P7 notes-Money Laundering

By Roberto Taylor,2014-05-20 14:57
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P7 notes-Money Laundering

Money Laundering

    2. Money laundering

    a) Define money laundering.[1]

    b) Explain how international efforts seek to combat money laundering.[2]

    c) Explain the scope of criminal offences of money laundering and how professional

    accountants may be protected from criminal and civil liability.[2]

    d) Explain the need for ethical guidance in this area.[2]

    e) Describe how accountants meet their obligations to help prevent and detect money

    laundering including record keeping and reporting of suspicion to the appropriate re gulatory body.[2]

    f) Explain the importance of customer due diligence (CDD).[2]

    g) Recognise potentially suspicious transactions and assess their impact on reporting duties.[2]

    h) Describe, with reasons, the basic elements of an anti-money laundering program.[2]

    Money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds generated by illegal means, allowing them to maintain control over the proceeds and, ultimately, providing a legitimate cover for their sources of income.

International efforts to combat money laundering

    The financial action task force(FATF) is an international body that promotes policies globally to combat money laundering and terrorist financing. In 1990, FATF issued recommendations to combat the misuse of financial systems to launder drug money. The recommendations included:

    ; Making money laundering a criminal offence

    ; Measures to be taken by businesses and professions to prevent money laundering,


    - Customer due diligence and record-keeping

    - Reporting of suspicious transactions to an appropriate authority ; International co-operation including extradition of suspects.

FATF focuses on three principal areas:

    ; Setting standards aimed at combating money laundering and terrorist financing ; Evaluating the degree to which countries have implemented measures that meet

    those standards, and

    ; Identifying and studying money laundering and terrorist financing techniques.

In 1990, FATF drew up a document entitled “the forty recommendations” as an

    initiative to combat the misuse of financial systems to launder drug money. These recommendations (including the ones noted above) were endorsed by over 130 countries worldwide and now form the benchmark against which national anti-money laundering systems are assessed. However, different countries have moved forward in different ways.

    The UK has adopted the recommendations of FATF.

    The Republic of Ireland has similar legislation to the UK, with all reports of suspected money laundering to be made to the Garda Bureau of Fraud Investigation. The USA has a number of similar Acts:

    ; The bank Secrecy Act 1970: this requires all cash deposits, withdrawals and

    transfers above $10,000 to be reported to the Inland Revenue Service ; The Money Laundering Control Act 1986

    ; The United and strengthening America by Providing Appropriate Tools Required

    to Intercept and Obstruct Terrorism (USA PATRIOT) Act 2001: this requires all

    financial institutions to establish an anti-money laundering program, including

    the development of internal policies and the designation of a compliance officer.

    d) Explain the need for ethical guidance in this area.[2]

    ACCA provides guidance in its Code of Ethics and Conduct in the area of money laundering.

    ; This is needed because there is a clear conflict between:

    (1) The accountant‟s professional duty of confidentiality in relation to his 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 in bad faith or without reasonable grounds would possibly lead to the

    accountant being sued for breach of confidence.

    ; Auditor‟s duty of confidentiality will not be breached if they report, in good faith,

    any money laundering knowledge or suspicions to the appropriate authority.

    Statutory protection also applies where reports are made in good faith.

f) Explain the importance of customer due diligence (CDD).[2]

    In order to provide reasonable assurance on the assignment, the auditor need to perform the customer due diligence on their clients.

    In order to understand and investigate if any information were gathered and will mislead the accuracy of the financial reports.

    Due diligence provides management with the confidence to make investment decisions based on all the available facts. It can be carried out by management but it is often better to employ a specialised advisory firm.

    Gather information on a target company such as:

    Details of business operations

    Financial performance

    Financial position (hidden covenants or contingent liabilities)

    Legal issues

    Tax situation

    Armed with this information, the audit firm can make an informed decision on whether to acquire the target company. Any potential problems should be uncovered before the company is acquired, and the risk of unpleasant surprises after the purchase is minimised.

Verification of specific written representations

    Due diligence work should corroborate verbal representations made by the vendor to the potential acquirer. E.g. the target company may have sated the his company has no legal claims against it. Due diligence work would be able to verify this kind of representation giving confidence to the potential acquirer.

Identification of assets and liabilities

    A Due diligence investigation will ensure that all assets and liabilities of the target company are identified. It is particularly important to identify any contingent liabilities and understand the potential cost to the acquirer if the liabilities crystallises. This work can be very complex and so it may be advisable for the firm to use the expertise of an external due diligence provider.

    Operational risk

    A due diligence investigation will identify operational risks in the target company which are not apparent from examining financial information alone. The patent of a key engine part manufactured by target co may be about to expire or a key customer

    may wish to renegotiate terms. The issues discovered could mean that it decides the acquisition of the company is too risky or alternatively may offer a useful bargaining tool in negotiating the consideration paid.

Acquisition planning

    Post-acquisition strategy will also be assessed during a due diligence investigation. Potential economies of scale and operational synergies will be highlighted to the acquirer along with the costs of any necessary reorganisation. The due diligence report may be able to adivise the firm how best to integrate the target company into existing group structure.

    Management time

    It is possible for due diligence to be performed by directors of the acquiring company. Although this can be cheaper for the acquirer it has several drawbacks, the main one being that due diligence can be incredibly time-consuming for the directors, leaving them little to carry out their day-to-day activities. The directors may lack the experience and expertise in acquisitions that a professional due diligence advisor can offer.


    A third party review will add to the credibility of the investment decision in the target co and give shareholders some comfort over the consideration paid.

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