AML-CFT Global Requirements for DNFBPs

The Financial Action Task Force (FATF) and the Asia Pacific Group on Anti Money Laundering (APG) have outlined several basic guidelines related to AML-CFT for DNFBPs. The following recommendations have been proposed: (1) member countries to comply to all relevant requirements imposed on DNFBPs; (2) Member countries to carry out due diligence and record-keeping requirements (3) lawyers, notaries, other independent legal professionals and accountants should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the activities; (4) designated non-financial businesses and professions should be subject to regulatory and supervisory measures and the competent authorities (In Malaysi, this is the Financial Intelligence Unit of Bank Negara Malaysia.should establish guidelines, and provide feedback which will assist financial institutions and designated non-financial businesses and professions in applying national measures to AML/CFT, and in particular, in detecting and reporting suspicious transactions. Research to explore awareness and actual implementation is encouraged...

AML CFT Risks for Other DNFBPs

Three other large groups of DNFBPs are Real Estate Agents, Precious Stone Dealers and Casinos. Listed below are common fraud risk factors that should be considered. Real Estate Agents may be involved in the following activities: (1) engaging in a series of transactions designed to conceal the illicit source of funds; these transactions may be classified as of the layering phase; (2) investing in tourist complexes in order to acquire a legitimate appearance (integration phase); (3) buying and selling of real estate properties in fictitious names. Dealers in Precious Stones may may be involved with the risks of misusing the dealers in precious stones and metals are due to the fact that precious metals, particularly gold, attracts money launderers, as it has a high actual value and can be found in relatively small sizes, thus facilitating its transport, purchase and sale in several regions around the world. Gold also preserves its value regardless of its form whether it comes in the form of bullions or golden articles. Dealers are often interested in gold more than gems as it may be melted to change its form while preserving its value. Casino operators may be a party to ML/TF activities. Usually, gambling in Casino takes place in cash, which encompasses high risks that gamblers may use them in ML since they give money launderers a ready justification for obtaining a fortune with no legitimate source. Casinos are misused in ML operations in the first phase of ML (placement) where the funds intended to be laundered are transformed from cash money into cheques by the money launderer purchasing chips with the proceeds of a crime. The money launderer will later request repayment through a cheque drawn on the account of the casino. Again research to explore the awareness of these DNFBPs is greatly needed...

AML-CFT for DNFBPs - Accountants and Lawyers

As a result of stringent legislative frameworks to combat Money Laundering (ML) and Terrorist Financing (TF) in several countries, particularly those involving global financial institutions, money launderers have resorted to the nonfinancial sector to try to conceal laundered proceeds and revenues of crimes. Thus, the risks related to this sector lie in the potential misuse for Money Laundering and Terrorism Financing. They found that these businesses and professions comprise real estate agents, accountants, lawyers, casinos, dealers in automobiles and boats and horse races. Non-financial businesses and professions (DNFBPs)designated were: casinos, real estate agents, dealers in precious metals, dealers in precious stones, lawyers, notaries, other independent legal professionals and accountants, trusts and company service providers. Some of the risks involved may include accountants and lawyers involved in the following activities: (1) the establishment of companies or other complex legal arrangements (like trusts), as such services may conceal the link between the proceeds of the crimes and the criminals; (2) buying and selling of real estates, as the transfer of the real estate ownership is used to cover the illicit funds transfer (layering phase of ML)2 or the final investment of the proceeds passed through laundering operations (integration phase); (3) execution of financial operations on behalf of customers, like cash deposit or withdrawal, foreign currency exchange operations, sale and purchase of shares, sending and receiving international money transfers and (4) filing of fictitious lawsuits to obtain a judgment to legitimize the funds. Research to measure the level of awareness of these DNFBPs towards AML-CFT risks is needed...

Tax Evasion

In February 2012, the international Financial Action Task Force (FATF) has issued substantially revised guidance on money laundering legislation. One of the aims of the new FATF recommendations is "improved transparency", specifically requiring that there is reliable information available about the beneficial ownership and control of companies, trusts, and other legal persons or legal arrangements. For the first time tax evasion is recognised by FATF as a predicate offence for money laundering. As expected, FATF has also added tax crimes to the list of predicate offences for money laundering - a development welcomed by most countries. It will bring the proceeds of tax fraud within the scope of the powers and authorities used to investigate money laundering - which are typically far more extensive and intrusive than those used to investigate "ordinary" crime. The new guidance also suggests a risk-based approach to anti-money-laundering (AML) legislation, in which more stringent measures will be mandated where the risks are higher, with the option of simplified measures where the risks are lower. The 180 governments affiliated to FATF will now be expected to amend their AML legislation to conform to the new guidance. FATF will begin a new round of peer review evaluations of its member countries in 2013, focussing more intensively on assessing how effectively countries have implemented the standards. New research is needed to explore fraud risk indicators to recognise symptoms of tax evasion.

Professorial Lecture - Synopsis

The ACFE 2012’s Global Fraud Study 2012 reveals that financial statement fraud represents one of the most costly forms of occupational fraud in the new millennium. It is also one of the most difficult to trace. Although the final responsibility for ensuring the integrity of the financial statements of an organization lies with the board of directors, financial auditors have a very important role to play in mitigating and detecting financial statement fraud. At the professional level, various standards have been formulated and issued by accounting professional bodies to assist auditors. Two important standards that are used by auditors globally (when auditing financial statements) are the Statement on Auditing Standards No 99 (SAS 99) and the International Standards on Auditing 240 (ISA 240).

The “rule-based” SAS 99 was issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) in October 2002 and the “principle-based” ISA 240 was issued by the International Federation of Accountants (IFAC) in 2009. Basically, these standards were issued partly in response to various infamous accounting scandals involving Enron, WorldCom, Adelphia, and Tyco. This monograph is presented in five segments. First, an explanation of the basic definitions and concepts underlying financial statement fraud is given. Second, the monograph discusses two financial audit guidelines, SAS 99 & ISA 240 and their implications for auditors and management. In the third segment, relevant fraud theories are discussed to facilitate the development of fraud risk indicators. The fourth segment is premised on the framework underpinning the Fraud Diamond Theory and presents the empirical findings of a Malaysian study involving three groups of auditors, external, internal and government, and how they perceive the importance and usage of fraud risk indicators when auditing financial statements. While the results concerning the importance of risk indicators are fairly positive, there is a gap concerning their usage. Respondents emphasized their need for specialized training in financial fraud detection techniques. The final segment elaborates on the managerial and professional implications of the financial statement fraud on Corporate Malaysia.

Preparing for the Professorial Lecture

Just a day before the professorial lecture, the committee members have been working very hard to ensure that the event will be a success.

Getting the hall ready; confirming guest attendance; ensuring that there will be enough foods for everyone; communicating with publisher for book delivery etc etc; the committee members have been kept busy all day today. The rehearsal went as scheduled, and it is now my responsiblity to deliver the lecture to the audience. Thank you Dr Megawati for suggesting the catchy title "Stolen Fruit is the Sweetest ... or the Bitterest...?. Thank you all for your commitment

Non Profit Organisations Sector

Whilst no one doubts that the work of Non Profit Organisations (NPOs) is important, it is worthwhile to pay attention to the Mutual Evaluation Report produced and published by the Asia Pacific Group of Anti-Money Laundering (APG) which is related to NPOs.

Basically, the APG Mutual Evaluation Report specifies that “the use of charities and NPOs continues to be the leading source of funds for money laundering and terrorism financing”. The NPOs feature a number of vulnerabilities that money launders and terrorist organisations can use. They are: 1. NPOs enjoy public trust. 2. NPOs have access to considerable sources of funds. 3. NPOs are often cash–intensive. 4. Some NPOs have a global presence that provides a framework for national and international operations and financial transactions, often within or near areas that are most exposed to terrorist activity. 5. NPOs may often be subject to little or no governmental oversight (registration, record keeping, reporting and monitoring, check of background of beneficial owners, employees, management). 6. Governmental bodies may have insufficient resources to effectively oversee the sector. 7. NPOs may have limited resources or capacity to withstand demanding regulatory requirements.

Some of the negative economic effects of money laundering and terrorism financing include firstly, they undermine the integrity and soundness of the NPO sector that is critical to economic growth. Secondly, they reduce productivity in the economy's real sector by diverting resources. Thirdly, they distort the economy's international trade and capital flows to the detriment of long-term economic development and finally, the NPO sector can inadvertently become part of the criminal network encouraging criminal activity. Future research may include developing governance framework for NPOs.

Cost Effectiveness Model for CFT Regime

Ideally, an effective AML-CFT Compliance Programmes must be designed to address both the "costs" and "effectiveness" elements of the programmes. Cost effectiveness model may include evaluating the following: 1. the risks specifically posed by the products and services that one's business offers; 2. the type of customers that that business attracts; 3. the methods in which the products are delivered; 4. the geographies linked to the underlying transactions; 5. the vulnerabilities that the business poses to the risk of facilitating money laundering or terrorism financing; 6. the compliance programme to include details of the policies, systems and controls to manage and monitor the risks presented. 6. these controls to include the means for detecting suspicious transactions and frequency of customer due diligence. By applying a risk based approach, one can determine if a business is overcommitting resourcing to areas of low to medium risk.

Assessing Cost of Fraud

This is an excerpt from the ACFE Website: According to the recent ACFE's Report to the Nations on Occupational Fraud & Abuse, the typical organization loses 5% of its revenues to fraud each year. Applied to the estimated 2011 Gross World Product, this figure translates to a potential projected global fraud loss of more than $3.5 trillion. Other key findings include: (1) The median loss caused by the occupational fraud cases in our study was $140,000. More than one-fifth of these cases caused losses of at least $1 million. (2) The frauds reported will normally take a median of 18 months before being detected. (3) In 81% of cases, the fraudster displayed one or more behavioral red flags that are often associated with fraudulent conduct. Living beyond means (36% of cases), financial difficulties (27%), unusually close association with vendors or customers (19%) and excessive control issues (18%) were the most commonly observed behavioral warning signs. (4) Occupational fraud is more likely to be detected by a tip than by any other method. The majority of tips reporting fraud come from employees of the victim organization.

AML-CFT: Cost of Compliance

The Cost of Compliance for AML-CFT regime may differ from one institution to another institution. There are nevertheless some common costs incurred by a country that are not directly "absorbed" by a reporting institution. Example of costs incurred to establish AML-CFT legislation include items such as administrative costs, fees paid to experts, exposure drafts and various parlimentary readings and discussions. For financial institutions, costs could further be classified as "Prompted responses" and "Unprompted responses". Costs under the category of prompted responses include Training/professional development; Staff recruitment; Staff salaries; Monitoring software establishment; Software recurrent and External consultancy. Meanwhile, unprompted responses include Record keeping; monitoring; reporting; purchase of equipment or hardware; admin costs and customer relations. It is worth noting that reporting institutions are institutions that have been identified by the "AML-CFT Competent Authority - in Malaysia, this is Bank Negara Malaysia or BNM" who are expected to facilitate BNM by submitting "suspicious transaction reports or STR". Beside financial institutions, other reporting institutions are legal firms; accounting & auditing firms; company secretaries; casino; gem or metal dealers; money changers.

AML-CFT Fraud Risk Indicators

The Financial Action Task Force (FATF) is an inter governmental body set up in 1989 by various countries' jurisdiction with the aim of setting up standards and to promote effective implementation of legal, regulatory and operational measures to combat money laundering, terrorism financing and other related threats to the integrity of international financial system. The FATF developed several recommendations that are recognized as the international standards to combat money laundering and terrorism financing.

For financial institutions for example, FATF put forward the following recommendations to isolate high risk customers and high risk transactions. They include: (1) Policy and/or procedures for customer due diligence (R.5); (2) Policy and/or procedures for enhanced due diligence for politically exposed persons (R.6); (3) Policy and/or procedures for non-face to face business relationships (R.8); (4) Policy and/or procedures for anti-money laundering & counter terrorist financing programs (R.15); (5) Policy and/or procedures for countries that do not apply or insufficiently apply the FATF Recommendations (R.21); (6) Identify unusual and report suspicious transactions (R. 11 & 13) and (7) Consider identifying and reporting large currency transactions (R.19). Failure to comply to these recommendations constitute AML-CFT fraud risk indicators. The FATF have issued various recoomendations that covers various sectors and industries. Future research could look at indicators for various sectors and assess their effectiveness.

AML/CFT Training & Competency Framework

Gupta (2011) proposes a “competency framework” for human resources and professionals. Indeed, this framework is deemed suitable to be adapted when training AML-CFT professions - investigators, compliance officers, lawyers, accountants, auditors and company secretaries. According to Gupta, an effective competency framework for professionals should encompass at least eight dimensions. First, the competency training should focus on the real life requirements of the profession. Second, the competency training should integrate skills, attitudes, knowledge and experience to enable auditors to perform their tasks effectively.

Therefore, their sense of responsibility to ensure reasonable assurance against material misstatements should outweigh “mere compliance” with the standard. Third, the proficiency level of the professionals' expected competency should be objectively defined. Fourth, the organizations where the professionals are attached should provide sufficient flexibility to allow them to build their own competency. Fifth, the contents of competency training should be continuously updated to reflect latest requirements. Sixth, competency should be repeatedly demonstrated to achieve the objectives of the stipulated standard related to AML-CFT. Seventh, competency should be assessed by performance in real life situations against well-defined criteria. Finally, competency should be developed using various strategies at organizational and individual levels. Future research could propose competency framework for specific AML-CFT professionals.

Research Topics Related to Money Laundering

Research interest in the area of Money Laundering is a fairly new phenomenon. Though money laundering activities have started many years ago, research in this kind of financial crime is very limited. Money laundering is the process or activity undertaken by money launderers (or fraudsters) to conceal the sources of "dirty money" that are obtained from illicit means. Just like the concept of a laundery machine that is used to clean dirty linens, the dirty money (which is illegal)is put through various mechanisms so as to the ligitimise its existence. Once ligitimized, the "clean money" can be used as normal instrument for business transactions. In Malaysia, money laundering crimes involved those classified as predicate offences under the Anti-Money Laundering and Counter Financing of Terrorism Act 2001 (AMLATFA 2001). Among the predicate offences include: illegal gambling, illegal deposit taking, sale of illegal drug, criminal breach of trust, fraud, drug trafficking, embezzlement, racketeering, tax evasion and human traficking. For research purposes, there remains a gap in the following areas: (1) Developing AML/CFT Training & Competency Framework for AML-CFT Investigators (2) AML-CFT Fraud Risk Indicators (3) Training & Competency Framework for AML-CFT Professionals (4) Cost of AML-CFT Compliance (5) Assessing Cost of AML-CFT Fraud (6) Cost Effectiveness Model for CFT Regime (7) AML-CFT in Non Profit Organizations (8) Tax Evasion (9) AML-CFT Awareness Among Designated Non Financial Business & Professionals (DNFBP) Upcoming entries will discuss each of the above proposed research topics

International Collaboration with University of Tasmania

My four-day visit to the University of Tasmania (UTAS)is on the invitation of Professor Roger Willet, a senior research professor at the the School of Accounting and Corporate Governance. In November 2011, a letter of intent was signed between UTAS and UiTM for possible collaboration in research, publication, supervision and staff exchange. This visit signifies a significant initiative to illustrate committment of both entities towards executing a successful strategic alliance. For 2012, the collaboration will start with a joint research publication project focussing on the Financial Capital Markets in the Asia Pacific Region. The project will involve authors from more than twenty countries in the Asia Pacific.

Congratulations

I wish to congratulate all eleven students who attended my applied research class last semester and have successfully completed their research projects. The students are namely Jamal Sharif, Hafiz Ramli, Nor Adira, Nor Adliana, Dalina, Norazlina, Norhafizah, Faizah, Mohd Amran, Suliza and Firdaus. To most of them, the completion of their applied research thesis implicates that they have completed their Master in Forensic Accounting and Financial Criminology program at Universiti Teknologi MARA and they will be awarded the Master degree next semester. Congratulations all for maintaining the 100% success rate and in completing your research projects on time......

MOU Signing Ceremony

The Accounting Research Institute (ARI) and Universiti Teknologi MARA will be signing a Memorandum of Understanding with the the Institute of Public Enterprise (IPE),India. IPE, like ARI is a national research centre of excellence, focussing specifically on the development public enterprises. The Institute is a research centre within the University of Osmania in Hydrabad. Prof Mishra, who is IPE Director visited ARI in 2011 and ARI researchers participated in an international conference in Hydrabad last December. For the MOU ceremony, the Vice Chancellor, Dato' Prof Ir Dr Sahol Hamid Abu Bakar himself will be signing on behalf of the university. ARI-IPE will be co-organizing a Board Training Program in New Delhi on 9-10 February 2012, during which the MOU will be signed.