FORENSIC ACCOUNTING

Money Laundering and organized Finance

Money laundering poses a serious threat to individuals, businesses, financial systems,
markets and governments as this financial crime affect the health of human beings and destruct
the development of a country, for example developing countries loses billions every year to
countries such a Switzerland. In the recent years White Collar crime has become the potential
threat to the continued existence of capitalists’ economy , which now force the international
and regional government begin to acknowledge that money laundering has become a threat to
the global economy development, financial systems as well as to the global community. Due to
the growing of organised crime such as human trafficking, drug trafficking, terrorism and tax
evasion. Money laundering is believed to be the third industry by some academic researchers,
with an estimated 2% to 5% of gross domestic products (GDP) of the world.

This essay will also provide a literature review in order to better understand the theories
of money laundering and the roles and responsibilities of professional bodies. Which also
include the review of international and national policies and legislation frameworks designed
to prevent money laundering? Final the finding and recommendations of this essay clearly
shows evidence which suggest that professionals are vectors and advisers of money laundering,
therefore, such illicit seems to be made easy by various professions who collaborate and
contribute to this growing problem, in particularly the banks, professional bodies such as
Auditors, Accountants and Lawyers, are argued to play a pivotal role in smoothing the progress
for money launders to conceal the proceeds of their corrupt activities

INTRODUCTION

This study will attempt to examine the relationship between money laundering and
Fraud, as well as its global network and the seriousness of these crime’s effects in the global
economy and the social consequences for the international community. Furthermore, put in plan
words the problem of money laundering in the UK, reflecting on whether anti-money
laundering laws introduced in the past decades has in some why improved the control of this
criminal activity.

Summers (2000), states that the observable fact of money laundering is a characteristic
of organized crime with researcher and academic estimating that the money laundering generate
about US$100 billion; while the British Intelligence estimated that the total amount being
laundered annually is about US$500 billion..The illicit drug trade alone is estimated to generate
about US$300 billion of which a significant part would require laundering; this is also supported
by Wolfensohn (2002).

As there are many studies that critically examine money laundering and the factors that
contribute to money laundering etc, there are still few and far between studies actually looking
into the factors that contribute to the increase of money laundering in developing countries and
match up to whether developed countries’ preaching for regulations and monitoring money
laundering to the rest of the world , while ignoring their contribution in promoting this complex
crime in developing countries indirect and direct.
Problem statement

White Collar crime has become the potential threat to the continued existence of
capitalists’ economy. Money laundering for instance is assumed to take a large portion of white
collar crime global, as statistics predict that almost 5% of the world gross domestic product
(GDP) is lost to money laundering each year (IMF, Website ).

Research aim and objectives

The primary objective of this essay is to explore and identify the level that underpins
the bureaucracy of money laundering, looking at both point of views (Developed Countries
perspective and developing countries point of view), and measuring the preventing of money
laundering. Also as to give comment on the accuracy to whether the join combat efforts are
realistic.

Research methodology

The present study is an attempt to explore and explain the international legal systems in
combating money laundering and fraud the legal framework in the global scale. The
methodology of this study will gather information from secondary sources, which are already
in publication, such as academically journals, books, professional articles, the internet and any
other publications (Sekaran, 1992). Furthermore, the study will make an effort to find out the
relevance of the information so as to possible present appropriately, to explore some of the
factors that are part of the cause to money laundering and fraud. Therefore as the study will be
only based on published secondary information we will reach a conclusion that does not point
toward our own opinion but the critically review of the conclusion of the previous studies in
this have concluded.

Assumptions made in this report

As the definition of money laundering constitutes a range of dynamic criminal activities,

this study make assumption that money laundering includes trafficking, fraud, corruption and
terrorism as all these crimes share a common feature, which lead to proceeds of illicit being
laundered in some way or another. Therefore, all these above mentioned crimes are to be money
laundering for this study.

Investigation Outline

The first section of this essay will provide a brief introduction of the objectives and
assumptions made throughout the essay, as well as attempt to introduce the research question
and give an overview of the subject area. This will be followed by the second section, which
reviews previous studies and the critics of the conclusions of these studies. Section three will
then briefly communicate the theories of money laundering and the factors that cause money
laundering developing countries, followed by a short history and the definition accepted by this
essay. Section four will provide evidence found by this study and a critically suggestions.
Finally section five will reach a conclusion.
Literature Review

In order to understand the present and future of money laundering, it is important to first
give a brief explanation of the background history of its origin. According to Bosworth et al,
(1994), money laundering originated in the USA during the 1930s,

Despite the fact that there are several publications studies in the literature of critically
examining the subject area, their point of view seem to give attention to the legal and regulatory
framework, adding to analysing the stages of cash placement or analyzing causes and remedies
of legislations that contribute to money laundering, however, there is little done, in other words
a number of empirical studies are rather limited to study whether there is a linkage between the
developing and developed countries, and if are there any lessons learned?

According to a study by Wolfensohn (2002), stated that at least US$1trillion is believed

to laundered every year using progressively more highly developed methods such as the wiring
transfer of funds across boarders, in addition these complex methods involve employing
services and advice of professionals such financial advisers and accountants (Sikka, 2003;
Arnold and Sikka, 2001; Aloba, 2002; Bakre, 2007;).

Mitchell et al., (1996) study exposed actions carried out by some of these professionals
and companies in Accounting such as Jackson & Company; Grant Thornton Partners; Coopers
and Lybrand; and a cabinet minister in the UK government, who were all caught up in money
laundering of illegal transferring money from AGIP to Kinz Joallier SARL. The professional
body of the Institute of Chartered Accountants in England and Wales (ICAEW) was passed on
with the case to investigate the professional misconduct of its members. Even though the High
Court had previously dealt with the case and gave its own judgment, which found that the two
Accountants who were caught up in the act of money laundering, the court’s ruling stated that
these professionals actually knew that their action were against the law and obviously
laundering money, the Judge found them guilty, however the professional body itself (ICAEW)
it appears that did not view it the same way as the Court did. Furthermore when the
“investigation and disciplinary committee” of the ICAEW was criticised it argued in defence
that it was not provided with insufficient evidence to warrant the bringing of a disciplinary case
against any of its members in this case of money laundering (see Letter of May 9, 1994).

On the other hand, BCC I investigated the global closure in 1991 and uncovered a
massive amount of criminal activities including money laundering in a number of countries
around the world, which involved bribery of government officials, arms trafficking, the sales
of nuclear technologies, the support of terrorism, tax evasion, and smuggling operations, as well
as massive financial frauds (Arnold and Sikka, 2001).

According to the 400 page report by Arnaud Montebourge (2001) ” The City is an
impenetrable fortress with a status, rights and custom of its own, a closed universe where every
financier, banker or businessman chooses silence above all else”. The report stated that it had
taken the British an extraordinary amount of time to respond to Swiss tip-offs before ordering
19 banks to freeze funds linked to former Nigerian ruler, Sanni Abacha [BBC News, October
10, 2001].

A Harvard-educated Colombian economist, Franklin Jurado, used the services of

accountants to launder $36 million in profits, from US cocaine sales for the late Colombian
drug lord Jose Santacruz-Londono, by wiring it out of Panama, through the offices of Merrill
Lynch and other financial institutions, to Europe. In three years, he opened more than 100
accounts in 68 banks in nine countries: Austria, Denmark, the United Kingdom, France,
Germany, Hungary, Italy, Luxembourg, and Monaco. Some of the accounts were opened in the
names of Santacruz’s mistresses and relatives, others under assumed European-sounding
names. Keeping balances below $10,000 to avoid investigation, Jurado shifted the funds
between the various accounts. He established European front companies with the eventual aim
of transferring the “clean” money back to Colombia, to be invested in Santacruz’s restaurants,
construction companies, pharmacies and real estate holdings (UN, 1998) cited in Garnaut, J.
(2006).

According to the UN General Assembly, corrupt politicians, government officials and

other criminal organizations increasingly sub-contract the task of money laundering to
specialized professionals (such as accountants, lawyers and bankers) because the methods
required to circumvent law enforcement officials are becoming ever more complex (see UN
Special Session on the World Drug Problem 8-10 June, 1998). Professionals (such as
Accountants, lawyers and bankers) are used not only to conceal the origin of the source of the
proceeds, but to manage the subsequent investment into legitimate real estate and other assets.

Money Laundering

Introduction

In anticipation of comparatively recently notion of money laundering were subjects that,

although continuously reported and chattered about, were not studied to a great extent. it gives
a quite out of the ordinary impression for the fact that well know crime stories such as the
Medellin cartel to the notorious Al-Qaida network that have been taking place up to the
September 11. Therefore, this can be arguable that beyond doubt it point out that organised
crime has evolved a great deal fitting itself into a far-reaching socio-political changes, complex
technological developments and diverse culture environments. According to Murilo Portugal,
Deputy Managing Director of the IMF:

“Global financial stability hinges on collective action at the international level, but also on
effective national systems. Robust anti-money laundering and combating the financing of
terrorism regimes are an important pillar of the international regulatory and supervisory system
and part and parcel of the current efforts to strengthen the global financial framework.”.

Therefore, due to the out of the ordinary of money laundering and the new developing
complexity of the techniques used by launders it is hard to keep accurate information of this
sort of crime.

What is Money Laundering?

Although the observable fact of money laundering has taken on increase attention, from every
country in the world its notion is still a controversy in the criminological phraseology. In
anticipation of the concept of money laundering phrase, which has almost been talked about
and documented over for the past seven decades, it is extraordinary that this subject has been
given fewer research studies, regardless of the fact that organised crime has been part of the
society for such a long time.
Money laundering has been defined as the cover up of unlawfully get your hands on assets or
proceeds so the can be then made to appear as they have been acquired in a lawfully manner.
On the other hand, money laundering can mean different thing to different countries and
organisation as there are variations on the definition of money laundering, nevertheless, almost
certainly accepted definition that fit within the framework and the global idea intended to
provide a global definition of money laundering is the one outlined (UN Organised Crime
Convention). Article 6 of the convention regards the following conduct as money laundering:

(i) the conversion or transfer of property, knowing that such property is the proceeds of crime,
for the purpose of concealing or disguising the illicit origin of the property or of helping any
person who is involved in the commission of the predicate offence to evade the legal
consequences of his or her action;

(ii) The concealment or disguise of the true nature, source, location, disposition, movement or
ownership of or rights with respect to property, knowing that such property is the proceeds of
crime;

(iii) The acquisition, possession or use of property, knowing, at the time of receipt, that such
property is the proceeds of crime.

According to FATF, money laundering is defined as:

. . . the processing of a enormous number of criminal acts to generate profit for individual or
group that carries out the act with the intention to disguise their illegal origin in order to
legitimize the ill gotten gains of crime. Any crime that generates significant profit extortion,
drug trafficking, arms smuggling and some kind of white collar crime may create a “need” for
money laundering (FATF).

The process of money Laundering

Alternatively money laundering operates in the same manner as a lawful business in terms of
the financial operations. Therefore money launders in their set of business operations act upon
the intention of introducing funds originated from criminal activities into the economy so that
it appears legitimate. For this to be achieved funds or proceeds need to pass through a long way
before it take on the appearance of a legal financial transaction. The procedures used in a money
laundering process, theoretically, include three all-embracing stages known as placement,
layering and integration.

(I) Placement: This is the first stage in the money laundering process. It involves the
introduction of the proceeds of criminal activity into the main stream financial system. This
may involve the opening of bank account with genuine or fictitious names and the subsequent
lodgement of funds in the account. This is the most vulnerable stage;

(ii) Layering: This process involves the creation of a complex layer of financial transactions
with the aim of evading the audit trail. The launderer may as well decide to purchase high
valued commodities such as automobiles, jewellery, etc., and exporting to a different
jurisdiction. Or better still, it may involve the purchase of shares of companies at the stock
market;
(iii) Integration: This stage involves the recycling of the laundered wealth to the direct benefit
of the Launderer to appear as if it was derived from legitimate activity .It may involve the
selling off of some valuable items which were purchased during the layering process.

Causes of Money Laundering

In a recent study ( cited on Ribeiro, 2002:Galvao, 2000); it is argued that money laundering
causes bizarre changes, such as when the demand of money increases it also increases the risk
and precariousness of the banking sector and financial systems. In addition, money laundering
creates corruption, fraud, bribery, white collar crime and all other financial crimes. It is also
worth contemplating whether some of the key drivers of money laundering in developing
countries are due to the complexes of western regulations? According to Linell (1999), the
western countries such as USA & UK, approach the challenge against money laundering from
a cost to benefit approach. For example the enforcement officers evaluate the cost of resources
and compare it with the value of the crime in order for them to investigate; evidently this is an
open door to launders to curse developing countries. Another report by Moore (2004), accuses
Britain to be a safe Haven for money laundering. Moore’s reports found fairly estimate that
“between £25bn to £40bn of dirty money is laundered in the UK each year from all over the
world”. This opens a question to whether globalization and technology, developed countries
and professionals could be the main drivers of money laundering in developing countries
(Killick, M. (2004).

Globalisation and Technology

To understand how increasing technology can have an adverse effect on money laundering, it
is worth reflecting why the criminal considered technology as their shelter to hide their
proceeds. Drawing attention to the revolutionary impact of technological advancement on
organized crime, particularly money laundering as well as the concept of globalization, it is
clear for one to argue that the combination of these two has deregulated the simply customs of
state control over their own territory or location. There is no doubt even there is a lack of
academically evidence to support this, globalization and technology has created more
opportunities for criminality than it has for preventing them committing these crimes. for
example, Tinker (1980), argues that globalisation has created profit generation organisations,
such as the MNCs that work against the moral of local economy, particularly in developing
countries.

Money Laundering and the Professions in Developing Countries

What is the relationship between the professionals such as the Accountants, Auditor and the
Lawyers, and money laundering within the developing countries? Can their role be found been
in a contradictory to be of capital accumulation ambition. According to Hoogvelt and Tinker,
1978 the money launders and the professional groups are seen as a protection of capitalism for
the developed capitalist countries. For this reasons, capitalistic purpose of the Western
economic powers, reflected within the formation of the multinational corporations (MNCs) as
well as other overseas capitalists which produce offspring’s of capitalist relations in developing
countries, is arguable be the cause of contradictory placement between the corrupt ruling leaders
and those you have influential powers in developing countries and the “good governance”,
“accountability” and “transparency”-preaching Western capitalist world ( Bakre, 2005, 2006a).
Wade, 1996 suggested that the alleged reason of bringing investments to developing countries
is mainly based on the highly praised globalization. On the other hand, one can question
whether globalisation benefits these developing countries. Hirst and Thompson, 1996, argue
that this capital mobility is not in point of fact turning out a substantial shift of investment and
employment from the developed countries to the developing countries. Therefore, the notion
that these developed countries and globalisation would be of assistance to boast the economies
of these developing countries.

This seems to suggest that the MNCs and other foreign capitalists operating in foreign countries
may not be relied upon to subordinate their own capitalistic interest to the interest of those
countries where they operate, especially developing countries. However, the notion that the
developed capitalist economies would help to jump start and boost the economies of developing
countries through investments, which would eventually get rid of corruption and poverty, has
been the acclaimed cornerstone of globalization ( Groom, 2001).

Accountants and Auditors

The external auditors, PriceWaterhouse, were in the dual position of acting as private
consultants and tax advisors to the BCCI management to further their private interests, while
the State was relying upon them to perform public interest functions by acting as an external
monitor and independent quasi-regulator (Arnold and Sikka, 2001). For this reason, it can be
argued that Britain and other western countries are still providing safe haven for money
launderers and those who commit financial crimes (Moore, 2004). Another evidence is found
in the document on BBC News website( ),it accuses London’s development to be clearly doing
well as a result of its banking secrecy codes, which ignores the public’s interest. Another
example is the report by the African Business (online), which claim hundreds of billions of rand
from white-collar crime have been laundered through South Africa’s financial system, but no
convictions have yet been made (African Business, July 1, 2002). Deloitte & Touché forensic
services manager, Rupert Haw, says the global trend suggests that crime bosses earn their
income in developing countries but invest it in more secure and sophisticated financial systems
in developed countries (African Business, July 1, 2002)

The Duty to Report Unlawful Conducts.

It is obvious that for effective enforcements to tackle money laundering and fraud, the state
should put in place a clear role of reporting duties for individuals and companies as well as
professional boards involved in preventing. According to Masciandaro and Portolano (2003) &
Barret (1997), money laundering threatens the growth of the economy and the socioeconomic
development of a country. Therefore, the development and robust economy can only achieved
if both developing countries and developing countries put a balancing effort in combating
money laundering, such as good governance and regulations that are not charlatan.

From this perspective, the next following paragraphs will provides the evidence, which suggests
that the developing countries and its ruling elites, public bodies, professional bodies and
individuals as mentioned above are hypocrites in their role to prevent money laundering in
developing countries. According to a report

Hypocrisy of the developed countries and global bodies: evidences

Money laundering is a global problem which significantly affects both developed and
developing countries. This essay suggests that the problem should be tackled by both developed
and developing countries, rather than shifting the burden on poor developing nations that have
no resources to combat this global crime [Ekaette, 2002].

At the same time, readily available evidence indicates that some authorities in African countries
steal government funds that are meant to serve the public and wire the money into some implicit
accounts in banks in England, Switzerland, France, Germany, the USA, the Cayman Islands
and Bahamas and [Agabi, 2002]. As in the case of the former Zaire (Congo) President Mabuto
Seseko who was helped by the British government to win the elections in a fraudulent way.
Furthermore, during is time in power it is claimed the western opportunely looked the other
way and maintained their silence, while he was stealing the state money, laundering funds into
overseas bank accounts (mainly Switzerland).

With the continued protest from the several developing countries to those countries that
function as haven for ransack funds from developing countries to assist in the recovery of the
stolen funds in their banks, many of the countries, particularly the former colonial power,
Britain, have refused to cooperate. While some others (such as Switzerland) have been
promising to cooperate, sometimes these promises end up not being followed by these
Countries.

Secondly, from a developing country’s point of view, the Western countries uses criticisms of
the developing countries as in the case of (Mabuto Seseko) as a means of benefiting from the
issue of money laundering, while pretending to be implementing actions of the same anti-money
laundering and anti-corruption preaching Western economic powers suggest hypocrisy. For
example, while countries such as South Africa and Nigeria, and 28 other developing countries
have so far given their support to the United Nations Convention Against Corruption, except
France, all the other member countries of the so called Financial Action Task Force, FATF, that
have been jointly threatening Africa countries economic sanctions, have not yet endorse the UN
Conventions Against Corruption (see This Day, June 9, 2007). Moreover, it was during the
2002 meeting on the Global Organisation of Parliamentary against Corruption (GOPAC) that
Australia, Canada and Italy [1] made pledges to set in motion machinery to amend their banking
laws to facilitate easy recovery of the developing countries looted funds in the banks in their
countries [The Guardian, November 5, 2002]. Strangely enough, while countries such as USA,
Britain, France, Germany, and Switzerland which serve as havens for looted funds from African
countries expressed serious concern over the growing incidence of corruption especially in
developing countries, such pledges were not made by any of these countries.

For example in the case of , Raul Salinas de Gotari, brother of the former President of Mexico,
Carlos Salinas de Gotari was able to transfer $90 million to $100 million between 1992 and
1994 by using a private banking relationship formed by Citibank New York in 1992 (see US
General Accounting Office, 1999). The funds were transferred through Citibank Mexico and
Citibank New York to private banking investment accounts in Citibank London and Citibank
Switzerland. Yet, Britain and the United States are both powerful and leading member countries
of the Financial Action Task Force (FATF) that claim to be fighting money laundering globally.

Conclusion

Nonetheless, it is clear from available evidence shown in this essay that money laundering is
one of the major challenges faced by the developing countries and if it is not tackled In time it
will became the main destructive force to the economic and social development of this countries
as it affect economic growth, reduces productivity in the economy’s real sector by diverting
resources and encouraging crime and corruption, and can distort the economy’s long-term
economic development. This essay highlighted observable facts of Money Laundering and its
origins, as well as the patterns and implications it has in the developing countries. it is crucial
to make a note of the hypocrites approach the western countries take, however a accurately
study is recommended to effectively identify whether this claims exist. The resources against
money laundering should be strengthened to ensure that the professional and MNCs wont
continue to abuse the financial systems. Final Global responses to the challenges of money
laundering should be tighter than at present.