Protecting your organisation against money laundering

With a view to making communities safer and eradicating tax evasion globally, governments are increasingly adopting measures to defeat money laundering. The success of those measures depends on the efforts of accountants and other professionals to deter, detect, and report illicit money movement.

The UN Office on Drugs and Crime estimates that from 2%–5% of global GDP is laundered annually. And it is not just drug trafficking driving those staggering figures. Crimes such as fraud, bribery, theft, tax evasion, and even copyright offences contribute to the total.

Following all that money can be challenging. Money launderers have developed many techniques to disguise the origin of illicit funds and complicate the transaction trail. Launderers often use companies, from inside and out, as vessels for some stages of the process to provide a veil of legitimacy to their transactions. From the inside, criminals might create and use a corporation, or a series of corporations, to hide illicit proceeds among legitimate business transactions. From the outside, criminals may conduct transactions through an established counterparty, with uneconomic incentives, to avoid additional scrutiny.

Would you know if your or your client's company were being used for this purpose? Involvement with the proceeds of crime can lead to criminal charges, publicised civil penalties, seizures and forfeitures, organisational distraction, and reputational risk.

You might dismiss that question because you don't work with cash-intensive organisations. However, cash is no longer essential to money laundering — white collar crime, for instance, often involves no cash.

Today, launderers focus on how to channel tainted funds already in the system through a maze of financial networks around the world, while surviving a gauntlet of identification and transaction scrutiny standards set to an international standard. An awkward truth is that accounting professionals have been enlisted to assist with that process, both knowingly and otherwise, as the builders and guardians of those networks.

Accountants and other financial gatekeepers have been called upon by their governing bodies and regulators to be aware of the methods and indicators of laundering, to know their clients well enough to recognise anomalous transactions, and to report suspicious activity.

International standards expect governments to enact laws subjecting accountants to those requirements when (1) buying or selling real estate; (2) managing client money, securities, or other assets; (3) managing bank, savings, or securities accounts; (4) organising contributions for the creation, operation, or management of companies; (5) creating, operating, or managing of legal persons or arrangements; (6) buying and selling of business activities; and (7) other professional activities of accountants, including auditing. Canada and the UK have nearly achieved compliance with those standards, with Australia currently debating the issue and the US being called out for the absence of such measures.

Summarised below are three key techniques of laundering money through a business, and the indicators they might present to an accountant observing from within or without.

Complex and obscure corporate structures

Money launderers actively seek anonymity — ways to remove any association between themselves and their assets and criminality. This makes investigations more difficult. As there are few reliable state-level corporate ownership databases in the world, launderers obtain protection against revealing who directs or owns companies with illegally obtained assets through complex and geographically diverse corporate structures.

In the simplest schemes, an employee might submit fraudulent invoices to his or her employer, posing as a supplier (often with slight variations of the name of the usual supplier), and direct the payments to a corporation with no overt connections to the employee or to a bank account with an internationally accessible ATM card.

With their specialised knowledge, accounting professionals might be called on to arrange international corporate structures under the guise of tax planning or creditor proofing.

One indicator of this may be that clients or divisions within their group are reluctant to provide particulars about their business and its transactions. Accountants should also be on the lookout for any unexplained involvement of intermediaries, or if the entities involved have an unexpectedly low level of public or online documentation. In another instance, a supplier may ask you to pay for a shipment to an apparently unrelated business.

Commingling

Mixing legitimate and tainted funds in a business is a classic and common method of laundering the proceeds of crime. Otherwise legitimate businesses come with the structure and facilities to clean such funds, including banking, tax reporting, and even nominee owners.

Cash may be directly involved or indirectly processed through intermediaries such as armoured car companies. Illicit activities attract excess profits, so companies involved in commingling often show extraordinary profit margins and liquidity. Accountants may also notice volumes that exceed apparent capacity and irregularities in revenue documentation, such as sequential invoicing or unusual shipping documentation.

Trade-based money laundering

The US Government Accountability Office posits that trade-based money laundering — the movement of criminal proceeds through trade transactions using falsely documented pricing, quantities, or descriptions — is one of the primary methods used by criminal organisations.

Early research into this practice cited an example of razors being imported to the US from Colombia at $34.81 each, when the world average price was 9 cents a unit. A million-unit mispriced shipment could legitimise the movement of nearly $35 million in funds from Colombia into the US through the legitimate banking sector, even though the razors shipped were only worth $90,000.

Indicators of such schemes can include unreasonable margins, unusual volumes for the businesses and geographies involved, and inconsistencies across contracts, invoices, and other trade documents.

Now what?

With suspicion or awareness of criminal proceeds comes responsibility. Reporting requirements and constraints might come from multiple sources: laws, regulations, contracts, privacy and confidentiality standards, internal policies, insurance policies, and professional obligations. In such a situation, legal advice should be sought to determine whether any standards have been breached, to plan remedial actions and the relevant timing, and to consider privacy implications and whistle-blower protections.

Accountants' specialised training, roles, and access provide us with the ideal perspective to detect money laundering and contribute intelligence to global anti-money laundering efforts, to deprive criminals of routes through which to channel their ill-gotten gains. Awareness of potential abuses and vigilance to prevent and deter criminal proceeds can protect an organisation's assets and reputation.

— Matt McGuire, FCPA, CFF, is the practice leader and co-founder of The AML Shop, a team of advisers who help companies assess and manage their financial crime and compliance risks, and a Fellow of CPA Ontario. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.