Forensic and Investigative AccountingForensic and Investigative Accounting

Chapter 7

Money Laundering and Transnational Financial Flows

© 2013 CCH Incorporated. All Rights © 2013 CCH Incorporated. All Rights Reserved.Reserved.

4025 W. Peterson Ave.4025 W. Peterson Ave.

Chicago, IL 60646-6085Chicago, IL 60646-6085

800 248 3248800 248 3248

CCHGroup.comCCHGroup.com

Chapter 7 Forensic and Investigative Accounting 2

DefinitionDefinition

A definition of A definition of money launderingmoney laundering that covers that covers both legal and illegal contexts is to take both legal and illegal contexts is to take money that comes from one source, hide that money that comes from one source, hide that source, and make the funds available in source, and make the funds available in another setting so that the funds can be used another setting so that the funds can be used without incurring legal restrictions or without incurring legal restrictions or penalties.penalties.

Chapter 7 Forensic and Investigative Accounting 3

Steps in Money LaunderingSteps in Money Laundering

The traditional money laundering process can be The traditional money laundering process can be divided into three steps:divided into three steps:

1.1. Money is deposited in a bank or financial Money is deposited in a bank or financial institution.institution.

2.2. A set of complex transfers is made to disguise A set of complex transfers is made to disguise the original source for the money and to hide the original source for the money and to hide the audit trail. (This step is called the audit trail. (This step is called layering the layering the transactionstransactions.).)

3.3. The money is integrated back into the The money is integrated back into the legitimate money supply.legitimate money supply.

Chapter 7 Forensic and Investigative Accounting 4

Cybercash Creates New Laundering Cybercash Creates New Laundering OpportunitiesOpportunities

Using the Internet, it will be possible for Using the Internet, it will be possible for anyone to transfer large sums of money from anyone to transfer large sums of money from one location to another without using a bank one location to another without using a bank and with the transfers being totally and with the transfers being totally anonymous. anonymous.

Chapter 7 Forensic and Investigative Accounting 5

Cybercash Creates New Laundering Cybercash Creates New Laundering OpportunitiesOpportunities

Today, cybercash transactions are beginning Today, cybercash transactions are beginning to take place without the need for third parties to take place without the need for third parties and the consequential scrutiny that might and the consequential scrutiny that might otherwise exist. otherwise exist.

Furthermore, cybercash transfers can be Furthermore, cybercash transfers can be structured so that they originate in a structured so that they originate in a jurisdiction where such activities are not jurisdiction where such activities are not considered illegal.considered illegal.

Chapter 7 Forensic and Investigative Accounting 6

Possible Users of Money Laundering Possible Users of Money Laundering PracticesPractices

Grant recipientsGrant recipients CriminalsCriminals Political asylum seekersPolitical asylum seekers

Chapter 7 Forensic and Investigative Accounting 7

Correspondent BankingCorrespondent Banking

Correspondent bankingCorrespondent banking takes place when one takes place when one bank provides services to another bank to bank provides services to another bank to move funds, exchange currencies, and access move funds, exchange currencies, and access investment services such as money market investment services such as money market accounts, overnight investment accounts, CDs, accounts, overnight investment accounts, CDs, trading accounts, and computer software for trading accounts, and computer software for making wire transfers and instant updates on making wire transfers and instant updates on account balances.account balances.

Chapter 7 Forensic and Investigative Accounting 8

Correspondent BankingCorrespondent Banking

A A payable-through accountpayable-through account enables the enables the respondent bank’s clients within the country respondent bank’s clients within the country where the bank is registered to write checks where the bank is registered to write checks that are drawn directly on the respondent that are drawn directly on the respondent bank’s correspondent account in the United bank’s correspondent account in the United States.States.

Chapter 7 Forensic and Investigative Accounting 9

Tools Banks Use to Identify Tools Banks Use to Identify Money LaunderersMoney Launderers

Monitoring softwareMonitoring software Currency Transaction Reports (CTRs)Currency Transaction Reports (CTRs) Suspicious Activity Reports (SARs)Suspicious Activity Reports (SARs)

Chapter 7 Forensic and Investigative Accounting 10

Due Diligence Laws for BanksDue Diligence Laws for Banks

Laws and regulations require that a bank Laws and regulations require that a bank perform due diligence in its relationships with perform due diligence in its relationships with other banks and important clients as well as other banks and important clients as well as continually monitor account transactions. continually monitor account transactions. Within banks, due diligence must co-exist Within banks, due diligence must co-exist with the client’s need for privacy and the with the client’s need for privacy and the secrecy laws existing in many foreign secrecy laws existing in many foreign jurisdictions that prevent access to bank jurisdictions that prevent access to bank documents.documents.

Chapter 7 Forensic and Investigative Accounting 11

Shell BanksShell Banks

Shell banks are generally high-risk banks that Shell banks are generally high-risk banks that exist without any physical presence in any legal exist without any physical presence in any legal jurisdiction. These banks have a banking license jurisdiction. These banks have a banking license in a specific country, but they are not likely to in a specific country, but they are not likely to have a staff and may be operated as part of have a staff and may be operated as part of another business or operated out of an another business or operated out of an individual’s personal residence.individual’s personal residence.

Chapter 7 Forensic and Investigative Accounting 12

Offshore BanksOffshore Banks

An offshore banking license prevents the An offshore banking license prevents the organization from transacting banking organization from transacting banking activities with any citizens of the licensing activities with any citizens of the licensing jurisdiction or transacting business with the jurisdiction or transacting business with the currency of the licensing jurisdiction. These currency of the licensing jurisdiction. These bank operations solely exist within bank operations solely exist within international financial transactions.international financial transactions.

Chapter 7 Forensic and Investigative Accounting 13

Cash-Oriented BusinessesCash-Oriented Businesses

Currency exchangesCurrency exchanges Online auctionsOnline auctions CasinosCasinos Purchasing departmentsPurchasing departments

Bitcoins Bitcoins

Bitcoins are electronic encrypted currency and an alternative to national currencies.

The value of the coins are online market The coins have value in themselves and do

not require the deposit of cash into an account.

Chapter 7 Forensic and Investigative Accounting 14

Chapter 7 Forensic and Investigative Accounting 15

Audit TrailAudit Trail

ChurningChurning Laundering cyclesLaundering cycles

1.1. Illegal cashIllegal cash

2.2.Deposited into bankDeposited into bank

3.3.Purchase assetPurchase asset

4.4.Sell assetSell asset

5.5.Documented legal cashDocumented legal cash

Chapter 7 Forensic and Investigative Accounting 16

Finding Money Laundering SchemesFinding Money Laundering Schemes

Web logsWeb logs

– Tracing IP addressesTracing IP addresses

– HTTP common logfile formatHTTP common logfile format Wire transfersWire transfers Bank reportsBank reports IRS Form 8300IRS Form 8300

Chapter 7 Forensic and Investigative Accounting 17

Guarding Against Money LaunderingGuarding Against Money Laundering Individual due diligence.Individual due diligence.

– Business associations.Business associations.– Employment.Employment.

Company due diligence in verification Company due diligence in verification procedures.procedures.– Corporate ownership and governance.Corporate ownership and governance.– Bearer shares.Bearer shares.

Trust due diligence.Trust due diligence.– Trust deeds.Trust deeds.– Beneficiaries.Beneficiaries.

Chapter 7 Forensic and Investigative Accounting 18

Accountant’s Role as Gateway KeeperAccountant’s Role as Gateway Keeper

AICPA Auditing Standards Governing AICPA Auditing Standards Governing Money Laundering.Money Laundering.

– SAS No. 54, Illegal Acts by Clients.SAS No. 54, Illegal Acts by Clients.

– SAS No. 82, Consideration of Fraud in a SAS No. 82, Consideration of Fraud in a Financial Statement Audit (now replaced Financial Statement Audit (now replaced by SAS No. 99).by SAS No. 99).

Lack of Reporting Requirement.Lack of Reporting Requirement.

Social MediaSocial Media

Part of any due diligence investigation Part of any due diligence investigation todaytoday

There is an explosion in personal information that is available about individuals on social media websites such as Twitter, Facebook, and LinkedIn

Chapter 7 Forensic and Investigative Accounting 19

Chapter 7 Forensic and Investigative Accounting 20

USA Patriot Act of 2001USA Patriot Act of 2001

International Money Laundering Abatement International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 and Financial Anti-Terrorism Act of 2001 (MLAA).(MLAA).

Payable-through accounts.Payable-through accounts. Enhancements and restrictions under MLAA.Enhancements and restrictions under MLAA. Reporting requirements under MLAA.Reporting requirements under MLAA.

U.S. V. EuropeU.S. V. Europe

Money laundering in Europe is based more Money laundering in Europe is based more on a risk model analysis that goes beyond on a risk model analysis that goes beyond AML measures.AML measures.

Risk based modeling deals with Risk based modeling deals with geographical locations, number of cash geographical locations, number of cash transactions, extraordinary high audit fees, transactions, extraordinary high audit fees, and bartering of goods.and bartering of goods.

Chapter 7 Forensic and Investigative Accounting 21