Regulatory

framework
Lecture 1b
The processLaundering
Money by which criminals attempt
and the to hide the
Auditor
true source of their funds in an attempt to make it
look like their funds have come from legitimate
sources.

In many countries, the definition is even broader,

and possessing or transferring the proceeds of
ANY crime can be money laundering.
ForMoney
example,Laundering
breaching health
andand
thesafety
Auditor
regulations in order to save money makes the
company a money launderer – it possesses the
cost savings, and these were saved by
committing a crime.
How money is laundered
 There are three 3 stages in laundering money.
 1. Placement. This is the introduction or
placement of the illegal funds into the financial
system.
 Example, put money into a company we
(directors/shareholders) control and pretend it is
sales revenue. This may be in the form of lots of
small cash deposits in numerous bank accounts.
Also using cash intensive business
How money is laundered
 2. Layering. This is passing the money through a
large number of transactions or “layers”, so that it
becomes very difficult to trace it to its original
source. Using the cash to create a trail of
transactions complicated as possible and involving
multiple countries.
 Examples include transferring the money through
multiple bank accounts, perhaps across different
national jurisdictions.
How money is laundered
 3. Integration. This is the final of funds back into
the legitimate economy. The criminal now has
“clean” money which can be spent or invested.
 The money looks legitimate to be spent so is taken
out of company through salary, bonus, or
dividends.
Money Laundering – Auditor
Responsibilities
 Over the past 20 years in particular since 2000,
there has been the international attempt to tighten
laws on money laundering and to force
professionals to do more.
 This has been lead by Financial Action Task Force
(FACT) on Money Laundering which has around
30 of the leading economies as members
Money Laundering – Auditor
Responsibilities
 Many countries have now made money laundering a criminal offence.
 The ACCA has issued a Technical Fact Sheet 94 to provide guidance
to audit firms.
 The main obligations are;
 To make sure you know who your client really is and to confirm
where they get their money from (“Customer Due Diligence”)
 To report any suspicions of money laundering to relevant authorities .
(Eg Serious Organised Crime Agency – SOCA in the UK)
 Not to tip off a client when you have suspicions
 (any failure to do the above can result into prison)
Practical things for Audit Firms to
do/money laundering programme
 Appoint MLRO (Money Laundering Reporting
Officer) whose job is to ensure that all other ML
processes are in place in the firm and to decide
whether suspicions raised by staff should be
reported externally. The MLRO is likely to be a
partner.
 Have Know Your Client (KYC) procedures. The
better you know your clients the easier it is for you
to spot odd transactions and behaviours.
Practical things for Audit Firms to
do/money laundering programme
 Check the identity of all new and existing
clients and maintain evidence of identification
thus Customer Due Diligence measures (eg by
checking passports of directors, searches on the
company itself, directors and who owns)
 Train all relevant staff in ML processes, to be
aware of relevant legislation, and how to spot
suspicious transactions to the MLRO.
Practical things for Audit Firms to
do/money laundering programme
 Maintain records of clients identification, and
any transactions undertaken for or with the client.
 Report suspicions of money laundering to the
NCA
Know Your Client (KYC)
 The firm must gather “know your client”
information. This includes;
 Who the client is
 Who controls it
 The purpose and intended nature of business
relationships
 The nature of the client
 The client’s source of funds
 The client’s business and economic purpose
Customer Due Diligence (CDD)
 CDD is the term used in the Money Laundering
Regulations for the steps that businesses must take to;
 (a) Identify the customer and verify their identity
using documents, data or information obtained from
reliable source.
 (b) Identify any beneficial owner who is not the
customer
 (c) Understanding the purpose and nature of business
relationships
Suspicious transactions
 Transactions that pass through several
companies or countries, especially when there is
no obvious reason for doing so.
 Multiple small transactions of a similar nature
rather than one large individual transaction.
 The creation of complicated group of companies
when a simpler solution appears to exist.
 The creation of a new company that is never
actually used to trade.
Cash based businesses
 Cash based businesses have always been a favourite
for money launderers as they can pass their illegal
funds through the company and claim it is sales
revenue.
 Observation;
 Many businesses refuse to accept cash in excess of
a certain limit.
 Any cash based business is useful for money
laundering. Eg casinos
Situations that could lead to money
laundering offences
 A client under tax investigation….if problems are
found the evaded tax is the proceeds of crime.
 Client making “facilitation payments” (eg bribes)
to help to help smooth certain transactions (eg
paying an official a fee to ensure a contract is
won).
Situations that could lead to money
laundering offences
 Having clients in political positions makes them
“politically exposed persons” (PEP), who have the
power to enrich themselves with public money. As
such, auditors should treat such clients with extra
care, ensuring they fully understand the source of
all their funds.
The need for ethical guidance
 Money laundering situations may be complex, so
ethical guidance would be useful in the following
ways;
 In helping to understand the heavy legal burden
 In providing a framework of how to address
situations not covered by law or previous experience
 In helping to resolve conflicts between client
confidentiality, and the need to report externally.
The need for ethical guidance
 In helping to guide an outgoing auditor in what he
can say to an incoming auditor as part of the
“professional clearance” process.
 In helping to guide auditors working in countries
where there are no/limited money laundering laws.
 In helping to understand the interaction between
money laundering and the audit report, and other
reports to clients and 3rd Parties.
Question 1
 You are a manager in Lark and Co. responsible for
the audit of Heron Co. an owner-managed business
which operates a chain of bars and restaurants.
This is your firm’s first year auditing the client and
the audit for the year ended 31 March 20X2 is
underway. The audit senior sends a note for your
attention:
Question 1
 ‘When I was auditing revenue I noticed something strange. Heron Co’s
revenue, which is almost entirely cash based, is recognized at $5.5 million
in the draft financial statements. However, the accounting system shows that
till receipts for cash paid by customers amount to only $3.5 million. This
seemed odd, so I questioned Ava Gull, the financial controller about this.
She said that Jack Heron, the company’s owner, deals with cash receipts and
posts through journals dealing with cash and revenue. Ava asked Jack the
reason for these journals but he refused to give an explanation.’
 ‘While auditing cash, I noticed a payment of $2 million made by electronic
transfer from the company to an overseas financial institution. The bank
statement showed that the transfer was authorized by Jack Heron, but no
other documentation regarding the transfer was available.’
Question 1
 ‘Alarmed by the size of this transaction, and the lack of
evidence to support it, I questioned Jack Heron, asking
him about the source of cash receipts and the reason for
electrical transfer. He would not give any answers and
became quite aggressive.’
 Required
 Discuss the implications of the circumstances described
in the audit senior’s note; and (6marks)
 Explain the nature of any reporting that should take place
by the audit senior.(3marks)
Question 2
 There are specific regulatory obligations imposed on accountants and auditors in
relation to detecting and reporting money laundering activities. You have been
asked to provide a training session to the new audit juniors on auditors’
responsibilities in relation to money laundering.
 Required
 Prepare briefing notes to be used at your training session in which you:
 Explain the term ‘money laundering’, illustrate with examples of money
laundering offences, including those which could be committed by the accountant.
 Explain the policies and procedures that a firm of Chartered Certified Accountants
should establish in order to meet its responsibilities in relation to money
laundering. (10 marks)
 Professional marks will be awarded in part (c) for the format of the answer, and
the quality of the explanations provided. (4 marks)
Question 3
 The audit strategy relevant to the audit of Waters Co concludes that the
company has a relatively high risk associated with money laundering,
largely due to the cash- based nature of its activities. The majority of
customers purchase their cinema tickets and refreshments in cash, and the
company transfers its cash to overseas bank accounts on a regular basis.
 Required
 Explain the stages used in laundering money, commenting on why Waters
Co has been identified as high risk
(5 marks)
 Recommend FOUR elements of an anti-money laundering programme
which audit firms such as Hunt & Co should have in place.
(6,marks)
Laws and Regulations
Affecting Clients
(ISA 250)
Regulatory environment
(Read the article attached)
Legal requirements relating to the
company
 Companies are increasingly subject to laws and
regulations with which they must comply. Some
examples include;
 Company law
 Employment law
 Health and safety regulations
 Environmental law and regulation
 Civil law
 Contract
 Tort
Legal requirements relating to the
company
 ISA 250 Consideration of laws and regulations in
an audit of financial statements provides guidance
on the auditors’ responsibility to consider laws and
regulations in an audit of financial statements
Responsibility of management for
compliance
 Itis the responsibility of management (with
oversight from those charged with governance) to
ensure a clients’ operations are conducted in
accordance with laws and regulations.
 The following policies and procedures, among
others, may be implemented to assist management
in the prevention and detection of non-compliance
with laws and regulations
Responsibility of management for
compliance
 Monitor legal requirements
 Institute and operate appropriate systems of internal
control including internal audit and audit committee.
 Develop, publicize and follow a code of conduct
 Ensure employees are properly trained and
understand the code of conduct.
 Monitor compliance with the code of ethics and
discipline employees who fail to comply with it.
 Maintain a register of significant laws with the entity.
‘Non-compliance’
 ‘Non-compliance’ refers to acts of omission or
commission by the entity, either intentional or
unintentional, which are contrary to the prevailing
laws or regulations. Such acts include transactions
entered into by the entity, or on its behalf by
management or employees. It does not include
personal misconduct.
Responsibility of the auditor
 Auditors cannot know and understand every law
and regulation that affects every client, but they
should aim to be aware of those that could
materially affect the Financial Statements.
 By doing this, they are more likely to spot
breaches, even if management do not tell them (or
are themselves not aware).
Responsibility of the auditor
 Where breaches are found, that the auditor considers
material;
 Report the breach to management (it is their ultimate
responsibility, not the auditor’s, to ensure the company
is not breaking laws).
 If the breach involves management, report to the highest
level possible (e.g Audit Committee)
 If the breach involves the highest level possible, may
need to take legal advice and consider whether the of
lack integrity necessitates resignation by the auditor.
Responsibility of the auditor
 Consider the effect of the breach on the accuracy of
the Financial Statements – it may result in a
qualified audit report.
 If laws are new, or have been announced but precise
detail is yet to be agreed by government, it may be
difficult to assess the effect on the company, and
may affect the Going Concern assessment.
 In some cases, a breach may have external reporting
consequences.
Question 4
 An audit senior left the following note for your attention:
 ‘I have been working on the audit of properties, including
the Group’s storage facility warehouses. Customers rent
individual self-contained storage areas of a warehouse, for
which they are given keys allowing access by the customer
at any time. The Group’s employees rarely enter the
customers’ storage areas.
 It seems the Group’s policy for storage contains contracts
which generate revenue of less than $10,000, is that very
little documentation is required, and the nature of the items
stored is not always known.
Question 4
 While visiting one of Group’s warehouses, the door to
one of the customers’ storage areas was open, so I
looked in and saw what appeared to be potentially
hazardous chemicals, stored in large metal drums
marked with warning signs. I asked the warehouse
manager about the items being stored, and he became
very aggressive, refusing to allow me to ask other
employees about the matter, and threatening me if I
alerted management to the storage of these items. I
did not mention the matter to anyone else at the client.
Question 4
 Required;
 Discuss the implications of the audit senior’s note
for the completion of the audit, commenting on the
auditor’s responsibilities in relation to laws and
regulations, and on any ethical matters arising.