Syllabus A2: Money laundering

Syllabus A2a: Define ‘money laundering’ and discuss international methods for
combatting money laundering
Money Laundering Basics
Money laundering is creating the appearance that money obtained from
crimes originated from a legitimate source.
Money laundering is thus 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.
The term is widely defined to include:
• Possessing
• Dealing with in any way
• Concealing
.....the proceeds of any crime
Money laundering usually consists of three steps
1. placement,
2. layering and
3. integration.
1. Placement
is the depositing of funds into the financial system
To disguise criminal activity, launderers route cash through a "front" operation; that is
often, a cash based business
The entry of cash into the financial system, (placement’ stage) is where the launderer is
most vulnerable to detection.
Because of the large amounts of cash involved it is extremely hard to place it into a
bank
account legitimately
2. Layering
involves the wire transfer of funds through a series of accounts in an attempt to hide the
funds' true origins.
This often means transferring funds to countries which have strict bank-secrecy laws.
Once deposited in a foreign bank, the funds can be moved through accounts of "shell"
corporations, which exist solely for laundering purposes.
The high daily volume of wire transfers makes it difficult to keep track of for those
investigating it
The keeping of comprehensive transaction records by financial organisations provides a
useful audit trail and gives useful information on people and organisations involved in
laundering schemes once discovered.
3. Integration
involves the buying of legitimate goods, using the cash after the layering stage
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International Efforts on Money Laundering
The Financial Action Task Force on Money Laundering (FATF) is an
international body which sets standards, and develops policies to combat
money laundering and terrorist financing
It currently has 35 member countries/territories and observers such as the World Bank
and
International Monetary Fund.
Their recommendations are endorsed by more than 180 countries and are the
international anti-money laundering standard against which national anti-money
laundering
systems are assessed
The recommendations cover
• Policies and coordination
• Money laundering and confiscation
• Terrorist financing and financing of proliferation
More specifically these deal with:
1. The scope of the criminal offence of money laundering
2. Measures to prevent money laundering including:
– customer due diligence (CDD) and record-keeping; and
– reporting of suspicious transactions and compliance to an external financial
intelligence unit (FIU);
3. Measures needed in systems for combating money laundering, including
transparency
of legal persons and arrangements
4. International co-operation including mutual legal assistance and extradition
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Syllabus A2b: Explain the scope of criminal offences of money laundering and how
professional accountants may be protected from criminal and civil liability.
Scope of Money Laundering
These are the common ones under UK legislation but generally apply
worldwide and hence in the exam..
1. Not appointing a Money Laundering Reporting Officer (MLRO)
2. Not having risk management procedures and internal controls complying with anti-ML
legislation
3. Not verifying identity of all new clients
4. No ongoing client due diligence
5. Failure to report a suspicion of ML
6. Tipping off
7. Tax evasion
Tipping-off
This is when an individual who is suspicious, discloses that suspicion to the suspect
In fact even non-disclosure/action may be considered tipping off (e.g. not carrying out a
client's instructions that is effectively a money laundering operation).
If the client asks the accountant to commit a suspected ML offence, this must be
reported
to the appropriate authority
Also not being suspicious is not a defence if it is clear that a reasonable person should
have been suspicious
The fear of tipping off should not prevent the professional accountant from discussing
money laundering matters with clients on a non-specific basis. Not doing so, when
requested, may amount to tipping off.
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How Accountants May Be Protected
All partners are potentially liable on a joint and several basis for breaches of the firm's
obligations.
Defences to money laundering offences include:
• Reporting to the MLRO
• Intending to report BUT there was a reasonable excuse for not doing so (fear of
violence)
• We thought the client's actions were in good faith (and it's a reasonable assumption)
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Syllabus A2c: Explain the need for ethical guidance in this area.
Ethical Framework or Rules
Current Issue - Is an ethical framework better than rules?
Here's some reasons why a framework is good…
• Needs auditor to consider his situation actively - not just a checklist
• Ensures there are no loopholes by interpreting rules too narrowly
• Every situation is different
• A framework works better in changing environments
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Syllabus A2d: 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.
How Accountants Prevent Money Laundering
Accountants have money laundering obligations..
The following will prevent their organisations being used for money laundering
purposes:
• Establish a top-down anti-money laundering culture
• Have risk management procedures & internal controls
• Appoint a money laundering reporting officer (MLRO)
• Have record keeping systems for all transactions
• Keep systems for initial verification and continued monitoring of clients' identities
• Have internal suspicion reporting procedures
• Educate and train all staff in the main requirements of
the legislation
Money Laundering Reporting Officer
Basically should have a suitable level of seniority and experience
If the MLRO is away then a deputy must be appointed (as reports must be made as
soon
as practicable)
Sole practitioners do not need to appoint an MLRO
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MLRO Responsibilities Include
• Internal reports of money laundering
• Deciding if sufficient grounds for suspicion
• Preparing the external report to present to the appropriate authority
• Key liaison individual with the authorities
• Advising the engagement individual/team on how to continue their work and interact
with
the client
• Training on ML matters
• Designing anti-ML systems
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Syllabus A2e: 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.
Importance of Customer Due Diligence
This is vital so as you know who you are dealing with - this is more than
just
getting their passports or certificates of incorporation (if they’re a company)
To know what is a suspicious transaction you must understand what their business
patterns and models are
Also know where their income should come from, so any money laundering income
would
look suspicious
Client Acceptance Procedures
Identification procedures
1. Know your Client information
including... passports, driving licences, utility bills.
2. Also company registration documents
3. Their expected patterns of business
4. Their business model
5. Where their funds come from
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Syllabus A2f: Recognise potentially suspicious transactions
and assess their impact on reporting duties.
Reporting Duties
Professional accountants must report money laundering to the appropriate
authority (e.g. MLRO, Police).
Some Points about Reporting
• It is a criminal offence not to report
• Regardless of the amount or seriousness
• There is no obligation to quantify the certainty of suspicion
• There is no automatic need to cease working for a particular client where a report has
been filed
• Doing so may even be tipping off!
An external report should be made to the authorities
It should include the following:
1. Name of the reporting business
2. Identification information of each person (DOB, address etc)
3. Role of each person (e.g. Suspect)
4. Any references seen (e.g.Bank account)
5. Details of suspicious transaction
6. Location of any laundered property
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Resignation
You should consider resigning where..
• It is in your commercial interests to do so
• It is professionally and ethically responsible to do so
Just be careful to avoid tipping off. Again, legal advice should be sought if in doubt
What are suspicious transactions?
• Large cash deposits
• Unexplained foreign transactions
• Transactions with no business explanation
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Syllabus A2g: Describe, with reasons, the basic elements of an anti-money laundering
program.
Anti-Money Laundering Programme
The MLRO is responsible for setting up the anti-money laundering
programme
The following is required:
• Dedicated Resources
An MLRO in place
The MLRO has appropriate knowledge, experience and responsibility
• Written Policies and Procedures
The procedures should use available technology and identify risk factors - items to look
for when detecting money laundering
These risk factors could include:
• Secrecy with a transaction
• Transactions through several jurisdictions or financial institutions without any apparent
purpose
• Using central bank or government-owned banks as the source of funds
• A rapid increase/decrease in a balance, not explained by fluctuations in the underlying
market value of investments held
• Frequent or excessive use of funds/wire transfers in or out of an account
• Repeated deposits or withdrawals just below the monitoring and reporting threshold on
or around the same day
• A pattern that after a deposit or wire transfer the same (or similar) amount is wired to
another financial institution (especially one that is offshore).
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• A frequent clearing out of an account for purposes other than maximising the value of
the
funds held in the account
• Comprehensive Coverage
All aspects of a company's business, particularly those that
have contact with customers should be covered
A comparison of the account holder's identity to the government lists of known or
suspected terrorists
• Timely Escalation and Resolution
• Timely reports
• Appropriate reviews of the report
• Identify the outcome / resolution of matters
• Explicit Management Support
• Senior management should set the tone
• Their support clearly visible to all employees
• Sufficient Training and Education
• Integral to the whole programme
• Courses on how to recognise suspicious activity and what to do next
• Regular Review of the Program
• To make sure it is working as designed
• Accompanied by a formal assessment / report
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