Forensic+ ML

MONEY LAUNDERING
Money laundering is the process by which criminals attempt to conceal the true origin
and ownership of the proceeds of their criminal activity. In order to be able to spend
money openly, criminals will seek to ensure that there is no direct link between the
proceeds of their crime and the actual illegal activities
Factors indicating money laundering:

Transactions routed through several jurisdiction.
Secrecy over transactions.
Excessive use of wire transfers
High value deposits or withdrawals not characteristics of the type of account
A pattern that after a deposit, the same amount is wired to another financial
institution.
The three stages of the money laundering process

Placement;
Layering.; and
Integration
Anti money laundering procedures

The firm must gather know your client information (KYC) to assist in spotting suspicious
transactions. This includes:
1. Who the client is
2. Who controls it
3. The nature of the client
4. The client’s sources of funds
5. The client’s business and economic purposes.
Elements of basic money laundering program
1. Appoint Money Laundering Reporting Officer (MLRO).
2. Train the individuals to ensure that they are aware of relevant legislation, know
how to deal with potential money laundering, how to report suspicions to MLRO.
3. Establish internal procedures such as know your client and client acceptance
procedures to prevent money laundering.
4. Verify the identity of new and existing clients and maintain evidence of
identification.
5. Maintain records of identification, and any transactions undertaken for or with the
client.
6. Report suspicions of money laundering to SOCA.
Note:
1. Concealing and tipping off (MLRO or any individual discloses something that
might prejudice any investigation) is itself a criminal offence.
2. The obligation to report money laundering act does not depend on the amount
involved or the seriousness of the offence.
The need for ethical guidance on money laundering

This is needed because there is a clear conflict between the following two situations:
1. The accountants’ professional duty of confidentiality in relation to client’s
business, and
2. The duty to report suspicions of money laundering to the appropriate authorities
as required by law.
Professional accountants are not in breach of their professional duty of confidentiality if

they report in good faith their knowledge or suspicions of money laundering to the
appropriate authority.
Disclosure without reasonable grounds would possibly lead to the accountants being
sued for breach of confidence.
1.a You are a manager in Lark & Co, responsible for the audit of Heron Ltd, an owner-managed business
which operates a chain of bars and restaurants. This is your firm's first year auditing the client and the
audit for the year ended 31 March 20X2 is underway. The audit senior sends a note for your attention:
'When I was auditing revenue I noticed something strange. Heron Ltd's revenue, which is almost entirely
cash-based, is recognised at £5.5 million in the draft financial statements. However, the accounting
system shows that till receipts for cash paid by customers amount to only £3.5 million. This seemed odd,
so I questioned Ava Gull, the financial controller about this. She said that Jack Heron, the company's
owner, deals with cash receipts and posts through journals dealing with cash and revenue. Ava asked
Jack the reason for these journals but he refused to give an explanation.
'While auditing cash, I noticed a payment of £2 million made by electronic transfer from the company's
bank account to an overseas financial institution. The bank statement showed that the transfer was
authorised by Jack Heron, but no other documentation regarding the transfer was available.
'Alarmed by the size of this transaction, and the lack of evidence to support it, I questioned Jack Heron,
asking him about the source of cash receipts and the reason for electronic transfer. He would not give
any answers and became quite aggressive.'
Required
(i) Discuss the implications of the circumstances described in the audit senior's note; and (6 marks)
(ii) Explain the nature of any reporting that should take place by the audit senior. (3 marks)
(b) You are an audit manager in Nate & Co, a firm of Chartered Accountants. You are reviewing the
situations, which were recently discussed at the monthly audit managers' meeting:
Nate & Co has recently been approached by a potential new audit client, Fisher Co. Your firm is keen to
take the appointment and is currently carrying out client acceptance procedures. Fisher Co was recently
incorporated by Marcellus Fisher, with its main trade being the retailing of wooden storage boxes.
There are specific regulatory obligations imposed on accountants and auditors in relation to detecting and
reporting money laundering activities. You have been asked to provide a description of the auditors'
responsibilities in relation to money laundering.
Required
(i) Define 'money laundering' and explain the money laundering process.
(ii) State the procedures specific to money laundering that should be considered before, and on the
acceptance of, the audit appointment of Fisher Co.
(iii) Explain the policies and procedures that a firm of Chartered Accountants should establish in order to
meet its responsibilities in relation to money laundering.
i. Definition of Money laundering

Money laundering is the process by which criminals attempt to conceal the true origin and ownership of
the proceeds of their criminal activity, allowing them to maintain control over the proceeds and, ultimately,
providing a legitimate cover for their sources of income.
Explanation
The money laundering process has three stages:
(1) Placement: getting money (usually cash) into the system in the first place. This could be by making
bank deposits, making investments (eg. in a unit trust), or through a 'front' business, which is a legitimate
business that is used to launder money (eg. a betting shop, which legitimately receives high levels of
cash, could be used to deposit stolen cash).
(2) Layering: using lots of different transactions to create so many 'layers' of transactions between the
initial placement of 'dirty' money and the money that is taken out at the end, that it is difficult to trace.
(3) Integration: extracting funds from the laundering system, and 'integrating' them back into the world of
legitimate and use-able money.
ii. Money laundering procedures – before acceptance
The firm should carry out client identification procedures, such as:
Obtaining evidence that the client exists, such as looking at the certificate of incorporation and
establishing the identities of all directors (Mr Fisher and any others) by taking copies of passports or
driving licenses
Conducting a Companies House search on Fisher Co
Confirming the registered address (by obtaining headed paper)
Obtaining a list of shareholders and directors
Money laundering procedures – after acceptance

The firm should obtain 'know your client' information, such as:
The expected patterns of Fisher Co's business, are there peak seasons for selling wooden storage
boxes, are there any major clients or suppliers?
The business model of the client (in this instance Marcellus Fisher appears to be acting individually
through a company – does he own any other companies and what activities do they have?)
The source of the client's funds (is Mr Fisher the only investor, or are there others, does the company
also have debt finance and, if so, from whom?)
The firm should include a paragraph about money laundering responsibilities in the engagement letter.
iii. Appoint a 'Money Laundering Reporting Officer' (MLRO) and implement internal reporting
procedures
The MLRO should have a suitable level of seniority and experience. Individuals should make internal
reports of money laundering to the MLRO. The MLRO must then consider whether to report to the NCA,
and document this process.
Train individuals
Train individuals to ensure that they are aware of the relevant legislation, know how to recognise and deal
with potential money laundering, how to report suspicions to the MLRO, and how to identify clients.
Internal procedures
Establish internal procedures appropriate to forestall and prevent money laundering, and make relevant
individuals aware of the procedures. Procedures should cover:
Client acceptance
Gathering 'know your client' (KYC) information
Controls over client money and transactions through the client account
Advice and services to clients that could be of use to a money launderer
Verify client identities

The firm must be able to establish that new clients are who they claim to be. They should verify the
identity of new and existing clients, and keep the evidence of this on file – typically, copies of evidence
such as passports, driving licences and utility bills. For a company this will include identities
of directors and certificates of incorporation.
Record keeping
Maintain records of client identification, and any transactions undertaken for or with the client.
Special care needs to be taken when handling clients' money to avoid participating in a transaction
involving money laundering.

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MONEY LAUNDERING

Factors indicating money laundering:

The three stages of the money laundering process

Anti money laundering procedures

The need for ethical guidance on money laundering

Professional accountants are not in breach of their professional duty of confidentiality if

i. Definition of Money laundering

Money laundering procedures – after acceptance

Verify client identities

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