Topic Gateway Series Fraud and Money Laundering

Fraud and money

laundering
Topic Gateway Series No. 31

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Prepared by Martin Nimmo and Technical Information Service June 2007
Topic Gateway Series Fraud and Money Laundering

About Topic Gateways

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Topic Gateway Series Fraud and Money Laundering

Definition
Money laundering is defined as:

‘The funnelling of cash or other funds generated from illegal activities through
legitimate financial institutions and businesses to conceal the source of the funds.’

Anti-Money Laundering, 2nd ed., IFAC, 2004

Fraud is a general term for deliberate misrepresentation and may include money
laundering.

The problems of fraud and especially money laundering are increasing at an

unprecedented rate. Governments worldwide are introducing new legislation and
penalties for such white collar crimes. However, the huge amounts of money
involved in these illegal activities ensure that criminals continue to exploit ways of
increasing their activities. They clearly weigh up the potentially vast profits against
their chances of being caught and the subsequent penalties.

Context
It is a fact that legitimate financial institutions and businesses may be involved in
fraud and money laundering. It is therefore crucial that CIMA members, whether in
practice or in business, are fully aware of this possibility and are alert to the signs of
money laundering which can affect their business.

Examination candidates should be aware of the risks involved, especially at strategic

and TOPCIMA level. They should ensure that they know the signs of possible money
laundering and the steps they must take to report it.

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Topic Gateway Series Fraud and Money Laundering

Overview
There are a number of ways in which criminals commit financial fraud. Very often
this involves stealing another person’s identity.

Identify theft
Identity theft (including e-fraud and ‘phishing’) is a modern day fraud and much is
publicised about people whose assets have been stripped by personal identity theft.
It is advisable for individuals to check their own personal credit reports regularly.
However, there are increasing numbers of reported cases where the identities of
companies have been hi-jacked. This occurs through unauthorised changes to the
registered address of the company or to directorships.

These crimes are not just a financial risk to the companies concerned, but a
reputational risk which may damage the business for an appreciable amount
of time.

The Fraud Act 2006 came into force on 15 January 2007. This created a new
offence of fraud, which can be committed in three ways:

• by making a false representation (with intent to make a gain, cause loss or risk
of loss to another)

• by failing to disclose information

• by abuse of position.

It also became an offence to obtain services dishonestly, to possess equipment to

commit frauds, and to make or supply articles for use in frauds. The Identity Cards
Act 2006 created offences relating to the possession, control and intent to use false
identity documents, including genuine documents that relate to another person.

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Topic Gateway Series Fraud and Money Laundering

Phishing
The objective of 'phishing' is to obtain and use personal banking details. Potential
victims receive an email purporting to be from a bank or building society, or these
days commonly from eBay or PayPal. The email may state that there has been a
breach of security or the person concerned needs to update their details.

Alternatively, people may be told that they have made a purchase although they
have not. They are then directed to a website that appears to be legitimate where
they are asked to disclose their bank or personal details. If you receive any such
message:

• do not reply to it

• do not pass any personal information by email or complete any forms asking for
personal information

• delete the message.

Concerned individuals should contact the real company or organisation by post or

telephone at a genuine address or number. Many companies that deal exclusively on
the internet also have a help section which explains what you should do if you
receive one of these emails. Examples of 'phishing' letters are also given.

On 2 November 2005 the Times recorded that a fraudster who duped almost
£200,000 from eBay customers using a 'phishing' scam had been jailed by Preston
Crown Court. David Levi of Lytham, Lancashire, led a gang that amassed a fortune
by stealing account details from users and assuming their identities. It is believed to
have been the first successful prosecution for 'phishing'.

Individuals should purchase appropriate computer software to protect them from

this type of attack. Anti-spyware and personal firewalls are ideal, and anti-virus
software will give a measure of protection against 'phishing'.

Cash back fraud

Cash back fraud may result when an individual offers something for sale on the
internet, Exchange and Mart or even the small ads in a local paper. They may be
contacted by a 'buyer' who wants to purchase the advertised item without wanting
to see it.

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Topic Gateway Series Fraud and Money Laundering

The seller then receives a cheque for considerably more than the asking price, and is
asked to send some or all of the difference to the buyer or shipping agent by money
transfer (usually Western Union). The cheque will either be forged or stolen. Even if
it is cleared by the bank, it can be recalled and the seller will not be reimbursed for
this loss.

Research has established that many people put themselves at risk of fraud through a
failure to take basic precautions. For example, one in eight people fail to log out
after shopping online, leaving their financial details visible to others. One in four
people do not check if a website is secure (the padlock symbol to the bottom right
of your screen will usually indicate this).

People are also urged to sign up to security schemes such as Verified by Visa and
MasterCard SecureCode. The simple step of typing in a password or security code
when buying online makes it less likely for fraudsters to use stolen card details.

The Isle of Man Financial Services Commission adds a security point applicable in the
case of emails; If you want to save a copy of a document, do not open it. Right click
on the name of the document you require and a dialog box will appear which will
give you the option to save the target or to print it.

'419' letters
There continues to be a steady flow of letters either in hard copy, by fax or by
email, appealing to CIMA members to assist the originator(s) with moving money
out of the respective country by bank transfer. These letters are known to the Police
in the UK as '419' letters (after Section 419 of the Nigerian Penal Code).

In a typical '419' (advance fee fraud) letter, the author claims to be a senior
government, company or bank official who has managed to over inflate a contract,
generating a huge personal profit. In return for help in smuggling money out of the
country, the recipient is offered a percentage, usually between 10% and 30%
(which can apparently amount to several million pounds).

At first no money is requested, but once a victim has been drawn in, requests will be
made for legal and administrative payments. Victims have lost hundreds of
thousands of pounds in some cases, not to mention the loss of business and
reputation.

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Topic Gateway Series Fraud and Money Laundering

Interpol strongly recommends that people:

• do not reply to these letters

• do not surrender bank account details

• do not surrender company details

• do not send or hand over ID documents and letters with personal or official
letterheads and logos, not even copies.

Companies that have sent polite letters of refusal have had their letterheads abused.
Under no circumstances should such approaches be responded to. CIMA members
or students should send any letter of this type on to their local police force
immediately.

Overview of money laundering

The fight against financial crime worldwide is largely based on the 40 principles of
the international Financial Action Task Force (FATF) set up by the G7 nations. In the
UK, HM Treasury recently issued the draft Money Laundering Regulations 2007,
which will implement the EU 3rd Money Laundering Directive.

This is only the latest of many measures. The Money Laundering Regulations 2003
(in force until 15 December 2007 when they will be replaced with the new
Regulations) have been supplemented by the Proceeds of Crime Act and the Serious
Organised Crime Act, as well as other primary legislation. Similar regulation applies
in all EU member states (currently based on the EU 2nd Money Laundering Directive)
and compatible measures apply in most countries worldwide.

The EU Third Money Laundering Directive

The EU third Money Laundering Directive and the new Money Laundering
Regulations include changes to the obligations related to customer due diligence.
This is the requirement for financial institutions, including 'external accountants', to
identify their customers and verify their identity. They also need to maintain full
records.

It is vital that CIMA members understand that this not only relates to accountants
offering audit, insolvency services or financial advice. It applies to all CIMA Members
in Practice, and to all their new or existing clients, whether individuals or companies.
The Third Money Laundering Directive will be adopted in UK law as the Money
Laundering Regulations 2007.

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Topic Gateway Series Fraud and Money Laundering

Requirements of CIMA members

All CIMA members, but especially registered Members in Practice, must observe the
requirements of regulations and relevant legislation, as failure to do so could lead to
prosecution. They could also face both substantial fines and imprisonment if found
guilty. Members and students will also be subject to the Institute’s own conduct
procedures.

Attention should be drawn to the Fraud Act 2006 and to anti-terrorism legislation.
The UK Government’s view is that terrorism is largely financed by fraud and money
laundering. It also considers that money laundering covers a wide range of offences
ranging from drugs dealing to VAT fraud, robbery and disposing of the proceeds of
crime.

Application
There are three sources of sector specific guidance, namely IFAC, the CCAB and
CIMA. Both IFAC and the CCAB have issued online guidelines. CIMA has published
its own summary as Anti-Money Laundering: what every accountant must know.
This is available as a downloadable PDF document from this website, or in hard copy
from Professional Standards. A new edition, incorporating guidance on the Money
Laundering Regulations 2007, will be available later in 2007.

Customer due diligence (CDD)

CIMA registered Members in Practice must perform CDD when taking on a new
client, or when starting a possible contract or transaction with a person or company.
CDD should eventually be extended to relationships with an established supplier.
CIMA Members in Practice (described as 'external accountants' in the draft Money
Laundering Regulations 2007) are required to perform CDD, and CDD should be
considered for use by all members, not just those in practice, as a routine means of
establishing identity for business activity. This is risk based to an extent; in some
circumstances simplified CDD is acceptable, and in others enhanced CDD may be
required.

CDD was formerly known as KYC (know your client) but the regulations are now
quite specific about the requirements. Essentially, CIMA members must demonstrate
to their supervisory authority that they have taken the proper measures in line with
the risks. If necessary, they must involve the Serious Organised Crime Agency
(SOCA), the Police or the Crown Prosecution Service. CDD is now an essential part
of the client business relationship.

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Topic Gateway Series Fraud and Money Laundering

CDD means:

• identifying and verifying the customer’s identity using documents, data or

information obtained from a reliable and independent source

• where applicable, identifying the beneficial owner and taking risk based and
adequate measures to verify their identity

• obtaining information on the purpose and intended nature of the business

relationship

• conducting ongoing monitoring of the business relationship.

This ongoing monitoring should include:

• Scrutiny of transactions undertaken throughout the business relationship. This is

to ensure that transactions are consistent with the accountant’s knowledge of
the client, the business and risk profile.

• Ensuring that documentation, data or information held is kept up to date, and

carefully filed in hard copy.

Enhanced customer due diligence

Enhanced due diligence must be performed where the situation clearly represents a
higher risk of money laundering, for example, when the client is not present. This is
covered in Regulation 10 of MLR 2007. Enhanced due diligence is particularly
important when the client is a 'politically exposed person'.

Client not present

Where the customer has not been physically present for identification purposes,
specific measures must be taken to compensate for the higher risk. At least one of
the following measures should be applied.

• Ensuring that the customer’s identity is established by additional documents,

data or information.

• Taking supplementary measures to verify or certify the documents supplied.

Alternatively, confirmatory certification by a credit or financial institution which
is subject to the money laundering directive, may be required.

• Ensuring that the first operational payment is carried out through an account
opened in the customer’s name with a credit institution.

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Topic Gateway Series Fraud and Money Laundering

Politically Exposed Persons (PEP)

A PEP is an individual who is or has, at any time in the preceding year, been
entrusted with prominent public functions. PEP status also applies to an immediate
family member or a known close associate of such a person.

This is particularly important for people outside the UK, or for those entrusted with
a prominent public function by a state other than the UK, the European Union or an
international body, at any time in the preceding year. CIMA members are
responsible for deciding whether a person is a known close associate of a PEP. They
should pay attention to any information they have or which is publicly known.

In respect of a business relationship or occasional transaction with a PEP, CIMA

members are classed as a 'relevant person' and must:

• have appropriate risk based procedures to determine whether the customer is a

PEP

• have senior management approval for establishing a business relationship with

such a person

• take adequate measures to establish the source of wealth and source of funds
which are involved in the business relationship or occasional transaction

• conduct enhanced ongoing monitoring of the business relationship.

Simplified due diligence

Regulation nine of the new regulations essentially says that Simplified Due Diligence
(SDD) may be used where the client is:

• a credit or financial institution subject to the money laundering directive

requirements

• a listed company in the European Economic Area

• the beneficial owner of a pooled account held by a notary or other independent

legal professional

• a public authority in the United Kingdom.

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Topic Gateway Series Fraud and Money Laundering

SDD may also be used where the product is:

• a life insurance policy (subject to limitations of premium)

• an insurance policy for a pension scheme (if there is no surrender clause and if
the policy cannot be used as collateral)

• a pension, superannuation or similar scheme which provides retirement benefits

to employees (subject to conditions)

• electronic money (see Article 1(3)(b) of the electronic money directive), where:

If the device cannot be recharged, the maximum amount stored in the device is
150 Euro
or

If the device can be recharged, a limit of 2,500 Euro is imposed on total

transactions in a calendar year. This is unless the bearer redeems an amount of
1,000 Euro or more in the same calendar year.

A credit or financial institution situated in a non European Economic Area State,

which imposes requirements equivalent to those laid down in the money laundering
directive, and is supervised for compliance with those requirements.

It is highly advisable to read Regulation 9 before proceeding. There are other limited
circumstances where SDD may be used. SDD does not require CIMA members to
apply the normal CDD measures if there are reasonable grounds to believe that the
client, product or transaction is covered by the above instances.

Suspicious activities and suspicious activity reports

It is difficult to describe exactly what constitutes suspicious activity, to some extent
this is a gut feeling that something is wrong. An individual may feel that a client has
funds that are unaccounted for, a dubious background or that the character of the
business relationship has changed.

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Topic Gateway Series Fraud and Money Laundering

A suspicious situation must be reported to SOCA without delay. It is possible to

report electronically using the SOCA website or to download faxable forms. A sole
trader or a small partnership will probably do this themselves, but a larger firm must
designate a specific person as the Money Laundering Reporting Officer who is
responsible for liaison with SOCA.
www.soca.gov.uk/financialIntel/disclosure.html#forms
[Accessed 20 May 2008]

The purpose of filing a suspicious activity report (SAR) is for CIMA members to
obtain consent to proceed with the transaction. Even where consent is not given,
the form allows members to provide SOCA with as much information as possible.

Consent typically takes up to a week. The larger the sum of money involved, the
more likely it is that SOCA will take an interest. It is important to avoid tipping off
the client or prospective client, as tipping off is an offence under the Proceeds of
Crime Act. It may result in fines and prison sentences for compromising an
investigation. Sometimes the client may perceive a delay in dealing with his or her
account. This leads to difficulties, and it may be as well to prepare appropriate
'excuses' for such delays. Here it would be unwise either to lie or to suggest to the
client that the process would be brief.

There have been real life situations which can involve threats of kidnapping or bodily
harm, despite the legal sanctions. Criminals have little compunction about the lives
of unwitting intermediaries who may get in their way. It is best to refuse business if
a client is deemed to be suspicious.

Legal professional privilege

Under the UK’s Proceeds of Crime Act (POCA) and Money Laundering Regulations
(MLR), the courts regard the client’s right to confidentiality with a legal adviser
under so called professional privilege as fundamental to the right of access to legal
advice. Apart from lawyers, only patent agents, trademark agents and licensed
conveyancers had previously been granted such privilege.

After representation, this right of professional privilege was extended to

accountants (not just auditors) and tax advisers with regard to money laundering
only. To qualify, tax advisers must be members of appropriate professional bodies,
referred to as ‘relevant professional advisers’. These advisers now include members
of the CCAB bodies, including CIMA.

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Topic Gateway Series Fraud and Money Laundering

‘Professional privilege relates to information communicated by a client or his

representative in connection with the giving of legal advice or in connection with
legal proceedings or contemplated legal proceedings, but does not apply to
information communicated with the intention of furthering a criminal purpose
(including laundering money).’

Law Society of England and Wales

The following information is covered under legal professional privilege:

• advice on the interpretation or application of any element of tax law

• advice on the legal aspects of a takeover bid, for example, the Companies Act
legislation

• advice on duties of directors under the Companies Act

• advice to directors on legal issues relating to the Insolvency Act 1986, for
example, on the legal aspects of wrongful trading (not applicable to CIMA
members). Advice on employment law

• legal Professional Privilege normally applies when a client is either unwittingly

involved or not directly involved in money laundering, and requires advice from
a legal adviser in an accounting or taxation context. Advice may be given and
the accountant is not required to report to SOCA about the client

• exemption from making a money laundering report does not apply where the
services provided will be used to further a criminal purpose. However this
exception is complex and further legal advice should be sought before a decision
is made.

Further information
CIMA Articles
Nimmo, M. Government targets fraud with tougher legislation. Insight, March
2007. Available from: www.cimaglobal.com/insight
[Accessed 20 May 2008]

Nimmo, M. Professional privilege puts accountants in the legal spotlight. Insight,

August 2006. Available from: www.cimaglobal.com/insight
[Accessed 20 May 2008]

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Topic Gateway Series Fraud and Money Laundering

Nimmo, M. Money laundering laws force new ‘know your client’ procedure.
Insight, June 2006. Available from: www.cimaglobal.com/insight
[Accessed 20 May 2008]

Nimmo, M. How to beat charity fraudsters in 'Come hell or high water.' Financial
Management, February 2006, pp14-17. Available from:
www.cimaglobal.com/insight
[Accessed 20 May 2008]

Nimmo, M. Money laundering: financial crime and terrorism are global issues. (PDF
496KB). Financial Management, November 2005, pp28-29. Available from:
www.cimaglobal.com/financialmanagement
[Accessed 20 May 2008]

Articles
Abstract only from Business Source Corporate available from:
www.cimaglobal.com/mycima
[Accessed 20 May 2008]

Choudhury, C. Safety first. Accountancy Age, 05/10/2006, p. 16-17

Council approves rules on the tracing of fund transfers in order to better combat
terrorist financing. Accountancy Ireland, December 2006, Volume 38,
Issue 6, p. 34

Solicitor group’s role more than sticking to the rules. Accountancy, November 2006,
Volume 138, Issue 1359, p. 108

AccountancyAge: damned if you do, damned if you don’t. Accountancy Age,

28/09/2006, p. 15

Cycle of crime. Accountancy, September 2006, Volume 138, Issue 1357, p. 43-44

Whistleblower. Accountancy, August 2006, Volume 138, Issue 1356, p. 21

ICAEW issues money laundering tips. Accountancy, April 2006, Volume 137, Issue
1352, p. 109

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Topic Gateway Series Fraud and Money Laundering

Books
Graham, T., Bell, E. and Elliott, N. (2006). Money laundering. London: LexisNexis
Butterworths Tolley. (Butterworth’s Compliance Series)

Lilley, P. (2006). Dirty dealing: the untold truth about global money laundering,
international crime and terrorism. London: Kogan Page

Muller, W., H., Kalin, C. and Goldsworth, J. (2007). Anti-money laundering:

international law and practice. Chichester: John Wiley and Sons

Reuter, P. and Truman, E. (2004). Chasing dirty money: progress on anti-money

laundering. Washington D.C: Institute for International Economics

Schott, P. (2006). Reference guide to anti-money laundering and combating the

financing of terrorism. Washington D.C.: The International Bank for Reconstruction
and Development/The World Bank/The International Monetary Fund

CIMA Mastercourses
Money laundering: dispelling the myths. To book via
www.cimamastercourses.com
please go to Find and key in the course code MOLA.

Websites
Money laundering: how it is done and what is being done about it
A guide to sources http://digbig.com/4wxry
[Accessed 20 May 2008]

Institute of Chartered Accountants in England and Wales

Money laundering web page
http://digbig.com/4wxsa
[Accessed 20 May 2008]

Web resources for money laundering regulations

Selected by solicitor Delia Venables
http://digbig.com/4wxsb
[Accessed 20 May 2008]

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Other information
How SMEs can reduce the risk of fraud (2005) Brussels: FEE. (Free
download)
http://digbig.com/4wxsc
[Accessed 20 May 2008]

Fraud Risk Management bibliography on CIMA website

http://digbig.com/4wxsd
[Accessed 20 May 2008]

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