Money Laundering
1 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.
2 The stages of money laundering
The process of money laundering can be described in the following three steps:
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.
Integration: 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 jewellery.
3 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 organisations. As well as creating criminal offences for the immediate perpetrators of the crimes, the legislation can also cover the behaviour and responsibilities of auditors and accountants.
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.
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:
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.
Note that if the prosecution can show that a defendant had a even suspicion that money had criminal origins that the defendant can be found guilty of these crimes. So, ‘turning a blind eye’ is no defence.
Obviously an accountant could be directly participating in or abetting money laundering, but here we will assume you are all ethical and won’t take part in that. However, it is easier to inadvertently commit some of the other offences.
For example, suspicions 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.
Tipping off is the disclosure of information that is likely to prejudice an investigation. So, saying to a client “I think this is money laundering and I am going to report my suspicions to the authorities” is clearly tipping off. However, what if you repeatedly ask for evidence about a transaction? The client then knows that you might be suspicious and that your next step is to report the matter. However, if you make no enquiries at all or inadequate enquiries, you might fail to uncover a perfectly innocent explanation.
Auditors also do not want junior members of the audit team taking this into their own hands and directly informing the authorities. Junior member of the team are relatively inexperienced and might simply be jumping to the wrong, but dramatic, conclusions. Instead, all suspicions should be reported to the auditing firm’s money laundering reporting officer. This is a person who has sufficient experience and seniority to be able to make reliable decisions about when matters ought to be reported to the authorities.
4 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.
5 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