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BACK-GROUNDBACK-GROUND -What is Money Laundering?

Illegally obtained money

Conversion

Criminal ActivityDrugs / Robbery

Corruption

Extortion

Appears to originate from

legitimatesource

WHAT IS MONEY LAUNDERING?

• Money laundering is the processing of criminal proceeds to disguise their illegal origin.

• Traditionally, Money laundering was associated with the crime of hiding the proceeds of the offence of narcotics as captioned in the Vienna convention.

• In modern era, other criminal activities generate large proceeds of crime which need to be cleansed and made legitimate.

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WHAT IS TERRORIST FINANCING?

“The financial support, in any form of terrorism or of those who encourage, plan or engage in it” (IMF/World Bank).

• “Terrorism is the deliberate use of violence against civilian targets with the intention of instilling terror in a population for some political gain or purpose”

• In the 1990’s (Kenya and Tanzania US embassy bombings) and particularly after September 11, 2001, the world caught up with Financing of Terrorism

• ML and TF remain global problems with far reaching effects

TERRORIST FINANCING

Legal Sourceso Collection of membership dueso Sale of publicationso Cultural or social eventso Door to door solicitation within communityo Appeal to wealthy members of the community

Illegal Sourceso Kidnap and extortion;o Smuggling;o Fraud;o Misuse of non-profit organizations and charities

fraud;o Thefts and robbery; and o Drug traffickingo State Sponsorship

TERRORIST FINANCING

Things Terrorists Needo Ability to Travel o Communicationso Instruments of terroro Disposable Funds

PREDICATE OFFENCE

Predicate offence- is the underlying criminal offence that gave rise to criminal proceeds which are or may be the subject of a ML charge. Legitimately earned funds do not need to be laundered(with exception of TF)

You can’t launder money unless you have got some money to launder. You won’t have the money to launder unless you got it from someone, somewhere, somehow doing something wrong.

That act of doing something wrong is the predicate offence: it comes before, it is predicate to, the act of ML.

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CRIMINAL ACTIVITIES-

Drug TraffickingBribery / Corruption

Robbery and Fraud

White Collar Crimes

(including Insider Trading and Securities

offences)

Counterfeiting and Forgery

Piracy and hijacking

Smuggling (arms, people, goods)

Poaching, Illegal fishing,illegal mining,

Other crimes

WHY LAUNDER MONEY?

Hide the origin of the money to make it appear legitimate.

Confuse the audit trail by truncating information flow.

Divert suspicions and avoid unwanted questions about unexplained wealth

Money Laundering seeks to achieve two basic goals:- separate the perpetrator and the proceeds

from the underlying crime, and disguise the proceeds as legitimate funds

or assets and hence allow the criminal to enjoy the benefits of criminal activities

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WHY LAUNDER MONEY?

Criminals thus launder money Avoid prosecution Increase profits Avoid seizure of accumulated wealth Legitimize proceeds of crime Secure income for the future if successful.

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MONEY LAUNDERING PROCESS

Three stages of money laundering Placement Layering Integration

• PlacementImmersion or Soaking The physical disposal of cash proceeds derived

from illegal activity The initial point of entry for funds derived from

criminal activities. The easiest form of soaking being use of the

banking system via a myriad of financial services.

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MONEY LAUNDERING PROCESS

• Layering“Soaping and Scrubbing” Creating complex layers of financial transactions-

aimed at separation of illicit proceeds from their source

These disguise the audit trail and provide anonymity

The creation of complex networks of transactions which attempt to obscure the link between the initial entry point, and the end of the laundering cycle.

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MONEY LAUNDERING PROCESS

• Integration“Repatriation / Spin Dry” Re-injecting laundered proceeds into the main

stream economy so that they re-enter the financial system as normal business funds

Provides an apparently legitimate explanation to criminally derived wealth

The return of funds to the legitimate economy for later extraction.

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MONEY LAUNDERING PROCESS/SCHEME

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EFFECTS OF ML Erode country’s ability to use the international

financial system or for its institutions to grow into other countries

Erode the integrity of financial institutions and thus the financial system

Reputational risk Legal riskOperational risk

Present a threat to political stability, peace, unity and growth of democratic systems and institutions

Give criminal organizations considerable leverage over economies,

Threatens law and order, Ruins competitiveness in an economy, Affects attainment of national goals

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REASONS FOR IMPLEMENTING AML MEASURES

Protecting your family: Fighting money laundering deters the underlying crimes that can affect you and your family directly(e.g. drug trafficking, kidnapping of family members)

Protecting the community: Creating an environment that is hostile to criminal enterprise deters the criminalisation of the community

Law and order: Reduce crime, and prevent failed states

Prevent Reputational damage: Money laundering can erode a country’s ability to use the international financial system or for its institutions to grow into other countries

Protect the financial sector: to ensure financial sector stability and protecting integrity of the financial system.

• The economy in general: Support development and access to finance, remove distortions in the economy and stabilize it. 15

REASONS FOR IMPLEMENTING AML MEASURES

• Individual institutions: In addition to reputational damage, there may be significant financial consequences from lost business, fines, including revocation of licence; and limitations on (international) business activities,

• ML vulnerabilities can have a systemic impact

Money laundering and related financial crimes can contribute to financial sector crises or impede macro-economic performance and affect attainment of national goals

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ACCOUNTANTS’ ROLE• Accountants and Auditors are two sides of the same

coin.• Accountants write and keep books.• Auditors examine and vouch books.• Accountants help in the establishment of companies

in their early formation.• Accountants and Auditors are reporting persons for

Money Laundering Terrorist Financing purposes.• In their role of writing and keeping books of

accounts, accountants should be alive to the risks of ML/TF.

• In the process of booking assets, the accountant should ensure that assets are generated legally.

• Equally, companies should make payments for bonafide goods and services acquired by companies..

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ACCOUNTANTS’ ROLE• The International Financial Reporting Standards

(IFRS) did not come as an accident. They came in to close the gap of establishing a mechanism for measuring performance across the world. This instills sensibility inside the firm and to the parties trading with the firms.

• In ML/TF parlance, it is only the accountant who can structure the accounts and conceal illegal proceeds. If successful, the auditor may find it difficult to exhume the illegality and therefore render a positive opinion on the accounts when in fact they should not.

• Practically, accountants will be the first to know if Money Laundering or Terrorist Financing is going on in an institution. An astute accountant will interrogate transactions which do not make sense. If they are not happy they should refer such transactions to InternalTanzania FIU 18

ACCOUNTANTS’ ROLE

Risk Management Internal Audit or Money Laundering Reporting Officer.

• Auditors come into the picture after the effect. They look at the laws of the country, policies developed by management and good practice. They have the best opportunity of seeing the bigger picture. With their panoramic view they can query management on any practices they think make no sense or were in gross violation of the law or internal policies and procedures.

• In all events, accountants and auditors should report suspicious Transactions to the Financial Intelligence Unit as their legal obligation.

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CHALLENGES• Money Laundering and Terrorist financing are

new phenomena.

• Accountants and Auditors must have a good understanding of how money is laundered including the financing of terrorism. There is therefore an urgent need to include these in the teaching curriculum at all levels so that people know what to look for.

• Money launderers and terrorist financiers employ the best accountants and lawyers to guard their forts. You therefore need very sophisticated accountants and auditors to match the criminal industry. This requires talent and resources.

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CHALLENGES• Just as we complain of climates change, we should

seriously consider the change in the moral fabric of our people. The “get rich quickly at any cost syndrome” is such a serious challenge to the accounting and auditing profession.

• Some enterprises want to thrive and they do not care about the source of wealth. Young men and women see their success in the gold and silver that they can amass. Ethics is no longer an issue!! The accounting and auditing profession should guard against these developments.

• The dual economy where the informal sector is so large is a problem.

• While we are challenged for resources and skills, we must as a profession look at the feasibility of developing a strong code of conduct for the profession and deal with problematic cases seriously to safe guard the profession.Tanzania FIU 21

CHALLENGES

We should remember that the biggest audit scandal (Enron) does not speak well about the industry. Arthur Anderson got into a lot of problems and when enough research is done this was a sure Money Laundering case.

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CONCLUSION

• Money laundering and financing of terrorism are serious crimes whose effects are serious,

• The war against money laundering and terrorist financing calls for domestic, regional and international cooperation,

• The accountants, like all other professionals have a pivotal role to play.

• Sensitization and training of reporting persons, stakeholders and the Public is very important,

• Efforts by our governments to attain national development goals becomes hard with unchecked financial criminality.

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