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.
The stages of money laundering
The process of money laundering can be described in the following three steps:
1) 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
2) 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.
3) 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 jewelry.
Many countries now have legislation attacking money laundering and the proceeds of crime and also for the immediate perpetrators of the crimes the legislation can also cover the behaviour and responsibilities of auditors and accountants.
There are five types of offences related to money laundering
- 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 and possession of criminal property
- Failure to disclose
Tipping off. Tipping off is the offence of acting in a way that discloses to the potential suspect 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
Examples of activities that may raise suspicion about money laundering :
1) You work in a bank and see a customer dealing in large amounts of cash without any reasonable
explanation of their origin.
2) You are an auditor and see cash passing through various banks accounts for no apparent
Auditors’ responsibilities about money laundering
- ‘Know your client’. Proper 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.
Risk factors for money laundering
- A cash-based business
- Many similar deposits and withdrawals in various bank accounts for not obvious reason
- Many jurisdictions 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