEMENTS
Money Laundering Regulations impose certain obligations on financial services businesses,
which are designed to assist in detecting money laundering and preventing the financial
services organizations being used for money laundering purposes.
At a minimum, an anti money laundering program should incorporate:
• Customer identification procedures.
• Enhanced record keeping for:
• – all transactions
• – the verification of clients' identities.
• Appointment of a Money Laundering Reporting Officer ('MLRO').
• Establishing internal reporting procedures to the MLRO.
• Procedures for the reporting of suspicious transactions to the Financial Intelligence Unit
(FIU).
• Communication and training of all staff in the main requirements of the legislation.
• Systems and controls that effectively manage the risk that the firm is exposed to in relation
to money laundering activities and ensure compliance with the legislation.
 CUSTOMER IDENTIFICATION
PROCEDURES/KNOW YOUR CUSTOMER
• Accountants are required to establish that new clients are who they claim
to be by obtaining satisfactory evidence of identity from the client. This is
often referred to as 'customer due diligence' or 'know your customer'
procedures.
• Customer due diligence is an essential part of the antimony laundering
requirements. It ensures that accountants:
• know who their clients are, and
• do not unknowingly accept clients which are too high risk.
• It may be helpful for the auditor to explain to the client the reason for
requiring evidence of identity and this can be achieved by including this
matter in the engagement letter.
 ENHANCED RECORD KEEPING
• It is very important that accountants keep comprehensive records
to show that they have complied with money laundering
regulations, and protect themselves if there is an investigation into
one of their clients.
• Records must be kept of:
• All customer due diligence completed, including copies of the
evidence inspected.
• Transactions with each client.
• Internal and external money laundering/suspicious activity reports.
POTENTIALLY SUSPICIOUS TRANSACTIONS
There is no formal definition of "suspicious". A suspicious transaction will
often be inconsistent with the client’s known or usual legitimate activities.
Examples include:
• Unusually large cash deposits.
• Frequent exchanges of cash into other currencies.
• Overseas business arrangements with no clear business purpose.

• Remember it is a criminal offence not to report knowledge or suspicion

of money laundering.