Money Laundering

TOPIC OBJECTIVES

a) Define ‘money laundering’ and discuss international methods for combatting money laundering.[2]
b) Explain the scope of criminal offences of money laundering and how professional accountants may
be protected from criminal and civil liability.[2]
c) Explain the need for ethical guidance in this area.[2]
d) 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.[2]
e) Explain the importance of customer due diligence (CDD) also referred to as Know Your Customer
(KYC) and recommend the information which should be gathered as part of CDD/KYC.[2
f) Recognize potentially suspicious transactions and assess their impact on reporting duties.[2]
g) Describe, with reasons, the basic elements of an anti-money laundering program.[2]
Introduction

 Money laundering is a process whereby the proceeds of criminal activity are converted into
assets appearing to have a legitimate origin
 Dirty money is made clean-looking. The money typically comes from extortion, drugs,
prostitution, illegal gambling, illegal arms sales and people-trafficking. Criminal property
may also arise from tax evasion
STAGES OF MONEY LAUNDERING

 PLACEMENT : this is the process of introducing the money into a legitimate business activity so that its
origins appear bona fide. Methods include:
 Blending funds: mixing the dirty money with legitimate cash such as boosting the cash takings of a
business. Tax will have to be paid, but that’s a small price if the remainder of the money is safe-guarded.
 Gambling: winnings are artificially increased and this can be used to explain the source of the funds.
 Currency smuggling: move the cash to a lax jurisdiction where few questions will be asked.
You will notice that cash transactions facilitate placement because cash is relatively difficult to trace
compared to bank or credit transactions
 LAYERING repeated transfer of money through different bank accounts and different countries in an
attempt to conceal or camouflage its origins. That way, even if the placement process becomes known to the
authorities it becomes difficult for them to trace the cash and recover it.
 INTERGRATION: the movement of previously laundered money into the economy so that the money can
be safely used. Examples include the purchase of assets such as expensive cars and art works and jewelry.
Legislation

Many countries now have legislation to combat money laundering and the proceeds of crime
and also to interfere with the supply of money to terrorist organizations. As well as creating
criminal offences for the immediate perpetrators of the crimes, the legislation can also cover
the behavior and responsibilities of auditors and accountants.
Legislation cont…….

In the UK the Proceeds of Crime Act 2002 sets out three types of offence that can be
committed by any person:
 Concealing, disguising, converting or transferring money that is from the proceeds of
crime.
 Entering into an arrangement to launder the proceeds of crime or having the suspicion that
money laundering is taking place yet not reporting it.
 Acquisition, use or possession of criminal property.
Legislation cont…….

Two further offences are relevant to individuals in regulated sectors (financial services, law
firms, estate agents, casinos, etc):
 ๏ Failure to disclose knowledge or suspicion of money laundering:
 Failure to disclose knowledge or suspicion of money laundering:
 internally to a Money Laundering Reporting Officer (MLRO) or
 externally to the Serious Organised Crime Agency (SOCA)
 Tipping off.
The penalties are severe. For example, taking part in money laundering attracts a maximum
prison sentence of 14 years and/or an unlimited fine.
Suspicion would be expected to arise if:

 You work in a bank and see a customer dealing in large amounts of cash without any
reasonable explanation of their origin
 You are an auditor and see cash passing through various banks accounts for no apparent
reason.
Auditors’ Responsibilities

The Money Laundering Regulations 2007 require businesses in the accountancy sector to establish
anti money laundering ('AML') systems and controls including:
 Customer due diligence (‘Know your client’) measures include 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.
 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, for five years.
Risk factors

The existence of higher than normal risk factors require increased attention to gathering and
evaluation of KYC information and heightened awareness of the risk of money laundering in
performing professional work. For example:
 A cash-based business
 Many similar deposits and withdrawals in various bank accounts for no 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
PRACTICE QUESTION 1

You are the manager responsible for the audit of Sapporo Co, a chain of health and leisure clubs owned and
managed by entrepreneur Izumi Smith. The audit for the year ended 31 March 20X5 is nearing completion and the
draft financial statements recognize total assets of $27 million and profit before tax of $2.2 million. The audit
senior has left the following file note for your consideration during your review of the audit working papers:
Cash transfers
During a review of the cash book, a receipt of $350,000 was identified which was accompanied by the description
‘SJ’. Bank statements showed that the following day a nearly identical amount was transferred into a bank account
held in a foreign country. When you asked the financial controller about this, you were told to speak to Izumi, as
she has sole responsibility for cash management. According to Izumi, an old friend of hers, Seiko Jones, has loaned
the money to the company to fund further expansion and the money has been invested until it is needed.
Documentary evidence concerning the transaction has been requested from Izumi but has not yet been received.
Required:
Evaluate the implications for the completion of the audit, recommending any further actions which should be taken
by your audit firm. ( 6 Marks)