Forensic and Investigative Accounting Chapter 7 Money Laundering and Transnational Financial Flows © 2011 CCH. All rights Reserved. 4025 W. Peterson Ave. Chicago, IL 60646-6085 1 800 248 3248 www.CCHGroup.com

Forensic and Investigative Accounting Definition A definition of money laundering that covers both legal and illegal contexts is to take money that comes from one source, hide that source, and make the funds available in another setting so that the funds can be used without incurring legal restrictions or penalties. Chapter 7 Forensic and Investigative Accounting

Steps in Money Laundering The traditional money laundering process can be divided into three steps: Money is deposited in a bank or financial institution. A set of complex transfers is made to disguise the original source for the money and to hide the audit trail. (This step is called layering the transactions.) The money is integrated back into the legitimate money supply. Chapter 7 Forensic and Investigative Accounting

Cybercash Creates New Laundering Opportunities Using the Internet, it will be possible for anyone to transfer large sums of money from one location to another without using a bank and with the transfers being totally anonymous. Chapter 7 Forensic and Investigative Accounting

Cybercash Creates New Laundering Opportunities Today, cybercash transactions are beginning to take place without the need for third parties and the consequential scrutiny that might otherwise exist. Furthermore, cybercash transfers can be structured so that they originate in a jurisdiction where such activities are not considered illegal. Chapter 7 Forensic and Investigative Accounting

Possible Users of Money Laundering Practices Grant recipients Criminals Political asylum seekers Chapter 7 Forensic and Investigative Accounting

Correspondent Banking Correspondent banking takes place when one bank provides services to another bank to move funds, exchange currencies, and access investment services such as money market accounts, overnight investment accounts, CDs, trading accounts, and computer software for making wire transfers and instant updates on account balances. Chapter 7 Forensic and Investigative Accounting

Correspondent Banking A payable-through account enables the respondent bank’s clients within the country where the bank is registered to write checks that are drawn directly on the respondent bank’s correspondent account in the United States. Chapter 7 Forensic and Investigative Accounting

Tools Banks Use to Identify Money Launderers Monitoring software Currency Transaction Reports (CTRs) Suspicious Activity Reports (SARs) Chapter 7 Forensic and Investigative Accounting

Due Diligence Laws for Banks Laws and regulations require that a bank perform due diligence in its relationships with other banks and important clients as well as continually monitor account transactions. Within banks, due diligence must co-exist with the client’s need for privacy and the secrecy laws existing in many foreign jurisdictions that prevent access to bank documents. Chapter 7 Forensic and Investigative Accounting

Forensic and Investigative Accounting Shell Banks Shell banks are generally high-risk banks that exist without any physical presence in any legal jurisdiction. These banks have a banking license in a specific country, but they are not likely to have a staff and may be operated as part of another business or operated out of an individual’s personal residence. Chapter 7 Forensic and Investigative Accounting

Forensic and Investigative Accounting Offshore Banks An offshore banking license prevents the organization from transacting banking activities with any citizens of the licensing jurisdiction or transacting business with the currency of the licensing jurisdiction. These bank operations solely exist within international financial transactions. Chapter 7 Forensic and Investigative Accounting

Cash-Oriented Businesses Currency exchanges Online auctions Casinos Purchasing departments Chapter 7 Forensic and Investigative Accounting

Forensic and Investigative Accounting Audit Trail Churning Laundering cycles Illegal cash Deposited into bank Purchase asset Sell asset Documented legal cash Chapter 7 Forensic and Investigative Accounting

Finding Money Laundering Schemes Web logs Tracing IP addresses HTTP common logfile format Wire transfers Bank reports IRS Form 8300 Chapter 7 Forensic and Investigative Accounting

Guarding Against Money Laundering Individual due diligence. Business associations. Employment. Company due diligence in verification procedures. Corporate ownership and governance. Bearer shares. Trust due diligence. Trust deeds. Beneficiaries. Chapter 7 Forensic and Investigative Accounting

Accountant’s Role as Gateway Keeper AICPA Auditing Standards Governing Money Laundering. SAS No. 54, Illegal Acts by Clients. SAS No. 82, Consideration of Fraud in a Financial Statement Audit (now replaced by SAS No. 99). Lack of Reporting Requirement. Chapter 7 Forensic and Investigative Accounting

Forensic and Investigative Accounting USA Patriot Act of 2001 International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (MLAA). Payable-through accounts. Enhancements and restrictions under MLAA. Reporting requirements under MLAA. Chapter 7 Forensic and Investigative Accounting